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 June 30, 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 [X] Accelerated filer [_] 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 [_] No [X]
Number of shares of common stock outstanding at August 1, 2006: 63,215,692
MOTIENT CORPORATION
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2006
TABLE OF CONTENTS
PAGE
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2006 and 2005 3
Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2006 and 2005 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
Item 4. Controls and Procedures 36
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 38
Item 1A. Risk Factors 38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 56
Item 4. Submission of Matters to a Vote of Security Holders 57
Item 6. Exhibits 61
2
PART I- FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Motient Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2006 2005 2006 2005
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Services and related revenue $ -- $ -- $ -- $ --
Sales of equipment -- -- -- --
-------- -------- -------- --------
Total revenues -- -- -- --
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of services and operations -- -- -- --
Cost of equipment sold -- -- -- --
Sales and advertising -- -- -- --
General and administrative (including expense to
MSV, a related party, of $147 and $283 for the
three months ended June 30, 2006 and 2005,
respectively and $313 and $283 for the six months
ended June 30, 2006 and 2005, respectively) 21,825 2,961 31,210 15,851
Research and development (including expense to MSV,
a related party, of $265 and $351 for the three
months ended June 30, 2006 and June 30, 2005,
respectively and $717 and $351 for the six months
ended June 30, 2006 and 2005, respectively) 265 351 717 351
Depreciation and amortization (excluded from above
captions) 1,254 762 2,640 801
(Gain)/Loss on asset disposals -- -- -- --
-------- -------- -------- --------
Total Costs and expenses 23,344 4,074 34,567 17,003
-------- -------- -------- --------
Loss from continuing operations (23,344) (4,074) (34,567) (17,003)
Interest and other income 2,079 2,115 4,416 2,195
Equity in loss of MSV (9,187) (4,954) (17,380) (14,721)
Minority interests in losses of TerreStar 4,756 404 7,084 404
-------- -------- -------- --------
Net loss from continuing operations (25,696) (6,509) (40,447) (29,125)
Loss from discontinued operations (16,379) (13,780) (21,683) (22,303)
-------- -------- -------- --------
Net loss (42,075) (20,289) (62,130) (51,428)
Less:
Dividends on Series A and Series B Cumulative
Convertible Preferred Stock (5,885) (4,875) (11,693) (4,875)
Accretion of issuance costs associated with Series
A and Series B Cumulative Convertible Preferred
Stock (998) (614) (1,974) (614)
-------- -------- -------- --------
Net loss available to Common Stockholders $(48,958) $(25,778) $(75,797) $(56,917)
======== ======== ======== ========
Basic and Diluted Loss Per Share - Continuing
Operations: $ (0.51) $ (0.19) $ (0.86) $ (0.56)
Basic and Diluted Loss Per Share - Discontinued
Operations $ (0.26) $ (0.21) $ (0.34) $ (0.36)
Basic and Diluted Loss Per Share $ (0.77) $ (0.40) $ (1.20) $ (0.92)
Weighted-Average Common Shares Outstanding - basic
and diluted 63,174 63,762 63,168 61,683
======== ======== ======== ========
Non-cash stock-based compensation included above is as follows:
Cost of services and operations $ -- $ -- $ -- $ --
Sales and advertising -- -- -- --
General and administrative 11,350 (55) 14,441 10,204
Discontinued operations 991 (215) 1,622 1,095
-------- -------- -------- --------
Total non-cash stock-based compensation $ 12,341 $ (270) $ 16,063 $ 11,299
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
Motient Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
June 30, 2006 December31, 2005
------------- ----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 84,478 $ 179,524
Cash committed for satellite construction costs due by
December 31, 2006 37,841 77,946
Restricted cash for Series A and Series B Cumulative Convertible
Preferred Stock dividends 21,446 24,905
Accounts receivable-trade -- --
Deferred Issuance costs associated with Series A and Series B
Cumulative Convertible Preferred Stock 4,139 4,029
Assets held for sale 628 261
Deferred equipment costs -- --
Other current assets 2,393 2,025
Net current assets of discontinued operations -- 1,888
--------- ---------
Total current assets 150,925 290,578
RESTRICTED INVESTMENTS 78 76
PROPERTY AND EQUIPMENT, net 156,287 70,986
INTANGIBLE ASSETS, net 72,599 75,218
INVESTMENT IN MSV 478,828 496,208
RESTRICTED CASH FOR SERIES A AND SERIES B CUMULATIVE CONVERTIBLE
PREFERRED STOCK DIVIDENDS -- 7,264
DEFERRED ISSUANCE COSTS ASSOCIATED WITH SERIES A AND SERIES B CUMULATIVE
CONVERTIBLE PREFERRED STOCK 12,863 14,947
DEFERRED CHARGES AND OTHER ASSETS -- --
NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS -- 10,546
--------- ---------
Total assets $ 871,580 $ 965,823
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (including amounts due to MSV, a
related party, of $225 at June 30, 2006 and $699 December 31, 2005) $ 6,163 $ 8,105
Accounts payable to Loral for satellite construction contract 36,275 59,771
Deferred equipment revenue -- --
Deferred revenue and other current liabilities 65 72
Retained liabilities of discontinued operations 3,375 --
Series A and Series B Cumulative Convertible Preferred Stock dividends
payable 6,964 5,994
--------- ---------
Total current liabilities 52,842 73,942
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST 78,305 74,840
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK ($0.01 par value, 450,000
shares authorized and 90,000 shares issued and outstanding 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 318,500 318,500
STOCKHOLDERS' EQUITY:
Common Stock; voting (par value $0.01; 200,000,000 shares authorized,
66,892,935 and 66,606,504 shares issued at June 30, 2006 and December
31, 2005 and 62,941,733 and 63,119,302 shares outstanding at June 30,
2006 and December 31, 2005, respectively) 669 666
Additional paid-in capital 759,662 752,777
Common stock purchase warrants 73,692 74,600
Less: 3,951,202 and 3,487,202 common shares held in treasury stock at
June 30, 2006 and December 31, 2005, respectively, at cost (73,877) (67,086)
Accumulated deficit (428,213) (352,416)
--------- ---------
Total stockholders' equity 331,933 408,541
--------- ---------
Total liabilities, and stockholders' equity $ 871,580 $ 965,823
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Motient Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended Six Months Ended
June 30,2006 June 30, 2005
------------ -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Net loss $ (62,130) $ (51,428)
Adjustments to reconcile net loss to net cash (used in) continuing
operating activities:
Loss from discontinued operations (21,683) (22,303)
Depreciation and amortization 2,640 801
Equity in losses of MSV 17,380 14,721
Minority interest in losses of TerreStar (7,084) (404)
Non cash 401(k) match 98 154
Non-cash stock based compensation expense 16,063 11,299
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - trade -- --
Inventory -- --
Other current assets (370) (526)
Accounts payable and accrued expenses (including payments to MSV, a
related party, of $1,504 and $131 for the six months ended
June 30, 2006 and 2005, respectively) (1,942) 605
Deferred revenue and other current liabilities (7) 11
--------- ---------
Net cash (used in) continuing operating activities (57,035) (47,070)
--------- ---------
CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES:
Cash acquired in TerreStar asset purchase -- 6,165
Proceeds of restricted investments 50,826 --
Additions to property and equipment (49,047) --
Accounts payable to Loral for satellite construction contract (59,771) (61,209)
--------- ---------
Net cash (used in) continuing investing activities (57,992) (55,044)
--------- ---------
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES:
Proceeds from issuance of Series A Cumulative Convertible Preferred Stock -- 408,500
Issuance costs associated with Series A Cumulative Convertible Preferred Stock -- (17,483)
Dividends paid on Series A Cumulative Convertible Preferred Stock (10,723) --
Repayment of notes payable -- (8,739)
Proceeds from issuance of equity securities 90 116
Proceeds from issuance of employee stock options 278 1,220
Purchase of treasury stock (6,789) (56,750)
Stock issuance costs and other charges -- (9)
--------- ---------
Net cash (used in) provided by continuing financing activities (17,144) 326,855
--------- ---------
Net cash (used in) provided by continuing operations (132,171) 224,741
--------- ---------
Net cash provided by discontinued operating activities 37,170 34,061
Net cash (used in) discontinued investing activities (45) (30)
Net cash (used in) provided by discontinued financing activities -- --
--------- ---------
Net cash provided by discontinued operations 37,125 34,031
--------- ---------
Net (decrease) increase in cash and cash equivalents (95,046) 258,772
CASH AND CASH EQUIVALENTS, beginning of period 179,524 15,695
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 84,478 $ 274,467
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
1. ORGANIZATION AND BUSINESS
Our Business Segments
Motient Corporation (with its subsidiaries, "Motient" or the "Company")
currently 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. As of June 30
2006, we owned 49% of another satellite communications company, called Mobile
Satellite Ventures LP, ("MSV"), but do not have operating control of its
business. Our investments in TerreStar and MSV are governed by stockholder
agreements with the other equity owners of those entities.
As of June 30, 2006, we also provided our active direct customers with two-way
terrestrial wireless data communications services via convenient and
cost-effective access to wireless data networks, such as Sprint and Cingular
networks and our own DataTac network. We recently entered into agreements to
increase our ownership in TerreStar, decrease our ownership in MSV and sell of
most of the assets and liabilities associated with our terrestrial wireless
business to one of our customers. These agreements are described more fully
below and are expected to close in the third quarter of 2006. The accompanying
financial statements, including those for prior periods, present our terrestrial
wireless business as a discontinued operation. Pursuant to such presentation,
the Company's continuing operations are reflected as a single operating segment.
TerreStar
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". 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 TerreStar common stock purchase
increased Motient's ownership to its current 61%, 54.3% on a fully diluted
basis, of TerreStar's issued and outstanding common stock and resulted in
Motient starting to consolidate TerreStar's financial statements into its own.
Upon the initial consolidation of TerreStar, the assets and liabilities of
TerreStar were recorded on the Company's Consolidated Balance Sheet based upon
their fair values at such 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.
6
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. 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.
Mobile Satellite Ventures LP
MSV is also 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.
7
TerreStar and MSV Ownership Changes
In May 2006, we entered into a series of agreements to consolidate the ownership
of TerreStar under Motient and the ownership of MSV under SkyTerra
Communications, Inc. ("SkyTerra"), one of the other current investors in MSV and
TerreStar. Upon the closing of the transactions under these agreements, Motient
will issue shares of its common stock in exchange for shares of TerreStar.
Assuming that all of the other stockholders of TerreStar other than SkyTerra and
TMI Communications exercise their contractual "tag-along" rights to exchange
their shares of TerreStar common stock with us on the same financial terms, our
ownership of TerreStar will increase from 54.3% to 74.2% (each on a fully
diluted basis and assuming completion of this transaction) in exchange for the
issuance of 13.1 million shares of Motient common stock. Some of these tag along
rights may be exercised after the initial closing of the Ownership Consolidation
Transactions.
Also upon closing of the transactions under these agreements, Motient will
initially transfer a 26.3% interest in MSV to SkyTerra in exchange for 29.1
million shares of SkyTerra common stock, 25.5 million of which we intend to
distribute to our common stockholders as a dividend following the closing, or
the Initial Step. We will also have the right for a five year period after the
closing to transfer our remaining 17.1% interest in MSV to SkyTerra in exchange
for an additional 18.9 million shares of SkyTerra common stock, a portion of
which we intend to sell to pay income taxes incurred in connection with these
transactions, a portion of which we may sell in the future for other general
corporate purposes, and a portion of which we intend to distribute to the
holders of our preferred stock pursuant to the terms of our preferred stock upon
any conversion of the preferred stock into our common stock.
The closing of all of the transactions discussed above will be subject to
various closing conditions, including FCC and other regulatory approval. These
transactions have also been challenged in Texas state court (see Footnote 6 -
"Legal and Regulatory Matters"). Accordingly, Motient can not assure you that
these transactions will close on the terms outlined here, if at all.
Terrestrial Wireless Business
On June 19, 2006, various subsidiaries of Motient entered into an asset purchase
agreement with Geologic Solutions, Inc. and Logo Acquisition Corporation, a
wholly-owned subsidiary of GeoLogic. Pursuant to the agreement, Motient will
sell to Logo most of the assets relating to Motient's terrestrial DataTac
network and its iMotient platform for a nominal cash sum, and Logo will assume
most of the post-closing liabilities relating to the terrestrial business. The
assets and liabilities being transferred are limited to those that relate to the
current operations of Motient's terrestrial wireless network, and do not include
any assets or liabilities related to TerreStar or MSV. Motient estimates that
the transaction will save Motient $15 to $18 million in total future operating
costs. The consummation of this transaction will be subject to customary closing
conditions, including but not limited to Federal Communications Commission (FCC)
approval, and, accordingly, Motient cannot assure you that such transactions
will close in a timely fashion, if at all.
8
Our historical financial statements have been recast and our current financial
statements have been prepared to reflect this business as a discontinued
operation. The following tables depict the financial results and condition of
those discontinued operations for the periods ended and as of the date indicated
(dollars in thousands):
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2006 2005 2006 2005
---- ---- ---- ----
Loss from discontinued operations consists of the following:
Revenues $ 1,860 $ 3,545 $ 3,903 $ 8,558
Cost of equipment sold (9) (277) (30) (738)
Cost of services and operations (5,937) (5,283) (10,627) (12,823)
Sales and advertising (381) (166) (714) (529)
General and administrative (1,234) (1,734) (2,253) (3,186)
Restructuring charges -- (5,580) -- (5,665)
Depreciation and amortization (1,866) (4,285) (3,414) (7,926)
Loss on asset disposals (79) -- (141) 6
Loss on asset impairment (2,721) -- (2,721) --
Other income -- -- 326 --
Impairment of net assets of discontinued operations (6,012) -- (6,012) --
-------- -------- -------- --------
Total loss from discontinued operations $(16,379) $(13,780) $(21,683) $(22,303)
======== ======== ======== ========
June 30, 2006 December 31, 2005
------------- -----------------
Cash and cash equivalents $ 1,250 $ 1,250
Other current assets 906 1,663
Property and equipment, net 1,844 5,004
Intangible assets, net 2,779 5,850
Other noncurrent assets 37 35
Accounts payable and accrued
expenses (38) (49)
Other current liabilities (487) (976)
Long-term liabilities (279) (343)
-------- --------
Net assets of discontinued operations $ 6,012 $ 12,434
======== ========
The 2006 impairment loss (and resulting reserve) reflects the Company's current
estimate of the loss on sale it will incur based on the $1 purchase price and
the expected carrying value of the net assets to be sold on closing date less
expected sales costs.
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, including the
presentation of our terrestrial wireless business as a discontinued operation.
The results of operations for the three and six months ended June 30, 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 June 30, 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 TerreStar's intangible assets and
MSV, the valuation of deferred income tax assets, the ability to realize
tangible long-lived assets and the assumptions used to value stock compensation
awards. 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
The Company had approximately $59 million of restricted cash at June 30, 2006
held in money market escrow accounts. At December 31, 2005, the Company had
approximately $110 million of restricted cash. Cash is restricted in accordance
with the Company's satellite construction and preferred stock agreements. As all
such cash is expected to be paid before June 30, 2007, all restricted cash is
reflected as a current asset as of June 30, 2006.
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.
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.
10
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.
Revenue Recognition
The Company is not expected to recognize revenues from continuing operations
until TerreStar's satellite is in operation. TerreStar will then recognize
revenue primarily from satellite utilization charges and, to a lesser extent,
from providing managed services to our customers over the period during which
services are provided, as long as collection of the related receivable is
reasonably assured.
Revenue from our discontinued operations is primarily generated through airtime
services agreements, under which revenue is recognized when services are
performed and in accordance with the Securities and Exchange Commission's
("SEC") Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition and
Emerging Issues Task Force ("EITF") No. 00-21, Accounting For Revenue
Arrangements With Multiple Deliverables, including deferral of revenue for
portions of fees associated with activation of a subscriber.
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. 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 $156 million and $71 million at June 30, 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
11
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.
Assets Held for Sale
Assets held for sale as of June 30, 2006 includes $0.3 million of certain 800
MHz frequencies which we ceased use of during the second quarter of 2006. The
aggregate carrying value of $0.6 million of assets held for sale consists of
$0.3 million at December 31, 2005 and $0.3 million that was recorded in the
second quarter of 2006 relating to the net book value of the remaining 800 MHz
frequencies less a second quarter 2006 impairment charge of $2.7 million based
on the Company's current estimate of potential sales proceeds, less cost to
sell, of each individual frequency. The impairment charge is reflected as a
component of Costs and Expenses of discontinued operations. The Company expects
to sell these frequencies by June 30, 2007.
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.
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 half 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 three and six months ended June
30, under SFAS 123R is as follows (in thousands):
12
Three Months Six Months
Ended Ended
June 30, 2006 June 30, 2006
------------- -------------
Related to stock options granted prior to December 31, 2005 $ 4,818 $ 6,389
Related to stock options granted during 2006 4,139 4,634
Restricted stock awarded granted prior to December 31, 2005 -- --
Restricted stock awarded during 2006 2,393 3,418
------- -------
Stock-based compensation from continuing operations 11,350 14,441
Stock-based compensation from discontinued operations 991 1,622
------- -------
Total stock-based compensation $12,341 $16,063
======= =======
Included in continuing operations for the three months and six months ended June
30, 2006 is the impact of revising the requisite service period related to stock
compensation awards previously-granted to TerreStar employees and certain
Motient executives. This revised estimate was a shortening of the expected
service period from previous estimates to September 30, 2006, the estimated
closing date of the TerreStar and MSV ownership exchanges described in Note 1.
In accordance with the stock compensation awards, that transaction qualifies as
an event which triggers automatic acceleration of all the outstanding unvested
awards.
Similarly, included in discontinued operations for the three months and six
months ended June 30, 2006 is the impact of shortening the requisite service
period related to stock compensation awards previously-granted to certain
Motient employees due to the automatic acceleration which will occur upon the
closing of the sale of our terrestrial wireless business also as described in
Note 1, which is estimated to occur on September 30, 2006.
In November 2005, the Company granted an aggregate of 155,000 shares of
restricted stock to three executives, which will vest upon the completion of
strategic events, generally involving a change of control, which had not
occurred as of December 31, 2005. Through December 31, 2005, the Company had not
recorded any compensation charges associated with the grants, as they were
assigned a zero probability of vesting. On March 9, 2006, the Company amended
certain provisions regarding these restricted shares. Based upon a then 30%
probability that the restricted stock would vest pursuant to the amended
provisions, the Company recorded a compensation charge associated with the
restricted stock in the amount of $1.0 million during the first quarter of 2006.
As described above, these restricted shares will now vest upon the closing of
the TerreStar and MSV ownership exchanges and the full compensation charge has
been included in the results of operations for the six months ended June 30,
2006.
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 six months ended June 30, 2006 and 2005 and relevant pro forma
information regarding stock-based compensation for the three and six months
ended June 30, 2005. 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.
13
Six Months Six Months
Ended June 30, Ended June 30,
2006 2005
---- ----
Weighted fair value of stock options granted:
To acquire Motient common stock $ -- $ 19.61
To acquire TerreStar common stock $ 10.52 $ 24.42
Weighted average assumptions:
Motient stock options:
Risk-free interest rate -- 2.67
Dividend yield -- --
Expected volatility -- 669%
Expected option life in years -- 10
TerreStar stock options:
Risk-free interest rate 4.49% 4.02%
Dividend yield -- --
Expected volatility 46.0% 72.0%
Expected option life in years 2.5 6.5
Three Months Ended Six Months Ended
June 30, June 30,
2005 2005
---- ----
Net loss as reported $(25,778) $(56,917)
Add back recorded stock-based compensation expense:
Motient compensation expense (270) 11,299
Deduct stock-based compensation expense as if recorded
under the fair value method:
Motient compensation expense (229) (13,169)
-------- --------
Pro forma net loss $(26,277) $(58,787)
======== ========
Basic and Diluted loss per share:
As reported $ (0.40) $ (0.92)
Pro forma $ (0.41) $ (0.95)
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
June 30, 2006 were $630,043 and $369,695, respectively, of which $486,033 and
$285,193, respectively, relate to discontinued operations. 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:
14
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
June 30, 2006 298,635 $ 21.31 155,000 $ 22.05
========= =======
TerreStar:
Nonvested as of
December 31, 2005 713,593 $ 17.39 -- --
Granted 1,157,414 $ 10.52 -- --
Vested -- -- -- --
Cancelled -- -- -- --
--- --- --- ---
Nonvested as of
June 30,2006 1,871,007 $ 13.14 -- --
========= ========= ======= =========
At June 30, 2006, there was $4.3 million of total pre-tax unrecognized
stock-based compensation costs related to Motient's options and restricted stock
(considering estimated forfeitures and restricted stock awards which will never
vest) of which $3.3 million is related to discontinued operations and all of
which is expected to be recognized in the income statement by September 30,
2006. Similarly, for TerreStar, there was $13.5 million of total pre-tax
unrecognized stock-based compensation costs all of which is expected to be
recognized, along with related minority interest income, by September 30, 2006.
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. This includes the reported net loss plus the
additional loss attributable to preferred stock 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 June 30, 2006 and 2005, there were 90,000 and 408,500 shares of Series A
Cumulative Convertible Preferred Stock and 318,500 and 0 shares of Series B
Cumulative Convertible Preferred Stock, respectively, outstanding which were
entitled to be converted into a total of 12,255,000 shares of Motient common
stock. As of June 30, 2006 and 2005, there were outstanding warrants to acquire
approximately 5,800,320 and 6,831,301 shares, respectively, of Motient common
stock and outstanding options to purchase 682,910 and 377,849 shares,
respectively, of Motient common stock.
3. RELATED PARTY TRANSACTIONS
The Company made cash payments of $0.8 million and $2.2 million, respectively,
to related parties for service-related obligations during the three and six
months ended June 30, 2006. Of that amount, $0.4 million and $1.5 million,
respectively, was paid to MSV for consulting services related to TerreStar and
$0.4 million and $0.7 million, respectively, was paid to Capital & Technology
Advisors (CTA), a consulting and private advisory firm specializing in the
technology and telecommunications sectors. For the three and six months ended
June 30, 2005, $0.2 million and $1.4 million was paid to CTA for consulting
services and $0.1 and $0.1 million was paid to MSV for consulting services
related to TerreStar.
15
4. COMMON AND PREFERRED STOCK
Common Stock
- ------------
In May 2005, the Company repurchased 2,900,000 shares of its common stock for an
aggregate $57 million from various investors, and from September through
December 2005, Motient repurchased an additional 587,102 shares of its common
stock for approximately $10 million. In April 2006 and June 2006, the Company
repurchased 464,100 shares of its common stock for an aggregate $7 million. The
repurchased shares are included in treasury stock and are available for general
corporate purposes.
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.
5. COMMITMENTS AND CONTINGENCIES
As of June 30, 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) $103,419 $ 78,349 $ 25,070 $ -- $ --
Operating leases 5,413 1,151 2,391 1,871 --
-------- -------- -------- -------- ---
Continuing Operations 108,832 79,500 27,461 1,871 --
Discontinued Operations (2) 2,499 822 1,677 -- --
-------- -------- -------- -------- ---
Total Contractual Cash Obligations $111,331 $ 80,322 $ 29,138 $ 1,871 $ --
======== ======== ======== ======== ====
(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.
16
On November 21, 2005, Motient entered into employment agreements with three
executives. On March 9, 2006, the Company amended these agreements, but such
amendments did not change cash compensation or employment terms.
6. LEGAL AND REGULATORY MATTERS
Legal
On April 12, 2006, an entity controlled by James D. Dondero, a former director
of the Company 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. On July 6, 2006, the court
dismissed the suit. The plaintiff has appealed the court's ruling.
On June 19, 2006, another entity controlled by James D. Dondero filed a lawsuit
in the District Court of Travis County, Texas alleging that Motient's proposed
transaction with SkyTerra to consolidate the ownership of MSV violates the
Investment Company Act of 1940. The plaintiff asked the Court to, among other
things, declare the proposed transaction unenforceable, rescind the agreement
with SkyTerra and enjoin the registration statement required by the SkyTerra
agreements. Highland also named Capital Technology Advisors, Inc., (CTA) in the
suit, and seeks rescission of Motient's contracts with CTA. A preliminary
hearing on the injunction has been set for early September 2006.
From time to time, Motient is involved in legal proceedings in the ordinary
course of its business operations. Although there can be no assurance as to the
outcome or effect of any legal proceedings to which Motient is a party, Motient
does not believe, based on currently available information, that the ultimate
liabilities, if any, arising from any such legal proceedings not otherwise
disclosed would have a material adverse impact on its business, financial
condition, results of operations or cash flows.
Regulation
Overview
Motient's wireless communications 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.
17
Motient operates pursuant to various licenses granted by the FCC.
Motient's FCC licenses are subject to restrictions in the Communications Act
that (i) some FCC licenses may not be held by a corporation of which more than
20% of its capital stock is directly owned of record or voted by non-U.S.
citizens or entities or their representatives and (ii) no such FCC license may
be held by a corporation controlled by another corporation, referred to as
indirect ownership, if more than 25% of the controlling corporation's capital
stock is owned of record or voted by non-U.S. citizens 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 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.
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.
18
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.
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
19
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
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.
7. CONSOLIDATION OF TERRESTAR
The following table sets forth our unaudited pro forma results of operations for
the three and six months ended June 30, 2005 reflecting our purchase of the
TerreStar assets. The pro forma results are based on our historical financial
statements and the historical financial statements of the operations of
TerreStar. The unaudited pro forma statements of operations present the
transaction as if the transaction occurred on January 1, 2005. The pro forma
results are presented for informational purposes only and are not intended to be
indicative of either future results of our operations or results that might have
been achieved had the transactions actually occurred since the beginning of the
fiscal period.
20
Motient Corporation and Subsidiaries
Selected Consolidated Pro-forma
Results of Operations
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
Net Revenues $ -- $ --
Loss from continuing operations $ (4,965) $(18,415)
Net loss from continuing operations $(12,560) $(35,533)
Loss per share from continuing operations $ (0.20) $ (0.58)
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 and six months
ended June 30, 2006 and 2005 is as follows (in millions):
Three Months Six Months
Ended June 30, Ended June 30,
2006 2005 2006 2005
---- ---- ---- ----
Total revenues $ 9.4 $ 7.5 $ 17.5 $ 14.7
Total operating expenses 16.9 14.9 40.0 34.5
------- ------- ------- -------
Operating loss (7.5) (7.4) (22.5) (19.8)
Other income (expense) (7.9) 0.6 (6.3) (6.9)
------- ------- ------- -------
Loss from continuing operations $ (15.4) $ (6.8) $ (28.8) $ (26.7)
======= ======= ======= =======
9. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flows information for the six months ended June 30, 2006 and
2005 is presented in the following table (in thousands):
2006 2005
---- ----
Non-cash investing and financing activities:
Accrued Satellite under construction $ 36,275 $ --
Amortization of deferred financing fees related to
Series A Cumulative Convertible Preferred Stock 1,974 614
Dividends payable on Series A and Series B
Cumulative Convertible Preferred Stock 11,693 4,875
Issuance of common stock -- 370,980
Exercise and Expiration of common stock warrants $ (820) $ (6,515)
10. SUBSEQUENT EVENTS
On August 8, 2006, Motient filed a registration statement with the Securities
and Exchange Commission to begin a rights offering that it had originally
announced in November 2004. Motient previously had issued to its stockholders
one right for each share of Motient common stock held as of the close of
business on December 17, 2004. Each right entitles any holder that did not
21
participate in the November 12, 2004 private placement of Motient common stock
to purchase 0.103 shares of Motient's common stock at a price of $8.57 per
share. However, in no event will Motient issue more than 2.5 million shares in
the rights offering, and if valid subscriptions for more than 2.5 million shares
are received, the number of shares to be acquired pursuant to each valid
subscription will be reduced pro rata so that the total number of shares issued
in the rights offering will equal 2.5 million shares.
If eligible stockholders subscribe for all of the shares that are available in
the rights offering, the aggregate proceeds of the rights offering will be
approximately $21.4 million. The rights are non-transferable and will expire if
not exercised within the exercise period. The holders of the rights do not have
over-subscription rights, and there is no backstop to purchase unsubscribed
shares.
In August 2006, TerreStar exercised an option under its 2002 satellite
construction contract with Space Systems/Loral to purchase a second satellite
similar to the satellite currently under construction. The cost of this second
satellite is expected to be $187.5 million, plus incentive payments. We
anticipate that the initial payment of $3.3 million under the option will be
paid in August 2006.
22
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 Part II, Item 1A. of
this report as well as those in our other filings with the Securities and
Exchange Commission from time to time, including those in 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 Corporation (with its subsidiaries, "Motient" or the "Company")
currently 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. As of June 30,
2006, we owned 49% of another satellite communications company, called Mobile
Satellite Ventures LP, or MSV, but do not have operating control of its
business. Our investments in TerreStar and MSV are governed by stockholder
agreements with the other equity owners of those entities. As of June 30, 2006,
we also provided our active direct customers with two-way terrestrial wireless
data communications services via convenient and cost-effective access to
wireless data networks, such as Sprint and Cingular networks and our own DataTac
network. We recently entered into agreements to complete certain transactions
which will increase our ownership in TerreStar, decrease our ownership in MSV
and sell of most of the assets and liabilities associated with our terrestrial
wireless business to one of our customers. These agreements are described more
fully below and are expected to close in the third quarter of 2006. The
following discussion, including those for prior periods, present our terrestrial
wireless business as a discontinued operation. Pursuant to such presentation,
the Company's continuing operations are reflected as a single operating segment.
23
TerreStar
TerreStar was created 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".
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.
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.
Mobile Satellite Ventures LP
MSV is also 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.
24
TerreStar and MSV Ownership Changes
In May 2006, we entered into a series of agreements to consolidate the ownership
of TerreStar under Motient and the ownership of MSV under SkyTerra
Communications, Inc. ("SkyTerra"), one of the other current investors in MSV and
TerreStar. Upon the closing of the transactions under these agreements, Motient
will issue shares of its common stock in exchange for shares of TerreStar.
Assuming that all of the other stockholders of TerreStar other than SkyTerra and
TMI Communications exercise their contractual "tag-along" rights to exchange
their shares of TerreStar common stock with us on the same financial terms, our
ownership of TerreStar will increase from 54.3% to 74.2% (each on a fully
diluted basis and assuming completion of this offering) in exchange for the
issuance of 13.1 million shares of Motient common stock. Some of these tag along
rights may be exercised after the initial closing of the transactions.
Also upon closing of the transactions under these agreements, Motient will
initially transfer a 26.3% interest in MSV to SkyTerra in exchange for 29.1
million shares of SkyTerra common stock, 25.5 million of which we intend to
distribute to our common stockholders as a dividend following the closing, or
the Initial Step. We will also have the right for a five year period after the
closing to transfer our remaining 17.1% interest in MSV to SkyTerra in exchange
for an additional 18.9 million shares of SkyTerra common stock, a portion of
which we intend to sell to pay income taxes incurred in connection with these
transactions, a portion of which we may sell in the future for other general
corporate purposes, and a portion of which we intend to distribute to the
holders of our preferred stock pursuant to the terms of our preferred stock upon
any conversion of the preferred stock into our common stock.
The closing of all of the transactions discussed above will be subject to
various closing conditions, including FCC and other regulatory approval. These
transactions have also been challenged in Texas state court (see Item 1.
Financial Statements - Footnote 6 - "Legal and Regulatory Matters").
Accordingly, Motient can not assure you that these transactions will close on
the terms outlined here, if at all.
Terrestrial Wireless Business
Our historical financial statements have been recast and our current financial
statements and the following discussion have been prepared to reflect this
business as a discontinued operation.
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.
Expenses
The tables below summarize, for the periods indicated, a period-over-period
comparison of the key components of our continuing operating expenses. Please
note that 2006 includes expenses related to TerreStar which were not
consolidated in the first quarter of 2005.
25
Three Months Ended June 30,
----------------------------------------------------
Summary of Expenses 2006(1) 2005(2) Change % Change
- ------------------- ------- ------- ------ --------
(dollars in millions)
Research and Development 0.3 0.4 (0.1) (25)%
General and Administrative 21.8 2.9 18.9 652%
Depreciation and Amortization 1.2 0.8 0.4 50%
------- ------ ------- ---
Total Costs and Expenses $ 23.3 $ 4.1 $ 19.2 468%
======= ====== ======= ===
(1) Includes non-cash stock-based compensation expense of $11.4 million in
General and Administrative.
(2) Includes non-cash stock-based compensation expense of $(0.1) million in
General and Administrative.
Six Months Ended June 30,
----------------------------------------------------
Summary of Expenses 2006(1) 2005(2) Change % Change
- ------------------- ------- ------- ------ --------
(dollars in millions)
Research and Development 0.7 0.4 0.3 75%
General and Administrative 31.2 15.8 15.4 97%
Depreciation and Amortization 2.7 0.8 1.9 238%
------- ------ ------- ---
Total Costs and Expenses $ 34.6 $ 17.0 $ 17.6 104%
======= ======= ======= ===
(1) Includes non-cash stock-based compensation expense of $14.4 million in
General and Administrative.
(2) Includes non-cash stock-based compensation expense of $10.2 million in
general and Administrative.
Research and Development: While research and development expenses were
consistent for the two second quarters, the increase in such expenses in the
2006 six month period was primarily due to the fact that our consolidation of
TerreStar did not begin until May 11, 2005. 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 increased $18.9 million and $15.4 million for the three and six
months ended June 30, 2006 as compared to the same periods for 2005. The change
in general and administrative expenses was primarily attributable to:
o For the three months ended June 30, 2006, corporate administrative
expenses increased a net $1.1 million as compared to the same period
for 2005 primarily due to increases related to the accelerated vesting
of employee stock-based compensation and corporate legal fees of $2.3
million due to litigation defense efforts, offset by a decrease in
audit fees of approximately $0.8 million. Corporate administrative
expense for the first six months of 2006 decreased a net $2.3 million
as compared to the same period for 2005, as a result of a decrease in
consulting and advisory fees of $9.0 million due to fees paid in 2005
related to the February capital transaction involving MSV and a
decrease in audit fees of $0.8 million related to lower Sarbanes-Oxley
and SEC reporting related costs, offset by an increase of $4.0 million
in stock-based compensation related to awards issued to employees and
executives which are expected to fully vest upon the closing of the
sale of the terrestrial wireless business in the third quarter of 2006
and an increase in corporate legal fees of $2.4 million due to
litigation defense efforts.
o TerreStar expenses of $19.6 million for the six months ended June 30,
2006 include $1.8 million in salary and related costs, $10.5 million
in stock-based compensation related to stock options issued to
employees which are expected to vest upon the closing of the TerreStar
26
and MSV ownership exchange agreements in the third quarter of 2006,
$4.4 million for consulting, $1.7 million for legal and regulatory
fees and $1.1 million for other expenses. These expenses compare to
only $0.7 million of TerreStar expenses during the 2005 period, as our
consolidation of TerreStar did not begin until May 11, 2005. Had
TerreStar expenses been consolidated from January 1, 2005, general and
administrative expenses were $2.8 million and $3.9 million for the
three and six months ended June 30, 2005, respectively.
Given our announced sale of our wireless terrestrial network, we anticipate our
corporate administrative costs related to this business will decrease after the
closing of that transaction. As we expand our efforts on TerreStar, however, we
anticipate that general and administrative expenses related to TerreStar will
increase.
Depreciation And Amortization: Including TerreStar expenses of $2.7 million for
the six months ended June 30, 2006, which includes the amortization of its
intangible assets, depreciation and amortization expense increased $1.9 million
for that period primarily due to TerreStar's intangible amortization expense for
a full six months in 2006 as compared to less than two months of intangible
asset amortization in 2005.
Other Expenses & Income
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2006 2005 2006 2005
---- ---- ---- ----
Other Income/Expense
- --------------------
(in thousands)
Interest and other Income $ 2,079 $ 2,115 $ 4,416 $ 2,195
Equity in Losses of Mobile Satellite
Ventures (9,187) (4,954) (17,380) (14,721)
Minority interests in losses of TerreStar 4,756 404 7,084 404
Discontinued Operations $(16,379) $(13,780) $(21,683) $(22,303)
Interest and Other Income: Interest and other income decreased for the three
months ended June 30, 2006, as compared to the same period for 2005, due to
lower cash balances in 2006. Interest and other income for the six months ended
June 30, 2006 increased over the same period in 2005 as our cash balances
increased significantly from the proceeds of our financing transactions in April
2005.
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 three and six months ended June 30, 2006 and 2005 include
Motient's applicable percentage of MSV's net losses plus $1.6 million and $3.3
million for 2006, respectively, as compared to $1.7 million and $2.6 million for
2005, respectively, of amortization of this fair value adjustment. For the three
and six months ended June 30, 2006, MSV had revenues of $9.4 and $17.5 million,
operating expenses of $16.9 and $40.0 million and net losses of $15.4 and $28.8
27
million, respectively. For the three and six months ended June 30, 2005, MSV had
revenues of $7.5 and $14.7 million, operating expenses of $14.9 and $34.5
million and net losses of $6.8 and $26.7 million, respectively. We anticipate
that our equity in losses of MSV will decrease in the fourth quarter of 2006
pending closing of the TerreStar and MSV ownership exchange in which our equity
investment percentage in MSV will decrease.
Minority Interest in TerreStar: For the three and six months ended June 30,
2006, the Company recorded an approximately $12.1 million and $18.0 million,
respectively, net loss for TerreStar. The respective $4.8 and $7.1 million
minority interest in TerreStar's net losses represents the approximately 39% of
TerreStar that is not owned by the Company. We anticipate that the minority
interest in TerreStar losses will decrease in the fourth quarter of 2006 pending
closing of the TerreStar and MSV ownership exchange in which our majority
ownership percentage of TerreStar will increase.
Discontinued Operations: Discontinued operations includes revenues from our
DataTac and iMotient networks of $1.9 million and $3.9 million for the three and
six months ended June 30, 2006, respectively as compared to $3.5 million and
$8.6 million for the same periods of 2005. Our iMotient revenues, however,
increased $0.3 million and $0.5 million for the three and six months ended June
30, 2006, respectively as compared to the same periods of 2005.
Loss from discontinued operations increased $2.6 million for the three months
ended June 30, 2006 as compared to the same period for 2005. The increase is
primarily due to a $6.0 million loss on the carrying value of the net assets to
be sold and a $2.7 million impairment charge relating to the net book value of
the remaining 800 MHz frequencies partially offset by $5.6 million in
restructuring charges recorded in 2005, as compared to $0 in 2006, related to
our network reduction efforts intended to reduce expenses related to our base
stations. Loss from discontinued operations decreased $0.6 million for the six
months ended June 30, 2006 as compared to the same period for 2005.
Liquidity And Capital Resources
The Company's future financial performance will depend on the successful
implementation of its business plan. As of June 30, 2006, the Company had $84.5
million of unrestricted cash on hand, of which approximately $53 million was
held at Motient and $31.5 million was held at TerreStar. In the third quarter of
2006, Motient anticipates completing its previously announced rights offering
which would result in net 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 $78 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. In this event, the value of TerreStar's intangible assets could be
significantly impaired.
28
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.
The cash requirement for TerreStar, 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 Six Months Ended June 30, (in thousands):
2006 2005
---- ----
Net cash flows used in Continuing Operating Activities: $ (57,035) $ (47,070)
Net cash flows used in continuing Investing Activities: (57,992) (55,044)
Cash flows from Continuing Financing Activities:
Proceeds from the issuance of equity securities 90 116
Stock issuance costs and other charges -- (9)
Proceeds from the issuance of preferred stock -- 408,500
Issuance costs associated with preferred stock -- (17,483)
Proceeds from the exercise of employee stock
options 278 1,220
Repayment of notes payable -- (8,739)
Purchase of treasury stock (6,789) (56,750)
Dividends paid on Series A and Series B Cumulative
Convertible Preferred Stock (10,723) --
Net cash provided by continuing financing activities (17,144) 326,855
Net cash provided by continuing operations (132,171) 224,741
Net cash provided by discontinued operating activities 37,170 34,061
Net cash (used in) discontinued investing activities (45) (30)
Net cash (used in) discontinued financing activities -- --
Net cash provided by discontinued operations 37,125 34,031
Net increase (decrease) in cash and cash equivalents (95,046) 258,772
Cash and Cash Equivalents, beginning of period 179,524 15,695
Cash and Cash Equivalents, end of period $ 84,478 $ 274,467
Operating Activities:
Cash used in continuing operating activities was $57.0 million for the first two
quarters of 2006 as compared to $47.1 million for the first two quarters of
2005. The increase in cash used in continuing operations was primarily a result
of an increase in our net loss of $10.7 million, consisting of an increase in
non cash items of depreciation and amortization and an increase in our equity
losses of MSV.
29
Investing Activities:
Net cash used in continuing investing activities for the six months ended June
30, 2006 was $58.0 million as compared to $55 million cash used for the same
period in 2005. The additional 2006 cash usage was attributable to cash acquired
in the 2005 TerreStar asset purchase, offset by payments placed is escrow and/or
released to Loral related to the satellite construction contract for TerreStar.
Financing Activities:
Net cash provided by continuing financing activities was $17.1 million for the
six months ended June 30, 2006 as compared to $326.9 million for the six months
ended June 30, 2005. The $309.8 million decrease in cash provided by financing
activities in 2006 over 2005 was primarily the result of $391 million in
proceeds from our 2005 preferred stock sale and a 2006 decrease in treasury
stock purchased of approximately $50 million.
Discontinued Operations:
Net cash provided by discontinued operating activities was $37.2 million for the
six months ended June 30, 2006 as compared to $34.1 million for the same period
in 2005. The increase in cash provided is related to reduced costs associated
with our 2006 network reduction efforts intended to reduce expenses related to
our base stations.
Net cash used in discontinued investing activities was $45 thousand for the six
months ended June 30, 2006 consisting of property and equipment purchases
related to out discontinued DataTac and iMotient operations.
We believe that our funds available at June 30, 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 June 30, 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
June 30, 2006, the unpaid portion of approximately $21.5 million is represented
by restricted cash, of which half will be paid out on October 15, 2006, and half
on 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 through April 15,
2010).
30
Contractual Cash Obligations
As of June 30, 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) $103,419 $ 78,349 $ 25,070 $ -- $ --
Operating leases 5,413 1,151 2,391 1,871 --
-------- -------- -------- -------- ---
Continuing Operations 108,832 79,500 27,461 1,871 --
Discontinued Operations (2) 2,499 822 1,677 -- --
-------- -------- -------- -------- ---
Total Contractual Cash Obligations $111,331 $ 80,322 $ 29,138 $ 1,871 $ --
======== ======== ======== ======== ====
(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 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. Trial in this case is set for summer 2007. 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 June
30, 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.
31
Revenue Recognition
The Company's revenues have historically been recorded in accordance with the
Securities and Exchange Commission's (SEC) Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition and Emerging Issues Task Force (EITF) No. 00-21,
Accounting For Revenue Arrangements With Multiple Deliverables. TerreStar will
recognize revenue primarily from satellite utilization charges and, to a lesser
extent, from providing managed services to our customers. TerreStar will
recognize revenue over the period during which services are provided, as long as
collection of the related receivable is reasonably assured. TerreStar will make
estimates regarding the likelihood of collection based upon an evaluation of the
customer's creditworthiness, the customer's payment history and other conditions
or circumstances that may affect the likelihood of payment, such as political
and economic conditions in the country in which the customer is located. When
TerreStar has determined that the collection of payments for satellite
utilization or managed services is not reasonably assured at the time the
service is provided, we will defer recognition of the revenue until such time
that collection is believed to be reasonably assured or the payment is received.
TerreStar will also maintain an allowance for doubtful accounts for customers'
receivables where the collection of these receivables is uncertain. If
TerreStar's estimate of the likelihood of collection is not accurate, they may
experience lower revenue or an increase in our bad debt expense. Upon receipt of
payments from customers in advance of our providing services and amounts that
might be received from customers pursuant to satellite capacity prepayment
options will be recorded in the financial statements as deferred revenue. These
deferred amounts will be recognized as revenue on a straight-line basis over the
agreement terms. Our revenue recognition policy as described above complies with
the criteria set forth in Staff Accounting Bulletin No. 101, Revenue
Recognition, as amended by Staff Accounting Bulletin No. 104.
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
32
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.
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:
33
- - 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%.
34
- - Operating expenses covering the operation of satellite facilities. These
include a network operations center, tracking, telemetry and command
systems, interconnect costs, in-orbit insurance, technical staff, and
general and administrative personnel Under the projected expense structure,
EBITDA margins grow to 60% early in the forecast period and expand to 70%
later in the forecast period.
- - 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.
35
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 second 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 June 30, 2006 is that
restated information. The quarterly statements provided herein reflect the
adjustments for these restatements. No additional restatements related to this
deficiency were required.
36
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.
37
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
The following risk factors are material modifications from those contained in
our Annual Report on Form 10-K.
An investment in our common stock involves risks. Any of the following risks, as
well as other risks and uncertainties, could harm our business and financial
results and cause the value of our securities to decline, which in turn could
cause investors to lose all or part of their investment in us. The risks below
are not the only ones we face. Additional risks not currently known to us, or
that we currently deem immaterial, also may impair our business.
Risks Related to our Business
Our primary assets are our ownership interests in TerreStar and MSV, and
therefore any factors that materially and adversely affect TerreStar and/or MSV
will materially and adversely affect Motient.
We own approximately 43% of MSV and 55% of TerreStar (each on a fully
diluted basis) and our ownership of TerreStar and MSV comprise substantially all
of our value. We have entered into ownership consolidation agreements described
herein or in documents incorporated by reference herein that will materially
increase our ownership of TerreStar and decrease our ownership of MSV. The
business plans of both TerreStar and MSV involve the development of a
next-generation network that is subject to significant risks, many of which are
described in this prospectus supplement. To the extent either MSV or TerreStar
is unsuccessful in implementing and executing upon its business strategy, the
value of our investment in TerreStar and MSV will be materially and adversely
affected.
TerreStar needs substantial financing to develop and construct its network.
We expect to require significant funding to finance our business strategy,
including construction and launch of our satellites, build out of our
terrestrial network, development and deployment of our technology. The costs may
be greater than our current estimates as we still need to finalize agreements
for the construction of the terrestrial component of our network. We estimate
that the total cost to develop and construct the satellite component of
TerreStar's network in the United States and Canada, including the costs of our
first satellite, TerreStar-1, its launch, launch insurance and associated ground
components, will be approximately $550 million. This estimate does not include
the costs associated with constructing and launching a spare satellite, which we
refer to as TerreStar-2, and which is required by the FCC to be completed within
one year following the commencement of operation of TerreStar-1.
38
In addition, we will require significant funds to deploy the ATC portion of
our network. If we decide to construct the towers for this terrestrial network,
the total cost to deploy the network could be substantial, and the magnitude of
this cost would depend on the choice of air interface technology, the number of
markets deployed, the scope of the terrestrial build within each market and the
targeted wireless service offering (limited mobile, portable or fully mobile).
If we decide not to build some or all of the towers for the terrestrial
component ourselves, we will incur costs to utilize existing terrestrial
networks, which may include leasing space on tower sites at a substantial cost.
Our business is subject to a high degree of government regulation.
The communications industry in which we operate is highly regulated by
governmental entities and regulatory authorities, including the FCC and Industry
Canada. Our business is completely dependent upon obtaining and maintaining
regulatory authorizations to operate our planned integrated satellite and
terrestrial network. For example, the FCC and/or Industry Canada could refuse to
approve, or impose material conditions on, the assignments of 2 GHz
authorizations to us. In addition, we could fail to obtain authorization to
operate an ATC network, which we have not yet applied for. Failure to obtain or
maintain necessary governmental approvals would impair our ability to implement
our planned network, and would have a material adverse effect on our financial
condition. Additional important risks relating to our regulatory framework are
listed below under "Risk Factors -Regulatory Risks".
TerreStar's success will depend on market acceptance of new and unproven
technology.
Other than satellite radio, we are not aware of any integrated satellite
and terrestrial wireless network in commercial operation. As a result,
TerreStar's proposed market is new and untested and we cannot predict with
certainty the potential demand for the services it plans to offer or the extent
to which we will meet that demand. There may not be sufficient demand to enable
us to generate positive cash flow, and TerreStar's cost structure may not permit
it to meet its obligations. Among other things, end user acceptance of
TerreStar's network and services will depend upon:
o its ability to provide integrated wireless services that meet with
market demand;
o its ability to provide attractive service offerings to its anticipated
customers;
o the cost and availability of handsets and other user equipment that is
similar in size, weight and cost to existing standard wireless
devices, but incorporate the new technology required to operate on our
network;
o federal, state, provincial, local and international regulations
affecting the operation of satellite networks and wireless systems;
o whether competitors develop new and alternative technologies;
o the price of our service offerings; and
o general and local economic conditions.
39
We cannot successfully implement our business plan if we cannot gain market
acceptance for our planned products and services. Any material miscalculation
with respect to our service offerings or operating strategy will adversely
affect our ability to operate our business, our financial condition and our
results of operations.
Spectrum assets are difficult to value and may decline in value.
In the future, we may form strategic partnerships to maximize value for our
spectrum, network assets and combined service offerings in the United States and
Canada. Values that we may be able to realize from such partnerships would
depend in part on the value ascribed to our spectrum. If valuations of spectrum
assets decline, a partner may not be willing to invest a significant amount in
us based on our spectrum and other assets or invest on terms attractive to us or
our investors. Valuations of spectrum in other frequency bands have historically
been volatile and we cannot predict at what amount a future partner may be
willing to value our spectrum and other assets.
The FCC or Industry Canada could allocate additional spectrum that could be
used to compete with us, or that could decrease the perceived market value of
our wireless capacity. The FCC, for example, recently scheduled an auction of 90
MHz of spectrum in the 1.7/2.1 GHz range for August 2006. Additional spectrum
auctions may be scheduled by the FCC and Industry Canada in the future. The FCC
and Industry Canada may take other action, such as spectrum leasing, to promote
the availability or more flexible use of existing satellite or terrestrial
spectrum allocations. The acquisition by our competitors of rights to use
additional spectrum could have a material adverse effect on the value of our
spectrum authorizations.
We may be unable to achieve our business and financial objectives because the
communications industry is highly competitive.
In seeking market acceptance for our network services, we will encounter
competition from many sources, including:
o existing satellite services from other operators;
o conventional terrestrial wireless services;
o traditional wireline voice and high-speed data offerings;
o terrestrial land-mobile and fixed services; and
o next generation integrated services that may be offered in the future
by other networks operating in the 2 GHz MSS band, L-band or Big Low
Earth Orbiting, or LEO, bands.
The communications industry includes major domestic and international
companies, many of which have financial, technical, marketing, sales,
distribution and other resources substantially greater than we do and which
provide a wider range of services than will be provided by us. While we believe
our services will be complementary to terrestrial wireless services, we may be
adversely affected by competition from companies that provide services using
existing wireless technologies.
40
We may also face competition from companies using new technologies and new
integrated networks in the future. For instance, the FCC has authorized ICO
North America and its affiliates, or ICO, to use radio frequencies for mobile
satellite services within the 2 GHz MSS band. Although ICO currently has no
operations in this band, they have announced plans to launch integrated networks
similar to those envisioned by us. We will also face competition with respect to
entering into strategic partnerships. Failure to offer services that compete
effectively with potential competitors or to attract strategic partners would
have a material adverse effect on our business and financial condition.
We may not be able to take advantage of, or may be negatively affected by,
industry consolidation.
Industry consolidation could adversely affect us by increasing the scale or
scope of our competitors and thereby making it more difficult for us to compete.
We may pursue acquisitions, joint ventures or other strategic transactions on an
opportunistic basis. However, we may not find or be able to take advantage of
any suitable assets or facilities. If we do pursue acquisitions, joint ventures
or other strategic transactions, we may face costs and risks arising from any
transaction, including integrating a new business into our business or in
managing a joint venture. These may include legal, organizational, financial and
other costs and risks.
TerreStar's network will depend on the development and integration of complex
and untested technologies.
TerreStar must integrate a number of sophisticated satellite, terrestrial
and wireless technologies that typically have not been integrated in the past,
and some of which are not yet fully developed, before they offer their proposed
ATC satellite network services. These include, but are not limited to:
o Satellites that have significantly larger antennas and are
substantially more powerful than any satellites currently in use;
o Use of spot-beam technology;
o Development of chipsets for mobile handsets that are capable of
receiving a satellite and ground-based signals;
o Development of integrated satellite and terrestrial-capable mobile
handsets with attractive functionality and price; and
o Development of ground infrastructure hardware and software capable of
supporting our communication system and demands of our customers.
As a result, unanticipated technological problems or delays relating to the
development and use of our technology may prove difficult, time consuming,
expensive or impossible to solve. Any of these may result in delays in
implementing our infrastructure and would adversely result our financial
condition.
41
TerreStar's satellites are subject to construction and delivery delays.
TerreStar is dependent on third parties to build and launch its satellites.
The manufacture of such satellites is technically complex and subject to
construction and delivery delays that could result from a variety of causes,
including the failure of third-party vendors to perform as anticipated and
changes in the technical specifications of the satellites. Delivery of the
satellites may not be timely. Such delays could adversely affect achievement of
TerreStar's FCC and Industry Canada-required construction and launch milestones
and the planned introduction of our network.
During any period of delay, TerreStar would continue to have significant
cash requirements that could materially increase the aggregate amount of funding
it needs. TerreStar may not be able to obtain additional financing on favorable
terms, or at all, during periods of delay. Delays could also make it more
difficult for TerreStar to secure strategic partnerships and could force us to
reschedule the anticipated satellite launch dates. Another launch slot may not
be available within the time period required to meet FCC milestones.
TerreStar's satellites could be damaged or destroyed during launch or deployment
or could fail to achieve their designated orbital location.
TerreStar's satellite launches and deployments may not be successful. A
percentage of satellites never become operational because of launch failures,
satellite destruction or damage during launch or improper orbital placement,
among other factors. Launch failure rates vary depending on the chosen launch
vehicle and contractor. TerreStar may not be able to launch its satellites on
vehicles with the highest success rates and, even if it does, these vehicles may
experience launch failures despite their track records. Even if successfully
launched into orbit, a satellite may use more fuel than planned to enter into
its orbital location, which could reduce the overall useful life of the
satellite, or may never enter or remain in its designated orbital location,
which could render it inoperable. Deployment and use of the antennas on
TerreStar's satellites, which are larger than those on most commercial
satellites, pose additional risks. If one or more of the launches or deployments
fail, TerreStar will suffer significant delays that will damage its business,
cause it to incur significant additional costs, and adversely affect its ability
to generate revenue.
Satellites have a limited useful life and premature failure of our satellites
could damage our business.
During and after their launch, all satellites are subject to equipment
failures, malfunctions and other problems. A number of factors could decrease
the expected useful lives or the utility of our satellites, including:
o defects in construction;
o faster than expected degradation of solar panels;
o malfunction of component parts;
o loss of fuel on board;
42
o higher than anticipated use of fuel to maintain the satellite's
orbital location or higher than anticipated use of fuel during orbit
raising following launch;
o random failure of satellite components not protected by back-up units;
o electromagnetic storms; and
o collisions with other objects in space.
The interruption of our business caused by the loss or premature
degradation of a satellite would continue until we either extended service to
end users on another satellite or built and launched additional satellites. If
one of our satellites were to malfunction or to fail prematurely, it could
affect the quality of our service, substantially delay the commencement or
interrupt the continuation of our service, harm our reputation, and adversely
affect our business and our financial condition.
Damage to TerreStar's satellites may not be fully covered by insurance.
TerreStar intends to purchase launch and in-orbit insurance policies for
its satellites from global space insurance underwriters. If the launch of
TerreStar's satellite system is a total or partial failure, its insurance may
not fully cover its losses, and these failures may also cause insurers to
include additional exclusions in TerreStar's insurance policies when they come
up for renewal. We may not be able to obtain additional financing to construct,
launch and insure a replacement satellite or such financing may not be available
on terms favorable to us. We expect that TerreStar will not buy insurance to
cover, and would not have protection against, business interruption, loss of
business or similar losses. Also, any insurance TerreStar obtains will likely
contain certain customary exclusions and material change conditions that would
limit our coverage.
TerreStar will depend on a limited number of suppliers and service providers to
design, construct and maintain its network.
We will rely on contracts with third parties to design and build
TerreStar's satellites, as well as the terrestrial components of TerreStar's
network. These include the integrated MSS and ATC systems, technology for
communications between the satellite and terrestrial equipment, and the
development of a small, mass-market dual-mode MSS/ATC handset and/or chipset
that will meet the FCC's requirements, none of which exists today. We also
intend to enter into relationships with additional third party contractors in
the future for additional satellites, equipment and maintenance and other
services relating to TerreStar's network. There are only a few companies capable
of supplying the products and services necessary to implement and maintain
TerreStar's network. As a result, if any of our third-party contractors
terminates its business relationship with us, or we seek to find additional
partners, we may not be able to find a replacement in a timely manner or on
terms satisfactory to us. This could lead to delays in implementing TerreStar's
network and interruptions in providing service to our customers, which would
adversely affect our financial condition. In addition, the development and
rollout of the terrestrial network by these third parties may also be subject to
unforeseen delays, cost overruns, regulatory changes, engineering and
technological changes and other factors, some of which may be outside of
TerreStar's control. If TerreStar is not able to enter into partnering
relationships and construct the terrestrial component of its network, it may not
be able to implement its business plan and its financial condition could be
adversely affected.
43
Delays in deployment of our terrestrial network due to limited tower
availability, local zoning approvals or adequate telecommunications transport
capacity would delay and reduce our revenues.
Our business strategy includes the deployment of a terrestrial network.
Tower sites or leases of space on tower sites and authorizations in some
desirable areas may be costly and time intensive to obtain. If we are unable to
obtain tower space, local zoning approvals or adequate telecommunications
transport capacity to develop our network in a timely fashion, the launch of our
network would be delayed, our revenues would be delayed and less than expected
and our business would suffer.
Our planned terrestrial network or other ground facilities could be damaged by
natural catastrophes or man-made disasters.
Since our planned terrestrial network will be attached to buildings, towers
and other structures around the country, an earthquake, tornado, flood or other
catastrophic event or other man-made disaster or vandalism could damage our
network, interrupt our service and harm our business in the affected area.
Temporary disruptions could damage our reputation and the demand for our
services and adversely affect our financial condition.
TerreStar and its partners may not be able to identify, develop and market
innovative products and therefore may not be able to compete effectively.
TerreStar's ability to implement its business plan depends in part on its
ability to gauge the direction of commercial and technological progress in key
markets and to fund and successfully develop and market products in its targeted
markets. TerreStar's competitors may have access to technologies not available
to TerreStar, which may enable it to provide communications services of greater
interest to end users, or at a more competitive cost. TerreStar may not be able
to develop new products or technology, either alone or with third parties, or
license any additional necessary intellectual property rights from third parties
on a commercially competitive basis. The satellite and wireless industries are
both characterized by rapid technological change, frequent new product
innovations, changes in customer requirements and expectations and evolving
industry standards. If TerreStar or its partners are unable to keep pace with
these changes, its business may be unsuccessful. Products using new
technologies, or emerging industry standards, could make its technologies
obsolete. If TerreStar or its partners fail to keep pace with the evolving
technological innovations in its markets on a competitive basis, our financial
condition and results of operation could be adversely affected. In particular,
if existing wireless providers improve their coverage of terrestrial-based
systems to make them more ubiquitous, demand for products and services utilizing
TerreStar's network could be adversely affected or fail to materialize.
A market for TerreStar's services may fail to develop.
Demand for the services TerreStar plans to offer may not grow or be
accepted generally, or in particular geographic markets, for particular types of
services, or during particular time periods. A lack of demand could adversely
affect TerreStar's ability to sell its services, enter into strategic
44
partnerships or develop and successfully market new services. In addition,
demand patterns shift over time, and user preferences may not favor the services
TerreStar plans to offer when its network is operational.
An economic downturn in the United States or Canada or changes in consumer
spending could adversely affect our financial condition.
We expect that the primary user base for our network will include customers
of partners we contract with and customers within certain vertical markets (for
example, public safety, fleet management and consumer telematics). In the event
that the United States or Canada experiences an economic downturn and spending
by end users drops, our business may be adversely affected.
Demand for the services we plan to offer may not grow or be accepted
generally, or in particular geographic markets, for particular types of
services, or during particular time periods. A lack of demand could adversely
affect our ability to sell our services, enter into strategic partnerships or
develop and successfully market new services. In addition, demand patterns shift
over time, and consumer preferences may not favor the services we plan to offer.
TerreStar depends on licenses of critical intellectual property from a
competitor.
TerreStar licenses the technology it plans to use to operate its network
from ATC Technologies, LLC, a wholly-owned subsidiary of MSV, which is one of
TerreStar's major competitors, and of which Motient currently is a significant
stockholder. Following the MSV ownership consolidation transactions, we will
cease to be a significant stockholder of MSV. MSV has rights to approximately 30
MHz of spectrum in the L-band and is positioned to achieve device transparency
and plans to offer services that compete with the services that TerreStar plans
to offer.
ATC Technologies granted to TerreStar a perpetual, non-exclusive,
royalty-free, fully paid up, nontransferable (except for certain rights to
sublicense), non-assignable, limited purpose right and license to certain
patents and technologies owned by ATC Technologies for the sole purpose of
providing 2 GHz MSS band services in any geographic territory in the entire
world in which TerreStar, one of its affiliates or a joint venture or strategic
alliance into which TerreStar has entered is authorized to provide 2 GHz MSS
band services. ATC Technologies granted similar rights to the same intellectual
property to MSV for L-band services in any geographic territory in the entire
world where MSV, one of its affiliates or a joint venture or strategic alliance
into which MSV has entered is authorized to provide L-band services. In
addition, ATC Technologies granted rights to MSV International, LLC, or MSVI, a
subsidiary of MSV, in and to the same intellectual property for the purpose of
providing communications services anywhere in the entire world, excluding
services relating to the 2 GHz MSS band. ATC Technologies has also contractually
committed to license to us, pursuant to the same terms as set forth above,
certain additional intellectual property that may be developed, licensed,
acquired or used by MSV, MSVI or ATC Technologies during a collaboration period
that will continue, unless terminated earlier, for a period of approximately
seven more years.
TerreStar's license agreements with ATC Technologies may be terminated,
among other reasons, if any person directly or indirectly acquires control of
TerreStar by ownership, control of voting securities, by contract or otherwise.
In the event TerreStar's license agreements with ATC Technologies are
terminated, TerreStar may not be able to obtain licenses for alternative
technologies on terms as favorable to it as those obtained through the license
45
agreement with ATC Technologies, if at all. If ATC Technologies terminates or
breaches its agreements with TerreStar or if TerreStar and ATC Technologies have
a significant dispute regarding the licensed intellectual property, such
termination, breach or significant dispute could have a material adverse effect
on our business.
The intellectual property TerreStar licenses from ATC Technologies includes
issued patents and technology subject to patent applications. In addition, any
patents held by ATC Technologies may be challenged, invalidated or circumvented.
TerreStar also relies upon unpatented proprietary technology and other
trade secrets, the vast majority of which TerreStar also licenses from ATC
Technologies. While it is TerreStar's practice to enter into confidentiality
agreements with its employees and third parties to protect its proprietary
expertise and other trade secrets, these agreements may not be enforceable, or,
even if legally enforceable, TerreStar may not have adequate remedies for
breaches of such agreements. The failure of TerreStar's patents or
confidentiality agreements to protect its proprietary technology or trade
secrets could adversely affect its ability to implement its business plan and
its financial condition. In addition, because TerreStar licenses much of the
proprietary technology and trade secrets upon which it relies from ATC
Technologies and because ATC Technologies also licenses that technology and
those trade secrets to MSV and MSVI, with a right to sublicense, the failure of
ATC Technologies, MSV, MSVI or any of their licensees or sublicensees to protect
such proprietary technology and trade secrets or the lack of enforceability or
breach of agreements entered into by ATC Technologies, MSV, MSVI or any of their
licensees or sublicensees, could also adversely affect TerreStar's ability to
implement its business plan and its financial condition.
All of the intellectual property that TerreStar has licensed from ATC
Technologies is subject to a first lien issued in favor of the holder of MSV's
outstanding senior secured notes due 2013. In the event that MSV defaults on its
financial obligations under the notes and related obligations, the noteholders
may require ATC Technologies to assign to the noteholders certain intellectual
property rights, including patents and patent applications. TerreStar may be
adversely affected in the event that ownership of the patents and know-how that
it currently licenses from ATC Technologies is transferred to a third party.
We have a contractual obligation to assign or exclusively license to a
competitor any intellectual property that we may develop, license, use or
acquire over the next seven years.
In accordance with the same license agreement pursuant to which we obtain
license rights from ATC Technologies for the critical intellectual property upon
which we depend, we have a contractual obligation to assign to or, if we are
prohibited from assigning, license to, ATC Technologies all intellectual
property that we develop, license, use or acquire during a collaboration period,
which will continue for approximately seven years. During this collaboration
period, we, MSV and MSVI have agreed to assign or, if legally prohibited from
assigning, license, intellectual property to ATC Technologies, which will, in
turn, license back such intellectual property to us, MSV and MSVI, with the
right to sublicense such intellectual property pursuant to the same terms under
which we license other intellectual property from ATC Technologies. We have a
separate eight-year contractual obligation to fund 50% of the intellectual
property-related expenses incurred by ATC Technologies, including but not
limited to research expenses, of which seven years are remaining. Pursuant to
this contractual obligation, we have a contractual commitment to fund a minimum
of $1 million dollars annually. We have the right to "opt out" of future
46
intellectual property development projects if and to the extent that our
financial obligation would exceed $1 million per year, and to forgo our right to
receive license rights stemming from future projects. This collaboration could
limit our ability to effectively differentiate ourselves from certain of our
competitors.
We may incur costs, and may not be successful, defending our rights to
intellectual property upon which we are dependent.
In developing and implementing our network, we will need to develop or
obtain rights to additional technology that is not currently owned by us or
licensed to us. We may be unsuccessful in developing additional technologies
required to develop and implement our network, and we may not be able to protect
any intellectual property associated with technologies we develop from
infringement by third parties. In addition, if we are able to develop or license
such technologies, there can be no assurance that any patents issued or licensed
to us will not be challenged, invalidated or circumvented. Litigation to defend
and enforce these intellectual property rights could result in substantial costs
and diversion of resources and could have a material adverse effect on our
financial condition and results of operations, regardless of the final outcome
of such litigation.
Litigation to defend and enforce our intellectual property rights could
result in substantial costs and diversion of resources and could have a material
adverse effect on our financial condition and results of operations, regardless
of the final outcome of such litigation. Despite our efforts to safeguard and
maintain our proprietary rights, we may not be successful in doing so, and our
competitors may independently develop or patent technologies equivalent or
superior to our technologies. We believe that third parties may infringe upon
our intellectual property now and in the future.
We may be unable to determine when third parties are using our intellectual
property rights without our authorization. The undetected or unremedied use of
our intellectual property rights or the legitimate development or acquisition of
intellectual property similar to ours by third parties could reduce or eliminate
any competitive advantage we have as a result of our intellectual property,
adversely affecting our financial condition and results of operations. If we
must take legal action to protect, defend or enforce our intellectual property
rights, any suits or proceedings could result in significant costs and diversion
of our resources and our management's attention, and we may not prevail in any
such suits or proceedings. A failure to protect, defend or enforce our
intellectual property rights could have an adverse effect on our business,
financial condition and results of operations.
Third parties may claim that our products or services infringe their
intellectual property rights.
Other parties may have patents or pending patent applications relating to
integrated wireless technology that may later mature into patents. Such parties
may bring suit against us for patent infringement or other violations of
intellectual property rights. The development and operation of our system may
also infringe or otherwise violate as-yet unidentified intellectual property
rights of others. If our products or services are found to infringe or otherwise
violate the intellectual property rights of others, we may need to obtain
licenses from those parties or substantially re-engineer our products or
processes in order to avoid infringement. We may not be able to obtain the
necessary licenses on commercially reasonable terms, if at all, or be able to
47
re-engineer our products successfully. Moreover, if we are found by a court of
law to infringe or otherwise violate the intellectual property rights of others,
we could be required to pay substantial damages or be enjoined from making,
using, or selling the infringing products or technology. We also could be
enjoined from making, using, or selling the allegedly infringing products or
technology, pending the final outcome of the suit. Our financial condition could
be adversely affected if we are required to pay damages or are enjoined from
using critical technology.
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.
We do not generate sufficient cash from operations to cover our operating
expenses, and it is unclear when, or if, we will be able to do so. We will
require substantial additional funds to meet capital expenditures and other
non-operating cash expenses, including but not limited to capital expenditures
required to complete and launch TerreStar's satellite currently under
construction, as well as its ground components. There can be no assurance that
we will be able to acquire sufficient funds in the amounts or at the time that
funding is required or that we will be able to obtain outside financing on
acceptable terms, or at all. If we are not successful in raising additional
financing, we may have to curtail or delay certain initiatives until such
financing is secured.
We will continue to incur significant losses.
If we do not become profitable, we could have difficulty obtaining funds to
continue our operations. We have incurred net losses every year since we began
operations. These losses are due to the costs of developing and building our
network and the costs of developing, selling and providing products and
services. Although we have significantly reduced our losses, we will continue to
have losses in the future.
The value of our intangible assets in our financial statements is based on
assumptions and estimates, which may not be correct.
The valuation of our intangible assets in our financial statements is based
on various assumptions and other considerations, including the assumptions and
estimates related to future periods that we used to determine these values.
Although we have attempted to be as accurate as possible in making and applying
the assumptions and estimates used in the valuation of our intangible assets,
including but not limited to those outlined herein, we can provide no assurances
that these assumptions and estimates for future periods will ultimately be
proven correct. Our actual operating results for future periods may be
materially different than our assumptions and estimates for future periods,
which may cause the actual value of these assets to be materially different than
our estimates. We will test these assets in the future for impairment, which may
result in a decrease in the book value of these assets.
We do not expect to pay any cash dividends on our common stock for the
foreseeable future.
We have never paid cash dividends on our common stock and do not
anticipated that any cash dividends will be paid on the common stock for the
foreseeable future. The payment of any cash dividend by us will be at the
discretion of our board of directors and will depend on, among other things, our
earnings, capital requirements and financial condition. In addition, pursuant to
the terms of our Series A and Series B Preferred Stock, no dividends may be
48
declared or paid, and no funds shall be set apart for payment, on shares of
Motient common stock, unless (i) written notice of such dividend is given to
each holder of shares of Series A and Series B Preferred not less than 15 days
prior to the record date for such dividend and (ii) a registration statement
registering the resale of shares of common stock issuable to the holders of the
Series A and Series B Preferred has been filed with the SEC and is effective on
the date Motient declares such dividend. Also, under Delaware law, a corporation
cannot declare or pay dividends on its capital stock unless it has an available
surplus. The terms of any future indebtedness of our subsidiaries also may
generally restrict the ability of some of our subsidiaries to distribute
earnings or make other payments to us.
We may have to take actions which are disruptive to our business to avoid
registration under the Investment Company Act of 1940.
We may have to take actions which are disruptive to our business if we are
deemed to be an investment company under the Investment Company Act of 1940. Our
equity investments, in particular our ownership interests in MSV, may constitute
investment securities under the Investment Company Act. A company may be deemed
to be an investment company if it owns investment securities with a value
exceeding 40% of its total assets, excluding cash items and government
securities and subject to certain other exclusions. Investment companies are
required to register under and comply with the Investment Company Act unless an
exclusion or SEC safe harbor applies. If we were to be deemed an investment
company, we would become subject to the requirements of the Investment Company
Act. As a consequence, we would be prohibited from engaging in business as we
have in the past and might be subject to civil and criminal penalties for
noncompliance. In addition, certain of our contracts might be voidable, and a
court-appointed receiver could take control of us and liquidate our business.
Ongoing litigation could negatively impact our value and our ability to
successfully implement our business plan
Certain stockholders affiliated with one of our former directors, James D.
Dondero, have initiated multiple lawsuits against Motient. Collectively, these
lawsuits (i) seek damages related to the issuance of our Series A Preferred
stock, including rescission, and (ii) seek to enjoin our proposed transaction to
consolidate the ownership of MSV and TerreStar. If Mr. Dondero is successful in
his claims, these suits could materially negatively impact the value of Motient,
including but not limited to requiring Motient to rescind the outstanding Series
A Preferred Stock. Although we believe these suits to be without merit, we can
provide no assurances that we will ultimately prevail in these matters.
Our failure to achieve and maintain effective internal control over financial
reporting in accordance with the 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.
In the course of our assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2005, which assessment was
conducted over the course of 2005 and the first quarter of 2006 in connection
with the preparation of 2005 audited financial statements and our Annual Report
on Form 10-K, we identified one material weaknesses in our internal control over
financial reporting. This material weakness in our internal control over
49
financial reporting, as described in our Annual Report on Form 10-K, as well as
any other weaknesses or deficiencies that may exist or hereafter arise or be
identified, could harm our business and operating results, and could result in
adverse publicity and a loss in investor confidence in the accuracy and
completeness of our financial reports, which in turn could have a material
adverse effect on our stock price, and, if such weaknesses are not properly
remediated, could adversely affect our ability to report our financial results
on a timely and accurate basis.
Although we believe that we have taken steps to remediate this material
weaknesses, we cannot assure you that this remediation will be successful or
that additional deficiencies or weaknesses in our controls and procedures will
not be identified. In addition, we cannot assure you that our independent
registered public accounting firm will agree with our assessment that our
material weakness has been remediated.
Failure to complete the TerreStar and MSV ownership consolidation transactions
could negatively impact our stock price and future business and financial
results.
The closing of the TerreStar and MSV ownership consolidation transactions
is subject to numerous conditions, many of which are not within the control of
Motient or the other parties to the transactions, such as:
o the continued accuracy of the representations and warranties of the
parties;
o the performance by the parties of their obligations under the
agreements;
o receipt of all necessary FCC approvals;
o expiration or early termination of applicable waiting periods under
anti-trust laws; and
o the effectiveness of various registration statements required by the
agreements.
Although Motient and the other parties to the transactions have agreed to
use their commercially reasonable efforts to obtain all necessary regulatory
approvals and satisfy all other closing conditions, there is no assurance that
the parties will receive the necessary regulatory approvals or satisfy the other
conditions to the completion of the transactions.
Our intended dividend to the holders of our common stock of the shares of
SkyTerra common stock that we will receive upon closing of the MSV ownership
consolidation transaction could be delayed, and the value of those shares could
decrease between the time of the closing and the time we are able to pay that
dividend.
Upon the closing of the MSV ownership consolidation transactions, we intend
to distribute 25.5 million of the shares of common stock of SkyTerra we receive
in these transactions as a dividend to the holders of our common stock. This
dividend will require registration of such common stock with the SEC, which is a
condition to the closing of the MSV ownership consolidation transaction.
However, the registration statement regarding this dividend could cease to be
effective or otherwise be available for payment of the proposed dividend for
various reasons beyond our control, such as the occurrence of material
developments that require the registration statement to be updated or amended.
In addition, the terms of our outstanding Series A Preferred Stock prohibit the
50
payment of dividends on our common stock unless the resale of the shares of
common stock into which this preferred stock is convertible is registered under
an effective registration statement. As a result of a dispute with the holder of
this preferred stock regarding its validity, we are currently unable to effect
the registration of the resale of the shares of common stock underlying this
preferred stock. We are working to resolve this dispute so that we can either
register the resale of the underlying shares of common stock or determine that
the preferred stock is not valid, in which case the restriction on the payment
of dividends will be of no effect. Until this dispute is resolved, we will not
be able to declare or pay the proposed dividend of the shares of SkyTerra common
stock. The value of these shares of SkyTerra common stock could decrease between
the time of the closing of the MSV ownership consolidation transaction and the
date on which we are ultimately able to pay such dividend to our common
stockholders, in which case the value of the dividend received by our common
stockholders would be less than what they could have received had we been able
to pay the dividend sooner.
Regulatory Risks
TerreStar could lose its FCC and Industry Canada authorizations and be subject
to fines or other penalties.
TerreStar must meet significant construction and implementation milestones
and comply with complex and changing FCC and Industry Canada rules and
regulations to maintain the authorizations to use the assigned spectrum and
orbital slot. The milestones include a successful satellite launch by November
2007 and certification that the system is operational by November 2008. Once the
system is operational, we will be required to maintain satellite coverage of all
50 states, Puerto Rico, the United States Virgin Islands and all regions of
Canada that are within the coverage contour described in our Industry Canada
authorization, and provide an integrated service offering in these locations. We
may not meet these milestones, satisfy these service requirements or comply with
other applicable rules and regulations. Non-compliance by us with these or other
conditions, including other FCC or Industry Canada gating or ongoing service
criteria, could result in fines, additional conditions, revocation of the
authorizations, or other adverse FCC or Industry Canada actions. The loss of
this spectrum authorization could prevent us from implementing our business plan
and have a material adverse effect on our financial condition.
We have not yet applied for, and may not receive, certain regulatory approvals
that are necessary to our business plan.
We may be required to obtain additional approvals from national and local
authorities in connection with the services that we wish to provide in the
future. For example, we must apply for ATC licenses in the United States and
Canada separately from any satellite authorizations we may already have. We
cannot be granted an ATC license until we can show that we will comply in the
near future with the FCC's and Industry Canada's ATC gating criteria, which we
may not be able to satisfy. In addition, the manufacturers of our ATC user
terminals and base stations will need to obtain FCC equipment certifications,
and similar certifications in Canada. In addition, our future customers or
partners, or our business strategy, may require us to launch additional
satellites, including TerreStar-2, in order to increase redundancy and decrease
the risk of having only one satellite in orbit. In order to do so, we must
obtain regulatory approval for one or more additional orbital slots, or
permission from Industry Canada to launch additional satellites into our orbital
slot for TerreStar-1, as well as a waiver of the FCC requirement that our spare
satellite remain on the ground.
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Industry Canada and the FCC may refuse to grant these and other necessary
regulatory approvals in the future, or they may impose conditions on these
approvals that we are unable to satisfy. Failure to obtain any necessary
regulatory approvals could impair our ability to execute our business plan, and
could materially adversely affect our financial condition.
The FCC and Industry Canada may not permit TMI Communications to assign its
authorizations to TerreStar, and the FCC many not permit the letter of intent
authorization to be modified.
In December 2002, we and TMI Communications jointly applied to the FCC for
authority to assign TMI Communications' 2 GHz MSS authorization to us. Certain
wireless carriers have opposed this assignment application, which will need to
be amended to reflect certain changes in our ownership and the eventual
assignment of the Canadian MSS authorization to us. The amendments may provide a
new opportunity for parties to object to the proposed assignment. In addition,
we and TMI Communications have agreed to the transfer of TerreStar-1 and the
assignment of TMI Communications' Industry Canada authorization to TerreStar
Canada, which transactions are subject to the prior approval of Industry Canada.
If the FCC or Industry Canada denies requests to complete these transactions, we
will not be able to serve the U.S. or Canadian market as the licensee of the 2
GHz MSS satellite. We also have to apply to modify our FCC letter of intent
authorization to reflect the actual technical details of our satellite. Third
parties will have an opportunity to oppose the modification application.
The Industry Canada authorization to construct and operate a satellite in a
Canadian orbital slot is held, and upon completion of construction, launch and
in-orbit testing our satellite will be owned, by a Canadian entity over which we
do not exercise control.
The Industry Canada authorization to construct and operate a 2 GHz MSS
satellite in a Canadian orbital position is currently held by TMI
Communications, and will be assigned to TerreStar Canada, both of which are
entities that we do not and will not control. Upon completion of this
assignment, which is pending Industry Canada approval, and upon completion of
construction, launch and in-orbit testing, TerreStar-1 will be transferred to
TerreStar Canada. Under the Radiocommunication Act (Canada) and the
Telecommunications Act (Canada), and the regulations promulgated thereunder, we
may only own a 20% voting equity interest in TerreStar Canada, along with a 33%
voting equity interest in TerreStar Canada Holdings, which will be TerreStar
Canada's parent and 80% voting equity owner. The rules and regulations further
provide that the business and operations of TerreStar Canada cannot otherwise be
controlled by non-Canadians. TMI Communications, a Canadian-owned and controlled
third party, will own a 66% voting interest in TerreStar Canada Holdings.
Although we will have certain contractual rights with respect to the business
and operations of, and certain negative protections as a minority shareholder
in, both TerreStar Canada and TerreStar Canada Holdings, TMI Communications will
control the boards of directors of TerreStar Canada and TerreStar Canada
Holdings and, with certain exceptions, we have no ability to control the
business or operations of TerreStar Canada, which will hold the Industry Canada
authorization and will own TerreStar-1.
52
FCC and Industry Canada decisions affecting the amount of 2 GHz MSS band
spectrum assigned to us are subject to reconsideration and review.
In December 2005, the FCC provided TMI Communications a reservation of 10
MHz of uplink spectrum and 10 MHz of downlink spectrum in the 2 GHz MSS band,
and TMI Communications has a contractual obligation to assign that authorization
to us. Two parties who have challenged the December 2005 ruling, and one party
has also challenged a separate decision by the FCC to cancel its former 2 GHz
MSS authorization. If these challenges succeed, the amount of 2 GHz MSS spectrum
that is available to us may be reduced to a level that is insufficient for us to
implement our business plan. Furthermore, in Canada, our spectrum could be
reduced from 20 MHz to 13.3 MHz if Industry Canada determines that this is
necessary in order to license another MSS operator in Canada. Any reduction in
the spectrum we are authorized to use could impair our business plan and
materially adversely affect our financial condition.
Our use of the 2 GHz MSS band is subject to successful relocation of existing
users.
In the United States and Canada, our operations at the 2 GHz MSS band are
subject to successful relocation of existing Broadcast Auxiliary Services, or
BAS, licensees and other terrestrial licensees in the band. In the United
States, Nextel Communications Inc., or Nextel, is obligated to relocate existing
BAS users in our uplink spectrum and 2 GHz MSS licensees must relocate FMS users
in the 2 GHz MSS downlink band. To the extent that Nextel complies with its BAS
band clearing obligations, 2 GHz MSS licensees commencing operations thereafter
would not have to clear the band themselves, but might be required to reimburse
Nextel for a portion of its band clearing costs. Due to the complex nature of
the overall 2 GHz MSS band relocation and the need to work closely with Nextel
on band clearing, we may not make sufficient progress in the relocation effort
or meet FCC requirements for relocating existing users and the start of our MSS
operations may be delayed. Nextel has petitioned the FCC for permission to delay
clearing the 2 GHz MSS band. If Nextel's petition were approved or their
activities otherwise delayed, our ability to implement our business plan and our
financial condition and to satisfy FCC milestones could be jeopardized. Costs
associated with spectrum clearing could be substantial. In Canada, existing
users in the band must be given a minimum of two years notice to relocate.
Our service may cause or be subject to interference.
We will be required to provide our ATC service without causing harmful
interference. In addition, we must accept some interference from certain other
spectrum users. For example, the FCC may adopt rules for an adjacent band that
do not adequately protect us against interference. 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 MSS band frequencies ultimately assigned to us. If the
rules that the FCC adopts for the 1995-2000 MHz band do not adequately protect
us against adjacent band interference, our reputation and our ability to compete
effectively could be adversely affected. Requirements that we limit the
interference we cause, or that we accept certain levels of interference, may
hinder satellite operations within our system and may, in certain cases, subject
our users to a degradation in service quality, which may adversely affect our
reputation and financial condition.
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ATC spectrum access is limited by technological factors.
We will operate with the authority to use a finite quantity of radio
spectrum. Spectrum used for communication between the satellite and the ground
will not be available for use in the ATC component of our network. In addition,
communications with the satellite may interfere with portions of the spectrum
that would otherwise be available for ATC use, further diminishing the
availability of spectrum for the ATC component to an extent that cannot be
quantified at this time.
Technical challenges or regulatory requirements may limit the attractiveness of
our spectrum for providing mobile services.
We believe our 2 GHz MSS band spectrum with ATC capability must be at least
functionally equivalent to PCS/cellular spectrum to be attractive to potential
partners. The FCC and Industry Canada require us to make satellite service
available throughout the United States and Canada. This requirement may limit
the availability of some of our spectrum for terrestrial service in some markets
at some times. If we are not able to develop technology that allows our partners
to use our spectrum in a manner comparable to PCS/cellular operators, we may not
be successful in entering into partnership arrangements.
Our ability to offer a fixed or fixed satellite service may be limited by the
policies of the FCC.
2 GHz MSS frequencies are allocated for the purpose of providing mobile
services. It is unclear whether the FCC would permit us, absent a waiver, to
provide fixed or fixed satellite services on an "incidental or ancillary" basis.
If we determine that we need to provide incidental or ancillary fixed or fixed
satellite services to remain competitive and we are unable to obtain a waiver,
our financial condition could be adversely affected.
We may face unforeseen future regulations that we find difficult, costly or
impossible to comply with.
The provision of communications services is highly regulated. As a provider
of communications services in the United States and Canada, we will be subject
to the laws and regulations of both the United States and Canada. Violations of
laws or regulations of these countries may result in various sanctions including
fines, loss of authorizations and the denial of applications for new
authorizations or for the renewal of existing authorizations.
From time to time, governmental entities may impose new or modified
conditions on our authorizations, which could adversely affect our ability to
generate revenue and implement our business plan. For example, from time to
time, the United States federal government has considered imposing substantial
new fees on the use of frequencies such as the ones we plan to use to provide
our service. In the United States and Canada, the FCC and Industry Canada
already collect fees from space and terrestrial spectrum licensees. We are
currently required to pay certain fees, and it is possible that we may be
subject to increased fees in the future.
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Export control and embargo laws may preclude us from obtaining necessary
satellites, parts or data or providing certain services in the future.
We must comply with United States export control laws in connection with
any information, products, or materials that we provide to non-U.S. persons
relating to satellites, associated equipment and data and with the provision of
related services. These requirements may make it necessary for us to obtain
export or re-export authorizations from the United States government in
connection with any dealings we have with TMI Communications, TerreStar Canada,
TerreStar Canada Holdings, and non-U.S. satellite manufacturing firms, launch
services providers, insurers, customers, and employees. We may not be able to
obtain and maintain the necessary authorizations, which could adversely affect
our ability to:
o consummate the transactions that are currently contemplated involving
TMI Communications, TerreStar Canada and TerreStar Canada Holdings;
o procure new United States-manufactured satellites;
o control any existing satellites;
o acquire launch services;
o obtain insurance and pursue our rights under insurance policies; or
o conduct our satellite-related operations.
In addition, if we do not properly manage our internal compliance processes
and violate United States export laws, the terms of an export authorization or
embargo laws, the violation could make it more difficult, or even impossible, to
maintain or obtain licenses and could result in civil or criminal penalties.
Our contractual relationships with potential strategic partners will be subject
to government regulations.
We must ensure that our strategic partners comply with the FCC's and
Industry Canada's ATC rules. This may require us to seek agreements with
potential partners that provide for a degree of control by us in the operation
of their business that they may be unwilling or unable to grant us.
In addition, the Communications Act and the FCC's rules require us to
maintain legal as well as actual control over the spectrum for which we are
licensed. Our ability to enter into partnering arrangements may be limited by
the requirement that we maintain de facto control of the spectrum for which we
are licensed. If we are found to have relinquished control without approval from
the FCC, we may be subject to fines, forfeitures, or revocation of our licenses.
Similarly, the Radiocommunication Act (Canada), the Telecommunications Act
(Canada) and Industry Canada's rules require that Canadians maintain legal as
well as actual control over TerreStar Canada and certain of its licensed
facilities. Our ability to enter into partnering arrangements may be limited by
the requirement that Canadians maintain de facto control over TerreStar Canada
and these licensed facilities in Canada. If TerreStar Canada is found to have
relinquished control to non-Canadians, TerreStar Canada may be subject to fines,
forfeitures, or revocation of its licenses, and may not lawfully continue to
carry on its business in Canada.
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FCC and Industry Canada regulations and approval processes could delay or impede
a transfer of control of us.
Any investment that could result in a transfer of control of TerreStar
would be subject to prior FCC approval and in some cases could involve a lengthy
FCC review period prior to its consummation. The prior approval of Industry
Canada is also required before any material change in the ownership or control
of TerreStar Canada can take effect. We may not be able to obtain any such FCC
or Industry Canada approvals on a timely basis, if at all, and the FCC or
Industry Canada may impose new or additional license conditions as part of any
review of such a request. If we are unable to implement our business plan and
generate revenue to meet our financial commitments these regulations could
impede or prevent a transfer of control or sale of our company to a third party
with greater financial resources.
Rules relating to Canadian ownership and control of TerreStar Canada are subject
to interpretation and change.
TerreStar Canada will be subject to foreign ownership restrictions imposed
by the Telecommunications Act (Canada) and the Radiocommunication Act (Canada)
and regulations made pursuant to the these acts. Future determinations by
Industry Canada or the Canadian Radio-television and Telecommunications
Commission, or events beyond our control, may result in TerreStar Canada ceasing
to comply with the relevant legislation. If such a development were to occur,
the ability of TerreStar Canada to operate as a Canadian carrier under the
Telecommunications Act (Canada) or to maintain, renew or secure its Industry
Canada authorizations could be jeopardized and our business could be materially
adversely affected.
For a more complete description of the above factors, please see the section
entitled "Risk Factors" in Motient's Registration Statement on Form S-3, filed
on August 8, 2006. The Company's risk factors have not changed substantially
from those described therein.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
During the fiscal quarter ended June 30, 2006, we repurchased shares of our
common stock on the dates and in the amounts set forth in the table below:
56
- ----------------------------------------------------------------------------------------------------------
Period (a) Total Number of (b) Average Price (c) Total Number of (d) Maximum Number
Shares (or Units) Paid per Share (or Shares (or Units) (or Approximate
Purchased (1) Unit) Purchased as Part of Dollar Value) of
publicly Announced Shares (or Units)
Plans or Programs that May Yet Be
Purchased Under the
Plans or Programs
- ----------------------------------------------------------------------------------------------------------
April 1, 2006 - 2,000 $18.00 0 $0
April 30, 2006
- ----------------------------------------------------------------------------------------------------------
May 1, 2006 - 0 $0 0 $0
May 31, 2006
- ----------------------------------------------------------------------------------------------------------
June 1, 2006 - 462,000 $14.59 1,027,000 $33,437,644
June 30, 2006
- ----------------------------------------------------------------------------------------------------------
Total 464,000 $14.60 1,027,000 $33,437,644
- ----------------------------------------------------------------------------------------------------------
(1) Repurchased on the open market at market rates.
Item 4. Submission of Matters to a Vote of Security Holders
On July 12, Motient held its annual meeting of stockholders. Five of our
existing directors and one new director stood for re-election and were
re-elected at the meeting, including: David Andonian, Robert Brumley, David
Grain, Jacques Leduc, David Meltzer and Raymond Steele. In addition to the
election of directors, the following proposals were acted on and approved at the
meeting: the ratification of Friedman LLP as Motient's independent auditors, an
amendment to Motient's certificate of incorporation to remove a restriction on
the issuance of non-voting stock, and the adoption of a new stock equity plan.
Four proposals put forth by Highland Capital Management, L.P. and affiliates
were voted upon but not passed. Voting on these matters was as follows:
Election of Directors
Nominee # of Shares # of Shares
------- ----------- -----------
Directors Elected
- -----------------
David Andonian FOR 39,610,735 WITHHELD AUTHORITY 21,827
---------- ------
Robert Brumley FOR 39,610,735 WITHHELD AUTHORITY 21,827
---------- ------
David Grain FOR 39,610,735 WITHHELD AUTHORITY 21,827
---------- ------
Jacques Leduc FOR 39,610,735 WITHHELD AUTHORITY 21,827
---------- ------
David Meltzer FOR 39,610,735 WITHHELD AUTHORITY 21,827
---------- ------
Raymond Steele FOR 39,610,735 WITHHELD AUTHORITY 21,827
---------- ------
57
Directors Not Elected
- ---------------------
Niles Chura FOR 10,186,888 WITHHELD AUTHORITY 65,354
---------- ----------
Jeffrey Ginsburg FOR 7,899,815 WITHHELD AUTHORITY 2,352,427
---------- ----------
Charles Maynard FOR 10,193,955 WITHHELD AUTHORITY 58,287
---------- ----------
John Ray, III FOR 7,899,815 WITHHELD AUTHORITY 2,352,427
---------- ----------
Eugene Sekulow FOR 7,899,815 WITHHELD AUTHORITY 2,352,427
---------- ----------
David Van Valkenburg FOR 7,899,815 WITHHELD AUTHORITY 2,352,427
---------- ----------
George Overstreet FOR 6,087,114 WITHHELD AUTHORITY 6,078,914
---------- ----------
Steven Turoff FOR 6,078,914 WITHHELD AUTHORITY 43,805,890
---------- ----------
Proposals Passed
- ----------------
To ratify the appointment of Friedman LLP as independent auditors of the Company
for the fiscal year ending December 31, 2005.
# of Shares # of Shares # of Shares
----------- ----------- -----------
FOR 42,151,061 ABSTAIN 8,647 AGAINST 7,725,096
----------- ----------- -----------
To remove the prohibition against issuing non-voting stock contained in the
Company's certificate of incorporation.
# of Shares # of Shares # of Shares
----------- ----------- -----------
FOR 33,886,437 ABSTAIN 5,833,717 AGAINST 10,164,650
----------- ----------- -----------
58
To approve the 2006 Motient Corporation Equity Incentive Plan.
# of Shares # of Shares # of Shares
----------- ----------- -----------
FOR 28,646,763 ABSTAIN 67,785 AGAINST 21,170,258
----------- ----------- -----------
Proposals Not Passed
- --------------------
To revoke any amendments to Motient's by-laws made since May 1, 2002.
# of Shares # of Shares # of Shares
----------- ----------- -----------
FOR 6,074,408 ABSTAIN 3,150 AGAINST 43,807,246
----------- ----------- -----------
To amend the by-laws to set the number of directors at eight.
# of Shares # of Shares # of Shares
----------- ----------- -----------
FOR 6,133,524 ABSTAIN 760 AGAINST 43,770,520
----------- ----------- -----------
To adopt a resolution providing for the order of voting at the annual meeting.
# of Shares # of Shares # of Shares
----------- ----------- -----------
FOR 6,084,054 ABSTAIN 910 AGAINST 43,799,840
----------- ----------- -----------
Item 6. Exhibits
The Exhibit Index filed herewith is incorporated herein by reference.
59
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)
August 9, 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)
60
EXHIBIT INDEX
Number Description
3.1 - Restated Certificate of Incorporation of the Company (as
restated effective May 1, 2002) (incorporated by reference
to Exhibit 3.1 of the Company's Amendment No. 2 to
Registration Statement on Form 8-A, filed May 1, 2002).
3.2 - Certificate of Amendment to Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.4 of the Company's Registration Statement on Form
S-1 (File No. 333-126099) filed June 24, 2005).
3.3 - Certificate of Amendment to Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.6 of the Company's Registration Statement on Form
S-3 (File No. 333-136366) filed August 7, 2006).
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).
61
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).
10.56 - Asset Purchase Agreement By and Among Motient Communications
Inc., Logo Acquisition Corporation, et al (incorporated by
reference to Exhibit 10.56 of the registration statement on
Form S-3 initially filed on July 26, 2006)
10.57 - Form of Exchange Agreement for parties exercising tag along
rights pursuant to Exchange Agreement by and among Motient,
Columbia Capital, et al.
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)
________________________
62