The following table summarizes our financial results as of and for the fiscal
years ended December 31, 1999 through December 31, 2001, the four months ended
April 30, 2002, the eight months ended December 31, 2002, and the year ended
December 31, 2003. The consolidated balance sheet data and the consolidated
statement of operations data as of and for the year ended December 31, 1999 are
derived from the consolidated financial statements of Motient, which were
audited by Arthur Andersen LLP, independent accountants who have ceased
operations. The other consolidated balance sheet data and the other consolidated
statement of operations data are derived from the consolidated financial
statements of Motient, which were audited by Ehrenkrantz Sterling & Co. LLC, an
independent registered public accounting firm, except for the December 31, 2003
consolidated financial statements, which were audited by Friedman LLP,
successors-in-interest to Ehrenkrantz Sterling & Co. LLC, an independent
registered public accounting firm. The financial statements for certain
historical periods have been restated to give effect to the accounting treatment
with respect to the MSV, Aether Systems transactions and certain additional
financial statement adjustments discussed in Note 2, "Significant Accounting
Policies - Restatement of Financial Statements," of notes to the consolidated
financial statements. All of the financial information for Motient up to and
including April 30, 2002 is referred to as "Predecessor Company" results. The
financial information for Motient for the periods subsequent to April 30, 2002
are referred to as "Successor Company" results.
You should read our selected financial data in conjunction with the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and related
notes thereto included elsewhere in this prospectus. In reading the following
selected financial data, please note the following:
o Effective May 1, 2002, as a result of our emergence from bankruptcy,
we adopted "fresh-start" accounting in accordance with American
Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the
Bankruptcy Code". "Fresh-start" accounting has resulted in material
changes to financial statements for periods beginning after May 1,
2002, to reflect adjustments required pursuant to SOP 90-7 to record
assets and liabilities at fair values in accordance with procedures
specified by Statement of Financial Accounting Standards No. 141,
"Business Combinations".
o Because the summary financial data below relates to periods prior to
May 1, 2002, the effective date we emerged from bankruptcy, we refer
to the summary financial data as that of the Predecessor Company. Due
to the reorganization and implementation of SOP 90-7, financial
statements issued for periods beginning after May 1, 2002 will not be
comparable to that of the Predecessor Company.
o In November 2002, we initiated a process to seek the concurrence of
the staff of the SEC with respect to our conclusions of the
appropriate accounting for the formation of and certain transactions
with MSV in 2000 and 2001 and the sale of certain of our
transportation assets to Aether Systems in 2000. This process was
completed in March 2003. The staff of the SEC did not object to
certain aspects of our prior accounting with respect to the MSV and
Aether Systems transactions, but did object to other aspects of our
prior accounting for these transactions. For a description of the
material differences between our original accounting treatment with
respect to the MSV and Aether Systems transactions and the revised
accounting treatment that we concluded is appropriate as a result of
this process, please see Note 2, "Significant Accounting Policies -
Restatement of Financial Statements," of notes to the consolidated
financial statements.
o As a result of our re-audit of the years ended December 31, 2000 and
2001 performed by Ehrenkrantz Sterling & Co. LLC, certain additional
financial statement adjustments were proposed and accepted by us for
the periods noted above. Please see Note 2, "Significant Accounting
Policies - Restatement of Financial Statements," of notes to the
consolidated financial statements.
20
Selected Consolidated Financial Data
(Amounts in thousands except per share data)
Successor Company Predecessor Company(1)(2)(3)(4)
----------------------------- ----------------------------------------------------------
Eight Months Four Months (Restated) (Restated)
Year Ended Ended Ended Year Ended Year Ended Year Ended
December 31, December 31, April 30, December 31, December 31, December 31,
2003 2002 2002 2001 2000 1999
---- ---- ---- ---- ---- ----
Revenues $ 54,485 $ 36,617 $ 22,373 $ 90,265 $ 95,756 $ 91,071
Operating Loss (40,167) (33,800) (21,430) (97,223) (182,914) (224,392)
Income (loss) before reorganization items (62,122) (58,786) (24,138) (267,000) (134,851) (330,931)
Reorganization items -- (772) 256,116 (2,497) (3,035) --
Income tax provision -- -- -- -- -- --
Net (loss) income (62,122) (59,558) 231,978 (269,497) (137,886) (330,931)
XM radio preferred stock dividend
requirement -- -- -- -- (5,081) --
XM beneficial conversion -- -- -- -- (44,438) --
--------- --------- --------- --------- --------- ---------
Net (loss) income before cumulative
effect of accounting change $ (62,122) $ (59,558) $ 231,978 $(269,497) $(187,405) $(330,931)
--------- --------- --------- --------- --------- ---------
Cumulative effect of change in
Accounting principle -- -- -- -- (4,677) --
Net (loss) income attributable to
common stockholders $ (62,122) $ (59,558) $ 231,978 $(269,497) $(192,082) $(330,931)
--------- --------- --------- --------- --------- ---------
Basic and diluted net income (loss)
per common share $ (2.47) $ (2.37) $ 3.98 $ (5.27) $ (3.89) $ (8.33)
Weighted-average common shares
outstanding during the period - basic
and diluted 25,145 25,097 58,251 51,136 49,425 39,704
Total assets 157,028 202,221 257,401 240,465 1,572,036 809,948
Long term liabilities $ 33,189 $ 33,913 $ 29,785 $ 30,652 $ 738,936 $ 470,784
(1) Motient restated certain of its financial data reflected above to reflect
certain transactions with MSV in 2000 and 2001, the sale of assets to Aether
Systems in 2000 and certain additional adjustments. Please see notes to the
consolidated financial statements herein.
(2) As of December 31, 2000, we had an equity interest of approximately 33.1%
(or 21.3% on a fully diluted basis) in XM Radio, a public company that launched
its satellite radio service at the end of 2001, and we controlled XM Radio
through our board of director membership and common stock voting rights. As a
result, all of XM Radio's results for the period from July 7, 1999 (the date we
acquired 100% voting interest of XM Radio) through December 31, 2000 have been
included in our consolidated financial statements. Prior to July 7, 1999, our
investment in XM Radio was accounted for pursuant to the equity method of
accounting. In January 2001, pursuant to FCC approval to cease to control XM
Radio, the number of directors that we appointed to XM Radio's board of
directors was reduced to less than 50% of XM Radio's directors, and we converted
a portion of our super-voting Class B common stock of XM Radio to Class A common
stock. As a result, we ceased to control XM Radio, and as of January 1, 2001, we
accounted for our investment in XM Radio pursuant to the equity method of
accounting. During 2001, we disposed of all of our remaining shares of XM Radio
and ceased to hold any interest in XM Radio as of November 19, 2001.
21
(3) In June 2000, we formed a joint venture subsidiary, MSV, in which we owned
80% of the membership interests. The remaining 20% interests in MSV were owned
by three investors unrelated to Motient; however, the minority investors had the
right to participate in certain MSV business decisions that were made in the
normal course of business; therefore, in accordance with Emerging Issues Task
Force Issue No 96-16, "Investor's Accounting for an Investee When the Investor
Has a Majority of the Voting Interest but the Minority Stockholder or
Stockholders Have Certain Approval or Veto Rights", our investment in MSV has
been recorded for all periods presented in the consolidated financial statements
included in this annual report pursuant to the equity method of accounting. On
November 26, 2001, Motient sold the assets comprising its satellite
communications business to MSV.
(4) In November 2000, Motient sold assets related to its retail transportation
business to Aether Systems. Concurrently with the closing of the asset sale, we
and Aether Systems entered into two long-term, prepaid network airtime
agreements with a total value of $20 million, of which $5 million was paid at
closing, pursuant to which Aether Systems agreed to purchase airtime on
Motient's satellite and terrestrial networks. Aether Systems also became an
authorized reseller of Motient's eLink and BlackBerry TM by Motient wireless
email service offerings. Aether Systems acquired all of the assets used or
useful in the retail transportation business, and assumed the related
liabilities. Aether Systems also purchased the existing inventory in the
business.
22
SELECTED QUARTERLY FINANCIAL DATA
(unaudited)
(dollars in thousands, except for per share data)
The following selected quarterly financial information should be read
in conjunction with Motient's consolidated financial statements, including the
notes thereto, appearing elsewhere in this prospectus, and the information
contained under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
As discussed above, numerous factors, including the application of
"fresh-start" accounting and Motient's recent reorganization, make period to
period comparison of Motient's financial results less meaningful, and,
therefore, you should not rely on them as an indication of future operating
performance. For a more complete discussion of these transactions, see "Summary
Financial Data," "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - General - The
Current and Former Components of Motient's Business."
Predecessor Company through April 30, 2002 and Successor
Company from May 1, 2002 to December 31, 2002
2002-Quarters
-------------
(Predecessor (Successor
Company) Company)
(Predecessor 1 Month 2 Months (Successor (Successor
Company) Ended Ended Company) Company)
3/31/02 4/30/02 6/30/02 9/30/02 12/31/02
------- ------- ------- ------- --------
Revenues $ 16,683 $ 5,690 $ 8,719 $ 13,297 $ 14,601
Operating expenses (1) 32,445 11,358 19,796 25,426 25,195
--------- --------- --------- --------- ---------
Loss from operations (15,762) (5,668) (11,077) (12,129) (10,594)
Interest and other income (expense) 837 312 15 -- (104)
Interest expense (1,739) (111) (408) (575) (927)
Write-off of deferred financing fees -- -- -- -- --
Other income from Aether/MSV -- -- -- -- 1,017
Gain (loss) on disposal of assets (20) (571) -- (1,193) (923)
Loss on impairment of asset -- -- -- -- --
(Gain) on sale of satellite/ transportation assets -- 372 -- -- 385
Gain on capital lease retirement -- -- -- -- --
Equity in loss of XM Radio and MSV (1,313) (595) (1,540) (2,747) (17,986)
--------- --------- --------- --------- ---------
Loss before reorganization items (17,997) (6,261) (13,010) (16,644) (29,132)
Costs associated with debt restructuring -- (4,771) -- -- (772)
Gain on extinguishment of debt -- 183,725 -- -- --
Gain on fair market adjustment of assets -- 94,715 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) (17,997) 267,408 (13,010) (16,644) (29,904)
Net income (loss) attributable to common
stockholders $ (35,429) $ 267,408 $ (13,010) $ (16,644) $ (29,904)
Basic and Diluted Net income (loss) per common
share (2) $ (0.61) $ 4.58 $ (0.52) $ (0.66) $ (1.19)
Weighted-average common shares outstanding during
the period 58,256 58,366 25,097 25,097 25,097
23
2003 - Quarters 2004 - Quarters
(Successor Company) (Successor Company)
------------------- -------------------
3/31/03 6/30/03 9/30/03 12/31/03 3/31/04 6/30/04 9/30/04
------- ------- ------- -------- ------- ------- -------
Revenues $ 14,370 $ 14,992 $ 12,051 $ 13,072 $ 11,500 $ 11,439 $ 8,353
Operating expenses (1) 24,424 25,358 24,311 20,559 21,672 24,275 14,585
------ ------ ------ ------- ------ ------ ------
Loss from operations (10,054) (10,366) (12,260) (7,487) (10,172) (12,836) (6,232)
Interest and other income (expense) 459 348 12 (157) 8 191 66
Interest expense (1,312) (1,642) (1,638) (1,773) (1,766) (1,273) (556)
Write-off of deferred financing fees -- -- -- -- -- (8,052) --
Other income from Aether/MSV 838 938 180 247 645 662 650
Gain (loss) on disposal of assets -- -- 51 (3,088) (2) 2 2
Loss on impairment of asset -- -- (5,535) -- -- -- --
(Gain) on sale of satellite/ transportation assets -- -- -- -- -- -- --
Gain on capital lease retirement -- -- -- -- -- 802 --
Equity in loss of XM Radio and MSV (2,325) (2,288) (3,155) (2,115) (2,230) (2,608) (3,779)
------- ------- ------- ------- ------- ------- -------
Loss before reorganization items (12,394) (13,010) (22,345) (14,373) (13,517) (23,112) (9,849)
Costs associated with debt restructuring -- -- -- -- -- -- --
Gain on extinguishment of debt -- -- -- -- -- -- --
Gain on fair market adjustment of assets -- -- -- -- -- -- --
------ ------ ------ ------- ------ ------ ------
Net income (loss) (12,394) (13,010) (22,345) (14,373) (13,517) (23,112) (9,849)
Net income (loss) attributable to common
stockholders $(12,394) $(13,010) $(22,345) $(14,373) $(13,517) $(23,112) $(9,849)
Basic and Diluted Net income (loss) per common
share (2) $ (0.49) (0.52) $ (0.89) $ (0.57) $ (0.54) $ (0.79) $ (0.29)
Weighted-average common shares outstanding during
the period 25,097 25,116 25,170 25,145 25,232 29,338 33,418
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Accounting Matters
In November 2002, we initiated a process to seek the concurrence of the staff of
the SEC with respect to our conclusions of the appropriate accounting for
certain transactions that occurred in 2000 and 2001. The transactions in
question involved the formation of and certain transactions with MSV in 2000 and
2001 and the sale of certain of our transportation assets to Aether Systems in
2000. This process was completed in March 2003. The staff of the SEC did not
object to certain aspects of our prior accounting with respect to the MSV and
Aether Systems transactions, but did object to other aspects of our prior
accounting for these transactions. For a description of the material differences
between our original accounting treatment with respect to the MSV and Aether
Systems transactions and the revised accounting treatment that we concluded is
appropriate as a result of this process, please see Note 2, "Significant
Accounting Policies - Restatement of Financial Statements," of notes to the
consolidated financial statements, and our current report on Form 8-K dated
March 14, 2003.
On March 2, 2004, we dismissed PricewaterhouseCoopers as our independent
auditors effective immediately. The audit committee of Motient's board of
directors approved the dismissal of PricewaterhouseCoopers.
PricewaterhouseCoopers was previously appointed to audit Motient's consolidated
financial statements for the period May 1, 2002 to December 31, 2002, and, by
its terms, such engagement was to terminate upon the completion of services
related to such audit. PricewaterhouseCoopers has not reported on Motient's
consolidated financial statements for such period or for any other fiscal
period. On March 2, 2004, our audit committee engaged Ehrenkrantz Sterling & Co.
LLC to replace PricewaterhouseCoopers to audit Motient's consolidated financial
statements for the period May 1, 2002 to December 31, 2002 and for the year
ended December 31, 2003.
On June 1, 2004, Ehrenkrantz Sterling & Co. LLC, merged with the firm of
Friedman Alpren & Green LLP. The new entity, Friedman LLP, has been retained by
Motient and the Audit Committee of Motient's Board of Directors approved this
decision on June 4, 2004.
Our financial statements for the year December 31, 2001 (restated) and the
period from January 1, 2002 to April 30, 2002 (restated) and May 1, 2002 to
December 31, 2002 have been audited by Ehrenkrantz Sterling & Co. LLC. Our
financial statements for the year ended December 31, 2003, have been audited by
Friedman LLP, successors-in-interest to Ehrenkrantz Sterling & Co. LLC.
General - The Current and Former Components of Motient's Business
This section provides information regarding the various current and prior
components of Motient's business which we believe are relevant to an assessment
and understanding of our financial condition and consolidated results of
operations. The sale of our satellite assets to MSV in 2001 makes period to
period comparison of our financial results less meaningful, and therefore, you
should not rely on such comparisons as an indication of future operating
performance. Additionally, on April 26, 2002, our Plan of Reorganization was
confirmed by the United States Federal Bankruptcy Court and we emerged from
bankruptcy on May 1, 2002. As a result of the reorganization and the recording
of the restructuring transaction and implementation of "fresh-start" reporting,
our results of operations after April 30, 2002 are not comparable to results
reported in prior periods. See Notes 1 and 2 of notes to the consolidated
financial statements for information on consummation of the Plan of
Reorganization and implementation of "fresh-start" reporting. The discussion
should be read in conjunction with our consolidated financial statements and
notes thereto.
Motient has six wholly-owned subsidiaries and a 38.6% interest in MSV. Motient
Communications Inc. owns the assets comprising Motient's core wireless business,
except for Motient's FCC licenses, which are held in a separate subsidiary,
Motient License. Motient License was formed on March 16, 2004, as part of
Motient's amendment of its credit facility, as a special purpose wholly-owned
subsidiary of Motient Communications and holds all of the FCC licenses formerly
25
held by Motient Communications. A pledge of the stock of Motient License, along
with the other assets of Motient Communications, secures borrowings under our
term credit facility. We currently have no borrowings outstanding under our term
credit facility. Our other four subsidiaries hold no material operating assets
other than the stock of other subsidiaries and Motient's interest in MSV. On a
consolidated basis, we refer to Motient Corporation and its six wholly-owned
subsidiaries as "Motient." Our indirect, less-than 50% voting interest in MSV is
not consolidated with Motient for financial statement purposes. Rather, we
account for our interest in MSV under the equity method of accounting.
Core Wireless Business
We are a nationwide provider of two-way, wireless mobile data services and
mobile Internet services. We provide our customers access to multiple
communications networks for a variety of wireless data communications services,
including email messaging and other services that enable businesses, mobile
workers and consumers to transfer electronic information and messages and access
corporate databases and the Internet.
In addition to selling wireless services that use our own network, we are also a
reseller of airtime on the Cingular and Sprint wireless networks. These reseller
agreements allow us to sell and promote applications and solutions to enterprise
accounts on networks with greater capacity than our own, while still maintaining
a direct relationship with the customer, since "back office" functions like
customer support, application design and implementation and billing, are handled
by Motient.
These arrangements allow us to provide integrated seamless solutions to our
customers using a variety of networks. In December 2004, we launched a new set
of products and services designed to provide these seamless solutions to our
customers called iMotient Solutions (TM). iMotient allows Motient's customers to
use these multiple networks via a single connection to Motient's back-office
systems, providing a one-source alternative for development, device management
and billing across multiple networks, including but not limited to GPRS, 1XRTT,
and DataTac. Once connected to iMotient, customers will receive proprietary
applications and services that reduce airtime usage, improve performance and
reduce costs.
Mobile Satellite Ventures LP
On June 29, 2000, we formed a joint venture subsidiary, MSV, in which we owned
80% of the membership interests. The remaining 20% interests in MSV were owned
by three investors unrelated to Motient; however, the minority investors had
certain participating rights which provided for their participation in certain
business decisions that were made in the normal course of business; therefore,
in accordance with Emerging Issues Task Force Issue No 96-16, "Investor's
Accounting for an Investee When the Investor Has a Majority of the Voting
Interest but the Minority Stockholder or Stockholders Have Certain Approval or
Veto Rights", our investment in MSV has been recorded for all periods presented
in the consolidated financial statements included in this annual report pursuant
to the equity method of accounting.
Through November 26, 2001, MSV used our satellite network to conduct research
and development activities. On November 26, 2001, we sold the assets comprising
our satellite communications business to MSV, as part of a transaction in which
certain other parties joined MSV, including TMI, a Canadian satellite services
provider. In consideration for our satellite business assets, we received the
following: (i) a $24.0 million cash payment in June 2000, (ii) a $45.0 million
cash payment paid at closing, of which $4.0 million was held by MSV related to
our sublease of real estate from MSV, and (iii) a five-year $15.0 million note.
Motient has recorded the $15.0 million note receivable from MSV, plus accrued
interest thereon at its fair value, estimated to be approximately $13.0 million
at the May 1, 2002 fresh-start accounting date, after giving effect to
discounted future cash flows at market interest rates. In this transaction, TMI
also contributed its satellite communications business assets to MSV. In
addition, we purchased a $2.5 million convertible note issued by MSV, and
certain other investors, including a subsidiary of Rare Medium, purchased a
total of $52.5 million of MSV convertible notes.
26
In February 2003, the FCC adopted its Spectrum Flexibility Order, which we refer
to as the ATC Order, giving mobile satellite operators broad authority to use
their assigned spectrum to operate an ATC. The ATC Order established a set of
preconditions and technical limits for ATC operations, as well as an application
process for ATC approval of the specific system incorporating the ATCs that the
licensee intends to use. On November 18, 2003, MSV filed an application with the
FCC for ATC authority to expand the use of its L-band spectrum and construct its
next-generation hybrid network. On November 8, 2004, the FCC issued an order
granting MSV the first ATC license ever granted by the FCC. The FCC also
approved several of MSV's waiver requests, allowing MSV to further enhance its
service and coverage, but it specifically deferred its ruling on other MSV
waiver requests. The order sets forth various limitations and conditions
necessary to the use of ATC by MSV, and there can be no assurances that such
conditions will be satisfied by MSV, or that such limitations will not be
unnecessarily burdensome to MSV. Please review the full FCC order for additional
important information regarding the authorizations and waivers granted to MSV,
and the limitations and conditions set forth therein. The order may be found on
the FCC's website, www.fcc.gov.
In addition to its L-band spectrum, MSV has certain rights to receive nationwide
spectrum in the S-band (2.1 GHz range) from its affiliate, TMI Communications
and Company, Limited Partnership, or TMI, as a result of the FCC's reinstatement
of TMI's S-band authorization on June 29, 2004. This reinstatement of TMI's
S-band authorization is subject to certain conditions. The S-band authorization
requires the satisfaction of certain satellite construction and other
milestones. Additionally, the amount of S-band spectrum that can be utilized by
any one operator is contingent upon the number of remaining authorized operators
in the band as determined by their respective ability to meet construction and
other milestones. There can be no assurances that such conditions and milestones
will be satisfied.
On August 21, 2003, two investors in MSV (excluding Motient) invested an
additional $3.7 million in MSV in exchange for Class A preferred units of
limited partnership interests in MSV. MSV used the proceeds from this investment
to repay other indebtedness that is senior in its right of repayment to
Motient's promissory note. Under the terms of the amended and restated
investment agreement, these investors also had the option of investing an
additional $17.6 million in MSV by December 31, 2003; however, if, prior to this
time, the FCC had not issued a decision addressing MSV's petition for
reconsideration with respect to the ATC Order, the option was automatically
extended to March 31, 2004.
On April 2, 2004, the above-mentioned additional $17.6 million investment was
consummated. In connection with this investment, MSV's amended and restated
investment agreement was amended to provide that of the total $17.6 million in
proceeds, $5.0 million was used to repay certain outstanding indebtedness of
MSV, including $2.0 million of accrued interest under the $15.0 million
promissory note issued to Motient by MSV. The remainder of the proceeds from
this investment will be used for general corporate purposes by MSV. Motient was
required to pay, and paid, 25% of the $2 million it received in this
transaction, or $500,000, to make prepayments under its existing notes owed to
Rare Medium Group, Inc. and Credit Suisse First Boston. As of the closing of the
initial investment on April 2, 2004, Motient's percentage ownership of MSV was
approximately 29.5% on an "as converted basis" giving effect to the conversion
of all outstanding convertible notes.
On November 12, 2004, Motient purchased approximately 5.4 million MSV limited
partnership units, and a corresponding number of shares in MSV's general
partner, Mobile Satellite Ventures GP Inc. ("MSV GP"). As consideration, Motient
provided MSV with $125 million in cash, converted its outstanding $15 million
principal note (and all accrued interest thereon) issued by MSV, converted its
$3.5 million of convertible notes issued by MSV, and converted the accrued
interest on such convertible notes. In connection with Motient's investment, the
other limited partners of MSV exchanged their outstanding notes (and the accrued
interest thereon), and one limited partner contributed an additional $20 million
in cash, for limited partnership units and a corresponding number of MSV GP
shares. Such investments and conversions increased Motient's ownership of MSV
from 29.5% (assuming conversion of all outstanding convertible notes) to 38.6%.
Motient does not control MSV and continues to account for its investment under
the equity method.
Motient's investment in MSV is governed by several agreements, including but not
limited to the limited partnership agreement of MSV and the stockholder's
agreement of MSV GP. The acquisition or disposition by MSV of its assets, the
acquisition or disposition of any limited partner's interest in MSV, subsequent
investment into MSV by any person, and any merger or other business combination
of MSV, would be subject to the control restrictions contained in such
documents. Such control restrictions include, but are not limited to, rights of
first refusal, tag along rights and drag along rights. Many of these actions,
among others, cannot occur without the consent of the majority of the ownership
interests of MSV. In addition several of the other limited partners of MSV
27
entered into a voting agreement amongst themselves, which may restrict any
signatories ability to give such consent absent the agreement of the majority of
the signatories to such voting agreement. MSV plans to use the proceeds from
this investment for general corporate purposes.
In November 2003, we engaged CTA to perform a valuation of our equity interests
in MSV as of December 31, 2002. Concurrent with CTA's valuation, Motient reduced
the book value of its equity interest in MSV from $54 million (inclusive of our
$2.5 million convertible note from MSV) to $41 million as of May 1, 2002 to
reflect certain preference rights on liquidation of certain classes of equity
holders in MSV. Including its notes receivable from MSV (estimated fair market
value of $13 million at May 1, 2002), the book value of Motient's aggregate
interest in MSV as of May 1, 2002 was reduced from $67 million to $53.9 million.
Also, as a result of CTA's valuation of MSV, we determined that the value of our
equity interest in MSV was impaired as of December 31, 2002. This impairment was
deemed to have occurred in the fourth quarter of 2002. Motient reduced the value
of its equity interest in MSV by $15.4 million as of December 31, 2002.
Including its notes receivable from MSV (estimated fair market value of $19
million at December 31, 2002), the book value of Motient's aggregate interest in
MSV was $32 million as of December 31, 2002 or March 31, 2004. It was determined
that there was no impairment as of December 31, 2003. For additional information
concerning this valuation process, please see Note 2, "Significant Accounting
Policies," of notes to the consolidated financial statements.
For additional information regarding MSV, please see the financial statements of
MSV beginning on page M-1.
Cost Reduction Actions
Since emerging from bankruptcy in May 2002, several factors have restrained our
ability to grow revenue at the rate we previously anticipated. These factors
include the weak economy generally and the weak telecommunications and wireless
sector specifically, the financial difficulty of several of our key resellers,
on whom we rely for a majority of our new revenue growth, and our limited
liquidity.
We have taken a number of steps to improve our liquidity and reduce operating
and capital expenditures in order to maintain our cash and lower our cash burn
rate:
Reductions in Workforce. We undertook reductions in March 2003 and February
2004. These actions eliminated approximately 10% (19 employees) and 32.5% (54
employees), respectively, of our then-remaining workforce. In the aggregate, we
have reduced our work force by approximately 39% since December 31, 2002 and
reduced employee and related expenditures by approximately $0.4 million per
month.
Closure of Reston, VA Facility. On July 15, 2003, we substantially completed the
transfer of our headquarters to Lincolnshire, IL, where we already had a
facility. This action reduced our monthly operating expenses by an amount of
approximately $65,000 per month or $780,000 per year.
Network Rationalization. In the second quarter of 2004, we finalized plans to
implement certain base station rationalization initiatives. These initiatives
involve the de-commissioning of approximately 409 base stations from our
network. We had 1,549 base stations in our network as of March 31, 2004, and
1,239 base stations as of September 30, 2004. We are taking these actions in a
coordinated effort to reduce network operating costs while also focusing on
minimizing the potential impact to our customers communications and coverage
requirements. This rationalization encompasses, among other things, the
reduction of unneeded capacity across the network by de-commissioning
under-utilized and un-profitable base stations as well as de-commissioning base
stations that pass an immaterial amount of customer data traffic. In some cases,
these base stations were originally constructed specifically to serve customers
with nationwide requirements that are no longer customers of Motient. In certain
instances, the geographic area that our network serves may be reduced by this
process and customer communications may be impacted. We have discussed these
changes to our network with many of our customers to assist them in evaluating
the potential impact, if any, to their respective communications requirements.
The full extent and effect of the changes to our network have yet to be
determined, but based on internal analyses, we believe the de-commissioning of
these base stations from our network will only impact approximately 1.5% of our
network's current data traffic. We are substantially complete with these network
rationalization initiatives.
28
Frame Relay and Tandem Equipment Retirement. In conjunction with our base
station rationalization initiatives discussed above, Motient is in the process
of converting its telecommunications infrastructure technology to frame relay
technology. As of September 30, 2004, this project was approximately 80%
complete. In the fourth quarter of 2004, we retired certain network equipment
associated with this conversion. We expect to realize significant
telecommunications cost reductions in 2005 as a result of this conversion.
Refinancing of Vendor Obligations, Retirement of Debt Obligations and Certain
Customer Arrangements. During the fourth quarter of 2002 and the first quarter
of 2003, we renegotiated several of our key vendor and customer arrangements in
order to reduce recurring expenses and improve our liquidity position. In some
cases, we were able to negotiate a flat rate reduction for continuing services
provided to us by our vendors or a deferral of payable amounts, and in other
cases we renegotiated the scope of services provided in exchange for reduced
rates or received pre-payments for future services. We continue to aggressively
pursue further vendor cost reductions where opportunities arise.
In the case of financing arrangements, we negotiated, among other things, a
deferral of approximately $2.6 million of accounts payable that was owed to a
vendor for services provided, for which we issued a promissory note for such
amount, with the note to be paid off ratably over a two-year period beginning in
January 2004.
We also restructured certain of our vendor and capital lease obligations to
significantly reduce the monthly amortization requirements of these facilities
on an on-going basis. As part of such negotiations, we agreed to fund a letter
of credit in twelve monthly installments during 2003, in the aggregate amount of
$1.125 million, to secure certain payment obligations. This letter of credit
will be released to us in fifteen monthly installments beginning in July 2004,
assuming no defaults have occurred and are occurring.
In March 2004, we further restructured our vendor financing facility and an
outstanding promissory note to the same vendor by extending the repayment
schedule, thereby reducing the combined monthly amortization requirements under
these obligations. In June 2004, we negotiated settlements of our entire amounts
outstanding under our vendor financing facility, promissory note and capital
lease. On July 15, 2004, we paid all principal and interest due and owing on our
Rare Medium and CSFB notes, in the aggregate amount of $23.5 million. Please see
"--Liquidity and Capital Resources - Summary of Liquidity and Financing" for
further details on these facilities and the related negotiations.
On December 1, 2002, we entered into a letter agreement with UPS, under which
UPS agreed to make a series of eight prepayments to us totaling $5 million for
future services we are obligated to provide to it after January 1, 2004. In
addition to any other rights it has under its network services agreement with
us, the letter agreement provides that UPS may terminate the network services
agreement, in whole or in part, by providing 30 days' notice to us, at which
point the remaining prepayment would be required to be repaid. As of July 31,
2003, all eight prepayments had been made. The $5 million prepayment is credited
against airtime services provided to UPS beginning January 1, 2004, until the
prepayment is fully credited. Based on UPS' current level of network airtime
usage, we do not expect that UPS will be required to make any cash payments to
us in 2004 or 2005 for service provided during 2004 or 2005.
Despite these initiatives, we continue to be cash flow negative, and there can
be no assurances that we will ever be cash flow positive.
Term Credit Facility
On January 27, 2003, our wholly-owned subsidiary, Motient Communications Inc.,
closed a $12.5 million term credit agreement with a group of lenders, including
several of our existing stockholders. As of December 31, 2003, Motient
Communications had borrowed $4.5 million under the credit agreement to fund
general working capital requirements.
29
For the monthly periods ended April 2003 through December 2003, and for the
month ended September 30, 2004, we reported events of default under the terms of
the credit facility to the lenders. In each period, the lenders waived these
events of default.
Borrowing availability under our term credit facility terminated on December 31,
2003. On March 16, 2004, we entered into an amendment to the credit facility
which extended the borrowing availability period until December 31, 2004.
On April 12, 2004, we repaid all outstanding principal and interest, in
aggregate $6.8 million, under the term credit facility. On December 31, 2004,
borrowing availability under the amended term credit facility terminated, and we
do not anticipate that such availability will ever be reinstated. For further
details, including details related to the repayment of amounts owed under this
facility, please see "-- Liquidity and Capital Resources -- Term Credit
Facility."
CTA Arrangements
CTA continued its engagement as a consultant by Motient for all of 2003.
In November 2003, we engaged CTA to provide a valuation of our equity interest
in MSV as of December 31, 2002. CTA was paid $150,000 for this valuation.
On January 30, 2004, we engaged CTA to act as chief restructuring entity. As
consideration for this work, we agreed to pay to CTA a monthly fee of $60,000.
The new agreement modifies our existing consulting arrangement with CTA. In
addition, since the initial engagement of CTA, the payment of certain monthly
fees to CTA had been deferred. In April 2004, Motient paid CTA $440,000 for all
past deferred fees.
As part of our private placements in April 2004 and July 2004, certain CTA
affiliates received 400,000 and 340,000 warrants to purchase our common stock at
a price of $5.50 and $8.57 per share, respectively. In December 2004, certain
affiliates of CTA were granted options to purchase 125,000 shares of the
Company's common stock at a price of $8.57 per share. The options are
immediately vested and have a term of 10 years.
Stock Option Plan
Options to purchase 1,757,513 shares of our common stock were outstanding as of
December 31, 2003 under our 2002 stock option plan, and as of December 20, 2004,
options to purchase 676,927 shares were outstanding. A portion of the options
granted under the plan will either vest or be rescinded based on Motient's
performance. These options are accounted for in accordance with variable plan
accounting, which requires that the value of these options be measured at their
intrinsic value and any change in that value be charged to the income statement
upon the determination that the fulfillment of the performance criteria is
probable. The other options are accounted for as a fixed plan and in accordance
with intrinsic value accounting, which requires that the excess of the market
price of stock over the exercise price of the options, if any, at the time that
both the exercise price and the number of options are known be recorded as
deferred compensation and amortized over the option vesting period. As of the
date of grant, the option price per share was in excess of the market price;
therefore, these options are not deemed to have any value and no expense has
been recorded to date.
In March 2003, our board of directors approved the reduction in the exercise
price of all of the then outstanding stock options from $5.00 per share to $3.00
per share. The repricing will require that all options be accounted for in
accordance with variable plan accounting, which requires that the value of these
options are measured at their intrinsic value and any change in that value be
charged to the income statement each quarter based on the difference (if any)
between the intrinsic value and the then-current market value of the common
stock.
In July and September 2003, the compensation and stock option committee of our
Board, acting pursuant to our 2002 stock option plan, granted 26 employees and
officers options to purchase an aggregate of 470,000 shares of the Company's
common stock at a price of $5.15 per share and 25,000 shares of our common stock
30
at a price of $5.65 per share. One-half of each option grant vests with the
passage of time and the continued employment of the recipient, in three equal
increments, on the first, second and third anniversary of the date of grant. The
other half of each grant was to either vest or be rescinded based on Motient's
performance in 2004. In May 2004, the compensation and stock option committee of
our board approved the vesting of a certain portion of the stock options related
to 2003 performance criteria and cancelled the remainder related to 2003
performance criteria. In July 2004, compensation and stock option committee of
our board granted Christopher Downie options to purchase an aggregate of 100,000
shares of the Company's common stock at a price of $5.15 per share and approved
the vesting of 40,000 of his existing stock options. In December 2004, the
Company granted to certain employees, consultants and directors options to
purchase an aggregate of 195,000 shares of the Company's common stock at a price
of $8.57 per share, which were immediately vested.
Research In Motion Matters
Our rights to use and sell the BlackBerryTM software and Research In Motion's
handheld devices may be limited or made prohibitively expensive as a result of a
patent infringement lawsuit brought against Research In Motion by NTP Inc. (NTP
v. Research In Motion, Civ. Action No. 3:01CV767 (E.D. Va.)). In that action, a
jury concluded that certain of Research In Motion's BlackBerryTM products
infringe patents held by NTP covering the use of wireless radio frequency
information in email communications. On August 5, 2003, the judge in the case
ruled against Research In Motion, awarding NTP $53.7 million in damages and
enjoining Research In Motion from making, using, or selling the products, but
stayed the injunction pending appeal by Research In Motion. On December 14,
2004, the appeals court found that Research In Motion had violated several
patents, but also found fault with certain instructions given to the jury.
Consequently, the appeals court vacated the injunction and remanded the case to
the trial court for further proceedings. As a purchaser and reseller of those
products, we could be adversely affected by the final outcome of this
litigation.
On June 26, 2003, Research In Motion provided us with a written End of Life
Notification for the RIM 857 wireless handheld device. This means that Research
In Motion will no longer produce this model of handheld device. The last date
for accepting orders was September 30, 2003, and the last date for shipment of
devices was January 2, 2004. Motient has implemented a RIM 857 "equivalent to
new" program and expects that there will be sufficient returned RIM 857s to
satisfy demand for the foreseeable future. Sales of RIM 850 and 857 devices have
declined significantly in 2004 due to competition and the supply constraints and
Motient anticipates very little, if any, sales of these devices in the future.
During the year ended December 31, 2003, a majority of our equipment revenues
were attributable to sales of the RIM 857 device, and we estimate that
approximately 52% and 59% of our monthly recurring service revenues were derived
from wireless messaging using RIM 857 devices as of December 31, 2003 and
September 30, 2004, respectively.
Results of Operations
Nine Months Ended September 30, 2004 and 2003
Revenue and Subscriber Statistics
Service revenues approximated $7.4 million and $27.5 million for the three and
nine months ended September 30, 2004, respectively, which represented a $3.3
million and $10.7 million decrease as compared to the three and nine months
ended September 30, 2003, respectively. The decrease in these periods was
primarily the result of a decrease in revenue in our wireless internet, field
services and transportation market segments. Total revenues approximated $8.4
million and $31.3 million for the three and nine months ended September 30,
2004, respectively, which represented a $3.7 million and $10.1 million decrease
as compared to the three and nine months ended September 30, 2003, respectively.
The decrease was primarily a result of decreased service and equipment revenues
for the three months ended September 30, 2004 as compared to the three months
ended September 30, 2003. For the nine months ended September 30, 2004, the
decrease in service revenues was partially offset by an increase in equipment
revenue.
31
The tables below summarize our revenue for the three and nine months ended
September 30, 2004 and 2003 and our subscriber base as of September 30, 2004 and
2003. An explanation of certain changes in revenue and subscribers is set forth
below.
Three Months Ended September 30,
--------------------------------
Summary of Revenue 2004 2003 Change % Change
------------------ ---- ---- ------ --------
(in millions)
Wireless Internet $4.3 $6.8 $(2.5) (37)%
Field Services 1.4 1.9 (0.5) (26)
Transportation 0.9 1.1 (0.2) (18)
Telemetry 0.6 0.6 0.0 0
All Other 0.2 0.3 (0.1) (33)
--- ---- ----- ----
Service Revenue 7.4 10.7 (3.3) (31)
Equipment Revenue 1.0 1.4 (0.4) (29)
--- ---- ------ ----
Total $8.4 $12.1 $(3.7) (31)%
==== ===== ====== =====
Nine Months Ended September 30,
------------------------------
Summary of Revenue 2004 2003 Change % Change
------------------ ---- ---- ------ --------
(in millions)
Wireless Internet $15.7 $21.1 $(5.4) (26)%
Field Services 4.7 7.9 (3.2) (41)
Transportation 2.7 7.0 (4.3) (61)
Telemetry 1.8 1.8 0.0 0
All Other 2.6 0.4 2.2 550
---- ---- ---- ---
Service Revenue 27.5 38.2 (10.7) (28)
Equipment Revenue 3.8 3.2 0.6 19
---- ---- ---- --
Total $31.3 $41.4 $(10.1) (24)%
===== ===== ======= =====
The make up of our registered subscriber base was as follows:
As of September 30,
---------------------------
2004 2003 Change % Change
---- ---- ------ --------
Wireless Internet 81,738 109,164 (27,426) (25)%
Field Services 10,951 18,278 (7,327) (40)
Transportation (1) 46,361 103,324 (56,963) (55)
Telemetry 31,058 31,005 53 0
All Other 393 868 (475) (55)
------- ------- -------- -----
Total 170,501 262,639 (92,138) (35)%
======= ======= ======== =====
(1) Includes 9,692 registered UPS devices as of September 30, 2004,
of which 3,006 were actively passing data traffic, as compared to
69,897 registered UPS devices as of September 30, 2003, of which
7,766 were actively passing data traffic.
o Wireless Internet: Revenue declined from $6.8 million to $4.3 million
for the three months ended September 30, 2004, as compared to the
three months ended September 30, 2003. Revenue declined from $21.1
million to $15.7 million for the nine months ended September 30, 2004,
as compared to the nine months ended September 30, 2003. The revenue
decline in the Wireless Internet sector during this period represented
customer losses that we are experiencing in both our direct and
reseller channels as a result of the migration of wireless internet
customers to other networks. These customer losses have been
exacerbated by the `end-of-life' announcement by RIM for the 857
32
device, which has negatively impacted the ability of our resellers to
add new devices to our network to replace those that are migrating
from their respective customer bases. This decline is also the result
of Motient's coordinated effort during the first six months of 2004 to
actively sell and promote wireless email and wireless Internet
applications to enterprise accounts under our agent relationships with
T-Mobile USA and Verizon Wireless. During the fourth quarter of 2003,
we sold several of our existing customers devices on these networks
that resulted in their termination of devices on our network in 2004.
We received commissions from these carriers for these sales. Our
efforts to sell and promote wireless email and wireless Internet
applications to enterprise accounts under our agent relationships with
T-Mobile USA and Verizon Wireless were reduced significantly in the
third quarter of 2004. We recently terminated our agent agreements
with T-Mobile USA and Verizon Wireless.
o Field Services: Revenue declined from $1.9 million to $1.4 million for
the three months ended September 30, 2004, as compared to the three
months ended September 30, 2003. Revenue declined from $7.9 million to
$4.7 million for the nine months ended September 30, 2004, as compared
to the nine months ended September 30, 2003. The decrease in revenue
from field services was primarily the result of the termination of
several customer contracts, including Sears, Schindler, Lanier, and
Bannex, as well as the general reduction of units and/or rates across
the remainder of our field service customer base, primarily IBM and
Pitney Bowes. Schindler's revenue increased slightly due to a $250
thousand contract termination fee that was billed and collected in
third quarter of 2004. This revenue segment was also negatively
impacted by approximately $675 thousand for the nine months ended
September 30, 2004 due to the reclassification of one of our
customers, Lucent, to the wireless internet segment.
o Transportation: Revenue declined from $1.1 million to $0.9 million for
the three months ended September 30, 2004, as compared to the three
months ended September 30, 2003. Revenue declined from $7.0 million to
$2.7 million for the nine months ended September 30, 2004, as compared
to the nine months ended September 30, 2003. The decrease in revenue
for the nine months ended September 30, 2004 from the transportation
sector was primarily the result of UPS, beginning in July 2003, having
removed a significant number of their units from our network and no
longer maintaining their historical level of payments. UPS represented
$0.2 million and $0.7 million of revenue for the three and nine months
ended September 30, 2004, as compared to $0.4 million and $5.2 million
of revenue for the three and nine months ended September 30, 2003. We
did, however, also continue to experience growth during this period in
other transportation accounts, most notably Aether and Roadnet.
o Telemetry: Revenue remained at $0.6 million for the three months ended
September 30, 2004, as compared to the three months ended September
30, 2003. Revenue remained at $1.8 million for the nine months ended
September 30, 2004, as compared to the nine months ended September 30,
2003. While we experienced growth in certain telemetry customer
accounts, including Transaction Network Services (formerly US Wireless
Data) and USA Technologies, this was equally offset by churn or
negative rate changes in other telemetry accounts.
o Other: Revenue decreased from $0.3 million to $0.2 million for the
three months ended September 30, 2004, as compared to the three months
ended September 30, 2003. Revenue increased from $0.4 million to $2.6
million for the nine months ended September 30, 2004, as compared to
the nine months ended September 30, 2003. The increase for the nine
months ended September 30, 2004 was attributable to the settlement of
a take-or-pay contract with Wireless Matrix resulting in the
recognition of $1.6 million and approximately $0.6 million of
commissions earned via our now terminated agency and dealer agreements
with Verizon Wireless and T-Mobile USA. Our efforts to sell and
promote wireless email and wireless Internet applications to
enterprise accounts under our agent relationships with T-Mobile USA
and Verizon Wireless were reduced significantly in the third quarter
of 2004. We recently terminated our agent agreements with T-Mobile USA
and Verizon Wireless.
33
o Equipment: Revenue decreased from $1.4 million to $1.0 million for the
three months ended September 30, 2004, as compared to the three months
ended September 30, 2003. Revenue increased from $3.2 million to $3.8
million for the nine months ended September 30, 2004, as compared to
the nine months ended September 30, 2003. The decrease in equipment
revenues for the three months ended September 30, 2004 was the result
of the decline sales of devices attributable to agency and dealer
agreements with Verizon Wireless and T-Mobile USA. The increase in
equipment revenue for the nine months ended September 30, 2004 was
primarily the result of the sales of devices attributable to agency
and dealer agreements with Verizon Wireless and T-Mobile USA. We
recently terminated our agent agreements with T-Mobile USA and Verizon
Wireless.
The table below summarizes our operating expenses for the three and nine months
ended September 30, 2004 and 2003. An explanation of certain changes in
operating expenses is set forth below.
Three Months Ended September 30,
--------------------------------
Summary of Expenses 2004(1) 2003(2) Change % Change
------------------- ------- ------- ------ --------
(in millions)
Cost of Service and Operations $7.8 $12.4 $(4.6) (37)%
Cost of Equipment Sales 0.9 1.5 (0.6) (40)
Sales and Advertising 0.2 1.1 (0.9) (82)
General and Administration 2.0 3.8 1.8 (47)
Operational Restructuring Costs 0.0 0.0 0.0 0
Depreciation and Amortization 3.7 5.5 (1.8) (33)
--- --- ----- ----
Total Operating $14.6 $24.3 $(9.7) (40)%
===== ===== ====== =====
(1) Includes compensation expense of $87 thousand related to the
market value of employee stock options.
(2) Includes compensation expense of $99 thousand related to the
market value of employee stock options.
Nine Months Ended September 30,
------------------------------
Summary of Expenses 2004(1) 2003(2) Change % Change
------------------- ------- ------- ------ --------
(in millions)
Cost of Service and Operations $29.5 $40.0 $(10.5) (26)%
Cost of Equipment Sales 3.7 3.6 0.1 3
Sales and Advertising 2.1 3.8 (1.7) (45)
General and Administration 6.9 10.4 (3.5) (34)
Operational Restructuring Costs 6.3 0.0 6.3 0
Depreciation and Amortization 12.1 16.3 (4.2) (26)
---- ---- ----- ----
Total Operating $60.6 $74.1 $(13.5) (18)%
===== ===== ======= =====
(1) Includes compensation expense of $4.0 million related to the
market value of employee stock options.
(2) Includes compensation expense of $1.2 million related to the
market value of employee stock options.
Cost of service and operations includes costs to support subscribers, such as
network telecommunications charges and site rent for network facilities, network
operations employee salary and related costs, network and hardware and software
maintenance charges, among other things. Costs of service and operations
decreased from $12.4 million to $7.8 million for the three months ended
September 30, 2004 as compared to the three months ended September 30, 2003.
Cost of service and operations expenses as a percentage of service revenue were
approximately 105% for the three months ended September 30, 2004, compared to
116% for the comparable period of 2003. Costs of service and operations
decreased from $40.0 million to $29.5 million for the nine months ended
September 30, 2004 as compared to the nine months ended September 30, 2003. Cost
of service and operations expenses as a percentage of service revenue were
approximately 107% for the first nine months of 2004, as compared to 105% for
the comparable period of 2003. The decrease in these expenses was partially the
result of lower employee salary and related costs due to the workforce
reductions implemented in March of 2003 and February of 2004. The decrease in
these expenses was also partially the result of lower fees paid to RIM for
licensing Blackberry as a result of the decline of Wireless Internet units and
revenues. The decrease in these expenses was also impacted by lower network
maintenance costs as a result of the termination of our national maintenance
contract with Motorola at December 31, 2003, as well as the continued removal of
older-generation base stations from the network and the removal of base stations
34
under our network rationalization efforts initiated in the second quarter of
2004. We currently perform our maintenance on our base stations by contracting
directly with service shops in respective regions, which has materially lowered
our cost relative to our prior national maintenance contract. Site lease and
telecommunications costs for base station locations also decreased during this
period as a result of the removal of base stations as part of our efforts to
remove older-generation equipment from our network and the removal of base
stations under our network rationalization efforts initiated in the second
quarter of 2004. The decrease in costs of service and operations was also
partially the result of reductions in hardware and software maintenance costs as
a result of the negotiation of lower rates on maintenance service contracts in
2003 and 2004, the reduction of software licenses as a result of having fewer
employees and a decrease in software development costs as a result of a change
in capitalization policy. These decreases were partially offset by compensation
expenses associated with stock options issued to employees of $70 thousand and
$2.0 million for the three and nine months ended September 30, 2004,
respectively. Compensation expenses associated with stock options issued to
employees totaled $24 thousand and $0.4 million for the three and nine months
ended September 30, 2003. Excluding these compensation charges, cost of service
and operations decreased $5.1 million and $12.1 million, or 41% and 31% for the
three and nine months ended September 30, 2004, respectively, as compared to the
comparable periods in 2003.
Cost of equipment sold decreased from $1.5 million to $0.9 million for the three
months ended September 30, 2004 as compared to the three months ended September
30, 2003. Cost of equipment sold increased from $3.6 million to $3.7 million for
the nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003. The decrease in cost of equipment for the three months ended
September 30, 2004 was the result of the decline sales of devices attributable
to our now terminated agency and dealer agreements with Verizon Wireless and
T-Mobile USA. The increase in cost of equipment for the nine months ended
September 30, 2004 was primarily the result of the cost of the increased sales
of devices attributable to the now terminated agency and dealer agreements with
Verizon Wireless and T-Mobile USA. Our efforts to sell and promote wireless
email and wireless Internet applications to enterprise accounts under our agent
relationships with T-Mobile USA and Verizon Wireless were reduced significantly
in the third quarter of 2004.
Sales and advertising expenses decreased to $0.2 million for the three months
ended September 30, 2004, as compared to $1.1 million for the three months ended
September 30, 2003. Sales and advertising expenses decreased to $2.1 million for
the nine months ended September 30, 2004, as compared to $3.8 million for the
nine months ended September 30, 2003. Sales and advertising expenses as a
percentage of service revenue were approximately 3% for the three months ended
September 30, 2004, as compared to 10% for the comparable period of 2003. Sales
and advertising expenses as a percentage of service revenue were approximately
8% for the first nine months of 2004, as compared to 10% for the comparable
period of 2003. The decrease in sales and advertising expenses for the three and
nine months ended September 30, 2004 was primarily attributable to lower
employee salary and related costs, including sales commissions, due to lower
sales volumes and the workforce reductions implemented in March 2003 and
February 2004, and the significant reduction in or elimination of sales and
marketing programs after our reorganization in May 2002. These decreases were
also impacted by compensation charges associated with stock options issued to
employees of income of $85 thousand and an expense of $0.8 million for the three
and nine months ended September 30, 2004, respectively. Compensation expenses
associated with stock options issued to employees totaled $42 thousand and $0.3
million for the three and nine months ended September 30, 2003. Excluding these
compensation charges, sales and advertising decreased $0.4 million and $2.2
million, or 57% and 63% for the three and nine months ended September 30, 2004,
respectively, as compared to the comparable periods in 2003.
General and administrative expenses for the core wireless business decreased
from $3.8 million to $2.0 million for the three months ended September 30, 2004
as compared to the three months ended September 30, 2003. General and
administrative expenses for the core wireless business decreased from $10.4
million to $6.9 million for the nine months ended September 30, 2004 as compared
to the nine months ended September 30, 2003. General and administrative expenses
as a percentage of service revenue were approximately 27% for the three months
ended September 30, 2004, compared to 36% for the comparable period of 2003.
General and administrative expenses as a percentage of service revenue were
approximately 25% for the first nine months of 2004, compared to 27% for the
comparable period of 2003. The decrease in general and administrative expenses
for the three and nine months ended September 30, 2004 was primarily
attributable to lower employee salary and related costs due to the workforce
reductions implemented in March of 2003 and February of 2004, lower consulting
35
expenses as a result of the $0.9 million expensed for the Further Lane warrants
in 2003, the closure of our Reston facility in July 2003, lower directors and
officers liability insurance costs subsequent to reorganization, lower audit and
tax fees and a reduction in bad debt reserves primarily due to lower accounts
receivables balances as a result of improvements in our collection capabilities.
These decreases were partially offset by increases in legal and regulatory fees
and by compensation expenses associated with stock options issued to employees
of $102 thousand and $1.1 million for the three and nine months ended September
30, 2004, respectively. Compensation expenses associated with stock options
issued to employees totaled $33 thousand and $0.5 million for the three and nine
months ended September 30, 2003. Excluding these compensation charges, general
and administrative decreased $1.8 million and $4.1 million, or 49% and 41% for
the three and nine months ended September 30, 2004, respectively, as compared to
the comparable periods in 2003.
Operational restructuring costs increased from $0 to $6.3 million for the nine
months ended September 30, 2004, as compared to the nine months ended September
30, 2003. The operational restructuring costs in the first quarter of 2004
resulted from the severance and related salary charges as a result of the
reduction in force in February 2004 and certain costs as a result of base
station deconstruction activities as part of our on-going network
rationalization efforts. In the second quarter of 2004, we took an operational
restructuring charge of $5.2 million related to these network rationalization
efforts.
In the second quarter of 2004, we finalized plans to implement certain network
station rationalization initiatives. These initiatives involve the
de-commissioning of approximately 409 base stations from our network. We had
1,549 base stations in our network as of March 31, 2004, and as of September 30,
2004, we have 1,239 base stations in our network. We are taking these actions in
a coordinated effort to reduce network operating costs while also focusing on
minimizing the potential impact to our customers communications and coverage
requirements. This rationalization encompasses, among other things, the
reduction of unneeded capacity across the network by de-commissioning
under-utilized and un-profitable base stations as well as de-commissioning base
stations that pass an immaterial amount of customer data traffic. In some cases,
these base stations were originally constructed specifically to serve customers
with nationwide requirements that are no longer customers of Motient. In certain
instances, the geographic area that our network serves may be reduced by this
process and customer communications may be impacted. We have discussed these
changes to our network with many of our customers to assist them in evaluating
the potential impact, if any, to their respective communications requirements.
The full extent and effect of the changes to our network have yet to be
determined, but based on internal analyses, we believe the de-commissioning of
these base stations from our network will only impact approximately 1.5% of our
network's current data traffic. We are completed these network rationalization
initiatives in December 2004.
Depreciation and amortization for the core wireless business decreased to $3.7
million for the three months ended September 30, 2004, as compared to $5.5
million for the three months ended September 30, 2003. Depreciation and
amortization for the core wireless business decreased to $12.1 million for the
nine months ended September 30, 2004, as compared to $16.3 million for the nine
months ended September 30, 2003. Depreciation and amortization was approximately
50% of service revenue for the three months ended September 30, 2004, as
compared to 51% for the comparable period of 2003. Depreciation and amortization
was approximately 44% of service revenue for the first nine months of 2004, as
compared to 43% for the first nine months of 2003. Depreciation and amortization
expense reduced as a result of our decline in asset value related to our
frequency sale transactions in 2003 and our write-down as of September 2003 of
our customer contract related intangibles. In May 2004, the Company engaged a
financial advisory firm to prepare a valuation of customer intangibles as of
September 2003. Due to the loss of UPS as a core customer in 2003 as well as the
migration and customer churn occurring in the Company's mobile internet base
that is impacting the average life of a customer in this base, among other
things, the Company determined an impairment of the value of these customer
contracts was probable. As a result of this valuation, the value of customer
intangibles was determined to be impaired as of September 2003 and was reduced
by $5.5 million.
36
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
Other Income/(Expense) 2004 2003 2004 2003
---------------------- ---- ---- ---- ----
(in thousands)
Interest Expense, net $ (556) $(1,638) $(3,595) $(4,592)
Write -off of deferred financing costs -- -- (8,052) --
Other Income, net 66 12 265 819
Other Income from Aether 650 180 1,957 1,956
Gain/(Loss) on Disposal of Assets 2 51 2 51
(Loss) on impairment of intangible asset -- (5,535) -- (5,535)
Gain on Debt & Capital Lease Retirement -- -- 802 --
Equity in Losses of Mobile Satellite Ventures $(3,779) $(3,155) $(8,617) $(7,768)
Interest expense decreased for the nine months ended September 30, 2004, as
compared to the nine months ended September 30, 2003, due primarily to the April
2004 repayment of our term credit facility, the July 2004 repayments of our
notes payable to Motorola, Rare Medium and CSFB, and the termination of our
capital lease with Hewlett-Packard. Interest expense decreased for the nine
months ended September 30, 2004, as compared to the nine months ended September
30, 2003, due to the debt repayment actions mentioned above, offset by the
amortization of fees and the value ascribed to warrants provided to the term
credit facility lenders on our closing of our credit facility in January of 2003
and the subsequent amendment in March 2004. Interest expense is presented net of
interest income on our bank balances and the interest accrued on our note
receivable from MSV.
In April 2004, we repaid all amounts outstanding under our term credit facility
of $6.7 million, which resulted in the requirement to immediately expense $6.4
and $1.7 million in financing fees related to the January 2003 and March 2004
credit facilities.
In June 2004, we negotiated settlements of our vendor financing and notes
payable with Motorola and our capital lease with Hewlett-Packard. These
settlements resulted in a gain on debt and capital lease retirements of $0.8
million.
In July 2004, we repaid all amounts outstanding under our notes payable to Rare
Medium and CSFB.
We recorded equity in losses of MSV of $3.8 million and $8.6 million for the
three and nine months ended September 30, 2004, as compared to $3.1 million and
$7.8 million for the three and nine months ended September 30, 2003. The MSV
losses for the three and nine months ended September 30, 2004 are Motient's
46.5% of MSV's losses for the same periods, and losses for the three and nine
months ended September 30, 2003 consist of Motient's 46.5% share of the MSV
losses to date reduced by the loans in priority. For additional information
regarding MSV, please see the financial statements of MSV beginning on page M-1.
Years Ended December 31, 2003 and 2002
Due to the consummation of our bankruptcy and the application of our
"fresh-start" accounting, results of operations for the periods after April 30,
2002 are not comparable to the results for previous periods. However, for the
discussion of results of operations, the four months ended April 30, 2002
(Predecessor Company) has been combined with the eight months ended December 31,
2002 (Successor Company) and then compared to the year ended December 31, 2003.
Differences between periods due to "fresh-start" accounting adjustments are
explained when necessary.
37
Revenue and Subscriber Statistics
The tables below summarize our revenue and subscriber base for 2003 and 2002. An
explanation of certain changes in revenue and subscribers is set forth below
under the caption "Summary of Year-over-Year Revenue."
Predecessor
Successor Company Company
----------------- -------
Eight Months Four Months Combined Year
Year Ended Ended Ended Ended
December 31, December 31, April 30, December 31,
Summary of Revenue 2003 2002 2002 2002 Change % Change
------------------ ---- ---- ---- ---- ------ -------
(in millions)
Wireless Internet $27.8 $15.5 $5.6 $21.1 $6.7 32%
Field Services 9.9 10.5 5.6 16.1 (6.2) (39)
Transportation 7.9 7.4 4.1 11.5 (3.6) (31)
Telemetry 2.3 1.8 0.8 2.6 (0.3) (12)
All Other 1.4 0.3 0.7 1.0 0.4 40
--- --- --- --- --- --
Service Revenue $49.3 $35.5 $16.8 $52.3 $(3.0) (6)
Equipment Revenue 5.2 1.1 5.6 6.7 (1.5) (22)
--- --- --- --- ----- ----
Total $54.5 $36.6 $22.4 $59.0 $(4.5) (8)%
===== ===== ===== ===== ====== =====
The make up of our registered subscriber base was as follows:
As of December 31,
----------------------------
2003 2002 Change % Change
---- ---- ------ --------
Wireless Internet 106,600 106,082 518 0%
Field Services 17,468 30,263 (12,795) (42)
Transportation 45,902 94,825 (48,923) (52)
Telemetry 32,420 30,171 2,249 7
All Other 1,305 653 652 100
----- --- --- ---
Total 203,695 261,994 (58,299) (22)%
======= ======= ======== =====
(1) UPS migrated a majority of their units to another network over the course of
the second half of 2003. At December 31, 2002, UPS had 70,955 units registered
on Motient's network. At December 31, 2003, UPS had 11,829 units registered on
Motient's network.
Service revenue approximated $49.3 million for the year ended December 31, 2003,
which was a $3.0 million reduction as compared to the year ended December 31,
2002. The decrease in revenue year-over-year was primarily the result of
decreases in field services and transportation revenues, partially offset by an
increase in revenue in the wireless internet segment. We experienced a 22%
decrease in total subscribers primarily in the field services and transportation
market segments. It should be noted that UPS deactivated a majority of its units
on our network during the third and fourth quarter of 2003 and our revenue from
UPS declined significantly during this period. Total revenues approximated $54.5
million for the year ended December 31, 2003, which was a $4.5 million reduction
as compared to the year ended December 31, 2002. In addition to the service
revenue decline discussed above, this reduction was also the result of a 22%
decrease in equipment revenue.
o Wireless internet revenue grew $6.7 million from the year ended
December 31, 2002 to the year ended December 31, 2003. The revenue
growth in the Wireless Internet sector during this period represented
our focus on expanding the adoption of eLink and BlackBerry TM
wireless email offerings to corporate customers with both direct sales
people and reseller channel partners. Our existing reseller channel
partners represented a significant portion of the revenue growth
during this period. The number of wireless internet units registered
on our network did not change materially from 2002 to 2003. The
increase in revenues was a result of the activation of existing
registered units into service. Despite this growth in 2003, it should
be noted that Motient is experiencing increased churn and migration in
this customer segment in 2004.
38
o Field service revenue decreased by $6.2 million from the year ended
December 31, 2002 to the year ended December 31, 2003. The decrease in
revenue from field services is primarily the result of the termination
of several customer contracts, including NCR Corporation, Sears,
Lanier, and Bank of America, as well as the general reduction of units
and rates across the remainder of our field service customer base,
primarily by IBM, and certain consulting revenues included in 2002
that were not included in 2003.
o Transportation revenue decreased by $3.6 million from the year ended
December 31, 2002 to the year ended December 31, 2003. The decrease in
revenue from our transportation segment was primarily the result of
UPS migrating most of its units to another network provider over the
course of the second half of 2003. UPS represented $0.3 million of
revenue for the three months ended December 31, 2003, as compared to
$2.5 million for the three months ended December 31, 2002. Another
reason for the decrease was the elimination, as part of fresh-start
accounting, of the recognition of deferred revenue that resulted from
the sale of an intellectual property license sold to Aether Systems
Inc. in 2000. These decreases were partially offset by an increase in
units and usage for AMSC and Metra.
o Telemetry revenues decreased by $0.3 million from the year ended
December 31, 2002 to the year ended December 31, 2003. Although
subscriber units grew by 2,249 or 7% year-over-year, this growth was
offset by other churn and negative rate changes in other telemetry
accounts.
o Other revenue increased $0.4 million from the year ended December 31,
2002 to the year ended December 31, 2003. This increase in revenue was
primarily attributable to commissions earned under our agency and
dealer agreements with Verizon Wireless and T-Mobile USA, which are
now terminated.
o Equipment revenue decreased by $1.5 million from the year ended
December 31, 2002 to the year ended December 31, 2003. The decrease in
equipment revenue was primarily a result of our decision to decrease
the prices for our equipment to customers over the course of the
second quarter of 2002 due to lower sales of certain of our customer
devices and our assessment of market conditions, demand and
competitive pricing dynamics. These reductions in equipment revenue
were partially offset by the sales of devices under our agency and
dealer agreements with Verizon Wireless and T-Mobile USA, which are
now terminated.
For the year ended December 31, 2003, five customers accounted for approximately
47% of Motient's service revenue, with two customers, UPS and SkyTel, each
accounting for more than 11%. As of December 31, 2003, there was no single
account with more than 6% of the Company's net accounts receivable. The revenue
attributable to such customers varies with the level of network airtime usage
consumed by such customers, and none of the service contracts with such
customers requires that the customers use any specified quantity of network
airtime, nor do such contracts specify any minimum level of revenue. There can
be no assurance that the revenue generated from these customers will continue in
future periods. UPS has deregistered a majority of its units as it migrates to
another network provider for its next generation solution.
Due to the bankruptcy of WorldCom, beginning in the quarter ended June 30, 2002,
we reserved 100% of all amounts then due from Skytel, a wholly-owned subsidiary
of WorldCom. In October 2002, we received payment from SkyTel of a significant
portion of the amount of our pre-petition claim amount. We have received full,
timely payments thereafter and believe that amounts from SkyTel are currently
fully collectible.
39
Expenses
Predecessor
Successor Company Company
----------------- -------
Eight Months Four Months Combined Year
Year Ended Ended Ended Ended
December 31, December 31, April 30, December 31,
Summary of Expense 2003 2002 2002 2002 Change % Change
------------------ ---- ---- ---- ---- ------ -------
(in millions)
Cost of Service and Operations $51.4 $38.1 $21.9 $ 60.0 $(8.6) (14)%
Cost of Equipment Sales 5.9 2.2 6.0 8.2 (2.3) (28)
Sales and Advertising 4.6 4.8 4.3 9.1 (4.5) (49)
General and Administration 11.3 9.7 4.1 13.8 (2.5) (18)
Restructuring Charges -- -- 0.6 0.6 (0.6) (100)
Depreciation and Amortization 21.5 15.5 6.9 22.4 (0.9) (4)
---- ---- --- ---- ----- ----
Total Operating $94.7 $70.3 $43.8 $114.1 $(19.4) (17)%
===== ===== ===== ====== ======= =====
Cost of service and operations includes costs to support subscribers, such as
network telecommunications charges and site rent for network facilities, network
operations employee salary and related costs, network and hardware and software
maintenance charges, among other things. The 14% year-over-year decrease is made
up of:
o decreases in telecommunication charges associated with rate reductions
in certain telecommunication contracts,
o decreases in site lease costs due to the removal of older-generation
base stations from our network,
o reductions in hardware and software maintenance costs as a result of
the negotiation of lower rates on maintenance service contracts,
o decreases in network maintenance costs as a result of the removal of
older-generation base stations from our network as well as the
reduction of rates under our national contract for these services,
o lower employee and related costs due to the workforce reductions
implemented in July and September 2002 and March 2003, as well as the
reversal of certain employee bonus accruals from current and prior
periods related to these workforce reductions.
These decreases were partially offset by:
o an increase in the average lease rate for our site leases,
o increases in licensing and commission payments to third parties with
whom we have partnered to provide certain eLink and BlackBerry(TM) by
Motient services, as a result of the revenue increase over the year in
our mobile internet segment,
o compensation expenses associated with stock options issued to
employees in 2003 as compared to 2002, and
o certain expenditures for the removal of older-generation base stations
from our network.
Cost of service and operations expenses as a percentage of total revenues were
approximately 94% for 2003, as compared to 102% for 2002.
Cost of equipment sales expenses as a percentage of total revenue were
approximately 11% for 2003 as compared to 14% for 2002. The 28% decrease in 2003
expenses over 2002 expenses in the cost of equipment sold expenses was primarily
the result of reduced terrestrial hardware sales prices during 2002, partially
offset by the increased cost of sales of devices attributable to the now
terminated agency and dealer agreements with Verizon Wireless and T-Mobile USA.
We also wrote down the value of its inventory in the second quarter of 2002 by
$4.5 million.
Sales and advertising expenses as a percentage of total revenue were
approximately 8% for 2003, compared to 15% for 2002. The 49% decrease in sales
and advertising expenses year over year was primarily attributable to lower
employee salary and related costs due to the workforce reductions implemented in
July and September 2002 and March 2003 as well as the reversal of certain
employee bonus accruals from current and prior periods related to these
workforce reductions as well as significant reductions in or elimination of
public relations costs and sales and marketing programs as a result of our
reorganization in May of 2002. These decreases were partially offset by
compensation expenses associated with stock options issued to employees in 2003
as compared to 2002.
40
General and administrative expenses for the core wireless business as a
percentage of total revenue were approximately 21% for 2003 as compared to 23%
for 2002. The 18% decrease in 2003 costs over 2002 costs in the general and
administrative expenses was primarily attributable to lower employee salary and
related costs due to the workforce reductions implemented in July and September
2002 and March of 2003 as well as the reversal of certain employee bonus
accruals from current and prior periods related to these workforce reductions.
In addition, this decrease was attributable to lower rent expense from the
closure of our Reston, VA facility in July 2003, lower directors and officers
liability insurance costs subsequent to our reorganization, and a reduction in
bad debt charges primarily due to the lowering of our reserves after our
reorganization. These decreases were partially offset by compensation expenses
associated with stock options issued to employees in 2003 a compared to 2002,
increases in the consulting costs related to the engagement and the related
compensation costs of CTA and Further Lane in May 2002 and July 2003,
respectively, and increases in audit, tax and legal fees related to our fiscal
year 2002 audit and re-audits of fiscal year 2001 and 2000, occurring
principally during the last nine months of 2003. Certain events in 2002 also
contributed to this decrease in general and administrative expenses from 2002 to
2003, including the compensation expense associated with the issuance of
warrants to CTA in December 2002 and fees incurred as a result of Motient's
withdrawal from certain FCC frequency auctions in the second quarter of 2002.
Cost of service and operations, sales and advertising and general and
administrative expenses were also impacted the reversal of certain bonus
accruals from 2002. In July 2003, the compensation committee of the Board of
Directors approved an aggregate payout of the 2002 corporate and personal
portions of employee bonuses in the amount of 37.5% accrued for this period.
There were no restructuring costs in 2003. Operational restructuring costs in
2002 of $0.6 million are associated with certain employee reduction initiatives
and reorganization expenses.
Depreciation and amortization for the core wireless business were approximately
40% of total revenue in 2003, as compared to 38% in 2002. Depreciation and
amortization expenses decreased from $22.4 million for 2002 to $21.5 million for
2003. The $0.9 million decrease in depreciation and amortization expense in 2003
was partially attributable to the impairment of the value of our customer
contract intangibles as of September 2003. In May 2004, we engaged a financial
advisory firm to prepare a valuation of customer intangibles as of September
2003. Due to the loss of UPS as a core customer in 2003 as well as the migration
and customer churn occurring in our mobile internet base that is impacting the
average life of a customer in this base, among other things, we determined an
impairment of the value of these customer contracts was probable. As a result of
this valuation, the value of customer intangibles was determined to be impaired
as of September 2003 and was reduced by $5.5 million.
Interest expense from May 1, 2002, is associated with our various debt
obligations, including the notes payable to Rare Medium and CSFB, our capital
lease obligations, our vendor financing commitment and our term credit facility
put in place in January 2003. We incurred $6.4 million of interest expense in
2003, compared to $3.8 million during 2002. The $2.6 million increase was due
primarily to the amortization of fees and the value ascribed to warrants
provided to the term credit facility lenders on our closing of our term credit
facility in January of 2003. We issued warrants at closing to the lenders to
purchase, in the aggregate, 3,125,000 shares of our common stock. The exercise
price for these warrants is $1.06 per share. The warrants were valued at $10
million using a Black-Scholes pricing model and have been recorded as a debt
discount and are being amortized as additional interest expense over three
years, the term of the related debt. Upon closing of the credit agreement, we
paid closing and commitment fees to the lenders of $500,000, which are also
being amortized over three years.
On July 29, 2003, our wholly-owned subsidiary, Motient Communications, entered
into an asset purchase agreement with Nextel, under which Motient Communications
sold to Nextel certain of its SMR licenses issued by the FCC for $3.4 million.
The closing of this transaction occurred on November 7, 2003. On December 9,
2003, Motient Communications entered into a second asset purchase agreement,
under which Motient Communications will sell additional licenses to Nextel for
$2.75 million. In February, 2004, we closed the sale of licenses covering
approximately $2.2 million of the purchase price, and we closed the sale of
approximately one-half of the remaining licenses in April 2004. The transfer of
the other half of the remaining licenses has been challenged at the FCC by a
41
third-party. While we believe, based on the advice of counsel, that the FCC will
ultimately rule in our favor, we cannot assure you that we will prevail, and, in
any event, the timing of any final resolution is uncertain. None of these
licenses are necessary for our future network requirements. We have and expect
to continue to use the proceeds of the sales to fund its working capital
requirements and for general corporate purposes. The lenders under our term
credit agreement consented to the sale of these licenses.
Effective May 1, 2002, we are required to reflect our equity share of the losses
of MSV. We recorded equity in losses of MSV of $9.9 million and $8.8 million for
the years ended December 31, 2003 and December 31, 2002, respectively. The MSV
losses for the years ended December 31, 2003 and 2002 are Motient's 46.5 % and
48% share of MSV's losses for the same period reduced by the loans in priority.
Our calculations give effect to the impairment of our investment in MSV in the
fourth quarter of 2002 in the amount of $15.4 million. For additional
information regarding MSV, please see the financial statements of MSV beginning
on page M-1.
We recorded other income from Aether Systems in 2003 of $2.2 million, as
compared to $2.1 million in 2002.
Additionally, we recorded a number of other non-recurring charges in 2003 and
2002 as a result of our various transactions. For additional information
concerning these non-recurring charges, please see "-- Liquidity and Capital
Resources."
In 2003:
o Loss on impairment of asset of $5.5 million, discussed above.
o We recorded a loss on the sale of certain assets of $3.0 million.
In 2002:
o As a result of our debt restructuring efforts, we recorded costs of $23.1
million.
o We recorded a gain on the sale of our transportation and satellite assets
of $0.8 million.
o We recorded a loss on the sale of certain assets of $1.2 million.
o Related to our reorganization in May of 2002, we recorded a gain on fair
market adjustment of $94.7 million and a gain on the restructuring of debt
of $183.7 million.
o Net capital expenditures for the year ended December 31, 2003 for property
and equipment were $0.02 million, as compared to $1.1 million for 2002.
Expenditures consisted primarily of assets related to our terrestrial
network.
Years Ended December 31, 2002 and 2001
Revenue and Subscriber Statistics
The tables below summarize our revenue and subscriber base for 2002 and 2001. An
explanation of certain changes in revenue and subscribers is set forth below
under the caption "Summary of Year-over-Year Revenue."
42
Successor Predecessor Predecessor
Company Company Company
------- ------- -------
Eight Months Four Months Combined Year
Ended Ended Ended Year Ended
December 31, April 30, December 31, December 31,
Summary of Revenue 2002 2002 2002 2001 Change % Change
------------------ ---- ---- ---- ---- ------ -------
(in millions)
Wireless Internet $15.5 $ 5.6 $21.1 $11.4 $9.7 85%
Field Services 10.5 5.6 16.1 19.4 (3.3) (17)
Transportation 7.4 4.1 11.5 15.9 (4.4) (28)
Telemetry 1.8 0.8 2.6 2.6 (0.0) (0)
All Other 0.3 0.7 1.0 18.8 (17.8) (95)
--- --- --- ---- ------ ----
Service Revenue 35.5 16.8 52.3 68.1 (15.8) (23)
Equipment Revenue 1.1 5.6 6.7 22.2 (15.5) (70)
--- --- --- ---- ------ ----
Total $36.6 $22.4 $59.0 $90.3 $(31.3) (35)%
===== ===== ===== ===== ======= =====
The make up of our registered subscriber base was as follows:
As of December 31,
------------------------------
2002 2001 Change % Change
---- ---- ------ --------
Wireless Internet 106,082 102,258 3,824 4%
Field Services 30,263 36,752 (6,489) (18)
Transportation 94,825 88,128 6,697 8
Telemetry 30,171 22,616 7,555 33
All Other 653 890 (237) (27)
--- --- ----- ----
Total 261,994 250,644 11,350 5%
======= ======= ====== ====
o Service revenue approximated $52.3 million for the year ended December 31,
2002, which was a $15.8 million reduction as compared to the year ended
December 31, 2001. The majority of the decrease in revenue year-over-year was
primarily the result of the sale of satellite assets to MSV in November 2001,
offset by an increase in revenue in the wireless internet segment. We
experienced a 5% growth in total subscribers, with growth in the wireless
internet, transportation and telemetry segments offsetting decreases in other
market segments.
o Wireless internet revenue grew $9.7 million from the year ended December 31,
2001 to the year ended December 31, 2002. While our wireless subscribers only
grew 4% from 102,258 to 106,082, the active, revenue-producing units grew
from approximately 31,500 units to 56,400 units, or a 79% year-over-year
increase. Resellers of our eLink and BlackBerryTM products purchased units to
stock their inventory in 2000 and 2001; these units became revenue-producing
as resellers moved from initial end-user pilots trials to full deployments.
o Field service revenue decreased by $3.3 million from the year ended December
31, 2001 to the year ended December 31, 2002. The decrease in revenue from
field services primarily reflects the churn of units as a result of contract
terminations and corporate downsizings. Additionally, certain contract
renewals resulted in rate reductions.
o Transportation revenue decreased by $4.4 million from the year ended December
31, 2001 to the year ended December 31, 2002. The decrease in revenue from
our transportation product was primarily the result of the sale of our
satellite assets to MSV in November 2001. The remaining reduction was due to
the change in accounting treatment for the amortization of certain software
licensing revenue related to the sales of our transportation business to
Aether Systems in November 2000. These decreases were partially off-set by an
increase in units and usage for our largest customer.
o Telemetry revenues remained virtually flat from the year ended December 31,
2001 to the year ended December 31, 2002. Although subscriber units grew by
7,555 or 33% year-over-year, this growth was offset by contractual pricing
reductions for one of our largest telemetry customers.
o All other revenue decreased $17.8 million from the year ended December 31,
2001 to the year ended December 31, 2002. This decrease in revenue was due
entirely to the sale of the satellite assets to MSV in November 2001,
partially offset by satellite capacity revenues paid by MSV as it pursued its
research and development program.
43
o The decrease in equipment revenue is primarily a result of the sale of our
satellite business in November 2001 and the loss of equipment sales from that
business. These reductions in equipment revenue were offset by an increase in
equipment sales for our eLink product lines. This reduction was also a result
of write-downs of deferred equipment revenue.
For the year ended December 31, 2002, five customers accounted for approximately
47% of Motient's service revenue, with two customers, UPS and SkyTel, each
accounting for more than 10%. As of December 31, 2002, SkyTel represented
approximately 14% of our net accounts receivable, all of which was current. The
revenue attributable to such customers varies with the level of network airtime
usage consumed by such customers, and none of the service contracts with such
customers requires that the customers use any specified quantity of network
airtime, nor do such contracts specify any minimum level of revenue. There can
be no assurance that the revenue generated from these customers will continue in
future periods. UPS has deregistered a majority of its units as it migrates to
another network provider for its next generation solution.
Due to the bankruptcy of WorldCom, beginning in the quarter ended June 30, 2002,
we reserved 100% of all amounts then due from Skytel, a wholly-owned subsidiary
of WorldCom. In October 2002, we received payment from SkyTel of a significant
portion of the amount of our pre-petition claim amount. We have received full,
timely payments thereafter and believe that amounts from SkyTel are currently
fully collectible.
Expenses
Successor Predecessor Predecessor
Company Company Company
------- ------- -------
Eight Months Four Months Combined Year
Ended Ended Ended Year Ended
December 31, April 30, December 31, December 31,
Summary of Expense 2002 2002 2002 2001 Change % Change
------------------ ---- ---- ---- ---- ------ -------
(in millions)
Cost of Service and Operations $38.1 $21.9 $ 60.0 $ 73.1 $(13.1) (18)%
Cost of Equipment Sales 2.2 6.0 8.2 34.1 (25.9) (76)
Sales and Advertising 4.8 4.3 9.1 22.6 (13.5) (60)
General and Administration 9.7 4.1 13.8 20.5 (6.7) (33)
Restructuring Charges 0.0 0.6 0.6 4.7 (4.1) (87)
Depreciation and Amortization 15.5 6.9 22.4 32.4 (10.0) (31)
---- --- ---- ---- ------ ----
Total Operating $70.3 $43.8 $114.1 $187.4 $(73.3) (39)%
===== ===== ====== ====== ======= =====
Cost of service and operations includes costs to support subscribers, such as
network telecommunications charges and site rent for network facilities, network
operations employee salary and related costs, network and hardware and software
maintenance charges, among other things. The 18% year-over-year decrease is made
up of:
o decreases in communication charges associated with reductions in the cost
of usage as a result of the sale of the satellite and transportation assets
and rate reductions in certain telecommunication contracts,
o cost reductions associated with reduced headcount levels, primarily as a
result of the sale of our satellite assets and cost control efforts
undertaken in the second half 2001,
o the operational restructurings in July and September 2002,
o reductions in research and development spending and
o decreases in costs associated with the sale of the satellite business to
MSV, including a reduction in in-orbit insurance costs for the year.
44
These decreases were offset by:
o increases in base station maintenance costs associated with an increase in
the number of base stations,
o increases in site rental costs associated with the increase in base
stations year-over-year,
o an increase in the average lease rate, increases in licensing and
commission payments to third parties with whom we have partnered to provide
certain eLink and BlackBerry(TM) by Motient services, and fees incurred as
a result of Motient's withdrawal from certain frequency auctions, and
o the decrease in cost of equipment sold for the year ended December 31,
2002, as compared to 2001, was a result of reduced terrestrial hardware
sales prices during 2002, and no hardware sales in 2002 were associated
with the satellite voice business that was sold to MSV in November 2001.
These decreases were offset by $4.5 million of writedowns in second quarter
of 2002. These write-downs compared to $7.5 million inventory valuation
charges in 2001 associated with our early-generation eLink inventory. This
reduction was also a result of write-downs of deferred equipment costs.
Sales and advertising expenses as a percentage of total revenue were
approximately 15% for 2002, compared to 25% for 2001. The 60% decrease in sales
and advertising expenses year over year was primarily attributable to reductions
in spending on advertising and trade shows, and decreases in headcount costs,
primarily as a result of the sale of our satellite assets, cost control efforts
undertaken in the second half 2001, and the operational restructurings in July
and September 2002.
General and administrative expenses for the core wireless business as a
percentage of total revenue were approximately 23% for 2002 as compared to 23%
for 2001. The 33% decrease in 2002 costs over 2001 costs in the general and
administrative expenses of our core wireless business was primarily attributable
to savings associated with having fewer employees throughout 2002, primarily as
a result of the sale of our satellite assets and cost control efforts undertaken
in the second half 2001, and the operational restructurings in July and
September 2002, reductions associated with various savings from the sales of our
satellite business, and reductions in regulatory expenditures in 2002 as
compared to 2001.
Operational restructuring costs in 2002 of $0.6 million are associated with our
staff reductions. Operational restructuring costs in 2001 of $4.7 million
represent those costs associated with the restructuring program that we
announced and implemented on September 26, 2001. Of these costs, approximately
$1.6 million are cash charges that are associated with severance packages for
approximately 16% of our direct work force that was laid off. These cash
expenditures did, in some cases, carry into the first quarter of 2002.
Additional charges were associated with the termination of a product initiative,
and represent primarily non-cash charges associated with the write off of
prepaid advertising costs.
Depreciation and amortization for the core wireless business was approximately
38% of total revenue for 2002, as compared to 36% for 2001. The $10.0 million
decrease in depreciation and amortization expense in 2002 was primarily
attributable to the sale of our satellite assets to MSV in late November 2001,
and the associated depreciation on those assets.
Interest income was $0.1 million for the year ended December 31, 2002, as
compared to $1.1 million for the year ended December 31, 2001. Due to our
reorganization efforts, we were limited in our ability to invest excess
available cash.
We incurred $3.8 million of interest expense in 2002, compared to $61.7 million
during 2001. The $57.9 million decrease was primarily a result of the
elimination of the majority of our debt as a result of the bankruptcy
reorganization in 2002 and the retirement of a term loan. Interest expenses in
2002 are primarily associated with our Rare Medium and CSFB notes, capital
leases and vendor financing.
We recorded equity in losses for MSV in 2002 of $24.2 million (after giving
effect to the impairment of our investment in MSV in the fourth quarter of 2002
in the amount of $15 million). In 2001, we recorded equity losses for XM Radio
of $48.5 million. In 2001, we also recorded our XM Radio equity investment
impairment charge of $81.5 million as a result of the sale or exchange of all of
our shares of XM Radio stock for cash or debt extinguishment, which resulted in
mark-to-market losses of $81.5 million on the shares disposed of, and a gain of
$10.1 million on the extinguishment of debt exchanged for these shares.
45
Additionally, we recorded a number of other non-recurring charges in 2002 and
2001 as a result of our various financing transactions. For additional
information concerning these non-recurring charges, please see "-- Liquidity and
Capital Resources."
In 2002:
o As a result of our debt restructuring efforts, we recorded costs of $23.1
million.
o We recorded a gain on the sale of our transportation and satellite assets
of $0.8 million.
o We recorded a loss on the sale of certain assets of $1.2 million.
o Related to our reorganization in May of 2002, we recorded a gain on fair
market adjustment of $94.7 million and a gain on the restructuring of debt
of $183.7 million.
In 2001:
o As noted below in "-- Derivatives," we purchased $50.0 million of notes
from Rare Medium that were secured and exchangeable into up to five million
of our shares of XM Radio stock. The embedded call options included in
these notes were deemed to be a derivative, and we recorded a net gain of
$1.5 million on the mark-to-market adjustment of these securities.
o We sold or exchanged all of our shares of XM Radio stock for cash or debt
extinguishment. As a result of these various transactions, we recorded a
mark-to-market loss of $81.5 million on the shares disposed of, and a gain
of $10.1 million on the extinguishment of debt exchanged for these shares.
o As a result of the permanent reductions in our bank facility, we also
recorded a loss on the extinguishment of debt in the amount of $11.3
million, representing the write off of fees and unamortized warrants
associated with the original placement of this debt.
o We recorded a gain of approximately $23.2 million on the sale of our
satellite assets to MSV.
o We incurred approximately $4.1 million of costs associated with the Rare
Medium merger, which was terminated in October 2001.
o Net capital expenditures for the year ended December 31, 2002 for property
and equipment were $1.1 million compared to $13.8 million for 2001.
Expenditures consisted primarily of assets necessary to continue the build
out of our terrestrial network.
Material Off-Balance Sheet Transactions
As of September 30, 2004, December 31, 2003, 2002 and 2001, we did not have any
material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) under
Regulation S-K.
Liquidity and Capital Resources
As of December 31, 2003, we had approximately $4.1 million of cash on hand and
short-term investments. As of November 30, 2004, we had approximately $15.2
million of cash on hand and short-term investments.
Summary of Cash Flow for the nine months ended September 30, 2003 and 2004, year
ended December 31, 2003 (Successor Company), the eight months ended December 31,
2002 (Successor Company), the four months ended April 30, 2002 (Predecessor
Company) and year ended December 31, 2001 (Predecessor Company)
46
Successor Company Predecessor Company
----------------- -------------------
Eight Four
Nine Months Nine Months Months Months (Restated)
Ended Ended Year Ended Ended Ended Year Ended
September 30, September 30, December 31, December 31, April 30, December 31,
2004 2003 2003 2002 2002 2001
---- ---- ---- ---- ---- ----
Cash (Used In) Provided by Operating Activities $ (14,578) $ (4,175) $ (7,120) $ (8,908) $ (14,546) $ (98,848)
--------- --------- --------- --------- --------- ---------
Cash (Used In) Provided by Investing Activities 2,445 202 4,893 (1,173) (122) 108,848
--------- --------- --------- --------- --------- ---------
Cash (Used In) Provided by Financing Activities:
Net proceeds from equity issuances 54,058 190 -- -- 17 354
Proceeds from issuance of employee stock options 1,235 -- 47 -- -- --
Debt payments on capital leases and vendor
financing (5,001) (2,773) (4,006) (1,425) (1,273) (8,758)
Net proceeds from debt issuances 1,500 3,963 4,500 -- -- 30,500
Repayment of notes and term loan 26,535 -- -- -- -- --
Other -- -- (536) (117) -- (1,229)
--------- --------- --------- --------- --------- ---------
Cash Provided (Used) in Financing Activities 25,257 1,380 5 (1,542) (1,256) 20,867
--------- --------- --------- --------- --------- ---------
Total Change in Cash 13,124 (2,997) (2,222) (11,623) (15,924) 30,867
========= ========= ========= ========= ========= =========
Cash and Cash Equivalents, end of period $ 16,742 $ 2,843 $ 3,618 $ 5,840 $ 17,463 $ 33,387
========= ========= ========= ========= ========= =========
Cash used in operating activities increased for the nine months ended September
30, 2004 as compared to the nine months ended September 30, 2003, as a result of
decreases in funds provided from operating revenue. Cash used in operating
activities decreased from the year ended December 31, 2002 to December 31, 2003
as a result of decreases in operating losses, due substantially to our reduction
in employee salary and related expenditures, reductions in network maintenance,
site lease and telecommunications charges, lower insurance costs subsequent to
reorganization, and decreases in funds provided by working capital, among other
things discussed above. Cash used in operating activities decreased from the
year ended December 31, 2001 to December 31, 2002 as a result of a decrease in
operating losses and a significant decrease in our cash interest expense.
The increase in cash provided by investing activities for the nine months ended
September 30, 2004 as compared to the nine months ended September 30, 2003 was
primarily attributable to the receipt of $2.0 million from MSV as a result of
the April 2, 2004 investment in MSV. Cash flows from investing activities also
includes the conversion of our $1.1 million letter of credit that secured our
capital lease with Hewlett-Packard to unrestricted cash, as part of our
negotiated settlement of these obligations with Hewlett-Packard in June 2004.
Investments in property and equipment reflected our investment in new
telecommunications infrastructure technology for our network that allowed us to
reduce our telecommunications infrastructure costs. The increase in cash
provided by investing activities for the year ended December 31, 2002 to
December 31, 2003 was primarily attributable to the sale of FCC licenses, offset
by the purchase of restricted investments in 2003. The decrease in cash provided
by (used in) investing activities for the year ended December 31, 2001 to
December 31, 2002 was primarily attributable to the sale in 2001 of two million
shares of our XM Radio stock for proceeds of approximately $38.3 million, the
funding of the $20.5 million second quarter 2001 high yield interest payment out
of the escrow account, offset by proceeds from the sale of MSV of $42.5 million
and the sale of certain transportation assets to Aether Systems for $10.0
million, the receipts from the sale of certain restricted investments of $11.3
million, and a decrease in capital spending.
The increase in cash provided by financing activities for the nine months ended
September 30, 2004 as compared to the nine months ended September 30, 2003 was
the result of the proceeds from the exercise of certain employee stock options
and certain other warrants and our private placements of common stock completed
in April and July 2004. These proceeds were partially utilized in our negotiated
settlement of our vendor debt and capital lease obligations in the second
quarter of 2004, the repayment of all amounts outstanding under our term credit
facility in April 2004 and the repayment of all amounts outstanding under our
debt obligations to Rare Medium and CSFB in July 2004.
47
The increase in cash provided by financing activities for the year ended
December 31, 2002 to December 31, 2003 was the result of the proceeds from
borrowings under the term credit facility, offset by vendor debt and capital
lease repayments. The decrease in cash used in financing activities for the year
ended December 31, 2001 to December 31, 2002 was a result of a net decrease in
borrowings and related issuance costs of $30.5 million and a net decrease in
payments of vendor debt and capital lease repayments.
Since emerging from bankruptcy protection in May 2002, we have undertaken a
number of actions to reduce our operating expenses and cash burn rate. Our
liquidity constraints have been exacerbated by weak revenue growth since
emerging from bankruptcy protection, due to a number of factors including the
weak economy generally and the weak telecommunications and wireless sector
specifically, the financial difficulty of several of our key resellers, on whom
we rely for a majority of our new revenue growth, the loss of UPS as a material
customer and our limited liquidity which has hindered efforts at demand
generation.
For a description of our significant cost reduction initiatives since emerging
from bankruptcy, please see "-- Overview -- Cost Reduction Actions."
We continue to pursue all potential funding alternatives. Among the alternatives
for raising additional funds are issuances of debt or equity securities, other
borrowings under secured or unsecured loan arrangements, and sales of assets.
There can be no assurance that additional funds will be available to us on
acceptable terms or in a timely manner. In April 2004, we sold 4,215,910 shares
of our common stock for aggregate consideration of $23.2 million in a private
placement, on July 1, 2004, we sold 3,500,000 shares of our common stock for
aggregate consideration of $30.0 million in a private placement, and on November
12, 2004 we sold 15,353,609 shares of our common stock for aggregate
consideration of $131.6 million in a private placement.
We believe that our available funds, together with anticipated proceeds from our
announced rights offering and the anticipated proceeds generated by the exercise
of outstanding warrants and options, will be adequate to satisfy our current and
planned operations for at least the next 12 months.
Motient's Chapter 11 Filing and Plan of Reorganization
Under our Plan of Reorganization, all then-outstanding shares of our
pre-reorganization common stock and all unexercised options and warrants to
purchase our pre-reorganization common stock were cancelled. The holders of
$335.0 million in senior notes exchanged their notes plus accrued interest for
25,000,000 shares of our new common stock. Some of our other creditors received
an aggregate of 97,256 shares of our new common stock in settlement for amounts
owed to them. These shares were issued upon completion of the bankruptcy claims
process; however, the value of these shares has been recorded in the financial
statements as if they had been issued on the effective date of the
reorganization. Holders of our pre-reorganization common stock received warrants
to purchase an aggregate of approximately 1,496,512 shares of new common stock.
The warrants never became exercisable by their terms, and were cancelled on May
1, 2004. All warrants issued to the holders of our pre-reorganization common
stock, including those shares held by our 401(k) savings plan, have been
recorded in the financial statements as if they had been issued on the effective
date of the reorganization. Also, in July 2002, we issued to Evercore Partners
LP, financial advisor to the creditors' committee in our reorganization, a
warrant to purchase up to 343,450 shares of common stock, at an exercise price
of $3.95 per share. The warrant was dated May 1, 2002, and has a term of five
years. If the average closing price of our common stock for thirty consecutive
trading days is equal to or greater than $20.00, we may require Evercore to
exercise the warrant, provided that our common stock is then trading in an
established public market. The value of this warrant has been recorded in the
financial statements as if it had been issued on May 1, 2002.
As a result of our Chapter 11 bankruptcy filing, we saw a slower adoption rate
for our services in the periods following emergence from bankruptcy. In a large
customer deployment, the upfront cost of the hardware can be significant.
Because the hardware generally is usable only on Motient's network, some of our
customers delayed adoption while we were in Chapter 11 proceedings. In an effort
to accelerate adoption of our services, we did, in selected instances in the
first quarter of 2002, offer certain incentives for adoption of our services
that were outside of our customary contract terms, such as extended payment
terms or temporary hardware rental. None of these offers were accepted;
therefore, these changes in terms were not material to our cash flow or
operations. Additionally, certain of our trade creditors required either
deposits for future services or shortened payment terms; however, none of these
deposits or changes in payment terms were material and none of our key suppliers
have ceased to do business with us as a result of our reorganization.
48
Effective May 1, 2002, we adopted "fresh-start" accounting, which required that
the $221 million of reorganization value of our assets be allocated in
accordance with procedures specified by Statement of Financial Accounting
Standards No. 141, "Business Combinations". The bankruptcy court originally set
a reorganization value for our assets of $234 million. In November 2003, Motient
engaged CTA to perform a valuation of its equity interests in MSV as of December
31, 2002. Concurrent with CTA's valuation, Motient reduced the book value of its
equity interest in MSV from $54 million (inclusive of Motient's $2.5 million
convertible notes from MSV) to $41 million as of May 1, 2002 to reflect certain
preference rights on liquidation of certain classes of equity holders in MSV.
Motient's reorganization value was reduced by $13 million to $221 million as a
result of this valuation revision.
Summary of Liquidity and Financing
We have the following sources of financing in place:
o Motient sold 4,215,910 shares of its common stock for aggregate
consideration of $23.2 million in a private placement on April 7, 2004.
Please see "--Private Placement" below for a discussion of this
transaction.
o Motient sold 3,500,000 shares of its common stock for aggregate
consideration of $30.0 million in a private placement on July 1, 2004.
Please see "--Private Placement" below for a discussion of this
transactions.
o Motient sold 15,353,609 shares of its common stock for aggregate
consideration of $131.6 million in a private placement on November 12,
2004. Please see "--Private Placement" below for a discussion of this
transactions.
We believe that our available funds, together with anticipated proceeds from our
announced rights offering and the anticipated proceeds generated by the exercise
of outstanding warrants and options, will be adequate to satisfy our current and
planned operations for at least the next 12 months.
Debt and Capital Lease Obligations
As of December 31, 2004, Motient has no outstanding debt or capital lease
obligations.
Credit Facility Repayment: On April 13, 2004, Motient repaid the all principal
amounts then owing under its term credit facility, including accrued interest
thereon, in an amount of $6.8 million. The facility terminated on December 31,
2004, and the Company does not plan to attempt to extend the borrowing
availability again.
United Parcel Service Prepayment: In December 2002 we entered into an agreement
with UPS pursuant to which UPS prepaid to us an aggregate of $5 million for
network airtime service to be provided beginning January 1, 2004. The $5 million
prepayment was credited against airtime services provided to UPS beginning
January 1, 2004, until the prepayment is fully credited. Based on UPS' current
level of network airtime usage, we do not expect that UPS will be required to
make any cash payments to us in 2004 and 2005 for service provided during 2004
and 2005. UPS has substantially completed its migration to next generation
network technology, and its monthly airtime usage of our network has declined
significantly. There are no minimum purchase requirements under our contract
with UPS, and the contract may be terminated by UPS on 30 days' notice. If UPS
terminates the contract, we will be required to refund any unused portion of the
prepayment to UPS. While we expect that UPS will remain a customer for the
foreseeable future, the bulk of UPS' units have migrated to another network.
Until June 2003, UPS had maintained its historical level of payments to mitigate
the near-term revenue and cash flow impact of its recent and anticipated
continued reduced network usage. However, beginning in July 2003, the revenues
and cash flow from UPS declined significantly. As of September 30, 2004, UPS had
approximately 3,006 active units on Motient's network. The value of our
remaining airtime service obligations to UPS at September 30, 2004 in respect of
the prepayment was approximately $4.1 million.
49
Rare Medium Note: Under the Company's Plan of Reorganization, the Rare Medium
notes were cancelled and replaced by a new note in the principal amount of $19.0
million. On July 15, 2004, the Company paid all principal and interest due and
owing on this note, in the amount of $22.6 million.
CSFB Note: Under the Company's Plan of Reorganization, the Company issued a note
to CSFB, in satisfaction of certain claims by CSFB against Motient, in the
principal amount of $750,000. On July 15, 2004, the Company paid all principal
and interest due and owing on this note, in the amount of $0.9 million.
Termination of Motorola and Hewlett-Packard Agreements: In June 2004, the
Company negotiated settlements of the entire amounts outstanding under its
financing facility with Motorola and its capital lease with Hewlett-Packard. The
full amounts due and owing under these agreements was $6.8 million. The Company
paid an aggregate of $3.9 million in cash to Motorola and Hewlett-Packard and
issued a warrant to Motorola to purchase 200,000 shares of the Company's common
stock at a price of $8.68, in full satisfaction of the outstanding balances.
Restructuring Costs
In June 2004, the Company recorded a restructuring charge of $5.1 million
related to certain network rationalization initiatives, consisting of base
station deconstruct costs of $0.5 million, the loss on the retirement of certain
base station equipment of $2.8 million and termination liabilities of $1.8
million for site leases no longer required for removed base stations. Of these
amounts, as of September 30, 2004, the Company had incurred base station
deconstruction costs of $0.4 million, the loss on the retirement of certain base
station equipment of $2.8 million and termination liabilities of $0.5 million
for site leases no longer required for removed base stations.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2004 to September 30, 2004:
As of December 31, 2003, we had the following outstanding cash contractual
commitments:
50
Less then
Total 1 year 1-4 years After 5 years
----- ------ --------- -------------
(in thousands)
Operating leases (1) $33,685 $12,170 $19,031 $2,484
Capital lease obligations, including interest thereon (1, 3) 3,504 1,752 1,752 --
Notes Payables (2, 3) 22,885 -- 22,885 --
Term Credit Facility (3) 4,914 -- 4,914 --
Equipment financing commitment (1, 3) 4,814 2,413 2,401 --
----- ----- ----- --
Total Contractual Cash Obligations $69,802 $16,335 $49,369 $2,484
======= ======= ======= ======
(1) 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.
(2) In addition to being accelerable upon default, notes payable to Rare
Medium and CSFB, which comprise approximately $21 million of this
amount, must be prepaid with 25% of the proceeds due from any
repayment of the $15 million principal note issued to Motient by MSV.
(3) These commitments have since been settled or repaid.
On December 1, 2002, we entered into a letter agreement with UPS under which UPS
agreed to make a series of eight prepayments to us totaling $5 million for
future services we are obligated to provide to it after January 1, 2004. In
addition to any other rights it has under its network services agreement with
us, the letter agreement provides that UPS may terminate the network services
agreement, in whole or in part, by providing 30 days' notice to us, at which
point the remaining prepayment would be required to be repaid. As of July 31,
2003, all eight prepayments had been made. The $5 million prepayment will be
credited against airtime services provided to UPS beginning January 1, 2004,
until the prepayment is fully credited. Based on UPS' current level of network
airtime usage, we do not expect that UPS will be required to make any cash
payments to us in 2004 and 2005 for service provided during 2004 and 2005. The
balance remaining as of September 30, 2004 under this prepayment was $4.1
million.
MSV Investment
At December 31, 2002, our percentage ownership of MSV was approximately 25.5% on
a fully-diluted basis assuming certain other investors exercised their right to
make additional investment in MSV as a result of the FCC ATC application
process.
On August 21, 2003, two investors in MSV (excluding Motient) invested an
additional $3.7 million in MSV in exchange for Class A preferred units of
limited partnership interests in MSV. MSV used the proceeds from this investment
to repay other indebtedness that is senior in its right of repayment to
Motient's promissory note. Under the terms of the amended and restated
investment agreement, these investors also had the option of investing an
additional $17.6 million in MSV by December 31, 2003; however, if, prior to this
time, the FCC had not issued a decision addressing MSV's petition for
reconsideration with respect to the ATC Order, the option will be automatically
extended to March 31, 2004. As of the closing of the initial investment on
August 21, 2003, Motient's percentage ownership of MSV was approximately 29.5%
on a fully diluted basis, assuming certain other investors fully exercise their
option to make the $17.6 million additional investment in MSV as a result of the
FCC ATC approval process.
On April 2, 2004, the above-mentioned additional $17.6 million investment was
consummated. In connection with this investment, MSV's amended and restated
investment agreement was amended to provide that of the total $17.6 million in
proceeds, $5.0 million was used to repay certain outstanding indebtedness of
MSV, including $2.0 million of accrued interest under the $15.0 million
promissory note issued to Motient by MSV. Motient was required to pay, and paid,
25% of the $2 million it received in this transaction, or $500,000, to make
prepayments under its existing notes owed to Rare Medium and CSFB. The remainder
of the proceeds from this investment was used for general corporate purposes by
MSV. As of the closing of the initial investment on April 2, 2004, Motient's
percentage ownership of MSV was approximately 29.5% on an "as converted basis"
giving effect to the conversion of all outstanding convertible notes.
51
On November 12, 2004, Motient purchased approximately 5.4 million MSV limited
partnership units, and a corresponding number of shares in MSV's general
partner, Mobile Satellite Ventures GP Inc. ("MSV GP"). As consideration, Motient
provided MSV with $125 million in cash, converted its outstanding $15 million
principal note (and all accrued interest thereon) issued by MSV, converted its
$3.5 million of convertible notes issued by MSV, and converted the accrued
interest on such convertible notes. In connection with Motient's investment, the
other limited partners of MSV exchanged their outstanding notes (but not
generally the accrued interest thereon), and one limited partner contributed an
additional $20 million of cash, for limited partnership units and a
corresponding number of MSV GP shares. Such investments and conversions
increased Motient's ownership of MSV from 29.5% (assuming conversion of all
outstanding convertible notes) to 38.6%. Motient does not control MSV and
accounts for its investment under the equity method.
Motient's investment in MSV is governed by several agreements, including but not
limited to the limited partnership agreement of MSV and the stockholder's
agreement of MSV GP. The acquisition or disposition by MSV of its assets, the
acquisition or disposition of any limited partner's interest in MSV, subsequent
investment into MSV by any person, and any merger or other business combination
of MSV, would be subject to the control restrictions contained in such
documents. Such control restrictions include, but are not limited to, rights of
first refusal, tag along rights and drag along rights. Many of these actions,
among others, cannot occur without the consent of the majority of the ownership
interests of MSV, and several of the other limited partners of MSV entered into
a voting agreement amongst themselves, which may restrict any signatories
ability to give such consent absent the agreement of the majority of the
signatories to such voting agreement. MSV plans to use the proceeds from this
investment for general corporate purposes.
For a discussion of certain recent developments relating to MSV, please see " --
Overview -- Mobile Satellite Ventures LP" above. For additional information
regarding MSV, please see the financial statements of MSV beginning on page M-1.
Wireless Matrix
On April 15, 2004, Motient filed a claim under the rules of the American
Arbitration Association in Fairfax County, VA, against Wireless Matrix
Corporation, a reseller of Motient's services, for the non-payment of certain
amounts due and owing under the "take-or-pay" agreement between Motient and
Wireless Matrix. Under this agreement, Wireless Matrix agreed to purchase
certain minimum amounts of air-time on the Motient network. In February 2004
Wireless Matrix informed Motient that it was terminating its agreement with
Motient. Motient did not believe that Wireless Matrix had any valid basis to do
so, and consequently filed the above mentioned claim seeking over $2.6 million
in damages, which amount represents Wireless Matrix's total prospective
commitment under the agreement. On May 10, 2004, Motient received notice of a
counter-claim by Wireless Matrix of approximately $1 million, representing such
amounts as Wireless Matrix claimed to have paid in excess of services rendered
under the agreement. In June 2004, Motient reached a favorable out of court
settlement with Wireless Matrix in which Wireless Matrix paid Motient $1.1
million.
Private Placements
On April 7, 2004, we sold 4,215,910 shares of our common stock at a per share
price of $5.50 for an aggregate purchase price of $23.2 million to The Raptor
Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund
L.P., Tudor Proprietary Trading, L.L.C., Highland Crusader Offshore Partners,
L.P., York Distressed Opportunities Fund, L.P., York Select, L.P., York Select
Unit Trust, M&E Advisors L.L.C., Catalyst Credit Opportunity Fund, Catalyst
Credit Opportunity Fund Offshore, DCM, Ltd., Greywolf Capital II LP and Greywolf
Capital Overseas Fund and LC Capital Master Fund. The sale of these shares was
not registered under the Securities Act of 1933, as amended and the shares may
not be sold in the United States absent registration or an applicable exemption
from registration requirements. The shares were offered and sold pursuant to the
exemption from registration afforded by Rule 506 under the Securities Act and/or
Section 4(2) of the Securities Act. In connection with this sale, we signed a
registration rights agreement with the holders of these shares. We also issued
warrants to purchase an aggregate of 1,053,978 shares of our common stock to the
investors listed above, at an exercise price of $5.50 per share. We also issued
warrants to purchase an aggregate of 525,000 shares of our common stock to the
investors listed above, at an exercise price of $8.57 per share. Because we met
certain conditions following the issuance of the warrants, they will never vest.
52
In connection with this sale, we issued to Tejas Securities Group, Inc., our
placement agent for the private placement, and certain CTA affiliates, warrants
to purchase 600,000 and 400,000 shares, respectively, of our common stock. The
exercise price of these warrants is $5.50 per share. The warrants are
immediately exercisable upon issuance and have a term of five years. We also
paid Tejas Securities Group, Inc. a placement fee of $350,000 at closing. The
fair value of the warrants was estimated at $6.2 million using a Black-Scholes
model. The shares were offered and sold pursuant to the exemption from
registration afforded by Rule 506 under the Securities Act and/or Section 4(2)
of the Securities Act.
On July 1, 2004, we sold 3,500,000 shares of our common stock at a per share
price of $8.57 for an aggregate purchase price of $30.0 million to The Raptor
Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund
L.P., Tudor Proprietary Trading, L.L.C., York Distressed Opportunities Fund,
L.P., York Select, L.P., York Select Unit Trust, York Global Value Partner,
L.P., Catalyst Credit Opportunity Fund, Catalyst Credit Opportunity Fund
Offshore, DCM, Ltd., Rockbay Capital Fund, LLC, Rockbay Capital Investment Fund,
LLC, Rockbay Capital Offshore Fund, Ltd., Glenview Capital Partner, L.P.,
Glenview Institutional Partners, L.P., Glenview Capital Master Fund, Ltd., GCM
Little Arbor Master Fund, Ltd., OZ Master Fund, Ltd., OZ Mac 13 Ltd., Fleet
Maritime, Inc., John Waterfall, Edwin Morgens, Greywolf Capital II, L.P.,
Greywolf Capital Overseas Fund, Highland Equity Focus Fund, L.P., Singer
Children's Management Trust, Highland Equity Fund, L.P., and Strome Hedgecap
Limited. The sale of these shares was not registered under the Securities Act
and the shares may not be sold in the United States absent registration or an
applicable exemption from registration requirements. The shares were offered and
sold pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. We also issued
warrants to purchase an aggregate of 525,000 shares of our common stock to the
investors listed above, at an exercise price of $8.57 per share. Because we met
certain conditions following the issuance of the warrants, they will never vest.
In connection with this sale, we issued to certain affiliates of CTA and Tejas
Securities Group, Inc., our placement agent for the private placement, warrants
to purchase 340,000 and 510,000 shares, respectively, of our common stock. The
exercise price of these warrants is $8.57 per share. The warrants are
immediately exercisable upon issuance and have a term of five years. We also
paid Tejas Securities Group, Inc. a placement fee of $850,000 at closing. The
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act.
On November 12, 2004, we sold 15,353,609 shares of our common stock at a per
share price of $8.57. We received aggregate proceeds of $126,397,809, net of
$5,182,620 in commissions paid to our placement agent, Tejas Securities Group,
Inc. The approximately 60 purchasers included substantially all of the
purchasers from the April and July 2004 private placements, as well multiple new
investors. The sale of these shares was not registered under the Securities Act
and the shares may not be sold in the United States absent registration or an
applicable exemption from registration requirements. The shares were offered and
sold pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. In connection with
this sale, we signed a registration rights agreement with the holders of these
shares. Among other things, this registration rights agreement required us to
file and cause to make effective a registration statement permitting the resale
of the shares by the holders thereof. We also issued warrants to purchase an
aggregate of approximately 3,838,401 shares of its common stock to the investors
listed above, at an exercise price of $8.57 per share. These warrants will vest
if and only if we do not meet certain deadlines between January and March 2005
with respect to certain requirements under the registration rights agreement. If
the warrants vest, they may be exercised by the holders thereof at any time
through November 11, 2009.
Following these private placements, we announced that we will issue to each of
our stockholders of record one right for each share of Motient common stock held
as of the close of business on December 17, 2004. Each right will entitle any
holder that did not participate in the April, July or November 2004 private
placement to purchase 0.103 shares of our common stock at a price of $8.57 per
share, with fractions rounded up to the next whole share. A maximum of 2.5
million shares may be sold in the rights offering, generating a maximum
aggregate proceeds of approximately $21.4 million.
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The rights will be non-transferable and will expire if not exercised within the
exercise period. The rights will not be exercisable until the registration
statement covering the rights and the shares of underlying common stock is
declared effective by the SEC, and the exercise period will expire 30 days after
the rights become exercisable. We have not filed a registration statement
relating to the rights offering, but intends to do so as soon as reasonably
practicable. We expect to consummate this rights offering in early 2005.
The holders of the rights will not have over-subscription rights, and there will
be no backstop to purchase unsubscribed shares. Purchasers that purchased shares
in the November 12, 2004 private placement of our common stock, which include
all purchasers in our April 2 and July 2004 private placements, have waived
their right to participate in the rights offering.
We reserve the right to abandon this rights offering at any time prior to the
effectiveness of the registration statement relating to the rights offering, and
upon any such abandonment, any and all of the rights previously issued will be
cancelled, will no longer be exercisable and will be of no further force or
effect.
Other
On May 1, 2002, the effective date of our Plan of Reorganization, the financing
agreements that included restrictions on our ability to pay dividends were
terminated as part of the implementation of our Plan of Reorganization. Since
our Plan of Reorganization, various financing obligations prohibit us from
paying cash dividends. All of these obligations have since been retired or
terminated. We have never paid dividends and do not expect to do so in the near
future.
Derivatives
In September 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which requires
the recognition of all derivatives as either assets or liabilities measured at
fair value, with changes in value reflected as current period income (loss). The
effective date of SFAS No. 133, as amended by SFAS No. 138, is for fiscal years
beginning after September 15, 2000. Except for the Rare Medium note embedded
call options and the bank financing swap agreement discussed in the following
paragraphs, SFAS No. 133 was not material to our financial position or results
of operations as of or for the periods ended December 31, 2001, April 30, 2002,
December 31, 2002 and December 31, 2003.
In April and July 2001, we sold notes to Rare Medium totaling $50.0 million. The
notes were collateralized by up to five million of our XM Radio shares, and,
until maturity, which was extended until October 12, 2001, Rare Medium had the
option to exchange the note for a number of XM Radio shares equivalent to the
principal of the note plus any accrued interest thereon. We determined the
embedded call options in the notes, which permit Rare Medium to convert the
borrowings into shares of XM Radio, were derivatives which were accounted for in
accordance with SFAS No. 133 and accordingly we recorded a gain in the amount of
$1.5 million in 2001 related to the Rare Medium note call options. On October
12, 2001, the embedded call options in the Rare Medium notes expired
unexercised.
In connection with our bank financing in March 1998, we entered into an interest
rate swap agreement, with an implied annual rate of 6.51%. The swap agreement
reduced the impact of interest rate increases on our then-existing term loan
facility. We paid a fixed fee of approximately $17.9 million for the swap
agreement. In return, the counter-party was obligated to pay a variable rate
equal to LIBOR plus 50 basis points, paid on a quarterly basis directly to the
respective banks on our behalf, on a notional amount of $100 million until the
termination date of March 31, 2001. In connection with the pay down of a portion
of the term loan facility during 1999, we reduced the notional amount of our
swap agreement from $100 million to $41 million and realized net proceeds of
approximately $6 million due to early termination of a portion of the swap
agreement. The interest rate swap agreement expired in March 2001, and our bank
financing credit facility was extinguished in 2001.
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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.
"Fresh-Start" Accounting
In accordance with SOP No. 90-7, effective May 1, 2002, we adopted "fresh-start"
accounting and allocated the reorganization value of $221.0 million to our net
assets in accordance with procedures specified by SFAS No. 141, "Business
Combinations".
We allocated the $221.0 million reorganization value among our net assets based
upon our estimates of the fair value of our assets and liabilities. In the case
of current assets, we concluded that their carrying values approximated fair
values. The values of our frequencies and its investment in and notes receivable
from MSV were based on independent analyses presented to the bankruptcy court
and subsequently modified as part of our valuation process in November 2003.
Please see Note 2, "Significant Accounting Policies - Restatement of Financial
Statements," and Note 16, "Subsequent Events," of notes to the consolidated
financial statements for further information concerning MSV. The value of our
fixed assets was based upon a valuation of our software and estimates of
replacement cost for network and other equipment, for which we believe that our
recent purchases represent a valid data point. The value of our other intangible
assets was based on third party valuations as of May 1, 2002.
For a complete description of the application of "fresh-start" accounting,
please refer to Note 2, "Significant Accounting Policies", of notes to the
consolidated financial statements.
Inventory
Inventory, which consists primarily of communication devices and accessories,
such as power supplies and documentation kits, are stated at the lower of cost
or market. Cost is determined using the weighted average cost method. We
periodically assess the market value of our inventory, based on sales trends and
forecasts and technological changes and record a charge to current period income
when such factors indicate that a reduction to net realizable value is
appropriate. We consider both inventory on hand and inventory that we have
committed to purchase, if any. Periodically, we will offer temporary discounts
on equipment purchases. In cases where this causes a write-down of the inventory
basis to the lower of cost or market, the write-down is recorded in the period
of the offer.
Investment in MSV and Note Receivable from MSV
As reported in our current report on Form 8-K dated March 14, 2003 and detailed
in Note 2, "Significant Accounting Policies - Restatement of Financial
Statements", of notes to the consolidated financial statements, we have
determined that certain adjustments to our historical financial information for
2000, 2001 and 2002 were required to reflect the effects of several complex
transactions, including the formation of and transactions with MSV.
As a result of the application of "fresh-start" accounting and as subsequently
modified by our valuation process in November 2003 (please see Note 2,
"Significant Accounting Policies - Restatement of Financial Statements," and
Note 16, "Subsequent Events," of notes to the consolidated financial statements
for further information concerning MSV), the notes and investment in MSV were
valued at fair value, and we recorded an asset in the amount of approximately
$53.9 million representing the estimated fair value of our investment in and
note receivable from MSV. Included in this investment is the historical cost
basis of our approximately 48% of common equity ownership as of May 1, 2002, or
approximately $19.3 million. In accordance with the equity method of accounting,
we recorded our approximately 48% share of MSV losses against this basis.
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Of the $53.9 million, approximately $21.6 million of the $40.9 million value
attributed to MSV is the excess of fair value over cost basis and is amortized
over the estimated lives of the underlying MSV assets that gave rise to the
basis difference. We are amortizing this excess basis in accordance with the
pro-rata allocation of various components of MSV's intangible assets as
determined by MSV through independent valuations. Such assets consist of FCC
licenses, intellectual property and customer contracts. At December 31, 2002 our
investment in MSV was impaired and we recorded a charge of approximately $15.4
million. As of January 1, 2003, approximately $6.2 million is the excess of fair
market value over cost basis subject to amortization.
Of the $53.9 million, we have recorded the $15.0 million note receivable from
MSV, plus accrued interest thereon at its fair value, estimated to be
approximately $13.0 million as of the "fresh-start" accounting date, after
giving affect to discounted future cash flows at market interest rates. This
note matures in November 2006, but may be fully or partially repaid prior to
maturity in certain circumstances, subject to certain conditions and priorities
with respect to payment of other indebtedness, involving the consummation of
additional investments in MSV. We also recorded the $2.5 million convertible
note issued to Motient by MSV. These notes, and all accrued interest thereon,
were converted into limited partnership units of MSV, and a corresponding number
of shares at MSV's general partner, on November 12, 2004, in connection with the
November 12, 2004 purchase of MSV limited partnership units described below.
In November 2003, we engaged CTA to perform a valuation of our equity interests
in MSV as of December 31, 2002. Concurrent with CTA's valuation, Motient reduced
the book value of its equity interest in MSV from $54 million (inclusive of
Motient's $2.5 million convertible note from MSV) to $41 million as of May 1,
2002 to reflect certain preference rights on liquidation of certain classes of
equity holders in MSV. Including its note receivable from MSV (estimated to have
a fair market value of $13 million at May 1, 2002), the book value of Motient's
aggregate interest in MSV as of May 1, 2002 was reduced from $67 million to
$53.9 million. Also, as a result of CTA's valuation of MSV, we determined that
the value of our equity interest in MSV was impaired as of December 31, 2002.
This impairment was deemed to have occurred in the fourth quarter of 2002.
Motient reduced the value of its equity interest in MSV by $15.4 million as of
December 31, 2002. Including its notes receivable from MSV (estimated to have a
fair market value of $19 million at December 31, 2002), the book value of
Motient's aggregate interest in MSV was $32 million as of December 31, 2002. It
was determined that no further impairment was required at December 31, 2003 and
March 31, 2004. For additional information concerning this valuation process,
please see Note 2, "Significant Accounting Policies," of notes to the
consolidated financial statements.
On November 12, 2004, Motient purchased approximately 5.4 million MSV limited
partnership units, and a corresponding number of shares in MSV's general
partner, Mobile Satellite Ventures GP Inc. ("MSV GP"). As consideration, Motient
provided MSV with $125 million in cash, converted its outstanding $15 million
principal note (and all accrued interest thereon) issued by MSV, converted its
$3.5 million of convertible notes issued by MSV, and converted the accrued
interest on such convertible notes. In connection with Motient's investment, the
other limited partners of MSV exchanged their outstanding notes (but not
generally the accrued interest thereon), and one limited partner contributed an
additional $20 million of cash, for limited partnership units and a
corresponding number of MSV GP shares. Such investments and conversions
increased Motient's ownership of MSV from 29.5% (assuming conversion of all
outstanding convertible notes) to 38.6%. Motient does not control MSV and
accounts for its investment under the equity method.
The valuation of our investment in MSV is an ongoing assessment that is, by its
nature, judgmental given that MSV is not traded on a public market and is in the
process of developing certain next generation technologies, which depend on
authorizations by the FCC and other regulatory bodies. While the financial
statements currently assume that there is value in our investment in MSV, there
is the inherent risk that this assessment will change in the future and we will
have to write down the value of this investment.
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For additional information regarding MSV, please see the financial statements of
MSV beginning on page M-1.
Deferred Taxes
We have generated significant net operating losses for tax purposes as of
December 31, 2003. 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 - Deferred Taxes," of notes to the consolidated financial
statements for further details.
Revenue Recognition
We generate revenue principally through equipment sales and airtime service
agreements. In 2000, we adopted SAB No. 101, which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements. In
certain circumstances, SAB No. 101 requires us to defer the recognition of
revenue and costs related to equipment sold as part of a service agreement.
In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue
Recognition", which supersedes SAB No. 101, "Revenue Recognition in Financial
Statements." SAB No. 104's primary purpose is to rescind accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangements and to
rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers", or FAQ, issued with SAB No. 101. Selected portions of
the FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104
will not have a material impact on our revenue recognition policies.
Revenue is recognized as follows:
Service revenue: Revenues from our wireless services are recognized when the
services are performed, evidence of an arrangement exists, the fee is fixed and
determinable and collectibility is probable. Service discounts and incentives
are recorded as a reduction of revenue when granted, or ratably over a contract
period. We defer any revenue and costs associated with activation of a
subscriber on our network over an estimated customer life of two years.
To date, the majority of our business has been transacted with
telecommunications, field services, natural resources, professional service and
transportation companies located throughout the United States. We grant credit
based on an evaluation of the customer's financial condition, generally without
requiring collateral or deposits. We establish a valuation allowance for
doubtful accounts receivable for bad debt and other credit adjustments.
Valuation allowances for revenue credits are established through a charge to
revenue, while valuation allowances for bad debts are established through a
charge to general and administrative expenses. We assess the adequacy of these
reserves quarterly, evaluating factors such as the length of time individual
receivables are past due, historical collection experience, the economic
environment and changes in credit worthiness of our customers. As of December
31, 2003 and December 31, 2002, we had a valuation allowance of approximately
16.6% and 9.7% of our accounts receivable, respectively. We believe that our
established valuation allowance was adequate as of December 31, 2003 and 2002.
If circumstances related to specific customers change or economic conditions
worsen such that our past collection experience and assessments of the economic
environment are no longer relevant, our estimate of the recoverability of our
trade receivables could be further reduced.
Equipment and service sales: We sell equipment to resellers who market our
terrestrial product and airtime service to the public. We also sell our product
directly to end-users. Revenue from the sale of the equipment as well as the
cost of the equipment, are initially deferred and are recognized over a period
corresponding to our estimate of customer life of two years. Equipment costs are
deferred only to the extent of deferred revenue.
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Long-lived Assets
On January 1, 2002, we adopted the provisions of SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against these new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively, amounts
initially recorded as goodwill may be separately identified and recognized apart
from goodwill. 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. As of January
1, 2002, we had approximately $5.0 million of recorded goodwill. However, as
part of our adoption of "fresh-start" accounting, our recorded goodwill was
reduced to zero.
We account for our frequencies as finite-lived intangibles and amortize them
over a 20-year estimated life. As described in Note 5 of notes to consolidated
financial statements, we are monitoring a pending FCC rulemaking proposal that
may affect our 800 MHz spectrum, and we may change our accounting policy for FCC
frequencies in the future as new information is available.
On January 1, 2002, we also adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of". The statement requires that all long-lived assets be measured at the lower
of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured on a net realizable value basis and will
not include amounts for future operating losses. The statement also broadens the
reporting requirements for discontinued operations to include disposal
transactions of all components of an entity (rather than segments of a
business). Components of an entity include operations and cash flows that can be
clearly distinguished from the rest of the entity that will be eliminated from
the ongoing operations of the entity in a disposal transaction. Subsequent to
the period covered by this report, we engaged a financial advisor to value
certain of our assets as of December 31, 2002, among other things, to test for
potential impairment of certain of our long-lived assets under SFAS No. 144.
This testing included valuations of software and customer-related intangibles.
Based on these tests, no recording of impairment charges was required. However,
we subsequently engaged this financial advisor to reevaluate the value of our
customer-related intangibles as of September 30, 2003 due primarily to the
decline in revenue from UPS in this time period. This valuation resulted in an
impairment of the customer-related intangibles of $5.5 million in the third
quarter of 2003. The adoption of SFAS No. 144 had no other material impact on
our financial statements.
Recent Accounting Standards
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. Previous accounting
guidance was provided by EITF No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 replaces EITF No.
94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We adopted SFAS No. 146 as of January 1,
2003, and this adoption had no material impact on our consolidated financial
statements.
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In November 2002, the EITF reached consensus on EITF No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables". This consensus requires that
revenue arrangements with multiple deliverables be divided into separate units
of accounting if the deliverables in the arrangement meet specific criteria. In
addition, arrangement consideration must be allocated among the separate units
of accounting based on their relative fair values, with certain limitations. The
sale of our equipment with related services constitutes a revenue arrangement
with multiple deliverables. We will be required to adopt the provisions of this
consensus for revenue arrangements entered into after June 30, 2003, and we have
decided to apply it on a prospective basis. We do not have any revenue
arrangements that would have a material impact on our financial statements with
respect to EITF No. 00-21.
In November 2002, the FASB issued FASB Interpretation, or FIN No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. However, a liability does not have to be recognized for a
parent's guarantee of its subsidiary's debt to a third party or a subsidiary's
guarantee of the debt owed to a third party by either its parent or another
subsidiary of that parent. The initial recognition and measurement provisions of
FIN No. 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 irrespective of the guarantor's fiscal year
end. The disclosure requirements of FIN No. 45 are effective for financial
statements with annual periods ending after December 15, 2002. Motient does not
have any guarantees that would require disclosure under FIN No. 45.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities -- An Interpretation of ARB No. 51", which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 provides guidance related to identifying
variable interest entities (previously known generally as special purpose
entities, or SPEs) and determining whether such entities should be consolidated.
FIN No. 46 must be applied immediately to variable interest entities created or
interests in variable interest entities obtained, after January 31, 2003. For
those variable interest entities created or interests in variable interest
entities obtained on or before January 31, 2003, the guidance in FIN No. 46 must
be applied in the first fiscal year or interim period beginning after June 15,
2003. FIN No. 46 did not have a material impact on our results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies the characteristics of
an obligation of the issuer. This standard is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We have determined that we do not have any financial instruments that are
impacted by SFAS No. 150.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
On April 17, 2003, we dismissed PricewaterhouseCoopers LLP, or PwC, as our
independent accountants, effective upon the completion of services related to
the audit of our consolidated financial statements for the period May 1, 2002 to
December 31, 2002.
Later, on March 2, 2004, PwC was dismissed prior to the completion of their
audit procedures related to the aforementioned period. PwC, therefore, never
reported on any of our consolidated financial statements for the aforementioned
period or for any other fiscal period. Our Audit Committee of the Board of
Directors recommended the change in independent accountants and the Board of
Directors approved both of these decisions.
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PwC was appointed in July 2002, was dismissed March 2, 2004 and never reported
on any consolidated financial statements for any fiscal period.
Over the course of PwC's engagement, there were no disagreements with PwC on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of PwC would have caused them to make reference thereto in their
report, except that we disagreed with PwC on the following accounting and
auditing matters related to certain 2000 and 2001 transactions:
- Allocation of initial proceeds we received from MSV, an equity
investee, upon the formation of MSV in June 2000. The initial proceeds
were allocated to deferred revenue under a research and development
agreement, a deposit on the expected future purchase of certain of our
assets and a payment for the right of certain investors in MSV to
convert their ownership in MSV into shares of our common stock, to
which we refer to as the investor conversion right;
- The subsequent accounting for the portion of the proceeds allocated to
the deposit on certain of our assets and to the investor conversion
right;
- Recording, in the fourth quarter of 2001, of previously unrecognized
losses associated with our investment in MSV;
- Recording of an increase in the value of our investment in MSV under
Staff Accounting Bulletin No. 51, Accounting for Sales of Stock of a
Subsidiary, upon MSV's acquisition of assets from a third party
company in November 2001 in exchange for cash, a note and equity in
MSV;
- Recognition of gain on the sale of certain assets from us to MSV in
November 2001;
- Allocation of proceeds from the sale of our transportation business to
Aether Systems in November 2000 and the impact on gain recognition;
- Amortization period for the deferred revenue related to the sale of a
perpetual license to Aether Systems in November 2000; and
- Recognition of costs associated with certain stock options granted to
our employees who subsequently transferred to Aether Systems upon the
sale of our transportation business in November 2000.
Each of the matters about which we initially disagreed with PwC were ultimately
resolved to the satisfaction of PwC. These matters were reviewed by the Audit
Committee of our Board of Directors, and the Audit Committee discussed these
matters with PwC.
Over the course of PwC's engagement, there were no reportable events (as defined
in Regulation S-K Item 304(a)(1)(v)), except that PwC has informed us that, with
regard to their audit of our consolidated financial statements for the period
May 1, 2002 to December 31, 2002:
- Timely reconciliations of certain accounts between the general ledger
and subsidiary ledger, in particular accounts receivable and fixed
assets, were not performed;
- Reviews of accounts and adjustments by supervisory personnel on
monthly cut-off dates, in particular fixed asset clearing accounts,
accounts receivable reserve and inventory reserve calculations, were
not performed;
- Proper cut-off of accounts at balance sheet dates related to accounts
payable, accrued expenses and inventories was not achieved; and
- No formal policy existed to analyze impairment of long-lived assets on
a recurring basis.
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To address such matters, PwC recommended that we undertake a review of our
monthly close-out process, including a detailed review of the financial
statements, comparing budget to actual and current period to prior period to
determine any unusual items. PwC also recommended that we prepare an accounting
policy and procedures manual for all significant transactions to include
procedures for revenue recognition, inventory allowances, accounts receivable
allowance, and accruals, among other policies.
In response to these comments, we have taken the following actions:
- In June 2003, we initiated a process of revising, updating and
improving our month-end closing process and created a checklist
containing appropriate closing procedures.
- We have increased our efforts to perform monthly account
reconciliations on all balance sheet accounts in a timely fashion.
- Beginning in July 2003, on a monthly basis, the corporate controller
began reviewing balance sheet account reconciliations.
- We have implemented and distributed a written credit and collections
policy, which includes reserve calculations and write-off
requirements.
- All accounts receivable sub-ledgers are reconciled to the general
ledger monthly, and on a monthly basis, inventory reports are
produced, sub-ledgers are reconciled to the general ledger and the
reserve account is analyzed.
- Since September 2003, the fixed assets clearing account is no longer
being used and all asset additions are reviewed by the corporate
controller to determine proper capitalization and balance sheet
classification.
- As of July 2003, all monthly income statement accounts are analyzed by
the corporate controller prior to release of the financial statements.
- We have prepared an accounting policy and procedures manual to include
procedures for all significant policies, business practices, and
routine and non-routine procedures performed by each functional area.
- Over the course of the third quarter of 2003, we updated our
procedures for the preparation of a monthly financial reporting
package to include management's discussion and analysis of results of
operations, financial statements, cash and investments reporting and
month-to-month variances. Under these procedures, departmental results
of operations are also prepared and provided to appropriate department
managers on a monthly basis.
In addition to the above, since April 2003, we have reevaluated our staffing
levels, reorganized the finance and accounting organization and replaced ten
accounting personnel with more experienced accounting personnel, including,
among others, a new chief financial officer, chief accounting officer and
corporate controller, a manager of revenue assurance and a manager of financial
services.
Our current auditors, Friedman LLP, successors-in-interest to Ehrenkrantz
Sterling & Co. LLC, agree that the matters described above constitute
significant deficiencies and have communicated this view to our audit committee.
We have authorized PwC to respond fully to the inquiries of Friedman LLP (our
new independent accountants -- see below) concerning the subject matter of each
of the items about which we and PwC initially disagreed.
In both April 2003 and March 2004, we requested that PwC furnish us with a
letter addressed to the SEC stating whether or not it agrees with the above
statements. Copies of such letters, dated April 22, 2003 and March 8, 2004, are
filed as exhibits 16.1 and 16.2, respectively, to this registration statement.
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New Independent Accountants
We engaged Ehrenkrantz Sterling & Co. LLC as our independent accountants on
April 17, 2003 to (i) re-audit our consolidated financial statements for the
fiscal year ended December 31, 2000, the fiscal year ended December 31, 2001 and
(ii) audit our consolidated financial statements for the interim period from
January 1, 2002 to April 30, 2002, and the fiscal year ended on December 31,
2003. Later, on March 2, 2004, we engaged Ehrenkrantz to audit our consolidated
financial statements for the period May 1, 2002 to December 31, 2002.
During the two most recent fiscal years and through December 1, 2004, neither we
nor anyone acting on our behalf consulted Ehrenkrantz on the application of
accounting principles to a specified transaction, either completed or proposed,
or on the type of audit opinion that might be rendered on our consolidated
financial statements, and neither a written report was provided to us nor oral
advice was provided that Ehrenkrantz concluded was an important factor we
considered in reaching a decision as to the accounting, auditing or financial
reporting issue. During the two most recent fiscal years and through December 1,
2004, we did not consult with Ehrenkrantz regarding any matter that was the
subject of a disagreement with PwC, as that term is defined in Item
304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of
Regulation S-K, or with regard to any "reportable event," as that term is
defined in Item 304(a)(1)(v) of Regulation S-K.
On June 1, 2004, Ehrenkrantz Sterling & Co. LLC, merged with the firm of
Friedman Alpren & Green LLP. The new entity, Friedman LLP has been retained by
Motient and the Audit Committee of Motient's Board of Directors approved this
decision on June 4, 2004.
For the period since Ehrenkrantz's appointment through December 1, 2004, there
have been no disagreements with Ehrenkrantz on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
Ehrenkrantz would have caused them to make reference thereto in their report.
For the period since Ehrenkrantz's appointment through December 1, 2004, there
have been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)),
that are not otherwise disclosed above.
Motient has requested that Friedman LLP, as successor-in-interest to
Ehrenkrantz, furnish it with a letter addressed to the SEC stating whether or
not it agrees with the above statements. A copy of Friedman's letter, dated June
7, 2004, was filed as Exhibit 16.1 to the registration statement on Form S-1
filed with the SEC on July 6, 2004.
During the two most recent fiscal years and through June 4, 2004, Motient did
not consult with Friedman Alpren & Green LLP regarding any matter that was the
subject of a "disagreement" with Ehrenkrantz, as that term is defined in Item
304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of
Regulation S-K, or with regard to any "reportable event," as that term is
defined in Item 304(a)(1)(v) of Regulation S-K, except as such consultations as
may have been made with former employees of Ehrenkrantz who are now employees of
Friedman LLP.
Quantitative and Qualitative Disclosures about Market Risk
Prior to our reorganization, we were exposed to the impact of interest rate
changes related to our credit facilities and we managed interest rate risk
through the use of fixed rate debt. As of December 1, 2004, we are not exposed
to the impact of interest rate changes. We do not use derivative financial
instruments to manage our interest rate risk. We invest our cash in short-term
commercial paper, investment-grade corporate and government obligations and
money market funds.
Effective May 1, 2002, Motient's senior notes and accrued interest thereon were
eliminated in exchange for new common stock of the company. As of December 1,
2004, Motient has no remaining debt obligations.
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BUSINESS
Overview
We are a nationwide provider of two-way, wireless mobile data and internet
services and mobile enterprise data solutions. We provide our customers access
to multiple communications networks, solution management capabilities and
applications for email messaging and enterprise data communications services,
which enable businesses, mobile workers and consumers to transfer electronic
information and messages and access corporate databases and the Internet. We
also assist customers in designing, implementing and managing their wireless
enterprise solutions. Our service platform is designed to offer a broad array of
wireless data services such as:
o wireless access to multiple networks, including GPRS, 1XRTT, and
DataTac;
o telemetry systems that connect remote equipment, such as wireless
point-of-sale terminals, with a central monitoring facility;
o mobile data and fleet management systems used by large field service
organizations.
o two-way mobile Internet services that provide users integrated
wireless access to a broad range of corporate and Internet email and
Internet-based information;
Motient has been providing terrestrial wireless services to customers for
several years using a network that possesses four key design attributes:
o two-way communication,
o superior in-building penetration,
o user mobility, and
o broad nationwide coverage.
As of December 20, 2004, Motient's terrestrial wireless two-way data network
covers a geographic area populated by more than 195 million people and is
comprised of over 1,200 base stations that provide service to 412 of the
nation's largest cities and towns, including all primary metropolitan
statistical areas. As of December 31, 2003 and September 30, 2004, there were
approximately 204,000 user devices and 170,000 user devices registered,
respectively, and 115,000 user devices and 83,000 user devices, respectively,
with active usage on Motient's network.
In addition to selling wireless services that use our own network, we are also a
reseller of airtime on the Cingular and Sprint wireless networks. These reseller
agreements allow us to sell and promote applications and solutions to enterprise
accounts on networks with greater capacity than our own, while still maintaining
a direct relationship with the customer, since "back office" functions like
customer support, application design and implementation and billing, among other
support services, are handled by Motient.
These arrangements allow us to provide integrated seamless solutions to our
customers using a variety of networks. In December 2004, we launched a new set
of products and services designed to provide these seamless solutions to our
customers called iMotient Solutions (TM). iMotient allows Motient's customers to
use these multiple networks via a single connection to Motient's back-office
systems, providing a one-source alternative for development, device management
and billing across multiple networks, including but not limited to GPRS, 1XRTT,
and DataTac. Once connected to iMotient, customers will receive proprietary
applications and services that reduce airtime usage, improve performance and
reduce costs.
We are a Delaware corporation with our principal executive offices located at
300 Knightsbridge Parkway, Lincolnshire, Illinois 60069. Our principal executive
offices were formerly located in Reston, VA, but in July 2003, we substantially
completed the move of our corporate headquarters to our present facility. Our
telephone number is (847) 478-4200.
63
Motient presently has six wholly-owned subsidiaries and a 38.6% interest (on an
"as-converted basis" giving effect to the conversion of all outstanding
convertible notes) in MSV. Motient Communications Inc. owns the assets
comprising Motient's core wireless business, except for Motient's Federal
Communications Commission, or FCC, licenses, which are held in a separate
subsidiary, Motient License Inc. Motient License was formed on March 16, 2004,
as part of Motient's amendment of its credit facility, and is a special purpose
wholly-owned subsidiary of Motient Communications that holds all of the FCC
licenses formerly held by Motient Communications. A pledge of the stock of
Motient License, along with other assets of Motient Communications, secures
borrowings under the term credit facility. There are currently no borrowings
outstanding under our term credit facility. Our other four subsidiaries hold no
material operating assets other than the stock of other subsidiaries and
Motient's interests in MSV. On a consolidated basis, we refer to Motient
Corporation and its six wholly-owned subsidiaries as "Motient."
History
Motient was formed in 1988 under the name "American Mobile Satellite
Corporation" to construct, launch and operate a mobile satellite services system
to provide a full range of mobile voice and data services via satellite to land,
air and sea-based customers subject to local regulation. During 1995, Motient
successfully launched its first satellite and initiated commercial voice
service. In late 1996, Motient expanded its mobile data business through the
acquisition of Rockwell International Corporation's dual mode mobile messaging
and global positioning and monitoring service for commercial trucking fleets.
In March 1998, Motient acquired Motient Communications, formerly ARDIS Company,
from Motorola and combined the ARDIS terrestrial-based business with Motient's
satellite-based business to offer a broad range of integrated end-to-end
wireless solutions through two network configurations, either a "satellite-only"
service network or a "multi-mode" terrestrial and satellite service network.
Following operation of a joint network for three years, Motient decided to base
its business primarily on the terrestrial network and make the satellite
available to a joint venture. Motient's satellite and related assets and
business were sold on November 26, 2001 to MSV. For more information regarding
this sale, please see the discussion under the caption "Mobile Satellite
Ventures" below.
In connection with Motient's acquisition of Motient Communications from Motorola
in March 1998, Motient's subsidiary, Motient Holdings Inc., issued $335.0
million of 12.25% senior notes due 2008.
Prior to 2002, Motient's working capital and operational financing historically
was derived primarily from internally generated funds and from borrowings under
two bank loan facilities, a $100.0 million term loan facility and a $100.0
million revolving credit facility. Borrowings under the bank facility were
guaranteed by Hughes Electronics Corporation, Singapore Telecommunications Ltd.
and Baron Capital Partners L.P. The indebtedness under the bank facility was
also guaranteed by Motient and certain of its subsidiaries and was secured by
certain assets of Motient. Motient also was required to reimburse the bank
guarantors for any payments made by the bank guarantors pursuant to their
guarantees.
XM Radio
As of December 31, 2000, we had an equity interest of approximately 33.1% (or
21.3% on a fully diluted basis) in XM Satellite Radio Holdings Inc., a public
company that launched its satellite radio service at the end of 2001, and we
controlled XM Radio through our board of director membership and common stock
voting rights. In January 2001, pursuant to FCC approval to cease control of XM
Radio, the number of directors that we appointed to XM Radio's board of
directors was reduced to less than 50% of XM Radio's directors, and we converted
a portion of our super-voting Class B common stock of XM Radio to Class A common
stock. As a result, we ceased to control XM Radio, and as of January 1, 2001, we
accounted for our investment in XM Radio pursuant to the equity method of
accounting. During 2001, we disposed of all of our remaining shares of XM Radio
and ceased to hold any interest in XM Radio as of November 19, 2001.
64
Sale of Transportation Business
In November 2000, Motient sold assets relating to its retail transportation
business to Aether Systems and received approximately $45 million. This
consisted of $30 million for the assets, of which $10 million was held in an
escrow account which was subsequently released in the fourth quarter of 2001
upon the satisfaction of certain conditions, and $15 million for a perpetual
license to use and modify any intellectual property owned by or licensed by
Motient in connection with the retail transportation business. Aether Systems
acquired all of the assets used or useful in the retail transportation business,
and assumed the related liabilities. Aether Systems also purchased the existing
inventory in the business. In the fourth quarter of 2000, Motient recognized a
gain of $6.6 million, which represented the difference between the net book
value of the assets sold and the $20 million cash portion of the purchase price
for the assets received at closing. Motient recognized an additional $8.3
million gain in the fourth quarter of 2001 when the additional $10 million of
proceeds were released from escrow. The $1.7 million difference between the
proceeds received and the gain recognized is a result of pricing modifications
that were made at the time of the release of the escrow related to network
capacity agreements. Motient deferred recognition of the $15 million perpetual
license payment over a four year period, which represents the life of the
network airtime agreement that Motient entered into with Aether Systems at the
time of the closing of the asset sale.
Concurrently with the closing of the asset sale, we and Aether Systems entered
into two long-term, prepaid network airtime agreements with a total value of $20
million, of which $5 million was paid at closing, pursuant to which Aether
Systems agreed to purchase airtime on our satellite and terrestrial networks.
All prepayments under these agreements have been exhausted. Aether Systems also
became an authorized reseller of our eLink and BlackBerry TM by Motient wireless
email service offerings.
Mobile Satellite Ventures
History
On June 29, 2000, we formed a joint venture subsidiary, MSV, with certain other
parties, in which we owned 80% of the membership interests. Through November
2001, MSV used our satellite network to conduct research and development
activities. The remaining 20% interests in MSV were owned by three investors
unrelated to Motient. However, the minority investors had the right to
participate in certain business decisions that were made in the normal course of
MSV's business. Therefore, in accordance with Emerging Issues Task Force Issue
No 96-16, "Investor's Accounting for an Investee When the Investor Has a
Majority of the Voting Interest but the Minority Shareholder or Shareholders
Have Certain Approval or Veto Rights", our investment in MSV has been recorded
for all periods presented in the consolidated financial statements included in
this annual report pursuant to the equity method of accounting.
On November 26, 2001, Motient sold the assets comprising its satellite
communications business to MSV. In consideration for its satellite business
assets, Motient received the following:
o a $24.0 million cash payment in June 2000;
o a $41.0 million cash payment paid at closing on November 26, 2001, net
of $4.0 million retained by MSV related to our sublease of real estate
from MSV; and
o a five-year, $15.0 million note.
In this transaction, TMI, a Canadian satellite services provider, also
contributed its satellite communications business assets to MSV. In addition,
Motient purchased a $2.5 million convertible note issued by MSV as part of this
transaction, and certain other investors, including a subsidiary of Rare Medium,
purchased a total of $52.5 million of MSV convertible notes. On August 12, 2002,
we purchased an additional $957,000 of MSV convertible notes. At December 31,
2002 and 2003, on a fully diluted basis, Motient owned approximately 25.5% and
29.5%, respectively, of the equity of MSV, assuming certain other investors
fully exercise their option to make additional investments in MSV as a result of
the FCC's ATC approval process described more fully below.
65
On August 21, 2003, two investors in MSV (excluding Motient) invested an
additional $3.7 million in MSV in exchange for Class A preferred units of
limited partnership interests in MSV. MSV used the proceeds from this investment
to repay other indebtedness that is senior in its right of repayment to
Motient's promissory note. Under the terms of the amended and restated
investment agreement, these investors also had the option of investing an
additional $17.6 million in MSV by December 31, 2003; however, if, prior to this
time, the FCC had not issued a decision addressing MSV's petition for
reconsideration with respect to the ATC Order, the option was automatically
extended to March 31, 2004.
On April 2, 2004, the above-mentioned additional $17.6 million investment was
consummated. In connection with this investment, MSV's amended and restated
investment agreement was amended to provide that of the total $17.6 million in
proceeds, $5.0 million was used to repay certain outstanding indebtedness of
MSV, including $2.0 million of accrued interest under the $15.0 million
promissory note issued to Motient by MSV. The remainder of the proceeds from
this investment will be used for general corporate purposes by MSV. Motient was
required to pay, and paid, 25% of the $2 million it received in this
transaction, or $500,000, to make prepayments under its existing notes owed to
Rare Medium Group, Inc. and Credit Suisse First Boston. As of the closing of the
initial investment on April 2, 2004, Motient's percentage ownership of MSV was
approximately 29.5% on an "as converted basis" giving effect to the conversion
of all outstanding convertible notes.
On November 12, 2004, Motient purchased approximately 5.4 million MSV limited
partnership units, and a corresponding number of shares in MSV's general
partner, Mobile Satellite Ventures GP Inc. ("MSV GP"). As consideration, Motient
provided MSV with $125 million in cash, converted its outstanding $15 million
principal note (and all accrued interest thereon) issued by MSV, converted its
$3.5 million of convertible notes issued by MSV, and converted the accrued
interest on such convertible notes. In connection with Motient's investment, the
other limited partners of MSV exchanged their outstanding notes (and the accrued
interest thereon), and one limited partner contributed an additional $20 million
of cash, for limited partnership units and a corresponding number of MSV GP
shares. Such investments and conversions increased Motient's ownership of MSV
29.5% (assuming conversion of all outstanding convertible notes) to 38.6%.
Motient does not control MSV and accounts for its investment under the equity
method.
Motient's investment in MSV is governed by several agreements, including but not
limited to the limited partnership agreement of MSV and the stockholder's
agreement of MSV GP. The acquisition or disposition by MSV of its assets, the
acquisition or disposition of any limited partner's interest in MSV, subsequent
investment into MSV by any person, and any merger or other business combination
of MSV, would be subject to the control restrictions contained in such
documents. Such control restrictions include, but are not limited to, rights of
first refusal, tag along rights and drag along rights. Many of these actions,
among others, cannot occur without the consent of the majority of the ownership
interests of MSV. In addition, several of the other limited partners of MSV
entered into a voting agreement amongst themselves, which may restrict any
signatories ability to give such consent absent the agreement of the majority of
the signatories to such voting agreement. MSV plans to use the proceeds from
this investment for general corporate purposes.
For additional information regarding MSV, please see the financial statements of
MSV beginning on page M-1.
MSV's Next-Generation System: ATC Approval Process
In February 2003, the FCC adopted its Spectrum Flexibility Order, which we refer
to as the ATC Order, giving mobile satellite operators broad authority to use
their assigned spectrum to operate an ATC. The ATC Order established a set of
preconditions and technical limits for ATC operations, as well as an application
process for ATC approval of the specific system incorporating the ATCs that the
licensee intends to use. On November 18, 2003, MSV filed an application with the
FCC for ATC authority to expand the use of its L-band assets and construct its
next-generation hybrid network. On November 8, 2004, the FCC issued an order
granting MSV the first ATC license ever granted by the FCC. The FCC also
approved several of MSV's waiver requests, allowing MSV to further enhance its
service and coverage, but it specifically deferred its ruling on other MSV
waiver requests. The order sets forth various limitations and conditions
necessary to the use of ATC by MSV, but there can be no assurances that such
conditions will be satisfied by MSV, or that such limitations will not be
unnecessarily burdensome to MSV.
66
MSV's Spectrum Assets
MSV has more than 25 MHz of L-band spectrum that is authorized for use in every
market in North America. The L-band spectrum is positioned within the range of
frequencies used by terrestrial wireless providers in North America.
In addition to its L-band spectrum, MSV has certain rights to receive nationwide
spectrum in the S-band (2.1 GHz range) from its affiliate, TMI Communications
and Company, Limited Partnership, or TMI, as a result of the FCC's reinstatement
of TMI's S-band authorization on June 29, 2004. This reinstatement of TMI's
S-band authorization is subject to certain conditions. The S-band authorization
requires the satisfaction of certain satellite construction and other
milestones. Additionally, the amount of S-band spectrum that can be utilized by
any one operator is contingent upon the number of remaining authorized operators
in the band as determined by their respective ability to meet construction and
other milestones. There can be no assurances that such conditions and milestones
will be satisfied.
For additional information regarding MSV, please see the financial statements of
MSV beginning on page M-1.
Motient's Chapter 11 Filing
Events Leading to Chapter 11 Filing
During 2001, Motient undertook a variety of transactions to address its
liquidity needs.
In mid-2001, Motient borrowed an aggregate of $50.0 million from Rare Medium.
Motient's obligation to repay this loan was secured by its aggregate pledge of
five million shares of Class A common stock of XM Radio then held by Motient.
In May 2001, Motient signed a definitive merger agreement with Rare Medium
through which Motient would have acquired 100% of the ownership of Rare Medium,
using a combination of convertible preferred stock of Motient and nine million
shares of Class A common stock of XM Radio then held by Motient.
In September 2001, Motient laid off approximately 25% of its workforce and
canceled certain of its product initiatives, in order to preserve cash.
In October 2001, Motient and Rare Medium terminated their merger agreement. One
of the principal reasons Motient pursued the Rare Medium merger was to gain
access to cash held by Rare Medium. As a result of the termination of the Rare
Medium merger, Motient did not receive the anticipated cash from that
transaction that would have allowed it to fund certain debt and interest payment
obligations. On October 12, 2001, Motient repaid approximately $26.1 million of
principal and accrued interest owed to Rare Medium by delivering to Rare Medium
five million shares of stock of XM Radio.
67
On October 1, 2001, Motient announced that it would not make the $20.5 million
semi-annual interest payment due on its 12.25% senior notes due 2008 issued by
Motient Holdings. On November 26, 2001, the trustee declared all amounts owed
under the senior notes immediately due and payable.
In November 2001, the agent for the bank lenders under Motient's bank financing
declared all loans immediately due and payable, due to the existence of several
events of default. The bank lenders sought payment in full from the guarantors
for the accelerated loan obligations, and the guarantors repaid all such loans
on November 14, 2001 in the amount of approximately $97.6 million. As a result,
Motient had a reimbursement obligation to the guarantors in the amount of $97.6
million, which included accrued interest and fees.
On November 19, 2001, Motient sold 500,000 shares of XM Radio common stock owned
by it for aggregate proceeds of $4.8 million. Motient used such proceeds to
reduce the amount of its reimbursement obligation to the guarantors of its bank
financing by this amount. Also on November 19, 2001, Motient delivered all of
the remaining 9,257,262 shares of XM Radio common stock owned by it to the
guarantors of its bank financing in full satisfaction of the entire remaining
amount of Motient's reimbursement obligations to the bank guarantors.
Pursuit of restructuring plan under protection of bankruptcy code - conversion
of outstanding debt
In late 2001, Motient determined that the continued viability of its business
required restructuring its highly leveraged capital structure. In October 2001,
Motient retained CSFB as financial advisors to assist it in restructuring its
debt.
In January 2002, Motient and an informal committee of its senior noteholders
reached an agreement in principle with respect to the primary terms of a Plan of
Reorganization of Motient and its principal subsidiaries. Accordingly, on
January 10, 2002, Motient and certain of its subsidiaries filed for protection
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court
for the Eastern District of Virginia. The Bankruptcy Court confirmed the Plan of
Reorganization on April 26, 2002, and the Plan became effective on May 1, 2002.
Upon effectiveness of the Plan, the ownership of Motient changed significantly,
with creditors becoming the new owners of substantially all of the equity of
Motient. Under the Plan, holders of the senior notes exchanged the principal
amount of their notes and all accrued interest thereon for shares of our common
stock. In addition, certain of our trade creditors received shares of our common
stock in settlement of their claims. All then outstanding shares of our
pre-reorganization common stock and all unexercised options and warrants were
cancelled. Holders of our pre-reorganization common stock received warrants to
purchase an aggregate of approximately 1,496,512 shares of common stock. These
warrants never vested and therefore they expired on May 1, 2004. Also pursuant
to our Plan of Reorganization, we issued to Evercore Partners LP, financial
advisor to the creditors' committee in our reorganization, a warrant to purchase
up to 343,450 shares of common stock, at an exercise price of $3.95 per share.
The warrant has a term of five years.
Upon effectiveness of the Plan, our certificate of incorporation and bylaws were
amended and restated. Our restated certificate of incorporation authorizes
Motient to issue up to 100 million shares of common stock and up to 5 million
shares of preferred stock.
On the effective date of our Plan of Reorganization, a new board of directors of
Motient consisting of seven members was established. Effective May 1, 2002, we
adopted "fresh-start" accounting in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code". We determined that the
selection of May 1, 2002 versus April 26, 2002 for the "fresh-start" date was
more convenient for financial statement reporting purposes and that the results
for the period from April 26, 2002 to May 1, 2002 were immaterial to our
consolidated financial statements. Under "fresh-start" accounting, a new entity
has been deemed created for financial reporting purposes.
Further details regarding the Plan of Reorganization are contained in our
disclosure statement with respect to the Plan of Reorganization, which was filed
as Exhibit 99.2 to our current report on Form 8-K dated March 4, 2002.
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Effects of Chapter 11 Filing
As a result of our Chapter 11 bankruptcy filing, we saw a slower adoption rate
for our services during the first quarter of 2002. In a large customer
deployment, the upfront cost of the hardware can be significant. Because the
hardware generally is usable only on Motient's network, certain customers
delayed adoption while we were in Chapter 11. In an effort to accelerate
adoption of our services, we did, in selected instances in the first quarter of
2002, offer certain incentives for adoption of our services that were outside of
our customary contract terms, such as extended payment terms or temporary
hardware rental. None of these offers were accepted; therefore, there was no
impact to our financial statements.
Additionally, certain of our trade creditors required either deposits for future
services or shortened payment terms; however, none of these deposits or changes
in payment terms were material, and none of our key suppliers have ceased to do
business with us as a result of our reorganization.
For more information regarding certain effects of the Chapter 11 filing on
Motient's business and results of operations, please read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" above.
Motient's Business Strategy
Motient's objective is to use its enterprise data experience to continue to
penetrate the large markets for mobile data communications services and
solutions and wireless telemetry applications while keeping costs under control.
To meet these objectives, we intend to:
Focus Growth Efforts on iMotient Solutions Service Platform. In December 2004,
we launched a new set of products and services designed to provide these
seamless solutions to our customers called iMotient Solutions (TM). iMotient
allows Motient's customers to use multiple networks via a single connection to
Motient's back-office systems, providing a one-source alternative for
development, device management and billing across multiple networks, including
but not limited to GPRS, 1XRTT, and DataTac. Once connected to iMotient,
customers will receive proprietary applications and services that reduce airtime
usage, improve performance and reduce costs. As part of the iMotient Solutions
platform, in addition to selling wireless services that use our own network, we
are also a reseller of airtime on the Cingular and Sprint wireless networks.
These reseller agreements allow us to sell and promote applications and
solutions to enterprise accounts on networks with greater capacity than our own,
while still maintaining a direct relationship with the customer, since "back
office" functions like customer support, application design and implementation
and billing, among other support services are handled by Motient.
Focus Growth Efforts on Telemetry, Field Service and Transportation
Applications. Telemetry, field service and transportation applications have
several key attributes that make them an efficient use of the Motient network.
They typically have small bandwidth requirements and can be designed to utilize
the network on a 24 hours per day, 7 days per week basis, thus smoothing loading
requirements and optimally using our existing capacity. We believe that
telemetry, field service and transportation market segments are poised for
significant growth and that this growth can be accommodated efficiently on the
existing Motient network as well as on our iMotient network platform. The growth
of the telemetry, field service and transportation markets could also allow for
some excess capacity to be removed from our network, which would reduce our
operating costs.
Leverage Motient's Expertise in Selling and Provisioning Complete Data Solutions
for Enterprise Customers. A key strategic asset of Motient is its experienced
sales, customer care and technical support team. This team is qualified to sell
complete data solutions that may include network services that utilize more than
Motient's core terrestrial network. Motient also has relationships with other
major carriers that enable it to broaden its network services offerings to
include a variety of next generation solutions, including both voice and data
solutions.
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Develop New Wireless Applications to Increase Demand and Revenue Per Subscriber.
Motient intends to exploit the market potential of its wireless network by
working with value-added resellers and major e-business solutions providers to
develop additional innovative wireless applications and content-based services.
As market acceptance and demand for wireless email grows, Motient believes users
will demand an increasing variety of Internet-based content and services.
Motient currently offers content-based services for use with its eLink service
provided by GoAmerica, Novarra, Inc., Notify Inc. and Neomar, Inc.
Leverage Distribution Resources of Strategic Resellers. To penetrate target
markets without significant direct sales and marketing expenses, Motient has
signed a number of strategic alliances with industry leaders selling services in
the mobile Internet, field service, transportation and telemetry marketplaces.
Motient intends to leverage the relationships, marketing and distribution
resources and large existing customer bases of these resellers to address
significantly more potential customers than Motient would be able to address on
its own. Motient has a roster of resellers and wholesale arrangements with third
parties for its mobile data communications service and solutions, including
SkyTel Communications, Inc., Metrocall Wireless, Inc., Geologic Solutions
(formerly Aether Systems, which purchased our transportation assets in November
2000), Research In Motion, Ltd. and Earthlink, Inc., among others. In the market
for small to medium-sized business users, Motient has signed a sales agent
agreement with CDW Computer Centers, Inc. In the telemetry market, Motient has
entered into agreements with a number of device manufacturers, resellers and
software vendors to develop and offer a variety of customer-driven telemetry
applications, including heating, ventilation and air conditioning, or HVAC,
system monitoring, energy monitoring, office and vending machine automation and
wireless point-of-sale applications. Motient plans to continue to seek strategic
distribution channels that will enable it to more fully penetrate its existing
markets and access potential new markets on an incremental basis. In addition,
in vertical markets Motient intends to exploit cross-selling opportunities using
some of its existing large corporate customers.
Leverage Motient's Expertise in Selling and Provisioning Complete Data Solutions
for Enterprise Customers. A key strategic asset of Motient is its experienced
sales, customer care and technical support team. This team is qualified to sell
complete data solutions that may include network services that utilize more than
Motient's core terrestrial network. Motient also has relationships with other
major carriers that enable it to broaden its network services offerings to
include a variety of next generation solutions, including both voice and data
solutions.
Effectively Manage the Anticipated Migration of our Mobile Internet Segment
Customers. Due to the emergence of high-bandwidth competitive data networks, and
with additional voice service capabilities, as well as limitations on the number
of available mobile internet user devices, primarily as a result of Research In
Motion's decision in 2003 to discontinue the RIM 857 product line, we are
implementing initiatives to manage the migration of these customers to
next-generation network solutions. These initiatives include supporting customer
migration efforts by referring these customer relationships to T-Mobile through
our sub-dealer agreement with RACO. This allows us to continue to support our
customers' needs, while also generating revenue from these customers. This
migration of customers could also allow for some excess capacity to be removed
from our network, which would reduce our operating costs.
Work With Vendors to Develop Less Expensive and More Functional User Devices to
Address Competition and Increase Demand for its Services. Motient plans to
continue to work with vendors to develop new generations of user devices and
applications that combine improved functionality and convenience at a lower
price. Motient plans to continue to incorporate inexpensive, off the shelf
software or free software in its services. Motient believes that lower price
points will help accelerate the acceptance and adoption of its services in its
traditional markets and will also enable Motient to better penetrate its
targeted new wireless markets. By working with suppliers and by making strategic
software and hardware investments, Motient has lowered the total cost of
ownership of its products. At the same time, Motient has improved the
functionality of its devices and made them smaller and more convenient.
Take Advantage of Motient's Professional Service and Back-Office Capabilities to
Potential Generate New Revenue Opportunities. Motient has a long track record of
deploying comprehensive and customized data communications solutions to
enterprise customers. These data communications solutions have often required
specialized billing, data switching requirements and inventory and reporting
requirements, among other tailored back-office capabilities. With our new
iMotient platform, these professional services and back-office capabilities can
be tailored to satisfy existing and new customers on Motient's network or
alternative networks. Motient believes that these professional services and
back-office capabilities can be positioned as network or carrier agnostic and
thus provide customers potentially expansive network capabilities and service at
the lowest cost.
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Rationalize Cost Structure & Improve Network Utilization. Motient plans to
rationalize its network infrastructure by focusing on market segments that are
most appropriate for the technology. We intend to focus on the telemetry, field
service and transportation markets because we believe that telemetry and
transportation solutions enable us to grow our revenue stream while also
reducing the operating cost of our network because telemetry and transportation
applications are less demanding on our network.
Cost Reduction Initiatives
During the fourth quarter of 2002 and the first quarter of 2003, we renegotiated
several of our key vendor and customer arrangements in order to reduce recurring
expenses and improve our liquidity position. In some cases, we were able to
negotiate a flat rate reduction for continuing services provided to us by our
vendors or a deferral of payable amounts, and in other cases we renegotiated the
scope of services provided in exchange for reduced rates or received
pre-payments for future services. For more information on our negotiations with
certain vendors and customers, please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Overview and Introduction --
Cost Reduction Actions."
Since December 31, 2003, we have taken a number of steps to continue to reduce
our operating and capital expenditures in order to lower our cash burn rate. For
example, in February 2004, we reduced our staffing levels from approximately 166
to 112, a reduction of approximately 32.5% of our then-remaining workforce. In
addition, we are currently reducing the number of base stations operating on our
network to reduce network operating costs while also minimizing the potential
impact to our customers' communications and coverage requirements. This
rationalization encompasses, among other things, the reduction of unneeded
capacity across the network by deconstructing under-utilized and un-profitable
base stations as well as deconstructing base stations that pass an immaterial
amount of customer data traffic. In some cases, these base stations were
originally constructed specifically to serve customers with nationwide
requirements that are no longer customers of Motient. In certain instances, the
geographic area that our network serves may be reduced by this process and
customer communications may be impacted. We have discussed these changes to our
network with many of our customers to assist them in evaluating the potential
impact, if any, on their respective communications requirements. The full extent
and effect of the changes to our network have yet to be determined, but based on
internal analyses, we believe the de-commissioning of these base stations from
our network will only impact approximately 1.5% of our network's current data
traffic. We are substantially complete with these network rationalization
initiatives, and anticipate final completion sometime in December 2004.
In conjunction with our base station rationalization initiatives discussed
above, Motient is in the process of converting its telecommunications
infrastructure technology to frame relay technology. As of September 30, 2004,
this project was approximately 80% complete. In the fourth quarter of 2004, we
will be retiring certain network equipment associated with this conversion. We
expect to realize significant telecommunications cost reductions in 2005 as a
result of this conversion.
For further information regarding cost reduction actions, please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview and Introduction -- Cost Reduction Actions."
Effective January 30, 2004, we hired Communications Technology Advisors LLC, or
CTA, to serve as "Chief Restructuring Entity" and advise us on various ways to
reduce our cash operating requirements. CTA's engagement is for a six month term
but may be extended at our discretion. For further details regarding CTA's
engagement, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview and Introduction - CTA
Arrangements."
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Private Placements of Common Stock
On April 7, 2004, we sold 4,215,910 shares of our common stock at a per share
price of $5.50 for an aggregate purchase price of $23.2 million to The Raptor
Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund
L.P., Tudor Proprietary Trading, L.L.C., Highland Crusader Offshore Partners,
L.P., York Distressed Opportunities Fund, L.P., York Select, L.P., York Select
Unit Trust, M&E Advisors L.L.C., Catalyst Credit Opportunity Fund, Catalyst
Credit Opportunity Fund Offshore, DCM, Ltd., Greywolf Capital II LP and Greywolf
Capital Overseas Fund and LC Capital Master Fund. The sale of these shares was
not registered under the Securities Act of 1933, as amended and the shares may
not be sold in the United States absent registration or an applicable exemption
from registration requirements. The shares were offered and sold pursuant to the
exemption from registration afforded by Rule 506 under the Securities Act and/or
Section 4(2) of the Securities Act. In connection with this sale, we signed a
registration rights agreement with the holders of these shares. We also issued
warrants to purchase an aggregate of 1,053,978 shares of our common stock to the
investors listed above, at an exercise price of $5.50 per share. However,
because we met certain conditions following the issuance of the warrants, they
will never vest. The proceeds of this private placement of common stock were
used for general corporate purposes and the repayment of the term credit
facility.
In connection with this sale, we issued to Tejas Securities Group, Inc., our
placement agent for the private placement, and certain CTA affiliates, warrants
to purchase 600,000 and 400,000 shares, respectively, of our common stock. The
exercise price of these warrants is $5.50 per share. The warrants are
immediately exercisable upon issuance and have a term of five years. We also
paid Tejas Securities Group, Inc. a placement fee of $350,000 at closing. The
fair value of the warrants was estimated at $6.2 million using a Black-Scholes
model. The shares were offered and sold pursuant to the exemption from
registration afforded by Rule 506 under the Securities Act and/or Section 4(2)
of the Securities Act.
On July 1, 2004, we sold 3,500,000 shares of our common stock at a per share
price of $8.57 for an aggregate purchase price of $30.0 million to The Raptor
Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund
L.P., Tudor Proprietary Trading, L.L.C., York Distressed Opportunities Fund,
L.P., York Select, L.P., York Select Unit Trust, York Global Value Partner,
L.P., Catalyst Credit Opportunity Fund, Catalyst Credit Opportunity Fund
Offshore, DCM, Ltd., Rockbay Capital Fund, LLC, Rockbay Capital Investment Fund,
LLC, Rockbay Capital Offshore Fund, Ltd., Glenview Capital Partner, L.P.,
Glenview Institutional Partners, L.P., Glenview Capital Master Fund, Ltd., GCM
Little Arbor Master Fund, Ltd., OZ Master Fund, Ltd., OZ Mac 13 Ltd., Fleet
Maritime, Inc., John Waterfall, Edwin Morgens, Greywolf Capital II, L.P.,
Greywolf Capital Overseas Fund, Highland Equity Focus Fund, L.P., Singer
Children's Management Trust, Highland Equity Fund, L.P., and Strome Hedgecap
Limited. The sale of these shares was not registered under the Securities Act
and the shares may not be sold in the United States absent registration or an
applicable exemption from registration requirements. The shares were offered and
sold pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. We also issued
warrants to purchase an aggregate of 525,000 shares of our common stock to the
investors listed above, at an exercise price of $8.57 per share However, because
we met certain conditions following the issuance of these warrants, they will
never vest. The proceeds of this private placement of common stock were used for
general corporate purposes and the repayment of the term credit facility.
In connection with this sale, we issued to certain affiliates of CTA and Tejas
Securities Group, Inc., our placement agent for the private placement, warrants
to purchase 340,000 and 510,000 shares, respectively, of our common stock. The
exercise price of these warrants is $8.57 per share. The warrants are
immediately exercisable upon issuance and have a term of five years. We also
paid Tejas Securities Group, Inc. a placement fee of $850,000 at closing. The
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act.
On November 12, 2004, we sold 15,353,609 shares of our common stock at a per
share price of $8.57. Motient received aggregate proceeds of $126,397,809, net
of $5,182,620 in commissions paid to Motient's placement agent, Tejas Securities
Group, Inc. The approximately 60 purchasers included substantially all of the
purchasers from the April and July 2004 private placements, as well multiple new
investors. The sale of these shares was not registered under the Securities Act
and the shares may not be sold in the United States absent registration or an
applicable exemption from registration requirements. The shares were offered and
sold pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. In connection with
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this sale, Motient signed a registration rights agreement with the holders of
these shares. Among other things, this registration rights agreement requires
Motient to file and cause to make effective a registration statement permitting
the resale of the shares by the holders thereof. Motient also issued warrants to
purchase an aggregate of approximately 3,838,401 shares of its common stock to
the investors listed above, at an exercise price of $8.57 per share. These
warrants will vest if and only if Motient fails to cause this registration
statement to become effective prior to March 12, 2005 with respect to certain
requirements under the registration rights agreement. If the warrants vest, they
may be exercised by the holders thereof at any time through November 11, 2009.
Pursuant to terms of this sale, we will issue to each or our stockholders of
record one right for each share of Motient common stock held as of the close of
business on December 17, 2004. Each right will entitle any holder that did not
participate in the April, July or November 2004 private placement to purchase
0.103 shares of our common stock at a price of $8.57 per share, with fractions
rounded up to the next whole share. A maximum of 2.5 million shares may be sold
in the rights offering, generating maximum aggregate proceeds of approximately
$21.4 million. Motient's board of directors has reserved the right to terminate
the rights offering at any time prior to the effectiveness of the registration
statement to be issued registering the offering
Motient's Wireless Service Offerings
General
Motient targets its data applications to both vertical and horizontal markets.
Applications include wireless email, Internet and Intranet access, fax, paging,
peer-to-peer communications, asset tracking, dispatch, point-of-sale and other
telemetry applications. There are over 13 types of subscriber devices available
from more than 10 manufacturers for use on Motient's terrestrial network. These
devices include Research In Motion handheld devices, ruggedized laptops,
handheld digital assistants and wireless modems for personal computers, or PCs.
Motient has also developed proprietary software and has engaged a variety of
other software firms to develop other "middleware," to minimize its customers'
development efforts in connecting their applications to its network. Also, a
number of off-the-shelf software packages enable popular email software
applications on Motient's network.
It is also Motient's intent to broaden its product line through its agreements
with wireless carriers to resell data solutions on their next generation
high-speed networks. In doing so, we believe we will be able to enhance our
sales performance by offering enterprise customers a full array of technology
solutions that meet their needs, independent of the network.
iMotient Solutions
In December 2004, we announced iMotient Solutions (TM) and that we are a
reseller of airtime on the Cingular and Sprint wireless networks. These reseller
agreements allow us to sell and promote applications and solutions to enterprise
accounts on networks with greater capacity than our own, while still maintaining
a direct relationship with the customer, since "back office" functions like
customer support, application design and implementation and billing, among other
things, are handled by Motient.
The iMotient Solutions (TM) set of products and services allows Motient's
customers to use these multiple networks via a single connection to Motient's
back-office systems, providing a one-source alternative for development, device
management and billing across multiple networks, including but not limited to
GPRS, 1XRTT, and DataTac. Once connected to iMotient, customers will receive
proprietary applications and services that reduce airtime usage, improve
performance and reduce costs.
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Mobile Internet
Motient offers a variety of wireless email solutions for its network, including
its own eLink wireless e-mail applications, as well as Research In Motion's, or
RIM's, BlackBerry(TM) wireless solution. In addition, Motient can offer its
customers an opportunity to utilize T-Mobile's network for their wireless email
solutions via its sub-dealer Agreement with RACO, Inc., a T-Mobile master
dealer.
Field Service
In the field service market, long-standing customers such as International
Business Machines Corporation, or IBM, use Motient's customized terrestrial data
applications and rely on certain Motient professional support services and
back-office capabilities to enable their mobile field service technicians to
stay connected. For these and other field service customers, Motient also
provides critical professional support service and back-office functionality
tailored to our customers' respective communications requirements, such as
specialized billing, data switching, inventory tracking, customer support and
reporting. The iMotient Solutions (TM) set of products and services will allow
Motient to expand its market presence in this vertical channel while leveraging
the coverage and capacity of multiple networks.
Transportation
In the transportation market, significant customers such as Geologic Solutions
take advantage of Motient's nationwide network, data switching capabilities and
professional support services and back-office capabilities to provide effective
communications solutions to transportation fleets and other similar mobile fleet
customers. For these and other transportation customers, we also provide
critical professional support service and back-office functionality tailored to
our customers' respective communications requirements, such as specialized
billing, data switching, inventory tracking, customer support and reporting. The
iMotient Solutions (TM) set of products and services will allow Motient to
expand its market presence in this vertical channel while leveraging the
coverage and capacity of multiple networks.
Telemetry
Motient has partnered with a variety of resellers, device manufacturers and
software vendors in the telemetry market. These resellers, device manufacturers
and software vendors integrate customer-specific devices and systems with
Motient's network to provide a wireless means of transmitting data from a fixed
or mobile site to a central monitoring facility. We have partnered with several
application service providers such as Transaction Network Services (formerly
U.S. Wireless Data, Inc.) and U.S. Technologies to develop and offer a variety
of customer-driven telemetry applications. Applications include HVAC system
monitoring, wireless point-of-sale systems, energy monitoring, vending and
office machine automation and security/alarm monitoring. We believe that our
expansive wireless network and telemetry experience will allow us to provide
cost-effective and comprehensive solutions for these communication requirements.
The iMotient Solutions (TM) set of products and services will allow Motient to
expand its market presence in this vertical channel while leveraging the
coverage and capacity of multiple networks.
Pricing of Services
Motient's customers are charged a monthly access fee. In addition to this access
fee, users pay for usage depending on the number of kilobytes of data
transmitted. Motient's pricing plans offer a wide variety of volume packaging
and discounts, consistent with customer demand and market conditions. Generally,
Motient reflects the addition of a subscriber unit upon the registration of a
unit on its network. In certain cases, primarily as it relates to strategic
resellers, a percentage of these subscriber units do not become revenue
producing for up to several months from initial registration on the network.
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Motient's Customers
As of December 31, 2003, there were approximately 204,000 user devices
registered on Motient's network, and an established customer base of large
corporations in the following market categories:
Percentage of
Market Categories Total Units
----------------- -----------
Transportation and package delivery 23%
Field service 9
Telemetry and point of sale 16
Wireless internet or email 52
-----------
Total 100%
====
For the year ended December 31, 2003, five customers accounted for approximately
47% of Motient's service revenue, with two of those customers, UPS and SkyTel,
each accounting for more than 11%. The loss of one or more of these customers,
or any event, occurrence or development, which adversely affects Motient's
relationship with one or more of these customers, could harm Motient's business.
The contracts with these customers are generally multi-year contracts, and the
services provided pursuant to such contracts are generally customized
applications developed to work solely on Motient's network.
UPS, Motient's second largest customer for the year ended December 31, 2003 and
eighth largest customer for the three months ended December 31, 2003,
substantially completed its migration to next generation network technology in
the first six months of 2003, and its monthly airtime usage of our network
declined significantly. Consequently, the revenue and cash flows generated by
UPS declined significantly. While we expect that UPS will remain a customer for
the foreseeable future, there are no minimum purchase requirements under our
contract with UPS and the contract may be terminated by UPS on 30 days' notice.
As of September 30, 2004, UPS had approximately 3,006 user devices actively
passing traffic units on Motient's network.
In addition, due to a separate arrangement entered into in 2002 under which UPS
prepaid for network airtime to be used by it in 2004, we do not expect that UPS
will be required to make any cash payments to us in 2004 and 2005 for service to
be provided in 2004 and 2005. As of September 30, 2004, UPS has not been
required to make any cash payments to us in 2004 for service provided in 2004,
and the value of our remaining airtime service obligations to UPS in respect of
the prepayment was approximately $4.1 million as of September 30, 2004. If UPS
terminates its contract with Motient, any remaining prepayment would be required
to be repaid.
Marketing and Distribution
Motient markets its wireless services through strategic distribution resellers
and its direct sales force.
Strategic Alliances and Resellers
To penetrate new wireless data markets with significant growth potential,
Motient has signed a variety of strategic alliances, including with industry
leaders. Motient intends to leverage the marketing and distribution resources
and large existing customer bases of these resellers to address significantly
more potential customers than Motient would be able to address on its own.
Motient has a roster of industry-leading resellers for its wireless email
services, including SkyTel, Metrocall, Geologic Solutions, Research In Motion
and Earthlink. Other alliances include:
o In the market for small to medium-sized business users, Motient has
signed a reseller agreement with CDW Computer Centers.
o Motient has teamed with Wynd Communications, Inc. to provide wireless
services for the hearing impaired.
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o In the telemetry market, Motient has partnered with a number of device
manufacturers, resellers and software vendors to develop and offer a
variety of customer-driven telemetry applications. Transaction Network
Services is a key partner in the wireless credit card processing and
point-of-sale segment, and USA Technologies, Inc. is developing
telemetry applications using Motient's network in the vending segment.
Motient is continuing to seek additional strategic distribution channels to help
Motient move forward with its plan to more fully penetrate its existing markets
and access potential new markets on an incremental basis.
Furthermore, Motient has broadened its product line by entering into agreements
with a number of wireless carriers to include their next generation high-speed
data services in Motient's product offerings. By doing so, we believe that
Motient would be able to market itself as a "one-stop shop" for a full array of
technology and product offerings, not just those products operating on the
Motient network.
Direct Sales Force
Motient has a direct sales force that is experienced in selling its various
wireless services. Prior to making a buying decision, a majority of Motient's
potential customers exercise a due diligence process where competitive
alternatives are evaluated. Motient's employees often assist in developing
justification studies, application design support, hardware testing, planning
and training. In the wireless email area, Motient's internal sales force has
been key to its ability to convey customer feedback to its product management
team, enabling Motient to identify and develop new product and service features.
Motient's Network
Motient's wireless network is one of the largest two-way terrestrial data
networks in the United States, providing service to over 400 of the nation's
largest cities and towns, including virtually all primary metropolitan
statistical areas. The network provides a wide range of mobile data services.
Users of Motient's network access it through subscriber units that may be
portable, mobile or stationary devices.
Subscriber units receive and transmit wireless data messages to and from
terrestrial base stations. Terrestrial messages are routed to their destination
via data switches that Motient owns, which connect to the public data network.
Motient's terrestrial network delivers superior in-building penetration,
completion rates and response times compared to other wireless data networks
through the use of a patented single frequency reuse technology developed by
Motorola. Single frequency reuse technology enables multiple base stations in a
given area to use the same frequency. As a result, a message sent by a
subscriber can be received by a number of base stations. This technology
contrasts with more commonly used multiple frequency reuse systems, which
provide for only one transmission path for a given message at a particular
frequency. In comparison with multiple frequency reuse systems, Motient's
technology provides superior in-building penetration and response times and
enables it to incrementally deploy additional capacity as required, instead of
in larger increments as required by most wireless networks.
We are currently removing unneeded capacity across the network by deconstructing
under-utilized and un-profitable base stations. This involves the
de-commissioning of approximately 409 base stations from our network. We are
taking these actions in a coordinated effort to reduce network operating costs
while also focusing on minimizing the potential impact to our customers
communications and coverage requirements. In some cases, the base stations being
deconstructed were originally constructed specifically to serve customers with
nationwide requirements that are no longer customers of Motient. In certain
instances, the geographic area that our network serves may be reduced by this
process and customer communications may be impacted. We have discussed these
changes to our network with many of our customers to assist them in evaluating
the potential impact, if any, to their respective communications requirements.
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The full extent and effect of the changes to our network have yet to be
determined, but based on internal analyses, we believe the de-commissioning of
these base stations from our network will only impact approximately 1.5% of our
network's current data traffic. We are substantially complete with these network
rationalization initiatives. For further information regarding cost reduction
actions, please see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview and Introduction -- Cost Reduction
Actions."
In conjunction with our base station rationalization initiatives discussed
above, Motient is in the process of converting its telecommunications
infrastructure technology to frame relay technology. As of September 30, 2004,
this project was approximately 80% complete. In the fourth quarter of 2004, we
will be retiring certain network equipment associated with this conversion. We
expect to realize significant telecommunications cost reductions in 2005 as a
result of this conversion.
On July 29, 2003, our wholly-owned subsidiary, Motient Communications, entered
into an asset purchase agreement with Nextel, under which Motient Communications
sold to Nextel certain of its SMR licenses issued by the FCC for $3.4 million.
The closing of this transaction occurred on November 7, 2003. On December 9,
2003, Motient Communications entered into a second asset purchase agreement,
under which Motient Communications will sell additional licenses to Nextel for
$2.75 million resulting in a $1.5 million loss which was recorded in December,
2003. In February, 2004, we closed the sale of licenses covering approximately
$2.2 million of the purchase price, and we closed the sale of approximately
one-half of the remaining licenses in April 2004. The transfer of the other half
of the remaining licenses has been challenged at the FCC by a third-party. While
we believe, based on the advice of counsel, that the FCC will ultimately rule in
our favor, we cannot assure you that we will prevail, and, in any event, the
timing of any final resolution is uncertain. None of these licenses are
necessary for our future network requirements. We have and expect to continue to
use the proceeds of the sales to fund our working capital requirements and for
general corporate purposes. The lenders under our term credit agreement
consented to the sale of these licenses.
Equipment and Supplier Relationships
Motient has contracts with a variety of vendors to supply end-user devices
designed to meet the requirements of specific end-user applications. Motient
continues to pursue enhancements to these devices that will result in additional
desirable features and reduced cost of ownership. Although many of the
components of its products are available from a number of different suppliers,
Motient relies on a relatively small number of key suppliers. The devices used
with Motient's services generally are subject to various product certification
requirements and regulatory approvals before they are delivered for use by its
customers.
On June 26, 2003, Research In Motion, Limited, or RIM, provided us with a
written End of Life Notification for the RIM 857 wireless handheld device. This
means that RIM will no longer produce this model of handheld device. RIM no
longer manufactures the RIM 850. The last date for accepting orders for the RIM
857 was September 30, 2003, and the last date for shipment of devices was
January 2, 2004. Sales of RIM 850 and 857 devices have declined significantly in
2004 due to competition and these supply constraints and Motient anticipates
very little, if any, sales of these devices in the future. During the years
ended December 31, 2002 and 2003, a majority of Motient's equipment revenues
were attributable to sales of the RIM 857 device, and Motient estimates that
approximately 35% and 52%, respectively, of its monthly recurring service
revenues were derived from wireless messaging that use RIM 857 devices in
December 2002 and December 2003, respectively.
There are currently over 13 types of subscriber units available from
approximately 10 manufacturers that can operate on Motient's terrestrial
network. Examples of portable subscriber units include ruggedized laptop
computers, small external modems, handheld or palmtop "assistants" and pen-based
"tablets. "Motient is also working with other device manufacturers and software
developers to bring its network services to other existing popular PDA and
wireless email platforms.
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AT&T Corp. provides network telecommunications services, including a nationwide
wireline data network, and leased sites which house regional switching equipment
for Motient's terrestrial network. Motient also has a relationship with AT&T as
Motient's vendor for switched inbound and outbound public switched telephone
network services.
The terrestrial network, and certain of its competitive strengths such as deep
in-building penetration, is based upon single frequency reuse technology.
Motorola holds the patent for the single frequency reuse technology. Motient has
entered into several agreements with Motorola historically under which Motorola
provided certain continued support for the terrestrial network infrastructure,
and ongoing maintenance and service of the terrestrial network base stations. We
currently have certain debt obligations outstanding to Motorola. We do not
currently have any service agreement with Motorola.
Competition
The wireless communications industry is highly competitive and is characterized
by constant technological innovation. Motient competes by providing broad
geographic coverage, deep in-building penetration and demonstrated reliability.
These features distinguish Motient from the competition. Motient's wireless
solutions are used by businesses that need critical customer and operational
information in a mobile environment. Motient offers multiple business lines and
competes with a variety of service providers, from small startups to Fortune 500
companies. Motient's competitors include service providers in several
markets--dedicated mobile data, PCS and cellular, narrowband PCS/enhanced paging
and emerging technology platforms.
Employees
On December 31, 2003, and November 30, 2004, Motient had 168 employees and 95
employees, respectively. None of Motient's employees is represented by a labor
union. Motient considers its relations with its employees to be good.
Regulation
The terrestrial two-way wireless data network used in Motient's wireless
business is regulated to varying degrees at the federal, state and local levels.
Various legislative and regulatory proposals under consideration from time to
time by Congress and the FCC have in the past materially affected and may in the
future materially affect the telecommunications industry in general, and
Motient's wireless business in particular. The following is a summary of
significant laws, regulations and policies affecting the operation of Motient's
wireless business. In addition, many aspects of regulation at the federal, state
and local level currently are subject to judicial review or are the subject of
administrative or legislative proposals to modify, repeal, or adopt new laws and
administrative regulations and policies. Neither the outcome of these
proceedings nor their impact on Motient's operations can be predicted at this
time.
The ownership and operation of Motient's terrestrial network is subject to the
rules and regulations of the FCC, which acts under authority established by the
Communications Act of 1934, as amended, and related federal laws. Among other
things, the FCC allocates portions of the radio frequency spectrum to certain
services and grants licenses to and regulates individual entities using that
spectrum. Motient operates pursuant to various licenses granted by the FCC.
Motient is a commercial mobile radio service provider and therefore is regulated
as a common carrier. Motient must offer service at just and reasonable rates on
a first-come, first-served basis, without any unjust or unreasonable
discrimination, and Motient is subject to the FCC's complaint processes. The FCC
has decided not to apply or to withhold its right, at this time, to apply
numerous common carrier provisions of the Communications Act to commercial
mobile radio service providers. In particular, Motient is not subject to
traditional public utility rate-of-return regulation, and is not required to
file tariffs with the FCC.
The FCC's universal service fund supports the provision of affordable
telecommunications to high-cost areas and the provision of advanced
telecommunications services to schools, libraries, and rural health care
providers. Under the FCC's current rules, end-user revenues derived from the
sale of information and other non-telecommunication services and certain
78
wholesale revenues derived from the sale of telecommunications services are not
subject to universal service fund obligations. Based on the nature of its
business, Motient is currently not required to contribute to the universal
service fund. Current rules also do not require that Motient impute to its
contribution base retail revenues derived when it uses its own transmission
facilities to provide a service that includes both information service and
telecommunications components. There can be no assurances that the FCC will
retain the exclusions described herein or its current policy regarding the scope
of a carrier's contribution base. Motient may also be required to contribute to
state universal service programs. The requirement to make these state universal
service payments, the amount of which in some cases may be subject to change and
is not yet determined, may have a material adverse impact on the conduct of
Motient's business.
Motient is subject to the Communications Assistance for Law Enforcement Act, or
CALEA. Under CALEA, Motient must ensure that law enforcement agencies can
intercept certain communications transmitted over its networks. Motient must
also ensure that law enforcement agencies are able to access certain
call-identifying information relating to communications over Motient's networks.
The deadline for complying with the CALEA requirements and any rules
subsequently promulgated was June 30, 2002. Based on discussions with Federal
law enforcement agencies regarding the applicability of CALEA's provisions to
Motient, we do not believe that our network, which uses packet data technology,
is subject to the requirements of CALEA. At the suggestion of Federal law
enforcement agencies, we have developed an alternative methodology for
intercepting certain communications over our network for the purposes of law
enforcement surveillance. We believe this alternative methodology has
substantially the same functionality as the standards provided in CALEA. It is
possible that our alternative methodology may ultimately be found not to comply
with CALEA's requirements, or that our interpretation that CALEA does not apply
to our network may ultimately be found to be incorrect.
In addition, CALEA establishes a federal fund to compensate telecommunications
carriers for all reasonable costs directly associated with modifications
performed by carriers in connection with equipment, facilities and services
installed or deployed on or before January 1, 1995. For equipment, facilities
and services deployed after January 1, 1995, the CALEA fund is intended to
compensate carriers for any reasonable costs associated with modifications
required to make compliance "reasonably achievable." It is possible that all
necessary modifications will not qualify for this compensation and that the
available funds will not be sufficient to reimburse Motient. Therefore, the
requirement to comply with CALEA could have a material adverse effect on the
conduct of Motient's business. Motient's FCC licenses are granted for a term of
10 years, subject to renewal. For Motient's non-market-based licenses, or
non-auction licenses, renewal is granted in the ordinary course. Motient no
longer holds any auction licenses. All such licenses were sold in November 2003
to Nextel Communications and its affiliates. As a matter of general regulation
by the FCC, Motient is subject to, among other things, payment of regulatory
fees and restrictions on the level of radio frequency emissions of Motient's
systems' mobile terminals and base stations. Any of these regulations may have
an adverse impact on the conduct of Motient's business.
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.
Motient's terrestrial network consists of base stations licensed in the 800 MHz
business radio and specialized mobile radio services. The terrestrial network is
interconnected with the public switched telephone network. The FCC's licensing
regime in effect when the majority of authorizations used in the terrestrial
network were issued provided for individual, site-specific licenses. The FCC has
since modified the licensing process applicable to specialized mobile radio
licenses in the band. Specialized mobile radio licenses are now issued by
79
auction in wide-area, multi-channel blocks. The geographic area and number of
channels within a block vary depending on whether the frequencies are in the
so-called "upper 200" specialized mobile radio channels, the "general category,"
or the "lower 80." In addition, wide-area auction winners in the upper 200 have
the right to relocate incumbent licensees to other "comparable" spectrum.
Auction winners in the general category and lower 80 do not have these same
relocation rights and must afford protection to incumbent stations. Incumbent
stations may not, however, expand their service areas.
Wide-area auction winners have substantial flexibility to install any number of
base stations including, in the case of the general category and lower 80
channels, base stations that operate on the same channels as incumbent
licensees. Motient was an incumbent in the upper 200 and remains an incumbent on
certain general category channels. Although the FCC requires general category
and lower 80 geographic licensees to protect incumbents from interference, there
is some concern that such interference may occur and that practical application
of the interference-protection rules may be uncertain.
Motient believes that it has licenses for a sufficient number of channels to
meet its current capacity needs on the terrestrial network. To the extent that
additional capacity is required, Motient may participate in other upcoming
auctions or acquire channels from other licensees.
Motient operates the terrestrial network under a number of waivers involving the
FCC's technical rules, including rules on station identification, for-profit use
of excess capacity, system loading and multiple station ownership. Several of
these waivers were first obtained individually by IBM and Motorola, which
operated separate wireless data systems until forming the ARDIS joint venture in
1990. The FCC incorporated a number of these waivers into its regulations when
it implemented Congress's statutory provision creating the commercial mobile
radio service classification. As of March 3, 1999, Motient completed its planned
construction of base stations for which extended implementation was granted by
the FCC in 1996.
On March 14, 2002, the FCC adopted a notice of proposed rulemaking exploring
options and alternatives for improving the spectrum environment for public
safety operations in the 800 MHz band. This notice of proposed rulemaking was
issued by the FCC after a "white paper" proposal was submitted to the FCC by
Nextel in November 2001 addressing largely the same issues. In its white paper,
Nextel proposed that some of its wireless spectrum in the 700 MHz band, lower
800 MHz band, and 900 MHz band be exchanged for spectrum in the upper 800 MHz
band and in the 2.1 GHz band. Nextel's proposal addressed the problem of
interference to public safety agencies by creating blocks of contiguous spectrum
to be shared by public safety agencies. Since the notice of proposed rulemaking
was issued, Motient has been actively participating with other affected
licensees, including Nextel, to reach agreement on a voluntary plan to
re-allocate spectrum to alleviate interference to public safety agencies. On
December 24, 2002, a group of affected licensees, including Motient, Nextel and
several other licensees, submitted a detailed proposal (commonly known as the
Consensus Plan) to the FCC for accomplishing the re-allocation of spectrum over
a period of several years. These parties have also been negotiating a mechanism
by which Nextel would agree to reimburse costs, up to $850.0 million, incurred
by affected licensees in relocating to different parts of the spectrum band
pursuant to the rebanding plan.
In mid-April 2003, the FCC's OET sent a letter to several manufacturers
requesting additional practical, technical and procedural solutions or
information that may have yet to be considered. Upon reviewing the filed
comments, OET has indicated that other technical solutions were possible and
were being reviewed by the FCC.
Seeking to resolve interference to public safety users, on July 8, 2004, the FCC
approved adoption of a reconfiguration plan for the 800 MHz spectrum band. Under
the plan, Nextel is allowed to occupy spectrum in the 1.9 GHz band in exchange
for, among other things, relocating and retuning public safety licensees in the
800 MHz band. Motient has spectrum in both the lower-800 MHz band and upper-800
MHz band, and on April 8, 2004, filed a request with the FCC asking that the FCC
relocate its lower-800MHz band frequencies into the upper -800MHz band as part
of the 800 MHz reconfiguration plan. On August 6, 2004, the FCC released the
text of its July 8, 2004 order. The text of the order did not grant Motient's
request, but neither did it explicitly deny it. On December 2, 2004, Motient
filed comments with the FCC seeking to clarify and implement Motient's original
request of April 8, 2004. On December 22, 2004, the FCC clarified that Motient
would generally be allowed, subject to certain conditions, to move its 800 MHz
frequencies to the upper-800 MHz band. Motient cannot assure that its operations
will be not affected by the adoption or implementation of this order or any
subsequent addenda.
80
Accounting and Auditing Matters
In March 2003, we obtained the concurrence of the staff of the SEC with respect
to our conclusions regarding the appropriate accounting relating to the
formation of and certain transactions with MSV in 2000 and 2001 and the sale of
some of our transportation assets to Aether Systems in 2000. The staff of the
SEC did not object to some aspects of our prior accounting with respect to the
MSV and Aether Systems transactions, but did object to other aspects of our
prior accounting for these transactions. For a description of the material
differences between our original accounting treatment with respect to these
transactions and the revised accounting treatment that we concluded is
appropriate as a result of this process, please see our current report on Form
8-K dated March 14, 2003 and Note 2, "Significant Accounting Policies -
Restatement of Financial Statements," of notes to the consolidated financial
statements.
On April 17, 2003, we dismissed PricewaterhouseCoopers as our independent
auditors, effective upon the completion of services related to the audit of our
consolidated financial statements for the period May 1, 2002 to December 31,
2002. On April 25, 2003, our board of directors approved the engagement of
Ehrenkrantz Sterling & Co. LLC as our independent auditors to (i) re-audit our
consolidated financial statements for the fiscal years ended December 31, 2000
and 2001 and (ii) audit our consolidated financial statements for the period
from January 1, 2002 to April 30, 2002 and the fiscal year that ended on
December 31, 2003.
On March 2, 2004, we dismissed PricewaterhouseCoopers as our independent
auditors. The audit committee of our board of directors approved the dismissal
of PricewaterhouseCoopers. PricewaterhouseCoopers was previously appointed to
audit our consolidated financial statements for the period May 1, 2002 to
December 31, 2002, and, by its terms, such engagement was to terminate upon the
completion of services related to such audit.
PricewaterhouseCoopers has not reported on our consolidated financial statements
for such period or for any other fiscal period. On March 2, 2004, the audit
committee engaged Ehrenkrantz Sterling & Co. LLC as Motient's independent
auditors to audit our consolidated financial statements for the period May 1,
2002 to December 31, 2002 and for the fiscal year ended December 31, 2003.
On June 1, 2004, Ehrenkrantz Sterling & Co. LLC, merged with the firm of
Friedman Alpren & Green LLP. The new entity, Friedman LLP has been retained by
Motient and the Audit Committee of Motient's Board of Directors approved this
decision on June 4, 2004.
Properties
Motient leases approximately 86,000 square feet for headquarters office space
and an operations center in Lincolnshire, IL, the lease for which expires
December 31, 2010. On April 1, 2003, Motient subleased approximately 8,500
square feet to a third party under a sublease agreement that expires on December
31, 2005.
Motient formerly sub-leased from MSV approximately 47,000 square feet at its
headquarters in Reston, VA for office space. This sub-lease expired in August
2003. On July 15, 2003, we substantially completed the transfer of our
headquarters to Lincolnshire, IL.
Motient also leases site space for over 1,200 base stations and antennae across
the country for the terrestrial network under one-to five-year lease contracts
with varied renewal provisions.
Motient believes that its existing facilities are adequate to meet its needs for
the foreseeable future.
81
Legal Proceedings
Our rights to use and sell the BlackBerryTM software and Research In Motion's
handheld devices may be limited or made prohibitively expensive as a result of a
patent infringement lawsuit brought against Research In Motion by NTP Inc. (NTP
v. Research In Motion, Civ. Action No. 3:01CV767 (E.D. Va.)). In that action, a
jury concluded that certain of RIM's BlackBerryTM products infringe patents held
by NTP covering the use of wireless radio frequency information in email
communications. On August 5, 2003, the judge in the case ruled against Research
In Motion, awarding NTP $53.7 million in damages and enjoining Research In
Motion from making, using, or selling the products, but stayed the injunction
pending appeal by Research In Motion. On December 14, 2004, the appeals court
found that Research In Motion had violated several patents, but also found fault
with certain instructions given to the jury. Consequently, the appeals court
vacated the injunction and remanded the case to the trial court for further
proceedings. As a purchaser and reseller of those products, we could be
adversely affected by the final outcome of this litigation.
On April 15, 2004, Motient filed a claim under the rules of the American
Arbitration Association in Fairfax County, VA, against Wireless Matrix
Corporation, a reseller of Motient's services, for the non-payment of certain
amounts due and owing under the "take-or-pay" agreement between Motient and
Wireless Matrix. Under this agreement, Wireless Matrix agreed to purchase
certain minimum amounts of air-time on the Motient network. In February 2004
Wireless Matrix informed Motient that it was terminating its agreement with
Motient. Motient did not believe that Wireless Matrix had any valid basis to do
so, and consequently filed the above mentioned claim seeking over $2.6 million
in damages, which amount represents Wireless Matrix's total prospective
commitment under the agreement. On May 10, 2004, Motient received notice of a
counter-claim by Wireless Matrix of approximately $1 million, representing such
amounts as Wireless Matrix claimed to have paid in excess of services rendered
under the agreement. In June 2004, Motient reached a favorable out of court
settlement, in which Wireless Matrix will paid Motient $1.1 million.
From time to time, Motient is involved in legal proceedings in the ordinary
course of its business operations. Although there can be no assurance as to the
outcome or effect of any legal proceedings to which Motient is a party, Motient
does not believe, based on currently available information, that the ultimate
liabilities, if any, arising from any such legal proceedings not otherwise
disclosed would have a material adverse impact on its business, financial
condition, results of operations or cash flows.
82
MANAGEMENT
The following table sets forth certain information about our executive
officers, directors and key employees.
Name Title Age Began Service
---- ----- --- -------------
Christopher W. Downie Executive Vice President, Chief Operating 35 2003
Officer and Treasurer
Dennis W. Matheson Senior Vice President and Chief 44 1993
Technology Officer
Robert L. Macklin General Counsel and Secretary 30 2003
Myrna J. Newman Controller and Chief Accounting Officer 48 2003
Steven G. Singer Director, Chairman 43 2002
Gerald S. Kittner Director 52 2002
Peter D. Aquino Director 43 2003
Jonelle St. John Director 50 2000
James D. Dondero Director 42 2002
Raymond L. Steele Director 69 2004
Christopher W. Downie, 35. Mr. Downie was appointed executive vice president,
chief operating officer and treasurer in May 2004. From March 2004 to May 2004,
Mr. Downie was appointed to the position of executive vice president, chief
financial officer and treasurer, and designated our principal executive officer.
From April 2003 to March 2004, he served as vice president, chief financial
officer and treasurer. From May 2002 to April 2003, Mr. Downie worked as a
consultant for CTA, a communications consulting firm. While with CTA, Mr. Downie
was primarily engaged on Motient-related and other telecom-related matters. From
February 2000 to May 2002, Mr. Downie served as a senior vice president and
chief financial officer of BroadStreet Communications, Inc. From August 1993 to
February 2000, Mr. Downie was a vice president in the Investment Banking
Division of Daniels & Associates, LP, an investment bank focused on
communications. From 1991 to 1993, Mr. Downie served as a financial analyst at
Bear, Stearns & Co. Inc.
Dennis W. Matheson, 44. Mr. Matheson has been Motient's senior vice president
and chief technology officer since March 2000. From 1993 to March 2000, Mr.
Matheson held other technical positions within Motient, most recently as vice
president of engineering and advanced technology. Before joining Motient, Mr.
Matheson was senior manager of systems architecture for Bell Northern Research,
a subsidiary of Nortel Networks Corporation (formerly known as Northern Telecom
Limited). Prior to that, he held various positions with Northern Telecom and
Bell Northern Research within the design and product management organizations
and held various engineering positions with Texas Instruments Incorporated.
Mr. Matheson was an executive officer of Motient at the time it filed for
Chapter 11 protection. Information regarding Motient's filing under Chapter 11
of the Bankruptcy Code is provided in "Business - Motient's Chapter 11 Filing,"
and is incorporated herein by reference.
Robert Macklin, 30. Mr. Macklin has served as Motient's general counsel and
secretary since May 2004. From September 2003 to May 2004, Mr. Macklin served as
Motient's associate general counsel and secretary. From May 2001 to September
2003, he was in-house counsel to Herman Dodge & Son, Inc., a national housewares
manufacturer and distributor. Prior to May 2001, he was an associate in the
corporate department of Skadden, Aprs, Slate, Meagher & Flom (Illinois).
Myrna J. Newman, 48. Ms. Newman has served as Motient's controller, chief
accounting officer and principal financial officer since May 2004. From April
2003 to May 2004, she served as controller and chief accounting officer. From
2001 to 2003, she was vice president of finance for Heads and Threads
International LLC, a subsidiary of Allegheny Corporation and distributor of
fasteners. Prior to that, from 1995 to 2001, she was the controller of Heads and
Threads.
83
Steven G. Singer, 43. Mr. Singer has been a Motient director since May 2002 and
chairman of the board since June 2003. Since November 2000, Mr. Singer has
served as chairman and chief executive officer of American Banknote Corporation,
a public company providing documents of value (such as currency, checks,
passports, and credit cards) and related services. Since 1994, Mr. Singer has
also been chairman and chief executive officer of Pure 1 Systems, a privately
held drinking water treatment company. From 1994 to 2000, Mr. Singer was
executive vice president and chief operating officer of Romulus Holdings, Inc.,
a family-owned investment fund. Mr. Singer also currently serves as the
non-executive chairman of Globix Corporation, a public company.
Gerald S. Kittner, 52. Mr. Kittner has been a Motient director since May 2002.
Since October 2001, Mr. Kittner has been an advisor and consultant for CTA. From
1996 to 1999, Mr. Kittner was a senior vice president for legislative and
regulatory affairs with CAI Wireless Systems. When CAI Wireless Systems was
acquired by WorldCom, Inc. (then MCI) in 1999, Mr. Kittner remained with
WorldCom as a senior vice president for approximately one year. From 1996 to
2000, Mr. Kittner served on the board of directors of the Wireless
Communications Association, and was a member of its executive and government
affairs committees. Previously, Mr. Kittner was a partner with the law firm
Arter & Hadden and worked with a variety of telecommunications clients.
Mr. Kittner was involved with CAI Wireless Systems, Inc. when it filed for
protection under Chapter 11 of the Bankruptcy Code in 1998. During all relevant
time periods relating to the Chapter 11 proceeding captioned In re CAI Wireless
Systems, Inc., Debtor, Chapter 11 Case No. 98-1766 (JJF) and In re Philadelphia
Choice Television, Inc., Debtor, Chapter 11 Case No. 98-1765 (JJF), commenced in
the United States Bankruptcy Court for the District of Delaware on July 30,
1998, Mr. Kittner was a senior vice president of CAI Wireless Systems. CAI
Wireless Systems and Philadelphia Choice Television consummated their joint plan
of reorganization and emerged from bankruptcy on October 14, 1998.
Peter D. Aquino, 43. Mr. Aquino has been a Motient director since June 2003. Mr.
Aquino was a senior managing director of CTA from February 2002 through the fall
of 2004. From July 1995 to January 1998, Mr. Aquino was a partner of Wave
International, Inc., a telecommunications investment firm. From January 1998 to
February 2002, Mr. Aquino was the chief operating officer of, and a board
advisor to, Veninfotel, LLC, one of Wave International's private telecom
holdings in Venezuela. From 1983 to 1995, Mr. Aquino held various positions in
finance, regulatory and corporate development at Bell Atlantic Corporation (now
Verizon). Mr. Aquino is a director of Neon Communications, Inc., a private
company.
Jonelle St. John, 50. Ms. St. John has been a Motient director since November
2000. Ms. St. John was the chief financial officer of MCI WorldCom International
in London from 1998 through 2000 following her positions as the treasurer of MCI
Communications Corporation from 1993 to 1998. Prior to working with WorldCom,
Ms. St. John was the vice president and treasurer and the vice president and
controller of Telecom*USA, which she joined in 1985. Before 1985, Ms. St. John
held various positions at Arthur Andersen LLP.
Ms. St. John was a director of Motient at the time it filed for Chapter 11
protection. Information regarding Motient's filing under Chapter 11 of the
Bankruptcy Code is provided in "Business - Motient's Chapter 11 Filing," and is
incorporated herein by reference.
James D. Dondero, 42. Mr. Dondero has been a Motient director since July 2002.
Mr. Dondero has been president of Highland Capital Management, L.P. since 1993.
Mr. Dondero is also a director of Audio Visual Services Corp., Genesis Health
Ventures, Inc. and American Banknote Corporation, all of which are public
companies.
Raymond L. Steele, 69. Mr. Steele was elected to the board of directors in May
2004. Mr. Steele has been a director of Globix since June 2003, and is also a
member of the board of directors of Dualstar Technologies Corporation and
American Banknote Corporation. From August 1997 until October 2000, Mr. Steele
served as a board member of Video Services Corp. Prior to his retirement, Mr.
Steele held various senior positions such as Executive Vice President of
Pacholder Associates, Inc. (from August 1990 until September 1993), Executive
Advisor at the Nickert Group (from 1989 through 1990), and Vice President, Trust
Officer and Chief Investment Officer of the Provident Bank (from 1984 through
1988).
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Board Compensation
Each non-employee member of the board of directors is entitled to receive $2,000
per month, and each member of the audit committee (currently Ms. St. John, Mr.
Aquino, Mr. Kittner and Mr. Steele) and the compensation and stock option
committee (currently Mr. Singer, Mr. Kittner and Mr. Dondero) are entitled to
receive an additional $500 and $250 per month, respectively. Through August 30,
2004, each non-employee member of the board of directors had been entitled to
receive an additional $1,000 for each board or committee meeting that is in
excess of four meetings per year. In September 2004, each board member received
a grant of 1,800 to 4,100 shares of restricted stock and such per-meeting fees
were eliminated. Further, each non-employee member of our board is eligible to
receive grants of stock options under our 2002 stock option plan. No options
have been granted to non-employee directors.
Executive Compensation.
The following tables set forth (a) the compensation paid or accrued by Motient
to Motient's chief executive officer and its six other most highly compensated
executive officers receiving over $100,000 per year in 2003, all of whom are
referred to herein as the "named executive officers" for services rendered
during the fiscal years ended December 31, 2001, 2002, and 2003 and (b) certain
information relating to options granted to such individuals.
Summary Compensation Table
All Other
Annual Compensation Long-Term Compensation Compensation
--------------------------------------------------------------------------------------
Restricted
Name and Other Annual Stock Underlying
Principal Position Year Salary Bonus Compensation(1) Awards(2) $ Options/SARs(3)
------------------ ---- ------ ----- --------------- ----------- ---------------
Christopher W. Downie 2003 $129,688 $0 $88 $0 40,000
Executive Vice President, Chief
Operating Officer and Treasurer (4)
Walter V. Purnell, Jr. (5) 2003 $272,813 $0 $774 $0 160,000
Former President and 2002 $280,763 $50,000 $774 $0 500,000
Chief Executive Officer 2001 $286,953 $83,000 $774 $46,508 100,000
Dennis W. Matheson 2003 $181,067 $0 $168 $0 40,000
Senior Vice President 2002 $177,923 $25,000 $476 $0 120,000
and Chief Technology Officer 2001 $182,355 $51,940 $158 $15,609 40,000
Daniel Croft(6) 2003 $168,420 $0 $229 $0 50,000
Former Senior Vice President, 2002 $173,184 $20,000 $40,146 $0 120,000
Business Development 2001 $177,145 $14,892 $19,319 $5,850 15,000
Michael Fabbri(6) 2003 $171,658 $0 $24,446 $0 40,000
Former Senior Vice 2002 $176,515 $30,000 $29,539 $0 120,000
President, Sales 2001 $184,220 $22,423 $41,175 $9,604 40,000
Robert L. Macklin (7) 2003 $32,392 $0 $14 $0 25,000
General Counsel and Secretary
Myrna J. Newman (8) 2003 $80,985 $0 $87 $0 15,000
Controller and principal
financial officer
85
(1) Includes group term life insurance premiums. For Mr. Croft, also includes
commissions in 2001, 2002 and 2003 in the amounts of $19,086, $39,913 and $0,
respectively. For Mr. Fabbri, also includes commissions in 2001, 2002 and 2003
in the amounts of $40,942, $29,062 and $24,290, respectively.
(2) In September 2001, Motient completed an option exchange program in which
holders of previously-granted options, including the named executive officers,
were entitled to exchange such options for a number of shares of restricted
stock equal to 75% of the number of shares covered by the exchanged options. The
amounts shown in this column for 2001 represent such restricted stock awarded in
September 2001. Under Motient's Plan of Reorganization, all shares of restricted
stock were cancelled as of May 1, 2002, the effective date of the Plan. On that
date, holders of restricted stock received warrants to purchase 0.02613 shares
of common stock at a price of $0.01 per share for each vested share of
restricted stock held. Holders did not receive anything in exchange for their
canceled unvested shares. The warrants expired May 1, 2004, and were never
exercisable. The shares of restricted stock issued in the exchange program were
to vest according to the vesting schedule of the options that were exchanged,
except that no shares of restricted stock vested before May 1, 2002. These
shares of restricted stock were to have vested as follows:
Name Total Number of Shares Vesting Schedule
---- ---------------------- ---------------------------------------
Walter V. Purnell, Jr. 357,750 182,750 shares on March 25, 2002
25,000 shares on January 25, 2003
12,500 shares on January 27, 2003
25,000 shares on January 25, 2004
112,500 shares on January 27, 2007
Dennis W. Matheson 120,073 72,573 shares on March 25, 2002
10,000 shares on January 25, 2003
2,500 shares on January 27, 2003
2,500 shares on March 23, 2003
10,000 shares on January 25, 2004
22,500 shares on January 27, 2007
Daniel Croft 45,000 33,750 shares on March 25, 2002
3,750 shares on January 25, 2003
3,750 shares on January 27, 2003
3,750 shares on January 25, 2004
Michael Fabbri 73,875 46,375 shares on March 25, 2002
10,000 shares on January 25, 2003
7,500 shares on January 27, 2003
10,000 shares on January 25, 2004
As of December 31, 2001, the dollar value of restricted stock held by each of
Messrs. Purnell, Matheson, Croft, and Fabbri was $150,255, $50,431, $18,900 and
$31,028 respectively, and the total number of shares of restricted stock held by
each of Messrs. Purnell, Matheson, Croft and Fabbri was 357,750, 120,073, 45,000
and 73,875, respectively.
(3) For 2000 and 2001, the numbers reflect grants of options to purchase shares
of common stock under Motient's former stock award plan, which was terminated in
conjunction with Motient's Plan of Reorganization in 2002. Under Motient's Plan
of Reorganization, all unexercised options outstanding as of May 1, 2002 were
cancelled on May 1, 2002, the effective date of the Plan. For 2002 and 2003, the
numbers reflect grants of options to purchase shares of common stock under
Motient's 2002 stock option plan. Motient has not granted stock appreciation
rights, or SARs.
(4) Mr. Downie's employment began in April 2003.
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(5) Mr. Purnell's employment terminated in March 2004.
(6) Mr. Croft's and Mr. Fabbri's employment terminated in February 2004.
(7) Mr. Macklin's employment began in September 2003.
(8) Ms. Newman's employment began in April 2003.
The following table sets forth each grant of stock options made during fiscal
year 2003 to each of the named executive officers.
Option/SAR Grants in Last Fiscal Year
Individual Grants
----------------------------------------------------------- Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Number of % of Total Appreciation for
Securities Options/SARs Option Term(1)
Underlying Granted to Exercise or -------------
Options/SARs Employees/ Base Price Expiration
Name Granted Fiscal Year ($/Share) Date 5% 10%
---- ------- ----------- --------- ---- ----------------------
Christopher W. Downie (5) 40,000 8% $5.15 7/15/2013 $130,000 $329,000
Walter V. Purnell, Jr. 160,000 31% $5.15 7/15/2013 $519,000 $1,314,000
Dennis W. Matheson 40,000 8% $5.15 7/15/2013 $130,000 $329,000
Daniel Croft(4) 50,000 10% $5.15 7/15/2013 $162,000 $411,000
Michael Fabbri(4) 40,000 8% $5.15 7/15/2013 $130,000 $329,000
Robert Macklin 25,000 5% $5.65 9/14/2013 $89,000 $225,000
Myrna Newman 15,000 3% $3.00 4/20/2013 $29,000 $72,000
(1) Based on actual option term and annual compounding.
(2) One-half of these options become exercisable in three annual installments,
vesting at the rate of 33-1/3% per year for three years. The other one-half of
these options become exercisable only upon the attainment of specified operating
and performance targets for the year ending December 31, 2004.
(4) Mr. Croft's and Mr. Fabbri's vested options will terminate on February 18,
2006.
(5) Mr. Downie's options vested with his designation as principal executive
officer in April 2004. In July of 2004, Mr. Downie was granted an additional
100,000 options at an exercise price of $5.15.
(6) In December 2004, Mr. Macklin was granted an additional 10,000 options with
an exercise price of $8.57.
The following table sets forth, for each of the named executive officers, the
value of unexercised options at fiscal year-end.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values (1)
Number of Securities Value of Unexercised
Underlying in-the-Money
Unexercised Options at Options/SARs at
Shares Fiscal Year-End Fiscal Year-End($)
Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value-Realized ($) Unexercisable Unexercisable
---- ------------ ------------------ ------------- -------------
Christopher W. Downie -- -- 0/40,000 0/0
Walter V. Purnell, Jr. -- -- 493,316/660,000 0/0
Dennis W. Matheson -- -- 40,000/120,000 0/0
Daniel Croft -- -- 40,000/130,000 0/0
Michael Fabbri -- -- 40,000/120,000 0/0
Robert Macklin -- -- 0/25,000 0/0
Myrna Newman -- -- 0/15,000 0/0
(1) Motient has not granted SARs.
(2) Upon the termination of Messers. Croft and Fabbri as part of its
February 2004 reduction in force, Motient accelerated outstanding
options to purchase an aggregate of 100,000 shares of our common stock
at $3.00 per share and 22,500 shares at $5.15 per share (split
approximately equally between Messrs. Croft and Fabbri). All remaining
outstanding options held by Messrs. Croft and Fabbri were cancelled.
87
Change of Control Agreements
Pursuant to the plan of reorganization, Motient entered into a change of control
agreement, effective May 1, 2002, with each of Messrs. Matheson, Fabbri, and
Croft and six other vice presidents of Motient. Under the agreements, each
officer is eligible to receive one year of their annual base salary (excluding
cash bonus) in the event that both (x) a "change in control" or an anticipated
"change in control," as defined in the change of control agreement, has occurred
and (y) the employee is terminated or his or her compensation or
responsibilities are reduced. The events constituting a "change of control"
generally involve the acquisition of greater than 50% of the voting securities
of Motient, as well as certain other transactions or events with a similar
effect. In July 2002, Mr. Purnell's change of control agreement was superseded
by the executive retention agreement described below. As part of their
termination from Motient in February 2004, Messrs. Fabbri and Croft were
provided severance pay and certain outstanding options were accelerated as
settlement of their change of control agreements.
Executive Retention Agreement for Mr. Purnell
On July 16, 2002, we entered into an executive retention agreement with Mr.
Purnell, which was amended in connection with the termination of Mr. Purnell's
employment in March 2004. Pursuant to the terms of the amended agreement, we
will pay Mr. Purnell a severance payment equal to one-half of his base salary
through September 2005. Additionally, we agreed to make a lump sum severance
payment to Mr. Purnell in September 2005 equal to the other half of his base
salary through such period. Mr. Purnell is entitled to receive certain medical
benefits until September 2005. As part of these severance arrangements, Mr.
Purnell entered into a waiver and release agreement and a non-compete agreement.
2002 Stock Option Plan
Our 2002 stock option plan was adopted by the board of directors on May 31, 2002
and received stockholder approval on July 11, 2002. A total of 2,993,024 shares
of common stock have been reserved for issuance under the 2002 stock option
plan. Under the 2002 stock option plan, we are authorized to grant options to
purchase shares of common stock intended to qualify as incentive stock options,
as defined under section 422 of the Internal Revenue Code of 1986, as amended,
and non-qualified stock options to any employees, outside directors,
consultants, advisors and individual service providers whose participation in
the 2002 stock option plan is determined by our compensation and stock option
committee to be in our best interests. The term of each stock option is fixed by
the board of directors or the compensation committee, and each stock option is
exercisable within ten years of the original grant date. Generally, an option is
not transferable by the recipient except by will or the laws of descent and
distribution. Some change of control transactions, such as a sale of Motient,
may cause awards granted under the 2002 stock option plan to vest. As of
December 31, 2003, options to purchase 1,757,513 shares of our common stock were
outstanding. In March 2003, the board of directors approved a reduction in the
exercise price of all of our then-outstanding stock options from $5.00 per share
to $3.00 per share.
2004 Restricted Stock Plan
In August 2004, the Company adopted a restricted stock plan, and subsequently
registered the shares to be issued under such plan on a registration statement
on Form S-8. Pursuant to this plan, the Company may issue up to 1,000,000 shares
of restricted common stock to employees or directors. In September 2004, the
Company issued an aggregate of 15,400 shares of restricted stock to its
directors as partial compensation for their service on the board of directors.
Such shares will vest six months after issue, or upon a change of control of the
Company.
88
Compensation and Stock Option Committee Interlocks and Insider Participation
In 2003, the compensation and stock option committee of Motient's board of
directors consisted of Messrs. Singer, Kittner and Dondero. During this time,
none of these individuals were executive officers of Motient.
Mr. Kittner is an advisor and consultant for CTA. During 2002, Motient and/or
certain of its subsidiaries were party to certain contracts and/or transactions
with CTA. All of these contracts and transactions were approved by Motient's
board of directors, and Motient believes that the contracts and transactions
were made on terms substantially as favorable to Motient as could have been
obtained from unaffiliated third parties. The following is a description of such
contracts and transactions. In addition, this section describes the relationship
between Steven Singer and one of the lenders under our credit facility. For
additional information concerning these relationships, see "Certain
Relationships and Related Transactions."
In May 2002, we entered into a consulting agreement with CTA under which CTA
provided consulting services to us. CTA is a consulting and private advisory
firm specializing in the technology and telecommunications sectors. Our
agreement with CTA had an initial term of three months ending August 15, 2002,
and was extended by mutual agreement for several additional terms of two or
three months each. For the first three months of the agreement, CTA was paid a
flat fee of $60,000 per month, and for the period August 2002 to May 2003, the
monthly fee was $55,000. We also agreed to reimburse CTA for CTA's out-of-pocket
expenses incurred in connection with rendering services during the term of the
agreement. Jared E. Abbruzzese, a director until September 20, 2003, is the
principal of CTA.
Beginning in May 2003, the monthly fee was reduced to $39,000. This agreement
was modified on January 30, 2004.
In November 2003, CTA was engaged to provide valuation of Motient's equity
interest in MSV as of December 31, 2002. CTA was paid $150,000 for this
valuation.
On January 30, 2004, Motient engaged CTA to act as chief restructuring entity.
As consideration for this work, we agreed to pay to CTA a monthly fee of
$60,000. The new agreement modifies the consulting arrangement discussed above.
CTA had previously acted as the spectrum and technology advisor to the official
committee of unsecured creditors in connection with our Chapter 11 case. CTA
received a total of $475,000 in fees for such advice and was reimbursed a total
of $4,896 for expenses in connection with the rendering of such advice.
Except for the warrants and options offered and provided to CTA and certain of
its affiliates described below, neither CTA, nor any of its principals or
affiliates is a stockholder of Motient, nor does it hold any debt of Motient
(other than indebtedness as a result of consulting fees and expense
reimbursement owed to CTA in the ordinary course under our existing agreement
with CTA). CTA has informed us that in connection with the conduct of its
business in the ordinary course, (i) it routinely advises clients in and appears
in restructuring cases involving telecommunications companies throughout the
country, and (ii) certain of our stockholders and bondholders and/or certain of
their respective affiliates or principals, may be considered to be (A) current
clients of CTA in matters unrelated to Motient; (B) former clients of CTA in
matters unrelated to Motient; and (C) separate affiliates of clients who are (or
were) represented by CTA in matters unrelated to Motient.
In July 2002, our board of directors approved the offer and sale to CTA (or
affiliates thereof) of a warrant (or warrants) for 500,000 shares of our common
stock, for an aggregate purchase price of $25,000. The warrant (or warrants) has
an exercise price of $3.00 per share and a term of five years. These warrants
were valued at $1.5 million and were recorded as a consultant compensation
expense in December of 2002. Certain affiliates of CTA purchased the warrants in
December 2002.
89
In April and July 2004, as part of our private placements of common stock,
certain CTA affiliates were provided warrants for 400,000 and 340,000 shares,
respectively, of our common stock at an exercise price of $5.50 and $8.57,
respectively, per share. In December 2004, certain CTA affiliates were provided
options to purchase 125,000 shares of our common stock at a price of $8.57 per
share.
In addition, on January 27, 2003, our wholly-owned subsidiary, Motient
Communications, closed a term credit agreement with a group of lenders,
including several of our existing stockholders. The lenders include Gary Singer,
directly or through one or more entities. Gary Singer is the brother of Steven
G. Singer, one of our directors serving on the compensation and stock option
committee. Steven Singer has, and continues to recuse himself from all
discussions of the credit agreement and has abstained from voting on all matters
regarding the credit agreement.
90
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This section describes arrangements with CTA, an entity in which (i) Jared E.
Abbruzzese, a director until June 20, 2003, is the chairman, (ii) Gerald S.
Kittner, a Motient director, is an advisor and consultant, (iii) Christopher W.
Downie, Motient's executive vice president, chief operating officer and
treasurer, was formerly affiliated with CTA as an independent consultant and
(iv) Peter Aquino, a Motient director, was formerly a senior managing director.
Additionally, this section describes related party transactions concerning our
credit facility and our April, July and November 2004 private placements of
common stock.
Communication Technology Advisors LLC
In May 2002, we entered into a consulting agreement with CTA under which CTA
provided consulting services to us. CTA is a consulting and private advisory
firm specializing in the technology and telecommunications sectors. Our
agreement with CTA had an initial term of three months ending August 15, 2002,
and was extended by mutual agreement for several additional terms of two or
three months each. For the first three months of the agreement, CTA was paid a
flat fee of $60,000 per month, and for the period August 2002 to May 2003, the
monthly fee was $55,000. We also agreed to reimburse CTA for CTA's out-of-pocket
expenses incurred in connection with rendering services during the term of the
agreement.
Beginning in May 2003, the monthly fee was reduced to $39,000. This agreement
was modified on January 30, 2004.
In November 2003, CTA was engaged to provide valuation of Motient's equity
interest in MSV as of December 31, 2002. CTA was paid $150,000 for this
valuation.
On January 30, 2004, we engaged CTA to act as chief restructuring entity. As
consideration for this work, Motient agreed to pay to CTA a monthly fee of
$60,000. The new agreement amends the consulting arrangement discussed above. In
April 2004, Motient paid CTA $440,000 for all past deferred fees.
CTA had previously acted as the spectrum and technology advisor to the official
committee of unsecured creditors in connection with our Chapter 11 case. CTA
received a total of $475,000 in fees for such advice and was reimbursed a total
of $4,896 for expenses in connection with the rendering of such advice.
Except for the warrants and options offered to CTA described below, and certain
warrants received by certain CTA affiliates in connection with the April 7, 2004
private placement of our common stock, neither CTA, nor any of its principals or
affiliates is a stockholder of Motient, nor does CTA hold any debt of Motient
(other than indebtedness as a result of consulting fees and expense
reimbursement owed to CTA in the ordinary course under our existing agreement
with CTA). CTA has informed us that in connection with the conduct of its
business in the ordinary course, (i) it routinely advises clients in and appears
in restructuring cases involving telecommunications companies throughout the
country, and (ii) certain of our stockholders and bondholders and/or certain of
their respective affiliates or principals, may be considered to be (A) current
clients of CTA in matters unrelated to Motient; (B) former clients of CTA in
matters unrelated to Motient; and (C) separate affiliates of clients who are (or
were) represented by CTA in matters unrelated to Motient.
In July 2002, our board of directors approved the offer and sale to CTA (or
affiliates thereof) of a warrant (or warrants) for 500,000 shares of our common
stock, for an aggregate purchase price of $25,000. The warrant (or warrants) has
an exercise price of $3.00 per share and a term of five years. These warrants
were valued at $1.5 million and were recorded as a consultant compensation
expense in December of 2002. Certain affiliates of CTA purchased the warrants in
December 2002. Christopher W. Downie received a warrant for 100,000 of the
500,000 shares.
91
In April 2004, as part of our private placements of common stock, certain CTA
affiliates were provided warrant for 400,000 and 340,000 shares, respectively,
of our common stock at an exercise price of $5.50 and $8.57, respectively, per
share. In December 2004, certain CTA affiliates were provided options to
purchase 125,000 shares of our common stock at a price of $8.57 per share.
Mr. Abbruzzese, Mr. Kittner and Mr. Aquino did not participate in the
deliberations or vote of the Board with respect to the foregoing matters while
serving as a member of the Board.
Term Credit Facility
On January 27, 2003, our wholly-owned subsidiary, Motient Communications, closed
a $12.5 million term credit agreement with a group of lenders, including several
of our existing stockholdersThe lenders include the following entities or their
affiliates: M&E Advisors, L.L.C, Bay Harbour Partners, York Capital, and Lampe
Conway & Co. York Capital is affiliated with James G. Dinan and JGD Management
Corp. Bay Harbour Management, JGD Management Corp. and James G. Dinan each hold
5% or more of our common stock. The lenders also include Gary Singer, directly
or through one or more entities. Gary Singer is the brother of Steven G. Singer,
one of our directors. The facility terminated on December 31, 2004, and all
amounts due and owing pursuant to the facility have been repaid. We do not
anticipate that it borrowing availability will be extended again.
Private Placements of Common Stock
Certain of our directors and holders of more than 5% of our common stock
participated in the April 7, July 1, and November 12, 2004 private placements of
our common stock. PDA Group, LLC, a wholly-owned entity of Peter D. Aquino, one
of our directors, was assigned by Tejas Securities, our placement agent,
warrants to purchase 56,250 shares of our common stock at a price of $5.50 per
share. James D. Dondero, a director and beneficial owner of more than 5% of our
common stock, purchased an aggregate of 2,420,688 shares of our common stock in
such private placements. In addition, he also received warrants to purchase
350,058 shares of our common stock at a price of $8.57 per share all of which
will vest if and only if we do not meet certain deadlines with respect to the
registration of the common stock sold in the private placement.
92
PRINCIPAL STOCKHOLDERS
Stock Ownership Of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The following table and the accompanying notes set forth certain information, as
of December 20, 2004 (or any other date that is indicated) concerning the
beneficial ownership of Motient's common stock by (i) each person who is known
by Motient to own beneficially more than five percent of Motient's common stock,
(ii) each director, (iii) each executive officer named in the summary
compensation table and (iv) all directors and executive officers as a group.
Except as otherwise indicated, each person listed in the table has informed
Motient that such person has sole voting and investment power with respect to
such person's shares of common stock and record and beneficial ownership with
respect to such person's shares of common stock.
Name of Beneficial Owner Number of Shares (1) % of Class (1)
------------------------ -------------------- --------------
Highland Capital Management, L.P. (2)
13445 Noel Road
Suite 3300
Dallas, TX 75240 6,042,702 11.8%
Paul Tudor Jones, II (3)
c/o Tudor Investment Corporation
1275 King St. 4,378,944 8.6%
Greenwich, CT 06831
George W. Haywood (4)
c/o Cronin & Vris, LLP
380 Madison Avenue
24th Floor
New York, NY 10017 5,804,500 11.3%
James G. Dinan (5)
York Capital Management & affiliates
350 Park Avenue
4th Floor
New York, NY 10022 3,687,627 7.2%
John C. Waterfall
c/o Morgens, Waterfall, Vintiadis & Co., Inc. (6)
600 Fifth Avenue
27th Floor
New York, NY 10020 2,926,000 5.7%
Directors and Executive Officers
--------------------------------
Dennis W. Matheson 0 *
Christopher W. Downie (9) 201,160 *
Robert Macklin (8) 14,786 *
Myrna Newman 0 *
Peter D. Aquino (10) 64,300 *
Gerald S. Kittner (11) 11,800 *
Steven G. Singer (11) 24,100 *
Jonelle St. John (11) 14,100 *
Raymond L. Steele (11) 11,800 *
James D. Dondero (2) 6,042,702 11.8%
All directors and named executive officers as a group (13
persons) 6,384,748 12.5%
* Less than 1% of the outstanding shares.
93
(1) The information regarding beneficial ownership of our common stock has been
presented in accordance with the rules of the SEC and is not necessarily
indicative of beneficial ownership for any other purpose. Under these
rules, beneficial ownership of common stock includes any shares as to which
a person, directly or indirectly, has or shares voting power or investment
power and also any shares as to which a person has the right to acquire
such voting or investment power within 60 days through the exercise of any
stock option or other right. The percentage of beneficial ownership as to
any person as of a particular date is calculated by dividing the number of
shares beneficially owned by such person by the sum of the number of shares
outstanding as of such date and the number of shares as to which such
person has the right to acquire voting or investment power within 60 days.
As used in this report, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or direct
the disposition of shares. Except as noted, each stockholder listed has
sole voting and investment power with respect to the shares shown as
beneficially owned by such stockholder.
(2) Indirect ownership consists of shares of Common Stock held by a filing
group consisting of Highland Capital Management, L.P. ("Highland Capital");
Strand Advisors, Inc. ("Strand"); Highland Crusader Offshore Partners, L.P.
("Crusader"); Prospect Street High Income Portfolio, Inc. ("PHY"); Prospect
Shares Income Shares, Inc. ("CNN"); Highland Legacy Limited ("Legacy");
PAMCO Cayman, Limited ("PAMCO"); Highland Equity Focus Fund, L.P. ("Equity
Focus"); Highland Equity Fund, L.P. ("Equity Fund") and James D. Dondero.
Highland Capital is the general partner of Crusader, Equity Fund and Equity
Focus, and the investment advisor for PHY, CNN, Legacy and PAMCO. Strand is
the general partner of Highland Capital. Mr. Dondero is the President of
Highland Capital and the President and a director of Strand. Highland
Capital, Strand and Mr. Dondero expressly disclaim beneficial ownership of
the securities reported herein except to the extent of their pecuniary
interest therein.
(3) The shares of Common Stock reported herein as beneficially owned are owned
directly by Tudor Proprietary Trading, L.L.C., The Altar Rock Fund, L.P.,
The Raptor Global Portfolio, Ltd. and The Tudor BVI Global Portfolio Ltd. .
Because Tudor Investment Corporation is the sole general partner of Altar
Rock and provides investment advisory services to Raptor Portfolio and BVI
Portfolio, Tudor Investment Corporation may be deemed beneficially to own
the shares of Common Stock owned by each. Tudor Investment Corporation
expressly disclaims such beneficial ownership. In addition, because Mr.
Jones is the controlling shareholder of Tudor Investment Corporation and
the indirect controlling equity holder of Tudor Proprietary Trading, Mr.
Jones may be deemed beneficially to own the shares of Common Stock deemed
beneficially owned by Tudor Investment Corporation and Tudor Proprietary
Trading. Mr. Jones expressly disclaims such beneficial ownership. Share
ownership is based on information provided to us on November 24, 2004. No
further public information relating to these holdings has been released
since such date.
(4) Does not include 130,000 shares owned by Mr. Haywood's spouse and children.
Share ownership is based on information provided to us on December 15,
2004.
94
(5) James G. Dinan beneficially owns the 2,276,445 shares of our common stock,
which includes shares owned by various funds and accounts over which Mr.
Dinan has discretionary investment authority. Mr. Dinan is the senior
managing member and holder of a controlling interest in Dinan Management,
L.L.C., York Select Domestic Holdings, LLC, York Select Offshore Holdings,
LLC, York Offshore Holdings L.L.C. and York Distressed Domestic Holdings,
LLC. Mr. Dinan is also a director and holder of a controlling interest in
York Offshore Holdings, Limited. York Offshore Holdings is the investment
manager of York Investment. Dinan Management is the general partner of York
Capital Management. York Select Domestic Holdings is the general partner of
York Select. York Select Offshore Holdings is the investment manager of
York Select Unit Trust. York Distressed Domestic Holdings is the investment
manager of York Distressed Opportunities Fund. York Offshore Holdings is
the investment manager of York Offshore Investors. Mr. Dinan is the
president and sole stockholder of JGD Management Corp., which manages the
other funds and accounts that hold our common stock over which Mr. Dinan
has discretionary investment authority. Share ownership is based on
information provided to us on November 19, 2004. No further public
information relating to these holdings has been filed since such date.
(6) John C. Waterfall is the president and treasurer of Morgens, Waterfall,
Vintiadis & Co., Inc. and beneficially owns 2,926,000 shares of common
stock, which includes 416,686 shares of common stock for his own account
and 10,000 shares of common stock held in trust for his children. Morgens,
Waterfall, Vintiadis & Co. beneficially owns 2,500,000 shares of common
stock. Edwin Morgens, the vice president and secretary of Morgens,
Waterfall, Vintiadis & Co. beneficially owns 2,716,000 shares of our common
stock, which includes 216,686 shares of common stock for his own account.
Share ownership is based generally on a Form 3 and a Schedule 13G/A filed
with the SEC on March 10, 2004, a Form 4 filed on July 19, 2004.
(7) Gilder, Gagnon, Howe & Corporation LLC is a broker/dealer which holds
1,848,602 in customer accounts over which partners and/or employees have
discretionary authority to dispose of or direct the disposition of shares,
130,421 shares held in accounts owned by the partners of the company and
their families, and 40,025 shares held in the account of the profit-sharing
plan of the company.
(8) Comprised of shares underlying stock options that have vested.
(9) Comprised of shares underlying options and a warrant that are fully vested
and exercisable.
(10) Comprised of shares underlying stock options and a warrant that are fully
vested and exercisable, as well as restricted stock not yet vested.
(11) Comprised of shares underlying stock options that are fully vested and
exercisable, as well as restricted stock not yet vested.
95
SELLING STOCKHOLDERS
The following table and accompanying notes set forth certain information
regarding the selling stockholders as of December 20, 2004. Under this
prospectus, the selling stockholders and any of their respective transferees,
assignees, donees, distributees, pledgees or other successors in interest may
offer and sell from time to time an aggregate of 16,255,636 shares of common
stock. In this prospectus, we refer to these holders collectively as the selling
stockholders. The shares are being registered to permit public sales of the
shares, and the selling stockholders may offer the shares for resale from time
to time. See "Plan of Distribution." The selling stockholders may offer all,
some or none of the common stock listed below.
The table below sets forth the names of the selling stockholders and the number
of shares owned, directly and beneficially, by such stockholders as of December
20, 2004. The number of shares of common stock outstanding on December 20, 2004
was 51,205,502. Except as otherwise indicated, each person listed in the table
has informed Motient that such person has (1) voting and investment power with
respect to such person's shares of common stock and (2) record and beneficial
ownership with respect to such person's shares of common stock.
If all of the shares are sold pursuant to this prospectus, then the selling
stockholders will sell 16,255,636 shares of our common stock, or 31.7% of
Motient's common stock outstanding as of December 20, 2004. Share ownership does
not include warrants to purchase an additional shares of Motient common stock,
issued in the November 12, 2004 private placement, which have not yet vested and
may never vest. Such warrants will vest if and only if we fail to meet certain
conditions regarding the registration of the shares sold in this private
placement.
96
Shares Beneficially Owned Shares Beneficially Owned
Prior to Offering After Offering
----------------- --------------
Shares
Name of Beneficial Owner Number Percentage Offered Number Percentage
------------------------ ------ ---------- ------- ------ ----------
Greywolf Capital II LP (1) 676,400 1.3% 200,000 476,400 *
Greywolf Capital Overseas Fund (1) 1,341,600 2.6% 800,000 541,600 1.1%
LC Capital Master Fund, Ltd. (2) 2,521,076 4.9% 1,166,861 1,354,215 2.6%
Millennium Partners, L.P. (3) 583,430 1.1% 583,430 0 *
RNR II, LP 257,500 * 257,500 0 *
Catalyst Credit Opportunity Fund (4) 27,568 * 4,800 22,768 *
Catalyst Credit Opportunity Fund Offshore (4) 84,898 * 14,800 70,098 *
DCM Limited. (4) 2,534 * 400 2,134 *
Highland Crusader Offshore Partners, L.P. (5) 2,919,289 5.7% 466,744 2,452,545 *
Highland Equity Fund, L.P. (5) 108,344 * 58,344 50,000 *
Highland Equity Focus Fund, L.P. (5) 1,300,145 2.5% 875,145 425,000 *
Kurt J. Rechner & Melani Rechner (6) 28,340 * 5,835 22,505 *
Kurt J. Rechner 401(k) (6) 5,835 * 5,835 0 *
Kurt J. Rechner IRA Rollover (6) 11,670 * 11,670 0 *
Morris D. Weiss, IRA Rollover (6) 11,670 * 11,670 0 *
Morris D. Weiss & Lauren C. Ravkind (6) 67,340 * 11,670 55,670 *
John J. Gorman 401(k) Plan & Trust (7) 1,040,058 2.0% 350,058 690,000 1.3%
York Investment Limited (8) 1,418,724 2.8% 863,510 555,214 1.1%
York Capital Management, L.P. (8) 374,937 * 213,396 161,541 *
York Select Unit Trust (8) 253,684 * 168,157 85,527 *
York Select, L.P. (8) 365,743 * 246,176 119,567 *
York Global Value Partners, L.P. (8) 342,425 * 252,425 90,000 *
York Credit Opportunities Fund, L.P. (8) 369,356 * 150,000 219,356 *
York/Green Capital Partners, L.P. (8) 180,000 * 90,000 90,000 *
Ahab Partners, L.P. (9) 147,025 * 147,025 0 *
Ahab International, Ltd. (9) 203,034 * 203,034 0 *
George W. Haywood (10) 5,804,500 11.3% 1,785,000 4,019,500 7.9%
Tracer Capital Offshore Fund Ltd. (11) 148,580 * 78,535 70,045 *
Tracer Capital Partners QP L.P. (11) 172,112 * 90,718 81,394 *
Tracer Capital Partners L.P. (11) 10,965 * 5,776 5,189 *
The Raptor Global Portfolio Ltd. (12) 3,248,275 6.3% 698,364 2,549,911 5.0%
The Tudor BVI Global Portfolio Ltd. (13) 713,726 1.4% 148,756 564,970 1.1%
The Altar Rock Fund L.P. (14) 34,975 * 6,907 28,068 *
Tudor Proprietary Trading, L.L.C. (15) 381,968 * 79,462 302,506 *
Rockbay Capital Fund, LLC 19,691 * 12,646 7,045 *
Rockbay Capital Institutional Fund, LLC 262,638 * 169,422 93,216 *
Rockbay Capital Offshore Fund, Ltd. 626,102 1.2% 401,363 224,739 *
Glenview Capital Partner, L.P. (16) 76,100 * 52,130 23,970 *
Glenview Institutional Partners, L.P. (16) 226,300 * 174,000 52,300 *
Glenview Capital Master Fund, Ltd. (16) 519,000 1.0% 353,900 165,100 *
GCM Little Arbor Master Fund, Ltd. (16) 20,400 * 3,400 17,000 *
OZ Master Fund, Ltd. (17) 2,050,947 4.0% 1,138,232 912,715 1.8%
OZ Mac 13 Ltd. (17) 31,309 * 18,504 12,805 *
Fleet Maritime, Inc. (17) 30,976 * 10,125 20,851 *
Singer Children's Management Trust (18) 535,000 1.0% 400,000 135,000 *
CY Offshore Fund, Ltd. (19) 263,938 * 263,938 0 *
CS Offshore Fund, Ltd. (19) 131,969 * 131,969 0 *
Edward W. Rose, III (20) 263,938 * 263,938 0 *
Cardinal Partners 2000, L.P. (20) 118,329 * 118,329 0 *
Cardinal Partners, L.P. (20) 124,749 * 124,749 0 *
George Kaiser Family Foundation 263,938 * 263,938 0 *
Xerion Partners II Master Fund Limited (21) 350,058 * 350,058 0 *
Ore Hill Partners (22) 408,401 * 408,401 0 *
John Waterfall (23) 2,926,000 5.7% 116,686 2,809,314 5.5%
Edwin Morgens (23) 2,726,000 5.3% 116,686 2,609,314 5.1%
MWV Employee Retirement Group Trust 35,006 * 35,006 0 *
Strome Hedgecap Ltd. (24) 257,500 * 257,500 0 *
Loeb Partners Corporation (25) 181,686 * 116,686 65,000 *
CanPartners Investments IV, LLC 577,500 1.1% 140,000 437,500 *
Harbert Distressed Investment Master Fund, LTD (26) 427,655 * 427,655 0 *
Alpha Sub Fund VI LLC 9,845 * 9,845 0 *
Roger C. Altman (27) 20,416 * 20,416 0 *
Austin M. Beutner (27) 22,339 * 22,339 0 *
Anthony Grillo (27) 135,308 * 118,208 17,100 *
William O. Hiltz (27) 9,905 * 9,905 0 *
Neeraj Mital (27) 8,658 * 8,658 0 *
David G. Offensend (27) 12,718 * 12,718 0 *
Michael J. Price (27) 41,059 * 41,059 0 *
John P. Fitzsimons (27) 20,000 * 20,000 0 *
Mitchell A. Harwood (27) 34,012 * 34,012 0 *
Craig T. Moore (27) 34,012 * 34,012 0 *
Eugene Lee (27) 2,000 * 2,000 0 *
M. Sharon Lewellen (27) 1,200 * 1,200 0 *
----------
* Less than 1% of the outstanding shares.
97
(1) Greywolf Advisors LLC exercises voting and investment control over all
the shares offered by Greywolf Capital Partners II LP and Greywolf
Capital Overseas Fund. Accordingly, Greywolf Advisors LLC may be
deemed to beneficially own all shares held by Greywolf Capital
Partners II LP and Greywolf Capital Overseas Fund.
(2) LC Capital Master Fund, Ltd. was a lender under our term credit
agreement.
(3) Millennium Management, L.L.C., a Delaware limited liability company,
is the managing general partner of Millennium Partners, L.P., a Cayman
Islands exempted company, and consequently may be deemed to have
voting control and investment discretion over securities owned by
Millennium Partners, L.P. Israel A. Englander is the sole managing
member of Millennium Management, L.L.C. As a result, Mr. Englander may
be deemed to be the beneficial owner of any shares deemed to be
beneficially owned by Millennium Management, L.L.C. The foregoing
should not be construed as an admission by either of Millennium
Management, L.L.C. or Mr. Englander as to beneficial ownership of the
shares owned by Millennium Partners. Millennium Partners, L.P. was a
lender under our term credit agreement.
(4) Catalyst Investment Management exercises voting and investment control
over all shares offered by Catalyst Credit Opportunity Fund Offshore,
Catalyst Credit Opportunity Fund and DCM Limited. Consequently,
Catalyst Investment Management may be deemed to be the beneficial
owner the shares of Motient common stock offered by such entities.
(5) Highland Capital Management, L.P., which is owned by James D. Dondero,
a member of Motient's board of directors, exercises voting and
investment control over the common stock offered hereby. Mr. Dondero
disclaims beneficial ownership of these securities except to the
extent of their pecuniary interest. Highland Capital Management, L.P.
was an indirect lender under our term credit agreement and is the
general partner of the selling stockholders.
(6) Kurt Rechner and Morris Weiss are employees of Tejas Securities Group,
Inc., which acted as placement agent for our April, July and November
2004 private placements of common stock. The Morris Weiss, IRA is the
individual retirement account for Morris Weiss. Kurt Rechner, Rollover
IRA and Kurt Rechner 401(k) are individual retirement accounts for
Kurt Rechner. Melanie Rechner is the wife of Kurt Rechner. Lauren C.
Ravkind is the wife of Morris Weiss. Morris Weiss and Kurt Rechner may
be considered affiliates of a broker-dealer. They have confirmed to us
that the securities were acquired in the ordinary course of business
and that there are no agreements or understandings with any other
person to dispose of the securities. The share ownership of Morris D.
Weiss and Lauren C. Ravkind includes 6,000 shares owned by their
children and 35,000 shares owned pursuant to two warrants.
(7) John Gorman is the chairman of the board of directors of Westech
Capital, which owns Tejas Securities Group, Inc., a registered
broker-dealer, which acted as placement agent for our April, July and
November 2004 private placements of common stock. Therefore, Mr.
Gorman is an affiliate of a broker-dealer. Mr. Gorman has confirmed to
us that the securities were acquired in the ordinary course of
business and that there are no agreements or understandings with any
other person to dispose of the securities.
(8) York Capital Management L.P., York Distressed Opportunities Fund,
L.P., York Investment Limited were lenders under our term credit
agreement.
(9) Jonathan Gallen exercises investment and voting control over all
shares offered hereby. Accordingly, he may be deemed to beneficially
own 350,059 shares of Motient common stock prior to the offering
contemplated hereby.
(10) Mr. Haywood's ownership includes 130,000 shares of Motient common
stock owned by his children and spouse.
(11) Riley McCormack is the Managing Member of the Investment Manager of
each of Tracer Capital Partners L.P., Tracer Capital Partners QP L.P.
and Tracer Capital Offshore Fund Ltd.. As such, he may be deemed to be
the beneficial owner of all shares owned by such entities.
(12) Tudor Investment Corporation is the investment advisor of The Raptor
Global Portfolio Ltd. Because Paul Tudor Jones II is the controlling
shareholder of Tudor Investment Corporation, he may be deemed to be
the beneficial owner of shares beneficially owned by The Raptor Global
Portfolio Ltd. Mr. Jones disclaims such beneficial ownership.
98
(13) Tudor Investment Corporation is the investment advisor of The Tudor
BVI Global Portfolio Ltd. Because Paul Tudor Jones II is the
controlling shareholder of Tudor Investment Corporation, he may be
deemed to be the beneficial owner of shares beneficially owned by The
Tudor BVI Global Portfolio Ltd. Mr. Jones disclaims such beneficial
ownership.
(14) Tudor Investment Corporation is the general partner of The Altar Rock
Fund L.P. Because Paul Tudor Jones II is the controlling shareholder
of Tudor Investment Corporation, he may be deemed to be the beneficial
owner of shares beneficially owned by The Altar Rock Fund L.P. Mr.
Jones disclaims such beneficial ownership.
(15) Paul Tudor Jones II is the indirect controlling equity holder of Tudor
Proprietary Trading, L.L.C. and, as a result, may be deemed to be the
beneficial owner of shares beneficially owned by Tudor Proprietary
Trading, L.L.C. Mr. Jones disclaims such beneficial ownership.
(16) Larry Robbins is the President and CEO of Glenview Capital Management,
LLC, the Investment Manager of each of Glenview Capital Partner, L.P.,
Glenview Institutional Partners, L.P., Glenview Capital Master Fund,
Ltd. and GCM Little Arbor Master Fund, Ltd. As such, he may be deemed
to exercise voting and investment control over the shares held by such
entities.
(17) Daniel S. Och is the Senior Managing Member of OZ Management, L.L.C.,
the investment manager of each of OZ Master Fund, Ltd., OZ Mac 13 Ltd.
and Fleet Maritime, Inc. As such, Mr. Och may be deemed to exercise
voting and investment control over the shares held by such entities.
(18) Singer Children's Management Trust is a trust established for the
benefit of the children of Gary and Karen Singer. Karen Singer is the
wife of Gary Singer (investment advisor of M&E Advisors, LLC, a lender
under our term credit agreement), the brother of Steven Singer, the
chairman of our board of directors. Gary and Karen Singer disclaim any
beneficial ownership of securities owned by the trust. Karen Singer
beneficially owns, for her own account, warrants to purchase 602,500
shares of common stock, which are not included herein.
(19) James Traweek, Jr. exercises voting and investment control over the
shares of Motient common stock owned by CY Offshore Fund, Ltd. and CS
Offshore Fund, Ltd. He therefore may be deemed to be the beneficial
owner of such shares.
(20) Edward W. Rose III exercises voting and investment control over the
shares of Motient common stock owned by Cardinal Partners 2000, L.P.
and Cardinal Partners, L.P. He therefore may be deemed to be the
beneficial owner of such shares in addition to the shares he holds for
his own account.
(21) Daniel J. Arbess exercises voting and investment control over the
shares owned by Xerion Partners II Master Fund Limited. He therefore
may be deemed to be the beneficial owner of such shares.
(22) Frederick Wahl and Ben Nickoll exercise voting and investment control
over the shares owned by Ore Hill Partners. They therefore may be
deemed to be the beneficial owner of such shares.
(23) John C. Waterfall is the president and treasurer of Morgens,
Waterfall, Vintiadis & Co., Inc. and beneficially owns 2,926,000
shares of common stock, which includes 416,686 shares of common stock
for his own account and 10,000 shares of common stock held in trust
for his children. Morgens, Waterfall, Vintiadis & Co. beneficially
owns 2,500,000 shares of common stock. Edwin Morgens, the vice
president and secretary of Morgens, Waterfall, Vintiadis & Co.
beneficially owns 2,716,000 shares of our common stock, which includes
216,686 shares of common stock for his own account. Share ownership is
based generally on a Form 3 and a Schedule 13G/A filed with the SEC on
March 10, 2004, a Form 4 filed on July 19, 2004.
99
(24) Strome Investment Management is the investment advisor to the selling
stockholder, and has common ownership with Strome Securities, a
registered broker-dealer. As such, it may be deemed to be the
beneficial owner of all shares owned by such entities. Mark Strome
exercises voting and investment control over such securities. The
selling stockholder has not notified us that the securities were
acquired other than in the ordinary course of business, or that there
are any agreements or understandings with any other person to dispose
of the securities.
(25) Gideon King and Robert Grubin each exercise voting and investment
control over the shares of Motient common stock owned by the selling
stockholder. They therefore may be deemed to be the beneficial owners
of such shares.
(26) The selling stockholder may be deemed to be an affiliate of HMC
Investments, Inc., a registered broker-dealer. The selling stockholder
is selling these shares for its own account, and has assured Motient
that there are no agreements with any other person to dispose of the
securities.
(27) The selling stockholder may be deemed to be an affiliate of Evercore
Group Inc., a registered broker-dealer. The selling stockholder is
selling these shares for his or her own account, and has assured
Motient that there are no agreements with any other person to dispose
of the securities.
100
DESCRIPTION OF MOTIENT'S SECURITIES
Since May 1, 2002, the effective date of our plan of reorganization, we have
been governed by our Restated Certificate of Incorporation, which provides for
one hundred five million (105,000,000) shares of authorized capital stock,
consisting of one hundred million (100,000,000) shares of common stock, par
value $.01 per share, and five million (5,000,000) shares of preferred stock,
par value $.01 per share. In accordance with Section 1123(a)(6) of the
Bankruptcy Code, our Restated Certificate of Incorporation prohibits the
issuance of any shares of non-voting securities. The following summary
description of our capital stock is qualified in its entirety by reference to
our Restated Certificate of Incorporation and Amended and Restated Bylaws, a
copy of each of which is filed as an exhibit to the registration statement of
which this prospectus is a part.
Common Stock
We may issue up to one hundred million (100,000,000) shares of common stock. As
of December 20, 2004, 51,205,502 shares of common stock were outstanding. The
common stock has the following terms:
o The outstanding shares of our common stock are fully paid and
non-assessable.
o Holders of common stock are entitled to one vote per share for each
share held of record on all matters submitted to a vote of
stockholders and are entitled to receive ratably such dividends as may
be declared by the board of directors out of funds legally available
therefor.
o After satisfaction of the dividend rights of holders of any
outstanding preferred stock, holders of common stock will be entitled
to any dividend declared by the board of directors out of funds
legally available for this purpose. However, it is not anticipated
that any cash dividends will be paid on the common stock for the
foreseeable future.
o Upon a liquidation, dissolution or winding up of Motient, holders of
common stock will have the right to a ratable portion of assets
remaining after payment of liabilities and any payments due to holders
of outstanding preferred stock;
o The holders of common stock have no preemptive rights; and
o The rights, preferences and privileges of holders of common stock may
be adversely affected by the rights of the holders of shares of any
series of preferred stock that we may designate and issue in the
future.
Preferred Stock
We may issue up to five million (5,000,000) shares of preferred stock in one or
more series. Our board of directors may issue such preferred stock, and
designate the terms thereof (including with respect to voting rights, dividends,
liquidation preferences and conversion rights), without the need for stockholder
approval. There are no shares of preferred stock outstanding, and there are no
agreements or understandings for the designation of any series of preferred
stock or the issuance of shares thereunder. The existence of authorized but
unissued preferred stock may enable our board to render more difficult or to
discourage an attempt to obtain control of us by means of a merger, tender
offer, proxy contest or otherwise.
Foreign Ownership Restrictions
Under the Telecommunications Act of 1996, non-U.S. citizens or their
representatives, foreign governments or their representatives, or corporations
organized under the laws of a foreign country may not own, in the aggregate,
more than 20% of a common carrier licensee or more than 25% of the parent of a
common carrier licensee if the FCC determines that the public interest would be
served by prohibiting this ownership. Additionally, the FCC's rules may under
some conditions limit the size of investments by foreign telecommunications
carriers in U.S. international carriers.
101
Limitation of Liability and Indemnification
Under Section 145 of the Delaware General Corporation Law, or DGCL, a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses, including attorneys' fees, as well as judgments, fines and settlements
in nonderivative lawsuits, actually and reasonably incurred in connection with
the defense of any action, suit or proceeding in which they or any of them were
or are made parties or are threatened to be made parties by reason of their
serving or having served in such capacity. The DGCL provides, however, that such
person must have acted in good faith and in a manner such person reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
in the case of a criminal action, such person must have had no reasonable cause
to believe his or her conduct was unlawful. In addition, the DGCL does not
permit indemnification in an action or suit by or in the right of the
corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for costs the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
Our Restated Certificate of Incorporation provides that no director of Motient
shall be personally liable for breach of fiduciary duty as a director. Any
repeal or modification of such provision shall not adversely affect any right or
protection, or any limitation of the liability of, a director of Motient
existing at, or arising out of facts or incidents occurring prior to, the
effective date of such repeal or modification. Both our Restated Certificate of
Incorporation and our Amended and Restated Bylaws contain provisions that
further provide for the indemnification of directors and officers in accordance
with and to the fullest extent permitted by the DGCL.
Additionally, Motient has entered into indemnification agreements with certain
of its directors and officers which may, in certain cases, be broader than the
specific indemnification provisions contained under current applicable law. The
indemnification agreements may require Motient, among other things, to indemnify
such officers, directors and key personnel against certain liabilities that may
arise by reason of their status or service as directors, officers or employees
of Motient and to advance the expenses incurred by such parties as a result of
any threatened claims or proceedings brought against them as to which they could
be indemnified.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is EquiServe Trust
Company, N.A., 250 Royal St., Canton, MA 02021.
102
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect our common stock's prevailing market price, assuming an
established trading market for our common stock develops. As of December 20,
2004, we had outstanding 51,205,502 shares of our common stock. Approximately
34,949,866 of these shares are freely tradable without restriction or further
registration under the Securities Act, if they are held by persons other than
"affiliates" of Motient, as defined under the Securities Act. We believe that
12,189,248 shares of our common stock are held, or will be held, by holders who
may be affiliates. In addition, we have issued approximately 16,255,636 shares
of restricted common stock, which are not registered and may not be traded by
any holder of such stock absent an exemption from the Securities Act until
registered. All of the shares offered for sale pursuant to this prospectus may
be sold pursuant to this prospectus under the Securities Act, and will
thereafter be freely tradable so long as they are not held by affiliates or
underwriters. If the selling stockholders sell a large number of shares into the
public market at one time, such sales could have an adverse effect on the market
price of the common stock. We are not aware of any shares held by affiliates not
being offered for sale under this prospectus. If any such shares exist, these
shares may be sold under Rule 144 promulgated under the Securities Act of 1933.
Rule 144 permits sales by a holder within any three-month period of a number of
shares that does not exceed the greater of: (1) 1% of the number of shares of
common stock then outstanding or (2) the average weekly trading volume of the
common stock during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to those sales. Sales under Rule 144 are also governed by
manner of sale provisions and notice requirements, and current public
information about Motient must be available.
Also, we have issued certain parties warrants to purchase an aggregate of up to
8,432,729 shares of our common stock. The table below sets forth certain
relevant terms of these warrants.
----------------------------------------------------------------------------------------------------------------------
Issued to: Number of Shares Exercise Price Term
----------------------------------------------------------------------------------------------------------------------
Lenders under our term 1,812,500 $1.06 5 year term, issued
credit agreement - January 2003
January 2003 issuance
----------------------------------------------------------------------------------------------------------------------
Lenders under our term 580,000 $4.88 None
credit agreement -
March 2004 issuance
----------------------------------------------------------------------------------------------------------------------
Certain Affiliates of CTA 250,000 $3.00 5 year term, issued
December 2002
----------------------------------------------------------------------------------------------------------------------
Certain Affiliates of CTA 293,750 $5.50 10 year term, issued
April 2004
----------------------------------------------------------------------------------------------------------------------
Certain Affiliates of CTA 340,000 $8.57 10 year term, issued
July 2004
----------------------------------------------------------------------------------------------------------------------
Further Lane Asset 200,000 $5.10 5 year term, issued July
Management 2003
----------------------------------------------------------------------------------------------------------------------
Certain Affiliates of 600,000 $5.50 10 year term, issued
Tejas Securities, Inc. April 2004
----------------------------------------------------------------------------------------------------------------------
Certain Affiliates of 510,000 $8.57 10 year term, issued
Tejas Securities, Inc. July 2004
----------------------------------------------------------------------------------------------------------------------
Evercore Investments, LLC 8,077 $3.95 5 year term, issued May
2002
----------------------------------------------------------------------------------------------------------------------
Purchasers of our common 3,838,402 $8.57 5 year term, issued
stock in the November 12, 2004 November 2004
private placement (1)
----------------------------------------------------------------------------------------------------------------------
Total: 8,432,729 (2)
----------------------------------------------------------------------------------------------------------------------
(1) The warrants issued to the purchasers of our common stock in the
November 12, 2004 private placement have not yet vested and may never
vest. Such warrants will vest if and only if we fail to meet certain
conditions regarding the registration of the shares sold in the
private placement. The first such condition was the filing of this
registration statement. The remaining conditions involve the timing of
the effectiveness of this registration statement. None of the shares
underlying these warrants are being registered pursuant to this
registration statement, and are not included in the total.
(2) We have reserved 2,993,024 shares of common stock for issuance under
our 2002 stock option plan. Such shares are not being registered
pursuant to this registration statement.
103
PLAN OF DISTRIBUTION
Motient has registered the shares offered by this prospectus on behalf of the
selling stockholders, and will not receive any proceeds from the sale of the
shares by the selling stockholders, although we will receive proceeds from the
exercise of our various outstanding warrants to the extent they are exercised.
These shares may be sold or distributed from time to time by the selling
stockholders and any of their respective transferees, assignees, donees,
distributees, pledgees or other successors in interest, all of whom we
collectively refer to in this prospectus as "selling stockholders." The selling
stockholders may sell their shares at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices,
or at fixed prices or in competitively bid transactions, which may be changed.
Each selling stockholder reserves the right to accept or reject, in whole or in
part, any proposed purchase of shares, whether the purchase is to be made
directly or through agents.
The selling stockholders may offer their shares at various times in one or more
of the following transactions:
o in ordinary brokers' transactions and transactions in which the broker
solicits purchasers;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account pursuant to this prospectus;
o in transactions involving cross or block trades;
o in transactions "at the market" to or through market makers in the
common stock or into an existing market for the common stock;
o in other ways not involving market makers or established trading
markets, including direct sales of the shares to purchasers or sales
of the shares effected through agents;
o through transactions in options, swaps or other derivatives which may
or may not be listed on an exchange;
o in privately negotiated transactions;
o in transactions to cover short sales;
o in underwritten transactions; or
o in a combination of any of the foregoing transactions.
The selling stockholders also may sell all or a portion of their shares in open
market transactions in accordance with Rule 144 under the Securities Act
provided that they meet the criteria and conform to the requirements of that
rule.
From time to time, one or more of the selling stockholders may pledge or grant a
security interest in some or all of the shares owned by them. If the selling
stockholders default in performance of their secured obligations, the pledgees
or secured parties may offer and sell the shares from time to time by this
prospectus. The selling stockholders also may transfer and donate shares in
other circumstances. The number of shares beneficially owned by selling
stockholders will decrease as and when the selling stockholders transfer or
donate their shares or default in performing obligations secured by their
shares. The plan of distribution for the shares offered and sold under this
prospectus will otherwise remain unchanged, except that the transferees, donees,
pledgees, other secured parties or other successors in interest will be selling
stockholders for purposes of this prospectus.
A selling stockholder may sell short the common stock. The selling stockholder
may deliver this prospectus in connection with such short sales and use the
shares offered by this prospectus to cover such short sales.
104
A selling stockholder may enter into hedging transactions with broker-dealers.
The broker-dealers may engage in short sales of the common stock in the course
of hedging the positions they assume with the selling stockholder, including
positions assumed in connection with distributions of the shares by such
broker-dealers. A selling stockholder also may enter into option or other
transactions with broker-dealers that involve the delivery of shares to the
broker-dealers, who may then resell or otherwise transfer such shares. In
addition, a selling stockholder may loan or pledge shares to a broker-dealer,
which may sell the loaned shares or, upon a default by the selling stockholder
of the secured obligation, may sell or otherwise transfer the pledged shares.
The selling stockholders may use brokers, dealers, underwriters or agents to
sell their shares. The persons acting as agents may receive compensation in the
form of commissions, discounts or concessions. This compensation may be paid by
the selling stockholders or the purchasers of the shares of whom such persons
may act as agent, or to whom they may sell as principal, or both. The
compensation as to a particular person may be less than or in excess of
customary commissions. The selling stockholders and any agents or broker-dealers
that participate with the selling stockholders in the offer and sale of the
shares may be deemed to be "underwriters" within the meaning of the Securities
Act. Any commissions they receive and any profit they realize on the resale of
the shares by them may be deemed to be underwriting discounts and commissions
under the Securities Act. Neither we nor any selling stockholders can presently
estimate the amount of such compensation.
Motient has advised the selling stockholders that during such time as they may
be engaged in a distribution of the shares, they are required to comply with
Regulation M under the Securities Exchange Act. With some exceptions, Regulation
M prohibits any selling stockholder, any affiliated purchasers and other persons
who participate in such a distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase, any security which is
the subject of the distribution until the entire distribution is complete.
Under Motient's registration rights agreement with certain of the selling
stockholders, Motient is required to bear the expenses relating to this
offering, excluding any underwriting discounts and fees, brokerage and sales
commissions, and stock transfer taxes relating to the sale or disposition of the
shares.
Motient has agreed to indemnify certain of the selling stockholders and their
respective controlling persons against some liabilities, including some
liabilities under the Securities Act.
It is possible that a significant number of shares could be sold at the same
time. Such sales, or the perception that such sales could occur, may adversely
affect prevailing market prices for the common stock.
This offering by any selling stockholder will terminate on the date on which the
selling stockholder has sold all of such selling stockholder's shares.
105
LEGAL MATTERS
For the purposes of this offering, Robert Macklin, the general counsel of
Motient has given his opinion as to the validity of the shares of common stock
offered by the selling stockholders. As of December 31, 2004, Mr. Macklin held
options to purchase 35,619 shares of common stock.
EXPERTS
The consolidated financial statements and schedules of Motient Corporation and
subsidiaries as of December 31, 2002 and 2003, and for each of the three years
in the period ended December 31, 2003, included in this prospectus, have been
audited by Eherenkrantz Sterling & Co., LLC, with respect to 2001 and 2002, and
Friedman LLP, successor-in-interest to Eherenkrantz Sterling & Co., LLC, with
respect to 2003, an independent registered public accounting firm, as indicated
in their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports. The financial
statements and schedules referred to above have been included in this prospectus
in reliance upon the authority of those firms as experts in giving said reports.
The consolidated financial statements of Mobile Satellite Ventures LP at
December 31, 2002 and 2003, and for each of the three years in the period ended
December 31, 2003, appearing in this prospectus and registration statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission, or SEC, to register the shares as required by the federal
securities laws. This prospectus, which constitutes a part of that registration
statement on Form S-1, omits certain information concerning us and our common
stock contained in the registration statement. Furthermore, statements contained
in this prospectus concerning any document filed as an exhibit are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the registration statement. Accordingly,
you should reference the registration statement and its exhibits for further
information with respect to us and the shares offered under this prospectus.
We also file annual, quarterly and special reports, proxy statements and other
information with the SEC under the Securities Exchange Act of 1934, as amended.
Our Exchange Act file number for our SEC filings is 0-23044. You may read and
copy any document we file with the SEC at the following SEC public reference
room:
Public Reference Room
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
You may obtain information on the operation of the SEC's Public Reference Room
by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, including Motient, who file
electronically with the SEC. The address of that site is http://www.sec.gov.
You should rely only on the information or representations provided in this
prospectus and the registration statement. We have not authorized anyone to
provide you with different information. The information contained in this
document speaks only as of the date of this document unless the information
specifically indicates that another date applies.
106
INDEX TO FINANCIAL STATEMENTS
MOTIENT CORPORATION AND SUBSIDIARIES
Independent Auditors' Report...................................................................................... F-1
Nine Months Ended September 30, 2004 and 2003 and 2003 Year-End Consolidated Statements of Operations ............ F-2
Nine Months Ended September 30, 2004 and 2003 Year-End Consolidated Balance Sheets ............................... F-3
Nine Months Ended September 30, 2004 and 2003 and 2003 Year-End Consolidated Statements of Changes in
Stockholders' Equity (Deficit).................................................................................... F-4
Nine Months Ended September 30, 2004 and 2003 and 2003 Year-End Consolidated Statements of Cash Flows ............ F-5
Notes to Consolidated Financial Statements ....................................................................... F-6
F-0
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Motient Corporation:
We have audited the accompanying consolidated balance sheets of Motient
Corporation (a Delaware Corporation) and Subsidiaries (together the "Company")
as of December 31, 2003 and 2002 (Successor Company), and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for the year ended December 31, 2003 (Successor Company), the
eight months ended December 31, 2002 (Successor Company), the four months ended
April 30, 2002 (Predecessor Company) and the year ended December 31, 2001
(Predecessor Company). Our audits also included the financial statement schedule
listed in the index at Item 15(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Motient Corporation and Subsidiaries as of December 31, 2003 and
2002 (Successor Company) and the results of their operations and their cash
flows for the year ended December 31, 2003 (Successor Company), the eight months
ended December 31, 2002 (Successor Company), the four months ended April 30,
2002 (Predecessor Company) and the year ended December 31, 2001 (Predecessor
Company), in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
/s/ Friedman LLP
----------------
Livingston, New Jersey
July 2, 2004
F-1
Motient Corporation and Subsidiaries
Consolidated Statements of Operations
For the Nine Months Ended September 30, 2004 and 2003, the Year Ended
December 31, 2003, the Eight Months Ended December 31, 2002, the Four Months
Ended April 30, 2002 and the Year Ended December 31, 2001
(in thousands, except per share data)
Successor Company Predecessor Company
----------------- -------------------
Nine Months Nine Months Eight Months Four Months (Restated)
Ended Ended Year Ended Ended Ended Year Ended
September 30, September 30, December 31, April 30, April 30, December 31,
2004 2003 2003 2002 2002 2001
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
REVENUES
Services and related revenues $ 27,446 $ 38,209 $ 49,275 $ 35,501 $ 16,809 $ 68,063
Sales of equipment 3,846 3,204 5,210 1,116 5,564 22,202
--------- --------- --------- --------- --------- ---------
Total revenues 31,292 41,413 54,485 36,617 22,373 90,265
========= ========= ========= ========= ========= =========
COSTS AND EXPENSES
Cost of services and operations (including
stock-based compensation of $211 for the
year ended December 31, 2003; and $2,028
and $426 for the nine months ended
September 30, 2004 and 2003, respectively
exclusive of depreciation and amortization
below) 29,532 39,999 51,393 38,141 21,909 73,064
Cost of equipment sold (exclusive of
depreciation and amortization) 3,705 3,607 5,942 2,226 5,980 34,116
Sales and advertising (including
stock-based compensation of $151 for the
year ended December 31, 2003 and $804 and
$304 for the nine months ended September
30, 2004 and 2003, respectively 2,058 3,782 4,552 4,825 4,287 22,618
General and administrative (including
stock-based compensation of $241 for the
year ended December 31, 2003 and $1,131
and $487 for the nine months ended
September 30, 2004 and 2003, respectively) 6,902 10,393 11,299 9,691 4,130 20,543
Restructuring charges 6,264 -- -- 25 584 4,739
Depreciation and amortization 12,071 16,312 21,466 15,509 6,913 32,408
--------- --------- --------- --------- --------- ---------
Total Costs and Expenses 60,532 74,093 94,652 70,417 43,803 187,488
========= ========= ========= ========= ========= =========
Operating loss (29,240) (32,680) (40,167) (33,800) (21,430) (97,223)
Interest and other income (expense) 265 819 662 (89) 145 1,128
Interest expense (3,595) (4,592) (6,365) (1,910) (1,850) (61,675)
Other income from Aether/MSV 1,957 1,956 2,203 1,017 1,125 --
Write-off of deferred financing fees (8,052) -- -- -- -- --
Gain (loss) on disposal of assets 2 51 (3,037) (2,116) (591) 67
Loss on impairment of asset -- (5,535) (5,535) 385 372 23,201
Gain on sale of transportation and
satellite assets -- -- -- -- -- 1,511
Gain on Rare Medium Note call option -- -- -- -- -- (4,054)
Rare Medium merger costs -- -- -- -- -- (81,467)
XM Radio equity investment impairment
charge -- -- (9,883) (22,273) (1,909) (48,488)
Equity in losses of XM Radio and MSV (8,617) (7,768) -- -- -- --
--------- --------- --------- --------- --------- ---------
Loss before reorganization items (46,478) (47,749) (62,122) (58,786) (24,138) (267,000)
Reorganization items:
Costs associated with debt restructuring -- -- -- (772) (22,324) (1,254)
Gain (loss) on extinguishment of debt -- -- -- -- 183,725 (1,243)
Gain on fair market adjustment of
assets/liabilities -- -- -- -- 94,715 --
--------- --------- --------- --------- --------- ---------
(Loss) income before income taxes (46,478) (47,749) (62,122) (59,558) 231,978 (269,497)
Income tax provision -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net (loss) income $ (46,478) $ (47,749) $ (62,122) $ (59,558) $ 231,978 $(269,497)
========= ========= ========= ========= ========= =========
Net (loss) income - basic and diluted $ (1.59) $ (1.90) $ (2.47) $ (2.37) $ 3.98 $ (5.27)
========= ========= ========= ========= ========= =========
Weighted-Average Common Shares
Outstanding - basic and diluted 29,323 25,128 25,145 25,097 58,251 51,136
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
Motient Corporation and Subsidiaries
Consolidated Balance Sheets
as of September 30, 2004, December 31, 2003 and 2002
(in thousands, except share and per share data)
Successor Successor Successor
Company Company Company
------- ------- -------
September December December
30, 2004 31, 2003 31, 2002
--------- -------- --------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,742 $ 3,618 $ 5,840
Accounts receivable-trade, net of allowance for
doubtful accounts of $298, $759 and $1,003 at September 30,
2004, December 31, 2003 and 2002, respectively 2,076 3,804 9,339
Inventory 96 240 1,077
Due from Mobile Satellite Ventures LP, net 100 93 234
Assets held for sale 271 2,734
Deferred equipment costs 1,453 3,765 2,755
Other current assets 1,220 5,091 6,796
Restricted cash and short-term investments -- 504 604
--------- --------- ---------
Total current assets 21,958 19,849 26,645
RESTRICTED INVESTMENTS 51 1,091
PROPERTY AND EQUIPMENT, net 21,822 31,381 46,405
FCC LICENSES AND OTHER INTANGIBLES, net 69,809 74,021 94,921
INVESTMENT IN AND NOTES RECEIVABLE FROM MSV 11,993 22,610 32,493
DEFERRED CHARGES AND OTHER ASSETS 4,519 8,076 1,757
--------- --------- ---------
Total assets $ 130,152 $ 157,028 $ 202,221
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 8,765 $ 12,365 $ 13,040
Deferred equipment revenue 1,512 3,795 2,861
Deferred revenue and other current liabilities 5,018 11,005 5,308
Obligations under capital leases, current -- 1,454 3,031
Vendor financing commitment, current -- 2,413 1,020
--------- --------- ---------
Total current liabilities 15,295 31,032 25,260
--------- --------- ---------
LONG-TERM LIABILITIES:
Notes payable, including accrued interest thereon -- 22,885 20,943
Term Credit Facility -- 4,914 --
Capital lease obligations, net of current portion -- 1,642 3,219
Vendor financing commitment, net of current portion -- 2,401 4,927
Other long-term liabilities 251 1,347 4,824
--------- --------- ---------
Total long-term liabilities 251 33,189 33,913
--------- --------- ---------
Total liabilities 15,546 64,221 59,173
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES -- -- --
STOCKHOLDERS' EQUITY:
Preferred Stock; par value $0.01; authorized 5,000,000 shares and no shares
outstanding at September 30, 2004, December 31,
2003 and 2002 -- -- --
Common Stock; voting, par value $0.01; authorized 100,000,000
shares; 34,529,958, 25,196,840 and 25,097,256 shares issued and
outstanding at September 30, 2004, December 31, 2003 and 2002,
respectively 345 252 251
Additional paid-in capital 256,541 198,743 197,814
Common stock purchase warrants 25,878 15,492 4,541
Accumulated deficit (168,158) (121,680) (59,558)
--------- --------- ---------
STOCKHOLDERS' EQUITY 114,606 92,807 143,048
--------- --------- ---------
Total liabilities, and stockholders' equity $ 130,152 $ 157,028 $ 202,221
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
Motient Corporation and Subsidiaries
Consolidated Statements of Changes In Stockholders' Equity (Deficit)
For the Nine Months Ended September 30, 2004, the Year Ended December 31, 2003,
the Eight Months Ended December 31, 2002, the Four Months Ended April 30, 2002
and the Year Ended December 31, 2001 (Restated)
Common Stock Common
------------ Additional Deferred Stock Unamortized
Par Paid-in Stock Purchase Guarantee Accumulated
Shares Value Capital Compensation Warrants Warrants Deficit Total
------ ----- ------- ------------ -------- -------- ------- -----
Predecessor Company
-------------------
BALANCE, December 31, 2000 $49,539,222 $495 $984,532 $(1,327) $92,249 $(11,504) $(1,043,861) $20,584
Common Stock issued under the 401(k) Savings
& Stock Purchase Plan 3,006,756 30 1,475 -- -- -- -- 1,505
Common Stock issued for exercise of stock
options and award of bonus stock 2,015 -- 1 -- -- -- -- 1
Common Stock issued for exercise of Stock
Purchase Warrants 38,228 -- 845 -- (845) -- -- --
Capital Gain in connection with sale of
stock by MSV -- -- 12,883 -- -- -- -- 12,883
Change in deferred compensation on non-cash
compensation -- -- 539 1,048 -- -- -- 1,587
Cancellation of restricted stock (88,200) -- (264) 264 -- -- -- --
Reduction of Guarantee Warrants for
extinguishment of debt -- -- -- -- -- 8,837 -- 8,837
Compensatory stock options issued to
employees -- -- 138 -- -- -- -- 138
Amortization of Guarantee Warrants -- -- -- -- -- 4,993 -- 4,993
Loss in connection with sale of stock by XM
Radio -- -- (12,180) -- -- -- -- (12,180)
Guarantee Warrants revaluation -- -- -- -- 2,326 (2,326) -- --
Issuance of Restricted Stock 3,219,236 32 386 (418) -- -- -- --
Net Loss -- -- -- -- -- -- (269,497) (269,497)
----------- ---- -------- ------- ------- -------- ----------- --------
BALANCE, December 31, 2001 55,717,257 557 988,355 (433) 93,730 -- (1,313,358) (231,149)
Common Stock issued under the 401(k) Savings
& Stock Purchase Plan 2,718,041 27 176 -- -- -- -- 203
Change in deferred compensation on non-cash
compensation -- -- -- 97 -- -- -- 97
Net Income - Predecessor Company -- -- -- -- -- -- 231,978 231,978
----------- ---- -------- ------- ------- -------- ----------- --------
Balance before fresh-start-Predecessor
Company 58,435,298 $584 $988,531 $(336) $93,730 $ -- $(1,081,380) $1,129
=========== ==== ======== ======= ======= ===== =========== =======
Successor Company
-----------------
Issuance of New Equity through bankruptcy 25,097,256 $251 $197,814 $ -- $ -- $ -- $ -- $198,065
Issuance of Common Stock Warrants -- -- -- -- 3,077 -- -- 3,077
BALANCE, April 30, 2002 25,097,256 251 197,814 -- 3,077 -- -- 201,142
Issuance of Common Stock Warrants -- -- -- -- 1,464 -- -- 1,464
Net Loss -- -- -- -- -- -- (59,558) (59,558)
BALANCE, December 31, 2002 25,097,256 251 197,814 -- 4,541 -- (59,558) 143,048
Common Stock issued under the 401(k) Savings
& Stock Purchase Plan 84,172 1 280 -- -- -- -- 281
Common Stock issued for exercise of stock
options 15,412 -- 46 -- -- -- -- 46
Issuance of Common Stock Warrants -- -- -- -- 10,951 -- -- 10,951
Change in deferred compensation on non-cash
compensation -- -- 603 -- -- -- -- 603
Net loss -- -- -- -- -- -- (62,122) (62,122)
----------- ---- -------- ------- -------- -------- ---------- -------
BALANCE, December 31, 2003 25,196,840 $252 $198,743 $ -- $15,492 $ -- $(121,680) $92,807
Issuance of Common Stock 8,886,310 88 52,448 -- -- -- -- $52,536
Common Stock issued under the 401(k) Savings
& Stock Purchase Plan 34,056 1 150 -- -- -- -- 151
Common Stock issued for exercise of stock
options 412,752 4 1,235 -- -- -- -- 1,239
Issuance of Common Stock Warrants -- -- -- -- 10,386 -- -- 10,386
Change in deferred compensation on non-cash
compensation -- -- 3,965 -- -- -- -- 3,965
Net loss -- -- -- -- -- -- (46,478) (46,478)
BALANCE, September 30, 2004 (unaudited) 34,529,958 $345 $256,541 $ -- $25,878 $ -- $(168,158) $114,606
=========== ==== ======== ======= ======= ======== =========== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
Motient Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2004 and 2003,
For the Year Ended December 31, 2003, the Eight Months Ended December 31, 2002,
the Four Months Ended April 30, 2002 and the Year Ended December 31, 2001
(in thousands)
Successor Company Predecessor Company
----------------- -------------------
Nine Months Nine Months Year Eight Months Four Months (Restated)
Ended Ended Ended Ended Ended Year Ended
September September December 31, December 31, April 30, December 31,
30, 2004 30, 2003 2003 2002 2002 2001
-------- -------- ---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (46,478) $ (47,749) $ (62,122) $ (59,558) $ 231,978 $(269,497)
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Amortization of Guarantee Warrants
and debt related costs -- -- -- -- 5,629 11,499
Depreciation and amortization 12,071 16,312 21,466 15,509 6,913 32,408
Provision for inventory
write-downs -- -- -- -- -- 7,891
Equity in loss of XM Radio and MSV 8,617 7,768 9,883 22,319 1,909 48,488
(Gain) loss on disposal of assets -- 479 8,572 2,116 591 (67)
Restructuring charges, fixed
asset disposals 2,798 -- -- -- -- --
Impairment loss on XM Radio
common stock held for sale -- -- -- -- -- 81,467
Gain on Rare Medium Note call
option -- -- -- -- -- (1,511)
Gain on sale of transportation
assets -- -- -- (385) (372) (23,201)
(Gain) loss on extinguishment of
debt -- -- -- -- (183,725) 1,243
Gain on debt restructuring (802) (405) (573) -- -- --
Issuance of warrants -- 927 927 -- -- --
Fresh-Start valuation and other
non-cash adjustments -- -- -- -- (94,715) --
Write-off of deferred financing
fees 8,052 -- -- -- -- --
Non cash amortization of
deferred financing costs 2,026 1,531 3,292 -- -- --
Non cash stock compensation 3,990 1,216 603 -- -- 1,150
Changes in assets and liabilities,
net of acquisitions and
dispositions:
Inventory 144 551 837 2,765 (2,167) (1,118)
Accounts receivable -- trade 1,728 4,403 5,535 782 1,370 462
Other current assets 6,867 2,482 (80) 4,263 15,833 10,764
Accounts payable and accrued
expenses (3,449) 805 (255) (217) 7,619 (10,327)
Accrued interest (3,080) 1,602 2,510 1,193 1,320 20,810
Deferred trade payables -- -- -- -- -- (2,212)
Deferred revenue and other deferred
items (7,062) 368 2,285 2,305 (6,729) (7,097)
--------- --------- --------- --------- --------- ---------
Net cash (used in) operating
activities (14,578) (4,175) (7,120) (8,908) (14,546) (98,848)
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets -- -- 6,116 616 -- --
Proceeds from sale of property and
equipment 2 -- -- -- -- --
Proceeds from sale of satellite
assets to MSV -- -- -- -- -- 42,500
Proceeds from sale of
transportation assets -- -- -- 385 372 10,000
Proceeds from MSV note 2,000 -- -- -- -- --
Proceeds (purchase) of restricted
investments 1,544 (202) (991) (604) -- 11,307
Proceeds from the sale of XM Radio
common stock -- -- -- -- -- 38,289
Receipt of Senior Note Interest
from escrow -- -- -- -- -- 20,503
Investment in MSV -- -- -- (957) -- --
Additions to property and equipment (1,101) -- (232) (613) (494) (13,751)
--------- --------- --------- --------- --------- ---------
Net cash (used in) provided by
investing activities 2,445 (202) 4,893 (1,173) (122) 108,848
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Rare Medium note -- -- -- -- -- 50,000
Principal payments under capital
leases (2,419) (2,116) (2,986) (1,425) (1,273) (3,582)
Principal payments under vendor
financing (2,582) (657) (1,020) -- -- (5,176)
Repayment from Term Loan (6,785) -- -- -- -- (25,500)
Proceeds from Term Credit Facility 1,500 4,500 4,500 -- -- --
Repayment of notes (19,750) -- -- -- -- --
Proceeds from Bank Financing -- -- -- -- -- 6,000
Proceeds from issuance of stock 55,480 -- -- -- 17 354
Proceeds from issuance of employee
stock options 1,235 190 47 -- -- --
Stock issuance costs and other
charges (1,422) -- -- -- -- --
Debt issuance costs and other
charges -- (537) (536) (117) -- (1,229)
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities 25,257 1,380 5 (1,542) (1,256) 20,867
--------- --------- --------- --------- --------- ---------
Net (decrease) increase in cash and
cash equivalents 13,124 (2,997) (2,222) (11,623) (15,924) 30,867
--------- --------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, beginning of
period 3,618 5,840 5,840 17,463 33,387 227,423
Less XM Radio cash included in 2000
consolidated cash total -- -- -- -- -- 224,903
--------- --------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 16,742 $ 2,843 $ 3,618 $ 5,840 $ 17,463 $ 33,387
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. ORGANIZATION
Motient Corporation (with its subsidiaries, "Motient" or the "Company") provides
two-way, wireless mobile data services and mobile Internet services. Motient
allows its customers access to multiple communications networks for a variety of
wireless data communications services, including email messaging and other
services that enable businesses, mobile workers and consumers to transfer
electronic information and messages and access corporate databases and the
Internet. (Unaudited)
In addition to selling wireless services that use its own DataTac network, it is
also a reseller of airtime on the Cingular and Sprint wireless networks. These
arrangements allow Motient to provide integrated seamless solutions to its
customers using a variety of networks. In December 2004, Motient launched a new
set of products and services designed to provide these seamless solutions to our
customers called iMotient Solutions(TM). iMotient allows Motient's customers to
use these multiple networks via a single connection to Motient's back-office
systems, providing a one-source alternative for development, device management
and billing across multiple networks, including but not limited to GPRS, 1XRTT,
and DataTac. The Company considers the two-way mobile communications service
described in this paragraph to be its core wireless business. (Unaudited)
Motient presently has six wholly-owned subsidiaries and a 38.6% interest in
Mobile Satellite Ventures LP (MSV). (Unaudited) For further details regarding
Motient's interest in MSV, please see "Recent Developments - Mobile Satellite
Ventures LP". Motient Communications Inc. owns the assets comprising Motient's
core wireless business, except for Motient's Federal Communications Commission,
or FCC, licenses, which are held in a separate subsidiary, Motient License Inc.
Motient License was formed on March 16, 2004, as part of Motient's amendment of
its credit facility, and is a special purpose wholly-owned subsidiary of Motient
Communications that holds all of the FCC licenses formerly held by Motient
Communications. A pledge of the stock of Motient License, along with other
assets of Motient Communications, secures borrowings under the term credit
facility. There are currently no borrowing outstanding under the term credit
facility. (Unaudited) For further details regarding the formation of Motient
License, please see Note 16 ("Subsequent Events"). Our other four subsidiaries
hold no material operating assets other than the stock of other subsidiaries and
Motient's interests in MSV. On a consolidated basis, we refer to Motient
Corporation and its six wholly-owned subsidiaries as "Motient."
Motient is devoting its efforts to expanding its core wireless business, while
also focusing on cost-cutting efforts. These efforts involve substantial risk.
Future operating results will be subject to significant business, economic,
regulatory, technical and competitive uncertainties and contingencies. Depending
on their extent and timing, these factors, individually or in the aggregate,
could have an adverse effect on the Company's financial condition and future
results of operations. In recent periods, certain factors have placed
significant pressures on Motient's financial condition and liquidity position.
These factors also have restrained Motient's ability to accelerate revenue
growth at the pace required to enable it to generate cash in excess of its
operating expenses. These factors include competition from other wireless data
suppliers and other wireless communications providers with greater resources,
cash constraints have limited Motient's ability to generate greater demand,
unanticipated technological and development delays and general economic factors.
Motient's results in recent periods, including the period covered by this
report, have also been hindered by the downturn in the economy and capital
markets. These factors contributed to the Company's decision in January 2002 to
file a voluntary petition for reorganization under Chapter 11 of the United
States Federal Bankruptcy Code. Motient's Plan of Reorganization was confirmed
on April 26, 2002 and became effective on May 1, 2002. Please see Note 2
("Significant Accounting Policies -- Motient's Chapter 11 Filing and Plan of
Reorganization and "Fresh-start" Accounting") below.
F-6
For a discussion of certain significant recent developments and trends in
Motient's business after the end of the period covered by this report, please
see Note 16 ("Subsequent Events"). As discussed in more detail in Note 2
("Significant Accounting Policies"), the 2002 comparative financial statements
provided herein have been restated and have been audited by the Company's former
independent registered public accounting firm, Ehrenkrantz Sterling & Co. LLC,
predecessor-in-interest to Friedman LLP.
The financial results for the year ended December 31, 2001 and the financial
results for the period January 1, 2002 to April 30, 2002 are herein referred to
as Predecessor Company results and the financial results for the period May 1,
2002 to December 31, 2002, the year ended December 31, 2003 and the nine months
ended September 30, 2004 included herein are referred to as Successor Company
results. Due to the effects of the "fresh-start" accounting, results for the
periods defined above are not comparable to periods beginning after May 1, 2002.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for all periods presented have been made.
XM Radio
XM Satellite Radio Holdings Inc. ("XM Radio"), a public company that launched
its satellite radio service at the end of 2001, was incorporated on December 15,
1992 for the purpose of procuring a digital audio radio service license. As of
December 31, 2000, Motient had an equity interest of approximately 33.1% (or
21.3% on a fully diluted basis) in XM Satellite Radio Holdings Inc. ("XM
Radio"), and Motient controlled XM Radio through its board of director
membership and common stock voting rights. In January 2001, pursuant to FCC
approval authorizing Motient to relinquish control of XM Radio, the number of
directors appointed by the Company to XM Radio's Board of Directors was reduced
to less than 50% of XM Radio directors, and the Company converted a portion of
its super-voting Class B Common Stock of XM Radio to Class A Common Stock. As a
result, the Company ceased to control XM Radio.
Throughout 2001, Motient disposed of its equity interest in XM Radio, and as of
November 19, 2001, Motient did not hold any interest in XM Radio. For the period
from January 1, 2001 through November 19, 2001, the Company accounted for its
investment in XM Radio pursuant to the equity method of accounting.
Mobile Satellite Ventures LP
On June 29, 2000, the Company formed a joint venture subsidiary, MSV, with
certain other parties, in which it owned 80% of the membership interests.
Through November 2001, MSV used the Company's satellite network to conduct
research and development activities. The remaining 20% interests in MSV were
owned by three investors unrelated to Motient. The minority investors had
certain participating rights which provided for their participation in certain
business decisions that were made in the normal course of business; therefore,
in accordance with EITF No 96-16, "Investor's Accounting for an Investee When
the Investor Has a Majority of the Voting Interest but the Minority Shareholder
or Shareholders Have Certain Approval or Veto Rights", the Company's investment
in MSV has been recorded for all periods presented in the consolidated financial
statements pursuant to the equity method of accounting. On November 26, 2002,
Motient's interest in MSV was reduced to approximately 48%. As of December 31,
2003 and September 30, 2004, Motient held a 29.5% and 38.6% interest,
respectively, in MSV, assuming conversion of all outstanding convertible notes.
(Unaudited) Please see Note 13 ("Business Acquisitions and Dispositions - MSV").
For additional information regarding MSV, please see the financial statements of
MSV beginning on page M-1.
Network Offerings: T-Mobile/Verizon Wireless
On March 1, 2003, Motient entered into a national premier dealer agreement with
T-Mobile USA, and, on May 21, 2003, Motient entered into an authorized agency
agreement with Verizon Wireless. These agreements allowed Motient to sell each
of T-Mobile's third generation global system for GSM/GPRS network subscriptions
and Verizon's third generation CDMA/1XRTT network subscriptions nationwide.
Motient was paid for each subscriber put onto either network. Each agreement
allowed Motient to actively sell and promote wireless email and wireless
Internet applications to enterprise accounts on networks with greater capacity
and speed, and that are voice capable. Please see Note 16 ("Subsequent Events")
for information regarding the termination of these agreements.
F-7
Effects of the Chapter 11 Filing and Emergence
As a result of the Company's Chapter 11 bankruptcy filing, the Company saw a
slower adoption rate for its services during the first quarter of 2002. In a
large customer deployment, the upfront cost of the hardware can be significant.
Because the hardware generally is usable only on Motient's network, certain
customers delayed adoption while Motient was in Chapter 11.
Additionally, certain of the Company's trade creditors required either deposits
for future services or shortened payment terms; however, none of these deposits
or changes in payment terms were material, and none of the Company's key
suppliers has ceased to do business with the Company as a result of its
reorganization.
Since emerging from bankruptcy protection in May 2002, the Company has
undertaken a number of actions to reduce its operating expenses and cash burn
rate. The Company's liquidity constraints have been exacerbated by weak revenue
growth since emerging from bankruptcy protection, due to a number of factors
including the weak economy generally and the weak telecommunications and
wireless sector specifically, the financial difficulty of several of its key
resellers, on whom it relies for a majority of its new revenue growth, and its
continued limited liquidity which has hindered efforts at demand generation.
Management and Board Changes
On January 17, 2003, David Engvall resigned as senior vice president, general
counsel and secretary.
On March 18, 2003, Brandon Stranzl resigned from the Board of Directors.
On April 17, 2003, the board of directors elected Christopher W. Downie to the
position of Vice President, Chief Financial Officer and Treasurer. Mr. Downie
had previously been a consultant with CTA, working on Motient matters, since May
2002.
On June 20, 2003, Jared Abbruzzese resigned his position as Chairman of the
Board. Steven Singer was elected Chairman of the Board and a new director, Peter
Aquino, was elected to the Board. Mr. Aquino was a senior managing director for
CTA.
For additional information on management and board changes for periods after
this report, please see Note 16, "Subsequent Events".
Change in Accountants
On May 31, 2002, the Company dismissed Arthur Anderson as its independent
auditors. On July 10, 2002, the Company engaged PricewaterhouseCoopers as its
independent auditors.
On April 17, 2003, the Company dismissed PricewaterhouseCoopers as its
independent auditors, effective upon the completion of services related to the
audit of the Company's consolidated financial statements for the period May 1,
2002 to December 31, 2002. On March 2, 2004, Motient dismissed
PricewaterhouseCoopers as its independent auditors effective immediately. The
audit committee of the Company's board approved the dismissal.
On April 25, 2003, the Company's Board approved the engagement of Ehrenkrantz
Sterling & Co. LLC as its independent registered public accounting firm to (i)
re-audit the Company's consolidated financial statements for the fiscal year
ended December 31, 2000 and the fiscal year ended December 31, 2001, and (ii)
audit the Company's consolidated financial statements for the interim period
from January 1, 2002 to April 30, 2002, and the fiscal year that ended on
December 31, 2003.
For additional information on changes in accountants for periods after this
report, please see Note 16, ("Subsequent Events").
F-8
Cost Reduction Actions
Predecessor Company Reductions in Workforce. On September 26, 2001, the Company
announced a plan to restructure its business. As part of this restructuring, the
Company laid off 25% of its workforce, or 50, 22 and 13 employees in the
Company's operations, sales and marketing and general and administrative
functions, respectively, and cancelled certain of its product initiatives. The
Company recorded a restructuring charge in 2001 of $4.74 million. This charge
represents $1.6 million of costs directly associated with employee severance
packages, $3.0 million of costs associated with product initiative cancellations
and $0.1 million of costs associated with capital assets that were no longer in
service. Of the $4.7 million charge, approximately $1.7 million represented cash
outlays made over the last quarter of 2001 and the first quarter of 2002. The
balance represents the write down of assets previously acquired. As of December
31, 2001, the Company had a remaining operational restructuring liability of
approximately $0.6 million, which was fully utilized in 2002.
Successor Company Reductions in Workforce. The Company undertook reductions in
its workforce in July 2002, September 2002, March 2003 and February 2004. These
actions eliminated approximately 29% (95 employees), 13% (26 employees), 10% (19
employees) and 32.5% (54 employees), respectively, of its then-remaining
workforce. In the aggregate, the Company has reduced its work force by
approximately 68% since July 2002 and reduced employee and related expenditures
by approximately $1.5 million per month.
Network Rationalization. (Unaudited) In the second quarter of 2004, the Company
finalized plans to implement certain base station rationalization initiatives.
These initiatives involve the de-commissioning of approximately 409 base
stations from our network. Motient had 1,549 base stations in its network as of
March 31, 2004, and 1,239 base stations as of September 30, 2004. Motient is
taking these actions in a coordinated effort to reduce network operating costs
while also focusing on minimizing the potential impact to its customers
communications and coverage requirements. This rationalization encompasses,
among other things, the reduction of unneeded capacity across the network by
de-commissioning under-utilized and un-profitable base stations as well as
de-commissioning base stations that pass an immaterial amount of customer data
traffic. In some cases, these base stations were originally constructed
specifically to serve customers with nationwide requirements that are no longer
customers of Motient. In certain instances, the geographic area that Motient's
network serves may be reduced by this process and customer communications may be
impacted. Motient has discussed these changes to our network with many of its
customers to assist them in evaluating the potential impact, if any, to their
respective communications requirements. The full extent and effect of the
changes to the network have yet to be determined, but based on internal
analyses, Motient believes the de-commissioning of these base stations from the
network will only impact approximately 1.5% of our network's current data
traffic. Motient completed these network rationalization initiatives in December
2004.
Frame Relay and Tandem Equipment Retirement. (Unaudited) In conjunction with our
base station rationalization initiatives discussed above, Motient is in the
process of converting its telecommunications infrastructure technology to frame
relay technology. As of September 30, 2004, this project was approximately 80%
complete. In the fourth quarter of 2004, we retired certain network equipment
associated with this conversion. We expect to realize significant
telecommunications cost reductions in 2005 as a result of this conversion.
Closure of Reston, VA Facility. On July 15, 2003, the Company substantially
completed the transfer of its headquarters from Reston, VA to Lincolnshire, IL,
where it already had a facility. This action reduced the Company's monthly
operating expenses by a net amount of approximately $65,000 per month, or
$780,000 per year.
Refinancing of Vendor Obligations. During the fourth quarter of 2002 and the
first quarter of 2003, the Company renegotiated several of its key vendor and
customer arrangements in order to reduce recurring expenses and improve its
liquidity position. In some cases, the Company was able to negotiate a flat rate
reduction for continuing services provided to it by its vendors or a deferral of
payable amounts, and in other cases the Company renegotiated the scope of
services provided in exchange for reduced rates or received pre-payments for
future services. The Company continues to aggressively pursue further vendor
cost reductions where opportunities arise.
F-9
In the case of financing arrangements, the Company negotiated, among other
things, a deferral of approximately $2.6 million of accounts payable that was
owed for services provided for which the Company issued a promissory note for
such amount, with the note to be paid off ratably over a two-year period
beginning in January 2004. The Company also restructured certain of its vendor
and capital lease obligations to significantly reduce the monthly amortization
requirements of these facilities on an on-going basis. As part of such
negotiations, the Company agreed to fund a letter of credit in twelve monthly
installments during 2003, in the aggregate amount of $1.125 million, to secure
certain payment obligations. This letter of credit will be released to Motient
in fifteen monthly installments beginning in July 2004, assuming no defaults
have occurred or are occurring. In March, 2004, Motient further restructured its
vendor financing facility and an outstanding promissory note to the same vendor
by extending the repayment schedule, thereby reducing the combined monthly
amortization requirements under these facilities. In June 2004, the Company
negotiated settlements of its entire amounts outstanding under its vendor
financing facility, promissory note and capital lease. On July 15, 2004, the
Company paid all principal and interest due and owing on its notes payable to
Rare Medium and CSFB, in the aggregate amount of $23.5 million. (Unaudited)
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations"--Liquidity and Capital Resources - Summary of Liquidity
and Financing" for further details on these facilities. For more information on
these events, please see Note 16, ("Subsequent Events").
UPS Revenue
On December 1, 2002, Motient entered into a letter agreement with UPS under
which UPS agreed to make a series of eight prepayments to Motient totaling $5
million for future services Motient is obligated to provide after January 1,
2004. In addition to any other rights it has under its network services
agreement with Motient, the letter agreement does not contain any minimum
purchase requirement and provides that UPS may terminate the network services
agreement, in whole or in part, by providing 30 days' notice to Motient at which
point any remaining prepayment would be required to be returned. As of July 31,
2003, all eight prepayments had been made. The $5 million prepayment is credited
against airtime services provided to UPS beginning January 1, 2004, until the
prepayment is fully credited.
UPS, the Company's largest customer as of December 31, 2002, has substantially
completed its migration to next generation network technology as of July 2003,
and its monthly airtime usage of the Company's network has declined
significantly in the last six months of 2003. UPS was our second largest
customer for the twelve months ended December 31, 2003 and our eighth largest
customer for the three months ended December 31, 2003. While the Company expects
that UPS will remain a customer for the foreseeable future, the bulk of UPS'
units have migrated to another network. As of December 31, 2003, UPS had
approximately 7,120 active units on Motient's network.
Until June 2003, UPS had voluntarily maintained its historical level of payments
to mitigate the near-term revenue and cash flow impact of its recent and
anticipated continued reduced network usage. However, beginning in July 2003,
the revenues and cash flow from UPS declined significantly. Also, due to the
arrangement entered into in 2002 under which UPS prepaid for network airtime to
be used by it in 2004, the Company does not expect that UPS will be required to
make any cash payments to the Company in 2004 for service to be provided in
2004. Pursuant to such agreement, and, as of November 30, 2004, UPS has not been
required to make any cash payments to the Company in 2004, and the value of the
Company's remaining airtime service obligations to UPS in respect of the
prepayment was approximately $4.0 million. (Unaudited)
Liquidity and Financing Requirements
The Company's future financial performance will depend on its ability to
continue to reduce and manage operating expenses, as well as its ability to grow
revenue. The Company's future financial performance could be negatively affected
by unforeseen factors and unplanned expenses.
F-10
The Company expects to continue to require significant additional funds before
it begins to generate cash in excess of its operating expenses, and does not
expect to generate cash from operations in excess of its operating costs until
the fourth quarter of 2005, at the earliest. Also, even if the Company begins to
generate cash in excess of its operating expenses, it expects to continue to
require significant additional funds to meet remaining interest obligations,
capital expenditures and other non-operating cash expenses.
On December 31, 2004, the Company's amended term credit facility expired.
(Unaudited) All amounts borrowed under the facility have been repaid.
(Unaudited) The Company continues to pursue all potential funding alternatives.
Among the alternatives for raising additional funds are the issuances of debt or
equity securities, other borrowings under secured or unsecured loan arrangements
and sales of assets. There can be no assurance that additional funds will be
available to the Company on acceptable terms or in a timely manner. In April
2004, the Company sold 4,215,910 shares of its common stock for aggregate
consideration of $23.2 million in a private placement. In July 2004, the Company
sold an additional 3,500,000 shares of its common stock for aggregate
consideration of $30.0 million. In November 2004, the Company sold an additional
15,353,609 shares of its common stock for aggregate consideration of $131.6
million. (Unaudited) For additional information on these events, please see Note
16 ("Subsequent Events").
The Company's projected cash requirements are based on certain assumptions about
its business model and projected growth rate, including, specifically, assumed
rates of growth in subscriber activations service revenue. While the Company
believes these assumptions are reasonable, these growth rates continue to be
difficult to predict and there is no assurance that the actual results that are
experienced will meet the assumptions included in the Company's business model
and projections. If the future results of operations are significantly less
favorable than currently anticipated, the Company's cash requirements will be
more than projected, and it may require additional financing in amounts that
will be material. The type, timing and terms of financing that the Company
obtains will be dependent upon its cash needs, the availability of financing
sources and the prevailing conditions in the financial markets. The Company
cannot guarantee that additional financing sources will be available at any
given time or available on favorable terms.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
On a consolidated basis, we refer to Motient Corporation and its six
wholly-owned subsidiaries as "Motient." All intercompany transactions have been
eliminated in consolidation.
For the period from January 1, 2001, through November 19, 2001, the Company's
investment in XM Radio was recorded pursuant to the equity method of accounting.
For the year ended December 31, 2001, XM Radio recorded $0.5 million of revenue,
incurred $282.1 million of operating expenses and had a net loss attributable to
common stockholders of $307.5 million.
As noted above (please see Note 1, "Organization"), the results of MSV have been
accounted for pursuant to the equity method of accounting.
Motient's Chapter 11 Filing and Plan of Reorganization and "Fresh-Start"
Accounting
On October 1, 2001, the Company announced that it would not make a $20.5 million
semi-annual interest payment due on the Senior Notes on such date. On November
26, 2001, the Senior Notes trustee declared all amounts owed under the senior
notes immediately due and payable. Following these events, the Company
determined that the continued viability of its business required restructuring
its highly leveraged capital structure. In October 2001, the Company retained
Credit Suisse First Boston ("CSFB") as its financial advisor to assist in the
restructuring the Company's debt. Shortly thereafter, the Company and CSFB began
meeting with the principal creditor constituencies.
In accordance with SOP No. 90-7, the reorganized value of the Company was
allocated to the Company's assets based on procedures specified by SFAS No. 141,
"Business Combinations". Each liability existing at the plan confirmation date,
other than deferred taxes, was stated at the present value of the amounts to be
F-11
paid at appropriate market rates. It was determined that the Company's
reorganization value computed immediately before the Effective Date was $234
million. Subsequent to the determination of this value, the Company determined
that the reorganization value ascribed to MSV did not reflect certain preference
rights on liquidation available to certain equity holders in MSV. Therefore, the
reorganization value of MSV was reduced by $13 million and the Company's
reorganization value was reduced to $221 million. The Company adopted
"fresh-start" accounting because holders of existing voting shares immediately
before filing and confirmation of the plan received less than 50% of the voting
shares of the emerging entity and its reorganization value is less than its
postpetition liabilities and allowed claims, as shown below:
Postpetition current liabilities $49.9 million
Liabilities deferred pursuant to Chapter 11 Proceedings 401.1 million
--------------
Total postpetition liabilities and allowed claims 451.0 million
Reorganization value (221.0 million)
----------------
Excess of liabilities over reorganization value $(230.0 million)
================
The reorganization value of Motient was determined by considering of several
factors and by reliance on various valuation methods. For the valuation of the
core wireless business, consideration was given to discounted cash flows and
price/earnings and other applicable ratios, a liquidation value analysis,
comparable company trading multiples and comparable acquisition multiple
analysis. The factors considered by Motient included the following:
o Forecasted operating cash flow results which gave effect to the
estimated impact of limitations on the use of available net operating
loss carryovers and other tax attributes resulting from the Plan of
Reorganization and other events,
o The discounted residual value at the end of the forecast period based
on the capitalized cash flows for the last year of that period,
o Market share and position,
o Competition and general economic considerations,
o Projected sales growth, and
o Working capital requirements.
For the valuation of the Company's investment in MSV, consideration was given to
the valuation of MSV's equity reflected by recent arms-length investments in
MSV, subsequently adjusted as discussed above.
After consideration of the Company's debt capacity, and after extensive
negotiations among parties in interest, it was agreed that Motient's
reorganization capital structure should be as follows:
Notes payable to Rare Medium and CSFB $19.8 million
Shareholders' Equity 201.2 million
--------------
$221.0 million
==============
The Company allocated the $221.0 million reorganization value among its net
assets based upon its current estimates of the fair value of its assets. In the
case of current assets, with the exception of inventory, the Company concluded
that their carrying values approximated fair values. The values of the Company's
frequencies and its investment in and note receivable from MSV were based on
independent analyses presented to the bankruptcy court and subsequently adjusted
as discussed above. The value of the Company's fixed assets was based upon a
valuation of the Company's software and estimates of replacement cost for
network and other equipment, for which the Company believes that its recent
purchases represent a valid data point. The value of the Company's other
intangible assets was based on third party valuations as of May 1, 2002.
In February 2003, the Company engaged a financial advisory firm to prepare a
valuation of software and customer intangibles. Software and customer
intangibles were not taken into consideration when the original fresh-start
balance sheet was determined at May 1, 2002. The changes for the software and
customer contracts are reflected below and in the financial statements and notes
herein.
The effect of the plan of reorganization and application of "fresh-start"
accounting on the Predecessor Company's balance sheet as of April 30, 2002, is
as follows:
F-12
Debt
Discharge
Preconfirmation and Reorganized
Predecessor Exchange Fresh Start Successor
(in thousands) Company(j) of Stock Adjustments Company
---------- -------- ----------- -------
Assets:
Current assets
Cash $17,463 $17,463
Receivables 10,121 10,121
Inventory 8,194 $(4,352) 3,842
Deferred equipment costs 11,766 (11,766) (e) --
Other current assets 11,443 11,443
------ ------ ------
Total current assets 58,987 (16,118) 42,869
Property and equipment 58,031 (1,553) (i) 56,478
FCC Licenses and other intangibles 45,610 56,866 (f)(i) 102,476
Goodwill 4,981 (4,981) (i) --
Investment in and notes receivable from MSV 27,262 26,593 (f) 53,855
Other long-term assets 2,864 (1,141) (e) 1,723
----- ------- -----
Total Assets $197,735 $59,666 $257,401
======== ======= ========
Liabilities & Stockholders' (Deficit) Equity
Liabilities Not Subject to Compromise:
Current liabilities:
Current maturities of capital leases $4,096 $4,096
Accounts payable - trade 1,625 1,625
Vendor financing 655 655
Accrued expenses 15,727 15,727
Deferred revenue 23,284 (18,913) (e)(g) 4,371
------ ------- -----
45,387 (18,913) 26,474
Long term liabilities:
Vendor financing 2,661 2,661
Capital lease obligation 3,579 3,579
Deferred revenue 19,931 (16,136) (e)(g) 3,795
Liabilities Subject to Compromise:
Prepetition liabilities 8,785 (8,785) (a) --
Senior note, including accrued interest
thereon 367,673 (367,673) (b) --
Rare Medium Note, including accrued
interest
thereon 27,030 (27,030) (c) --
-------- ------- ------
403,488 (403,488) --
Rare Medium and CSFB Notes -- 19,750 (a)(c) 19,750
-------- -------- ------- ------
Total liabilities 475,046 (383,738) (35,049) 56,259
Stockholders' (deficit) equity:
Common stock - old 584 (584) (h) --
Common stock - new 251 (d) 251
Additional paid-in capital 988,531 (988,531) 197,814
197,814 (d)(h)
Common stock purchase
warrants - old 93,730 (93,730) (h)
Common stock purchase
warrants - new 3,077 (d) 3,077
Deferred stock compensation (336) 336 (h) --
Retained (deficit) earnings (1,359,820) 1,359,820 94,715 --
----------- (183,725) ------ -------
(94,715) (d)(h)
183,725 (h)
---------
Stockholders' Equity (Deficit) (277,311) 383,738 94,715 201,142
--------- ------- ------ -------
Total Liabilities & Stockholders' Equity
(Deficit) $197,735 $ -- $59,666 $257,401
======== ===== ======= ========
F-13
(a) Represents the cancellation of the following liabilities:
i. Amounts due to Boeing $1,533
ii. Amounts due to CSFB 2,000
iii. Amounts due to JP Morgan Chase 1,550
iv. Amounts due to Evercore Partners LP ("Evercore") 1,948
v. Amounts due to the FCC 1,003
vi. Other amounts 751
--------
$8,785
Liabilities were cancelled in exchange for the following:
a. 97,256 shares of new Motient common stock,
b. a note to CSFB in the amount of $750 and
c. a warrant to Evercore Partners to purchase 343,450 shares of new
Motient common stock, and
d. a note to Rare Medium in the amount of $19,000.
(b) Represents the cancellation of the senior notes in the amount of $367,673,
including interest threron, in exchange for 25,000,000 shares of new
Motient common stock. Certain of the Company's other creditors received an
aggregate of 97,256 shares of the Company's common stock in settlement for
amounts owed to them.
(c) Represents the cancellation of $27,030 of notes due to Rare Medium,
including accrued interest thereon, in exchange for a new note in the
amount of $19,000. The Company also issued CSFB a note in the principal
amount of $750 for certain investment banking services.
(d) Represents the issuance of the following:
i. 25,097,256 shares of new Motient common stock.
ii. warrants to the holders of pre-reorganization common stock to
purchase an aggregate of approximately 1,496,512 shares of common
stock, with such warrants being valued at approximately $1,100.
iii. a warrant to purchase up to 343,450 share of common stock to
Evercore, valued at approximately $1,900. The retained earnings
adjustment includes the gain on the discharge of debt of
$183,725.
(e) Represents the write off of deferred equipment costs of $12,907 and
deferred equipment revenue of $12,907 since there is no obligation to
provide future service post-"fresh start".
(f) To reflect the step-up in assets in accordance with the reorganization
value and valuations performed. (g) Represents the write off of the
deferred gain associated with the Company's sale of its satellite assets to
MSV in November 2001 and the write-off of the unamortized balance of the
$15,000 perpetual license sold to Aether in November 2000, both of which
total approximately $22,142, since there is no obligation to provide future
service post-"fresh start".
(h) To record the cancellation of the Company's pre-reorganization equity and
to reverse the gain on extinguishment of debt of $183,725 and the gain on
fair market adjustment of $94,715.
(i) To record the valuation and resulting increase of customer intangibles of
approximately $11,501 and frequencies of $45,365. The reduction of $4,981
is due to a write-off of goodwill. The reduction of property and equipment
relates to a subsequent reduction in the carrying value of certain software
from $4,942 to $3,389, reduction to inventory from $8,194 to $3,842 to its
net realizable value.
(j) The balances do not match the balances in the Company's Plan of
Reorganization due to subsequent re-audit adjustments.
Under the Plan of Reorganization, all then-outstanding shares of the Company's
pre-reorganization common stock and all unexercised options and warrants to
purchase the Company's pre-reorganization common stock were cancelled. The
holders of $335 million in senior notes exchanged their notes for 25,000,000
shares of the Company's new common stock. Certain of the Company's other
creditors received an aggregate of 97,256 shares of the Company's new common
stock in settlement for amounts owed to them. These shares were issued following
completion of the bankruptcy claims process; however, the value of these shares
has been recorded in the financial statements as if they had been issued on the
effective date of the reorganization. Holders of the Company's
pre-reorganization common stock received warrants to purchase an aggregate of
approximately 1,496,512 shares of common stock. The warrants expired May 1,
2004, or two years after the Effective Date. The warrants were exerciseable to
F-14
purchase shares of Motient common stock at a price of $.01 per share only if and
when the average closing price of Motient's common stock over a period of ninety
consecutive trading days was equal to or greater than $15.44 per share.
Motient's common stock did not trade at this level from May 1, 2002 to May 1,
2004. All warrants issued to the holders of the Company's pre-reorganization
common stock, including those shares held by the Company's 401(k) savings plan,
have been recorded in the financial statements as if they had been issued on the
effective date of the reorganization. Also, in July 2002, Motient issued to
Evercore, financial advisor to the creditors' committee in Motient's
reorganization, a warrant to purchase up to 343,450 shares of common stock, at
an exercise price of $3.95 per share. The warrant was dated May 1, 2002, and has
a term of five years. If the average closing price of Motient's common stock for
thirty consecutive trading days is equal to or greater than $20.00, Motient may
require Evercore to exercise the warrant, provided the common stock is then
trading in an established public market. The value of this warrant has been
recorded in the financial statements as if it had been issued on May 1, 2002.
Cash (used) provided by reorganization items were as follows:
Predecessor
Successor Company Company
----------------- -------
Eight Months Four Months
Year Ended Ended Ended
December 31, December 31, April 30,
2003 2002 2002
---- ---- ----
(in thousands)
Professional Fees $-- $(3,434) $(5,892)
Interest Income -- -- 145
--- -------- --------
$-- $(3,434) $(5,747)
=== ======== ========
Further details regarding the plan are contained in Motient's Disclosure
Statement with respect to the plan, which was filed as Exhibit 99.2 to the
Company's current report on Form 8-K dated March 4, 2002.
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. Actual results could differ from those
estimates. The Company's most significant estimates relate to the valuation of
its net assets and assets in "fresh-start" accounting, the valuation on its
investment in MSV, the valuation of inventory, the allowance for doubtful
accounts receivable, the valuation of deferred tax assets and the realizability
of long-lived assets.
Cash Equivalents
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of three months or less to be cash
equivalents.
Short-term Investments
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of between three months and a year to be
short-term investments.
F-15
Restricted Investments
At December 31, 2003, the Company had $1.6 million of restricted investments. At
December 31, 2002, the Company had $0.6 million of restricted investments. The
securities included in restricted investments were classified as
held-to-maturity under the provision of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The Company classified restricted
investment amounts which would mature within one year as current assets in the
accompanying balance sheet. The Company accounted for these investments at their
amortized cost.
Inventory
Inventory, which consists primarily of communication devices and accessories,
such as power supplies and documentation kits, is stated at the lower of cost or
market. Cost is determined using the weighted average cost method. The Company
periodically assesses the market value of its inventory, based on sales trends
and forecasts and technological changes and records a charge to current period
income when such factors indicate that a reduction to net realizable value is
appropriate. The Company considers both inventory on hand and inventory which it
has committed to purchase, if any. The Company recorded inventory write-downs to
cost of equipment sold to reduce inventory amounts to its net realizable value,
in the amount of $0.2 million in 2003 and $4.4 million in 2002.
Other Current Assets
Other current assets consist of the following:
Successor Company
-----------------
December 31,
2003 2002
---- ----
(in thousands)
Prepaid site rent $3,416 $4,175
Prepaid maintenance 271 289
Prepaid expenses - other 806 1,802
Deposits 10 55
Non-trade receivables and other 588 475
------ ------
$5,091 $6,796
====== ======
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosures of the fair value of certain financial instruments. The carrying
amount for cash and cash equivalents, short-term investments, accounts
receivable, non-trade receivables included in other assets, accounts payable and
accrued expenses, and deferred revenues approximates their fair values. For debt
issues that are not quoted on an exchange, interest rates currently available to
the Company for issuance of debt with similar terms and remaining maturities are
used to estimate fair value. The fair value of the Company's equity investment
in MSV was determined by an independent third-party valuation performed in
November 2003 as part of Company's preparation of its December 31, 2002
financial statements. This same valuation methodology was utilized to value the
Company's equity interest in MSV as of December 31, 2003. The fair value of the
notes receivable from MSV approximates its carrying value as of December 31,
2003.
F-16
As of December 31, 2003 As of December 31, 2002
Successor Company Successor Company
----------------- -----------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(in thousands)
Assets:
Restricted investments $1,595 $1,595 $604 $604
Investment in and notes receivable from MSV 22,610 31,294 32,493 32,493
Liabilities:
Rare Medium Note $22,016 $22,016 $20,148 $20,148
CSFB Note 869 869 795 795
Term Credit Facility 4,914 4,914 -- --
Vendor financing commitment 4,814 4,814 6,096 6,096
Capital leases $3,096 $3,096 $6,250 $6,250
Concentrations of Credit Risk and Major Customers
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, short term investments, and accounts
receivable. The Company periodically invests its cash balances in temporary or
overnight investments. The Company's short term investments included debt
securities such as commercial paper, time deposits, certificates of deposit,
bankers acceptances, and marketable direct obligations of the United States
Treasury.
To date, the majority of the Company's business has been transacted with
telecommunications, field services, natural resources, professional service and
transportation companies located throughout the United States. The Company
grants credit based on an evaluation of the customer's financial condition,
generally without requiring collateral or deposits. Exposure to losses on trade
accounts receivable, for both service and for equipment sales, is principally
dependent on each customer's financial condition.
Motient's rights to use and sell the BlackBerryTM software and RIM's handheld
devices may be limited or made prohibitively expensive as a result of a patent
infringement lawsuit brought against RIM by NTP Inc. As a purchaser of those
products, Motient could be adversely affected by the outcome of that litigation.
Please see Note 14, "Legal and Regulatory Matters"
For the year ended December 31, 2003, five customers accounted for approximately
47% of the Company's service revenue, with two of those customers, SkyTel and
UPS, each accounting for more than 11% of the Company's service revenue. As of
December 31, 2003, no single customer accounted for more than 6% of the
Company's net accounts receivable.
For the four months ended April 30, 2002 and the eight months ended December 31,
2002, SkyTel and UPS accounted for approximately 11% and 16%, respectively, and
15% and 18%, respectively of the Company's service revenue. As of December 31,
2002, SkyTel represented approximately 14% of the Company's net receivables, all
of which was current.
For the year ended December 31, 2001, revenue from the MSV research and
development efforts accounted for approximately 9% of the Company's service
revenue. Excluding revenue earned from MSV, six other customers accounted for
approximately 41% of the Company's service revenue, with one customer
individually accounting for more than 10% of such revenue.
F-17
The revenue attributable to such customers varies with the level of network
airtime usage consumed by such customers, and none of the service contracts with
such customers requires that the customers use any specified quantity of network
airtime, nor do such contracts specify any minimum level of revenue. There can
be no assurance that the revenue generated from these customers will continue in
future periods.
Software Development Costs
During 1998, the Company adopted SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." As of December 31,
2003 and 2002, net capitalized internal use software costs were $1.3 million and
$4.0 million, respectively, are included in property and equipment in the
accompanying consolidated balance sheets and are amortized over three years.
Deferred Charges and Other Assets
Deferred charges and other assets consist of the following:
Successor Company
-----------------
December 31,
2003 2002
---- ----
(in thousands)
Deferred equipment costs $709 $1,640
Term credit facility financing fees 7,367 --
Other long term assets -- 117
------ ------
$8,076 $1,757
====== ======
Financing costs are amortized over the term of the related facility using the
straight-line method, which approximates the effective interest method.
Deferred Revenue and Other Current Liabilities
Deferred revenue and other current liabilities consist of the following:
Successor Company
-----------------
December 31,
2003 2002
---- ----
(in thousands)
Deferred Revenue - UPS $4,678 $--
Deferred Revenue - Aether 3,447 1,947
Deferred Revenue - RIM 1,397 3,163
Deferred Registration fees 175 90
Deposits - other 693 10
Deferred Revenue - other 615 98
------- ------
$11,005 $5,308
======= ======
Other Long-Term Liabilities
Other long-term liabilities consist of the following:
Successor Company
-----------------
December 31,
2003 2002
---- ----
(in thousands)
Deferred revenue, Aether, RIM, MSV and other $622 $3,115
Deferred equipment revenue 725 1,709
------ ------
$1,347 $4,824
====== ======
F-18
Revenue Recognition
The Company generates revenue through equipment sales, airtime service
agreements and consulting services. In 2000, the Company adopted SAB No. 101,
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. In certain circumstances, SAB No. 101 requires
the Company to defer the recognition of revenue and costs related to equipment
sold as part of a service agreement.
In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue
Recognition", which supersedes SAB No. 101, "Revenue Recognition in Financial
Statements." SAB No. 104's primary purpose is to rescind accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangements and to
rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers" ("FAQ") issued with SAB No. 101. Selected portions of the
FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104 will
not have a material impact on the Company's revenue recognition policies.
Revenue is recognized as follows:
Service revenue: Revenues from the Company's wireless services are recognized
when the services are performed, evidence of an arrangement exists, the fee is
fixed and determinable and collectibility is probable. Service discounts and
incentives are recorded as a reduction of revenue when granted, or ratably over
a contract period. The Company defers any revenue and costs associated with
activation of a subscriber on the Company's network over an estimated customer
life of two years.
To date, the majority of the Company's business has been transacted with
telecommunications, field services, natural resources, professional service and
transportation companies located throughout the United States. The Company
grants credit based on an evaluation of the customer's financial condition,
generally without requiring collateral or deposits. The Company establishes a
valuation allowance for doubtful accounts receivable for bad debt and other
credit adjustments. Valuation allowances for revenue credits are established
through a charge to revenue, while valuation allowances for bad debts are
established through a charge to general and administrative expenses. The Company
assesses the adequacy of these reserves quarterly, evaluating factors such as
the length of time individual receivables are past due, historical collection
experience, the economic environment and changes in credit worthiness of the
Company's customers. If circumstances related to specific customers change or
economic conditions worsen such that the Company's past collection experience
and assessments of the economic environment are no longer relevant, the
Company's estimate of the recoverability of its trade receivables could be
further reduced.
Equipment and service sales: The Company sells equipment to resellers who market
its terrestrial product and airtime service to the public. The Company also
sells its product directly to end-users. Revenue from the sale of the equipment,
as well as the cost of the equipment, are initially deferred and are recognized
over a period corresponding to the Company's estimate of customer life of two
years. Equipment costs are deferred only to the extent of deferred revenue.
As of December 31, 2003 and 2002, the Company had capitalized a total of $4.5
million and $4.4 million of deferred equipment revenue, respectively, and had
deferred equipment costs of $4.3 million and $4.4 million, respectively.
Advertising Costs
Advertising costs are charged to operations as incurred and totaled $6.6 million
in 2003, $4.3 million for the eight months ended December 31, 2002 and $2.5
million for the four months ended April 30, 2002 and $10.0 million in 2001. In
2001, a portion of the advertising costs associated with certain of the
Company's Internet promotions, were prepaid in the form of warrants to acquire
common stock issued by the Company, valued at $4.8 million. The warrants were
expensed as the associated page views were delivered. The Company recognized
advertising expense associated with the warrants issued for this Internet
promotion in the amount of $1.4 million in 2001. In September 2001, the Company
cancelled the Internet promotion, and the $2.9 million of remaining prepaid
advertising was written off.
F-19
Stock-Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", which
establishes a fair value based method of accounting for stock-based compensation
plans, the Company has elected to follow Accounting Principles Board Opinion
No.25 "Accounting for Stock Issued to Employees" for recognizing stock-based
compensation expense for financial statement purposes. For companies that choose
to continue applying the intrinsic value method, SFAS No. 123 mandates certain
pro forma disclosures as if the fair value method had been utilized. The Company
accounts for stock based compensation to consultants in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and
SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement
No.123", which provides optional transition guidance for those companies
electing to voluntarily adopt the accounting provisions of SFAS No. 123. In
addition, SFAS No. 148 mandates certain new disclosures that are incremental to
those required by SFAS No. 123. The Company continued to account for stock-based
compensation in accordance with APB No. 25.
The following table illustrates the effect on income (loss) attributable to
common stockholders and earnings (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Predecessor
Successor Company Company
----------------- -------
Twelve Eight
Nine Months Nine Months Months Months Four Months
Ended Ended Ended Ended Ended
September 30, September 30, December 31, December 31, April 30,
2004 2003 2003 2002 2002
---- ---- ---- ---- ----
(unaudited) (unaudited)
Net loss, as reported $(46,478) $(47,749) $(62,122) $(59,558) $231,978
Add: Stock-based employee compensation expense
included in net income, net of related tax effects 3,963 1,217 603 --- ---
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax related effects (2,218) (2,343) (2,488) (567) (57)
-------- ------- -------- -------- --------
Pro forma net loss (44,733) (48,875) $(64,007) $(60,125) $231,921
Weighted average common shares outstanding 29,323 25,128 25,145 25,097 58,251
Earnings per share:
Basic and diluted---as reported $(1.59) $(1.90) $(2.47) $(2.37) $3.98
Basic and diluted---pro-forma $(1.53) $(1.95) $(2.55) $(2.40) $3.98
Under SFAS No. 123 the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
Predecessor
Successor Company Company
----------------- -----------
Twelve Months Eight Months Four Months
Ended Ended Ended
Nine Months Ended December 31, December 31, April 30,
September 30, 2004 2003 2002 2002
------------------ ---- ---- ----
(unaudited)
Expected life (in years) 8 10 10 10
Risk-free interest rate 0.88%-1.46% 0.88%-0.93% 1.71% 1.71%
Volatility 146%-258% 148%-162% 173% 197%
Dividend yield 0.0% 0.0% 0.0% 0.0%
F-20
Options to purchase 1,631,025 shares, 1,757,513 shares, and 633,719 (unaudited)
of the Company's common stock were outstanding at December 31, 2002, December
31, 2003 and September 30, 2004, respectively, under the Company's 2002 Stock
Option Plan. Options to purchase 2,683,626 shares of the Predecessor Company's
stock were outstanding at April 30, 2002. These options were cancelled as part
of the Company's reorganization.
In March 2003, the Company's board of directors approved the reduction in the
exercise price of all of the outstanding stock options from $5.00 per share to
$3.00 per share. The repricing requires that all options be accounted for in
accordance with variable plan accounting, under which the value of these options
are measured at their intrinsic value and any change in that value is charged to
the income statement each quarter based on the difference (if any) between the
intrinsic value and the then-current market value of the common stock. The other
options are accounted for as a fixed plan and in accordance with intrinsic value
accounting, which requires that the excess of the market price of stock over the
exercise price of the options, if any, at the time that both the exercise price
and the number of options are known be recorded as deferred compensation and
amortized over the option vesting period. For the three and twelve months ended
December 31, 2003, the Company recorded a mark-to-market adjustment of $(0.6)
million and $0.6 million respectively relating to these re-priced options.
In July 2003, the compensation and stock option committee of the Company's board
of directors, acting pursuant to the Company's 2002 stock option plan, granted
26 employees and officers options to purchase an aggregate of 470,000 shares of
the Company's common stock at a price of $5.15 per share. In September 2003, one
additional employee received a grant for 25,000 shares of the Company's common
stock at a price of $5.65 per share. One-half of each option grant vests with
the passage of time and the continued employment of the recipient, in three
equal increments, on the first, second and third anniversary of the date of
grant. The other half of each grant will either vest or be rescinded based on
the performance of the Company in 2004. If vested and not exercised, the options
will expire on the 10th anniversary of the date of grant. In August 2004, one
employee received a grant for 100,000 shares of the Company's common stock at a
price of $5.15 per share. (Unaudited) In December 2004, the directors, one
employee and one consultant received options to purchase an aggregate of 195,000
shares of the Company's common stock at a price of $8.57 per share. (Unaudited)
These options were immediately exercisable. (Unaudited)
Assessment of Asset Impairment
The Company follows the provisions of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or their fair value less costs to sell. On
January 1, 2002, the Company also adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of". The statement requires that all long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured on a net realizable value basis and will
not include amounts for future operating losses. The statement also broadens the
reporting requirements for discontinued operations to include disposal
transactions of all components of an entity (rather than segments of a
business). Components of an entity include operations and cash flows that can be
clearly distinguished from the rest of the entity that will be eliminated from
the ongoing operations of the entity in a disposal transaction. Subsequent to
the period covered by this report, we engaged a financial advisor to value
certain of our assets as of December 31, 2002, among other things, to test for
potential impairment of certain of our long-lived assets under SFAS No. 144.
This testing included valuations of software and customer-related intangibles.
Based on these tests, no recording of impairment charges was required. However,
we subsequently engaged this financial advisor to reevaluate the value of our
customer-related intangibles as of September 30, 2003 due primarily to the
decline in revenue from UPS in this time period. This valuation resulted in an
impairment of the customer-related intangibles of $5.5 million in the third
quarter of 2003. The adoption of SFAS No. 144 had no other material impact on
our financial statements.
F-21
Deferred Taxes
The Company accounts for income taxes under the liability method as required in
SFAS No. 109, "Accounting for Income Taxes". Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax laws and rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under this method, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation reserve is established for
deferred tax assets if the realization of such benefits cannot be sufficiently
assured.
Property and Equipment
Property and equipment are recorded at cost for the Predecessor Company and
adjusted for impairment, and includes "fresh-start" adjustments for the
Successor Company and depreciated over their useful life using the straight-line
method. All identifiable assets recognized in accordance with "fresh-start"
accounting were recorded at the effective date based upon independent appraisal.
Assets recorded as capital leases are amortized over the shorter of their useful
lives or the term of the lease. The estimated useful lives of office furniture
and equipment vary from two to ten years, and the network equipment is
depreciated over seven years. The Company has also capitalized certain costs to
develop and implement its computerized billing system. These costs are included
in property and equipment and are depreciated over three years. Repairs and
maintenance do not significantly increase the utility or useful life of an asset
and are expensed as incurred.
Segment Disclosures
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", the Company has one operating segment: its core
wireless business. Since January 1, 2001, the Company had one operating segment:
its core wireless business. The Company provides its core wireless business to
the continental United States, Alaska, Hawaii and Puerto Rico. The following
summarizes the Company's core wireless business revenue by major market
categories:
Successor Company Predecessor Company
----------------- -------------------
(unaudited) (Restated)
Nine Months Year Eight Months Four Months Year
Ended Ended Ended Ended Ended
Summary of Revenue September 30, December 31, December 31, April 30, December 31,
------------------ 2004 2003 2002 2002 2001
(in millions) ---- ---- ---- ---- ----
Wireless Internet $15.7 $27.8 $15.5 $5.6 $11.4
Field Services 4.7 9.9 10.5 5.6 19.4
Transportation 2.7 7.9 7.4 4.1 15.9
Telemetry 1.8 2.3 1.8 0.8 2.6
All other 2.6 1.4 0.3 0.7 18.8
--- --- --- --- ----
Service Revenue $27.5 49.3 35.5 16.8 68.1
Equipment Revenue 3.8 5.2 1.1 5.6 22.2
--- --- --- --- ----
Total $31.3 $54.5 $36.6 $22.4 $90.3
===== ===== ===== ===== =====
The Company does not measure ultimate income or loss or track its assets by
these market categories.
(Loss) Per Share
Basic and diluted (loss) income per common share is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
F-22
Options and warrants to purchase shares of common stock were not included in the
computation of loss per share as the effect would be antidilutive for the years
ended December 31, 2003 and 2001 and for the four and eight months ended April
30, 2002 and December 31, 2002, respectively. As a result, the basic and diluted
earnings per share amounts for all periods presented are the same. As of
September 30, 2004 and 2003, there were warrants to acquire 6,063,450 and
5,664,962, respectively, shares of common stock and options outstanding for
633,719 and 1,787,900, respectively, shares that were not included in this
calculation because of their antidilutive effect. (Unaudited) As of December 31,
2003, there were warrants to acquire approximately 5,664,962 shares of common
stock and 1,757,513 options outstanding that were not included in this
calculation because of their antidilutive effect. As of December 31, 2002, there
were warrants to acquire approximately 2,339,962 shares of common stock and
1,631,025 options outstanding that were not included in this calculation because
of their antidilutive effect. For the four months ended April 30, 2002, no
options or warrants had exercise prices in excess of the fair market value of
the Company's common stock and thus were not factored into the per share
calculation. As of December 31, 2001 there were options outstanding for
approximately 393,353 shares of common stock that were not included in this
calculation because of their antidilutive effect.
Derivatives
In April and July 2001, the Company sold notes to Rare Medium totaling $50
million. The notes were collateralized by up to 5,000,000 of the Company's XM
Radio shares, and, until maturity, which was extended until October 12, 2001,
Rare Medium had the option to exchange the notes for a number of XM Radio shares
equivalent to the principal of the note plus any accrued interest thereon (see
Note 8, "Debt and Capital Leases"). The Company determined the embedded call
options in the notes, which permitted Rare Medium to convert the borrowings into
shares of XM Radio, were derivatives which were accounted for in accordance with
SFAS No. 133 and accordingly recorded a gain in the amount of $1.5 million in
2001 related to the Rare Medium note call options. On October 12, 2001, the
embedded call options in the Rare Medium notes expired unexercised. The Rare
Medium note was cancelled and replaced by a new Rare Medium note in the amount
of $19.0 million as part of the Company's reorganization.
In connection with the bank financing in March 1998, the Company entered into an
interest rate swap agreement, with an implied annual rate of 6.51%. The swap
agreement reduced the impact of interest rate increases on then-existing term
loan facility. The Company paid a fixed fee of approximately $17.9 million for
the swap agreement. In return, the counter-party was obligated to pay a variable
rate equal to LIBOR plus 50 basis points, paid on a quarterly basis directly to
the respective banks on behalf of the Company, on a notional amount of $100
million until the termination date of March 31, 2001. In connection with the pay
down of a portion of the term loan facility during 1999, the Company reduced the
notional amount of its swap agreement from $100 million to $41 million and
realized net proceeds of approximately $6 million due to early termination of a
portion of the swap agreement. The interest rate swap agreement expired in March
2001.
Investment in MSV and Notes Receivable from MSV
As a result of the application of "fresh-start" accounting, restatements and the
subsequent modifications described below, the notes and investment in MSV were
valued at fair value and the Company recorded an asset in the amount of
approximately $53.9 million representing the estimated fair value of our
investment in and note receivable from MSV. Included in this investment is the
historical cost basis of the Company's common equity ownership of approximately
48% as of May 1, 2002, or approximately $19.3 million. In accordance with the
equity method of accounting, we recorded our approximate 48% share of MSV losses
against this basis.
Approximately $6.2 million of the value attributed to the equity interest in MSV
is the excess of fair value over cost basis and is amortized over the estimated
lives of the underlying MSV assets that gave rise to the basis difference. The
Company is amortizing the excess basis in accordance with the pro-rata
allocation of various components of MSV's intangible assets as determined by MSV
through recent independent valuations. Such assets consist of FCC licenses,
intellectual property and customer contracts, which are being amortized over a
weighted-average life of approximately 12 years.
F-23
Additionally, Motient has recorded the $15.0 million note receivable from MSV,
plus accrued interest thereon at its fair value, estimated to be approximately
$13.0 million at "fresh start", after giving affect to discounted future cash
flows at market interest rates. This note matures in November 2006 and is
subject to certain conditions and priorities with respect to payment of other
indebtedness.
In November 2003, Motient engaged CTA to perform a valuation of its equity
interests in MSV as of December 31, 2002. Concurrent with CTA's valuation,
Motient reduced the book value of its equity interest in MSV from $53.9 million
(inclusive of Motient's $2.5 million convertible notes from MSV) to $40.9
million as of May 1, 2002 to reflect certain preference rights on liquidation of
certain classes of equity holders in MSV.
Also, as a result of CTA's valuation of MSV, Motient determined that the value
of its equity interest in MSV was impaired as of December 31, 2002. This
impairment was deemed to have occurred in the fourth quarter of 2002 and the
Company reduced the value of its equity interest in MSV by $15.4 million as of
December 31, 2002. It was determined that no further impairment was required as
of December 31, 2003.
The valuation of Motient's investment in MSV and its note receivable from MSV
are ongoing assessments that are, by their nature, judgmental given that MSV is
not traded on a public market and is in the process of developing certain next
generation technologies, which depend on approval by the FCC. There is the
inherent future risk that due to the uncertainties described above, Motient may
have to write down the value of this investment and note. For information
regarding recent developments involving MSV, please see Note 16 ("Subsequent
Events").
For the year ended December 31, 2003, MSV had revenues of $27.1 million,
operating expenses of $46.5 million and a net loss of $28 million. For the
eight-month period ended December 31, 2002, MSV had revenues of $15.8 million,
operating expenses of $36.4 million and a net loss of $17.0 million. For the
four-month period ended April 30, 2002, MSV had revenues of $9.1 million,
operating expenses of $9.3 million and a net loss of $9.2 million. For the year
ended December 31, 2003, the Company's equity in losses of MSV were $9.7
million. For the eight-month period ended December 31, 2002, the Company's
equity in losses of MSV were $6.9 million, and for the four-month period ended
April 30, 2002, the Company's equity in losses of MSV were $1.9 million. Results
for MSV for these periods and for the years ended December 31, 2003, 2002 and
2001 are outlined below.
Eight Months Four Months
Year Ended Ended Ended Year Ended
December 31, December 31, April 30, December 31,
2003 2002 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(in thousands)
Revenue $ 27,124 $ 15,766 $ 9,088 $ 2,095
Income (loss) from operations (19,332) (20,622) (175) (16,156)
Net Loss (28,000) (16,964) (9,203) (16,525)
Current Assets 10,678 12,383 14,292 14,335
Non-current assets 120,141 131,912 142,081 148,328
Current liabilities 10,372 10,555 14,801 11,999
Non-current liabilities $ 121,431 $ 110,474 $ 101,348 $ 101,238
For additional information regarding MSV, please see the financial statements of
MSV beginning on page M-1.
Recent Accounting Pronouncements
In February, 2002, EITF No. 01-09, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)", was
issued to provide guidance on whether consideration paid by a vendor to a
reseller should be recorded as expenses or against revenues. The Company has
reviewed EITF 01-09 and believes that all such consideration is properly
recorded by the Company as operating expenses. The Company adopted the
provisions of this consensus on January 1, 2002, and it had no material impact
on the Company's consolidated financial statements.
F-24
In November 2002, the EITF reached consensus on EITF No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables". This consensus requires that
revenue arrangements with multiple deliverables be divided into separate units
of accounting if the deliverables in the arrangement meet specific criteria. In
addition, arrangement consideration must be allocated among the separate units
of accounting based on their relative fair values, with certain limitations. The
sale of the Company's equipment with related services constitutes a revenue
arrangement with multiple deliverables. The Company will be required to adopt
the provisions of this consensus for revenue arrangements entered into after
June 30, 2003, and the Company has decided to apply it on a prospective basis.
Motient did not have any revenue arrangements that would have a material impact
on its financial statements with respect to EITF No. 00-21.
In November 2002, the FASB issued FASB Interpretation, or FIN No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. However, a liability does not have to be recognized for a
parent's guarantee of its subsidiary's debt to a third party or a subsidiary's
guarantee of the debt owed to a third party by either its parent or another
subsidiary of that parent. The initial recognition and measurement provisions of
FIN No. 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 irrespective of the guarantor's fiscal year
end. The disclosure requirements of FIN No. 45 are effective for financial
statements with annual periods ending after December 15, 2002. Motient does not
have any guarantees that would require disclosure under FIN No. 45.
In January 2003, the FASB issued FASB Interpretation No. 46 or FIN No. 46,
"Consolidation of Variable Interest Entities -- An Interpretation of ARB No.
51", which clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements", to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN No. 46
provides guidance related to identifying variable interest entities (previously
known generally as special purpose entities, or SPEs) and determining whether
such entities should be consolidated. FIN No. 46 must be applied immediately to
variable interest entities created or interests in variable interest entities
obtained after January 31, 2003. For those variable interest entities created or
interests in variable interest entities obtained on or before January 31, 2003,
the guidance in FIN No. 46 must be applied in the first fiscal year or interim
period beginning after June 15, 2003. The Company has reviewed the implications
that adoption of FIN No. 46 would have on its financial position and results of
operations and it did not have a material impact.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies the characteristics of
an obligation of the issuer. This standard is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company has determined that it does not have any financial instruments
that are impacted by SFAS No. 150.
Restatement of Financial Statements
Subsequent to the issuance of the Company's financial statements for the quarter
ended March 31, 2002 and year ended December 31, 2001, the Company became aware
that certain accounting involving the effects of several complex transactions
from these years, including the formation of and transactions with a joint
venture, MSV, in 2000 and 2001 and the sale of certain of our transportation
assets to Aether in 2000, required revision. These transactions were described
F-25
in more detail in Note 13 ("Business Acquisitions and Dispositions") of notes to
consolidated financial statements in each of Motient's annual reports on Form
10-K for the fiscal years ended December 31, 2000 and 2001. In addition, as a
result of the Company's re-audit of the years ended December 31, 2001 and 2000
performed by the Company's former independent accounting firm, Ehrenkrantz
Sterling & Co. LLC, certain accounting adjustments were proposed and accepted by
the Company. A description of these adjustments is provided below.
Summary of Adjustments to Prior Period Financial Statements with respect to MSV
and Aether Transactions
The following is a brief description of the material differences between our
original accounting treatment with respect to the MSV and Aether transactions
and the revised accounting treatment that Motient has concluded was appropriate
and has been reflected in the accompanying financial statements for the
respective periods.
Allocation of initial proceeds from MSV formation transactions in June 2000. In
the June 2000 transaction with MSV, Motient Services received $44 million from
MSV. This amount represented payments due under a research and development
agreement, a deposit on the purchase of certain of Motient's assets at a future
date, and payment for a right for certain of the investors in MSV to convert
their ownership in MSV into shares of common stock of Motient. Since the
combined fair value of the three components exceeded $44 million, based on
valuations of each component, Motient initially allocated the $44 million of
proceeds first to the fair value of the research and development agreement and
then the remaining value to the asset deposit and investor conversion option
based on their relative fair values. Upon review, Motient revised its initial
accounting treatment and allocated the $44 million of proceeds first to the
investor conversion option based on its fair value, and the remainder to the
research and development agreement and asset deposit based on their relative
fair values. The effect of this reallocation increased shareholders' equity at
the time of the initial recording by $12 million, as well as reduced subsequent
service revenue by $4 million in 2001, as a result of the lower recorded value
allocated to the research and development agreement. All remaining unamortized
balances were written off as part of the gain on the sale of the satellite
assets.
Recording of suspended losses associated with MSV in fourth quarter of 2001. In
November 2001, when the asset sale described in Note 13 was consummated, Motient
and MSV amended the asset purchase agreement, with Motient agreeing to take a
$15 million note as part of the consideration for the sale of the assets to MSV.
Additionally, at the time of this transaction, Motient purchased a $2.5 million
convertible note issued by MSV. As Motient had no prior basis in its investment
in MSV, Motient had not recorded any prior equity method losses associated with
its investment in MSV. When Motient agreed to take the $15 million note as
partial consideration for the assets sold to MSV, Motient recorded its share of
the MSV losses that had not been previously recognized by Motient ($17.5
million), having the effect of completely writing off the notes receivable in
2001.
Upon review, Motient determined that it should not have recorded any suspended
losses of MSV, since those losses should have been absorbed by certain of the
senior equity holders in MSV. As a result, Motient concluded that it should not
have written off its portion ($17.5 million) of the prior MSV losses against the
value of both notes in 2001.
Recording of increase in Motient's investment in MSV in November 2001. Also in
the November 2001 transaction, MSV acquired assets from another company, TMI, in
exchange for cash, a note and equity in MSV. Motient initially considered
whether or not a step-up in the value of its investment in MSV was appropriate
for the value allocated to TMI for its equity interest, and determined that a
step-up was not appropriate. Upon review, Motient determined that it should have
recognized a step-up in value of the MSV investment of $12.9 million under Staff
Accounting Bulletin No. 51, "Accounting for Sales of Stock of a Subsidiary"
("SAB 51"), with an offsetting gain recorded directly to shareholders' equity.
Recognition of gain on sale of assets to MSV in November 2001. Upon the
completion of the November 2001 transactions, Motient determined that 80% of its
gain from the sale of the assets should be deferred, since that was Motient's
equity ownership percentage in MSV at the time the assets were sold to MSV. Upon
review, Motient has determined that it was appropriate to apply Motient's
ownership percentage at the completion of all of the related transactions that
occurred on the same day as the asset sale transaction, since the transactions
were dependent upon one another and effectively closed simultaneously.
F-26
Accordingly, Motient should have deferred approximately 48% of the gain
(Motient's equity ownership percentage in MSV following the completion of such
transactions) as opposed to 80%. This change resulted in an increased gain on
the sale of MSV of $7.9 million in 2001.
Allocation of proceeds from the sale of the transportation business to Aether in
November 2000. Motient received approximately $45 million for the sale of its
retail transportation business assets and assumption of its liabilities to
Aether. This consisted of $30 million for the assets, of which $10 million was
held in an escrow account that was subsequently released in the fourth quarter
of 2001 upon the satisfaction of certain conditions, and $15 million for a
perpetual license to use and modify any intellectual property owned or licensed
by Motient in connection with the retail transportation business. In the fourth
quarter of 2000, Motient recognized a gain of $8.9 million, which represented
the difference between the net book value of the assets sold and the $20 million
cash portion of the purchase price for the assets received at closing. Motient
recognized an additional $8.3 million gain in the fourth quarter of 2001 when
the additional $10 million of proceeds were released from escrow. The $1.7
million difference between the proceeds received and the gain recognized is a
result of pricing modifications that were made at the time of the release of the
escrow plus certain compensation paid to former employees of the transportation
business as a result of certain performance criteria having been met.
Motient deferred the $15 million perpetual license payment, which was then
amortized into revenue over a five-year period, the estimated life of the
customer contracts sold to Aether at the time of the transaction. Upon review,
Motient determined that the $15 million in deferred revenue should be recognized
over a four year period, which represents the life of a network airtime
agreement that Motient entered into with Aether at the time of the closing of
the asset sale. The decrease in the amortization period resulted in increased
revenue of $63,000 and $750,000 in 2000 and 2001, respectively.
Recognition of costs associated with certain options granted to Motient
employees who were subsequently transferred to Aether upon consummation of the
sale of Motient's transportation business to Aether in November 2000. Motient
valued the vested options based on their fair value at the date of the
consummation of the asset sale and recorded that value against the gain on the
sale of the assets to Aether. Upon review, Motient has determined to value these
vested options as a repricing under the intrinsic value method, with any charge
recorded as an operating expense. In addition, for each subsequent quarter for
which the unvested options continued to vest, Motient had valued these options
on a fair value basis and recorded any adjustment in value as an operating
expense. Upon review, Motient has determined that any adjustments in value
should have been reflected as an increase or reduction of the gain on the sale
of the assets to Aether. The revised accounting resulted in an increase in
expenses of $1.0 million in 2001.
Recognition of difference between strike price and fair market value at
measurement date for options issued to ARDIS employees. Motient has restated its
consolidated financial statements to recognize compensation expense related to
the issuance of stock options with an exercise price below fair market value.
The revised accounting resulted in a decrease in net income and a corresponding
increase in additional paid in capital of $0.01 million for the year ended
December 31, 2001.
Recognition of adoption of SAB 101,"Revenue Recognition in Financial
Statements". Motient has restated its consolidated financial statements as of
January 1, 2000, based on guidance provided in Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements", as amended ("SAB101"). Motient's adoption of SAB101 resulted in a
change of accounting for certain product shipments and activation fees. The
cumulative effect of the change to retained earnings as of January 1, 2000 was
$4.6 million. The cumulative effect was recognized as income in 2001 as the
amounts were amortized into revenue and ultimately recognized as additional gain
on the sale of the Company's satellite, transportation and certain other assets.
Accrual of advertising expense in December 2000. Motient has restated its
consolidated financial statements in 2000 to recognize an additional $1.1
million in advertising expense previously recognized in 2001.
F-27
Recognition of costs associated with inventory write-downs. Motient has restated
its consolidated financial statements in 2000 to recognize an additional $1
million in Cost of Goods Sold for inventory write-downs previously recognized in
2001. In addition, Motient has restated its consolidated financial statements
for the three-months ended March 31, 2002 to recognize an additional $0.4
million in Cost of Goods Sold for inventory write-downs not previously recorded.
Summary of Impact of the Restatement
The revised accounting treatment described above required that certain
adjustments be made to the income statements and balance sheets for the years
ended December 31, 2001 and the quarter ended March 31, 2002. The effect of
these adjustments is illustrated in the table below. Certain of the adjustments
are based on assumptions that we have made about the fair value of certain
assets.
Quarter Ended Year Ended
March 31, December 31,
2002 2001
---- ----
(in thousands)
Statement of operations data
----------------------------
Net Revenue, as previously reported $ 16,495 $ 93,293
Adjustments 188 (3,028)
--------- ---------
As restated $ 16,683 $ 90,265
========= =========
Net Operating Loss, as previously reported $ (15,970) $ (94,996)
Adjustments 208 (2,227)
--------- ---------
As restated $ (15,762) $ (97,223)
========= =========
Net Loss, as previously reported $ (32,885) $(292,089)
Adjustments (2,544) 22,592
--------- ---------
As restated - inclusive of the cumulative
effect of $4,677 $ (35,429) $(269,497)
========= =========
Basic and Fully Diluted Loss Per Share of
Common Stock, as previously reported $ (0.56) $ (5.71)
Adjustments (0.05) 0.44
--------- ---------
As restated $ (0.61) $ (5.27)
========= =========
Balance sheet data
------------------
Total Assets, as previously reported $ 177,628 $ 209,617
Adjustments 27,654 30,848
--------- ---------
As restated $ 205,282 $ 240,465
========= =========
Total Liabilities, as previously reported $ 485,681 $ 485,086
Adjustments (14,122) (13,472)
--------- ---------
As restated $ 471,559 $ 471,614
========= =========
Stockholders' Equity, as previously
reported $(308,053) $(275,469)
Adjustments 41,776 44,320
--------- ---------
As restated $(266,277) $(231,149)
========= =========
Total Liabilities & Stockholders' Equity,
as previously reported $ 177,628 $ 209,617
Adjustments 27,654 30,848
--------- ---------
As restated $ 205,282 $ 240,465
========= =========
F-28
3. STOCKHOLDERS' (DEFICIT) EQUITY
As of December 31, 2003 and 2002, the Company has authorized 5,000,000 shares of
preferred stock and 100,000,000 shares of common stock. For each share of common
stock held, common stockholders are entitled to one vote on matters submitted to
the stockholders.
The Preferred Stock may be issued in one or more series at the discretion of the
Board of Directors (the "Board"), without stockholder approval. The Board is
authorized to determine the number of shares in each series and all
designations, rights, preferences, and limitations on the shares in each series,
including, but not limited to, determining whether dividends will be cumulative
or non-cumulative.
As of December 31, 2003, the Company had reserved common stock for future
issuance as detailed below.
Shares issuable upon exercise of warrants 5,664,962
2002 Stock Option Plan 2,993,024
Defined Contribution Plan 115,828
---------
Total 8,773,814
=========
XM Radio
During 2000 and 2001, XM Radio executed certain equity transactions that
affected the Company's ownership percentage in XM Radio. As a result of these
transactions, and in accordance with SAB 51, the Company recorded a decrease to
its investment in XM Radio of $12.2 million in 2001, and an increase to its
investment in XM Radio of $129.5 million in 2000. SAB 51 addresses the
accounting for sales of stock by a subsidiary. Because XM Radio was a
development stage company until November 12, 2001, SAB 51 required the
difference in the carrying amount of the Company's investment in XM Radio and
the net book value of XM Radio after the stock issuances be reflected in the
financial statements of the Company as a capital transaction in the accompanying
consolidated statements of stockholders' (deficit) equity. As of November 19,
2001, the Company did not hold any interest in XM Radio.
Mobile Satellite Ventures LP
During 2001, MSV executed certain equity transactions that affected the
Company's ownership percentage in MSV. As a result of these transactions, and in
accordance with SAB 51, the Company recorded an increase to its investment in
MSV of $12.9 million in 2001, with an offsetting gain recorded directly to
shareholders' equity.
Please see the audited financial statements of MSV beginning on page M-1 for
further information regarding the financial condition of MSV.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Successor Company
-----------------
December 31,
2003 2002
---- ----
(in thousands)
Network equipment $35,865 $47,384
Office equipment and furniture 2,846 3,951
Construction in progress -- 1,409
------ ------
38,711 52,744
Less accumulated depreciation and
amortization (7,330) (6,339)
------- -------
Property and equipment, net $31,381 $46,405
======= =======
F-29
Depreciation expense totaled $13,770 for the year ended December 31, 2003;
$9,816 for the eight months ended December 31, 2002 and $5,924 for the four
months ended April 30, 2002.
5. FCC LICENSES AND OTHER INTANGIBLE ASSETS
FCC licenses and other intangible assets consist of the following:
Successor Company
-----------------
December 31,
2003 2002
---- ----
(in thousands)
FCC Licenses $80,594 $88,997
Customer contracts 1,893 11,501
------- -------
82,487 100,498
Less accumulated amortization (8,466) (5,577)
------- -------
FCC licenses and other intangible
assets, net $74,021 $94,921
======= =======
Amortization totaled $7,696 for the year ended December 31, 2003; $5,693 for the
eight months ended December 31, 2002 and $989 for the four months ended April
30, 2002.
Motient accounts for its frequencies as finite-lived intangibles and amortizes
them over a 20-year estimated life. Motient's FCC licenses are granted for a
term of 10 years, subject to renewal. Renewal of Motient's current licenses are
granted in the ordinary course. Motient had amortized its goodwill on a
straight-line basis over 20 years, however, this goodwill was eliminated as part
of Motient's "fresh-start" accounting. As part of its "fresh-start" accounting,
Motient valued its long-term customer contracts and amortizes these contracts
over a four-year life.
Subsequent to the period covered by this report, we engaged a financial advisor
to value certain of our customer-intangible assets as of December 31, 2002,
among other things, to test for potential impairment of certain of our
long-lived assets under SFAS No. 144. Based on these tests, no recording of
impairment charges was required. However, we subsequently engaged this financial
advisor to reevaluate the value of our customer-related intangibles as of
September 30, 2003 due primarily to the decline in revenue from UPS in this time
period. This valuation resulted in an impairment of the customer-related
intangibles of $5.5 million in the third quarter of 2003. For information
regarding recent developments related to the Company's FCC licenses, please see
Note 16 ("Subsequent Events").
The table below outlines Motient's amortization requirements for the five year
period from December 31, 2003.
Prior to its reorganization, the Company had several active stock option plans.
The Motient Corporation Award Plan (the "Award Plan") permitted the grant of
non-statutory options and stock-based awards up to a total of 7.3 million shares
of common stock. Under the Award Plan, the exercise price and vesting schedule
for options was determined by the compensation and stock option committee of the
Board, which was established to administer the Award Plan. Generally, options
vested over a three year period and had an exercise price of not less than the
fair market value of a share on the date the option was granted or have a term
greater than ten years. In May 2000, the Company's stockholders approved certain
amendments to the Award Plan, including permitting non-employee directors to be
eligible for option grants under the Award Plan.
F-30
The Company also had a Stock Plan for Non-Employee Directors (the "Director
Plan") which provided for the grant of the options up to a total of 100,000
shares of common stock. Effective March 25, 1999, Directors received an initial
option to purchase 5,000 shares of common stock, with annual option grants to
purchase 2,500 shares of common stock. In addition, the Board was allowed to
grant discretionary options at such time and on such terms and conditions as it
deemed appropriate. Options under the Director Plan were exercisable at a price
equal to the fair market value of the stock on the date of grant and were fully
vested and immediately excercisable on the date of grant. Each Director Plan
option expired on the earlier of (i) ten years from the date of grant or (ii)
seven months after the Director's termination.
In January 1998, the Board granted restricted stock to certain members of senior
management. These grants included both a three year vesting schedule as well as
specific corporate performance targets. The Company did not record any
compensation expense associated with these shares during 1999 or 2000 however in
January 2001, in recognition of employee services in entering into the second
MSV transaction, the Board lifted the remaining restrictions, and the shares
were released upon vesting. Accordingly, the Company recorded compensation
expense in the amount of $1.4 million in 2001 associated with the vesting of
these shares.
On September 25, 2001, the Company issued approximately 3.2 million shares of
restricted stock to employees, with a price on the date of issuance of $0.13 per
share, in exchange for approximately 4.3 million outstanding employee stock
options, which were cancelled. With the exception of restricted stock issued to
an employee terminated on September 26, 2001, which shares vested immediately
based on the terminated employees' then-vested exchanged options, all other
shares of restricted stock issued on September 25, 2001 were subject to a six
month holding period, at which time the shares of restricted stock vested in
accordance with the vesting schedule of the options for which the restricted
stock was exchanged. The Company recorded a deferred compensation charge as of
December 31, 2001 in the amount of $419,000 associated with the issuance of
these shares. This compensation was charged expense over the employees' service
period.
All of the above mentioned plans and the respective authorized and issued stock
options were cancelled as part of the Company's reorganization on May 1, 2002.
In May 2002, the Company's Board approved the 2002 Stock Option Plan with
2,993,024 authorized shares of common stock, of which options to purchase
1,757,513 shares of the Company's common stock were outstanding at December 31,
2003. The plan was approved by the Company's stockholders on July 11, 2002. The
2002 options are subject to vesting in two parts - 50% of the shares vest in
three equal parts on the first, second and third anniversary of the date of
grant, and the other 50% vest in three equal parts, or are rescinded, based on a
comparison of the Company's performance in 2002, 2003, and 2004 to certain
objectives established by the compensation and stock option committee of the
Board following the availability of the annual results. A portion of the options
granted under the 2002 Stock Option Plan have a performance-based component.
These options will be accounted for in accordance with variable plan accounting,
which requires that the value of these options are measured at their intrinsic
value and any change in that value be charged to the income statement upon the
determination that the fulfillment of the performance criteria is probable. The
other options were previously accounted for as a fixed plan and in accordance
with intrinsic value accounting, which require that the excess of the market
price of stock over the exercise price of the options, if any, at the time that
both the exercise price and the number of options are known be recorded as
deferred compensation and amortized over the option vesting period.
In March 2003, the Company's board of directors approved the reduction in the
exercise price of all of the outstanding stock options from $5.00 per share to
$3.00 per share. The re-pricing requires that all options be accounted for in
accordance with variable plan accounting, which requires that the value of these
options are measured at their intrinsic value and any change in that value be
charged to the income statement each quarter based on the difference (if any)
between the intrinsic value and the then-current market value of the common
stock.
F-31
In July and September 2003, the compensation and stock option committee of the
Company's Board, acting pursuant to the Company's 2002 stock option plan,
granted 26 employees and officers options to purchase an aggregate of 470,000
shares of the Company's common stock at a price of $5.15 per share and 25,000
shares of the Company's common stock at a price of $5.65 per share. One-half of
each option grant vests with the passage of time and the continued employment of
the recipient, in three equal increments, on the first, second and third
anniversary of the date of grant. The other half of each grant will either vest
or be rescinded based on the performance of the Company in 2004. In August 2004,
one employee received a grant for 100,000 shares of the Company's common stock
at a price of $5.15 per share. (Unaudited) In December 2004, the directors, one
employee and one consultant received options to purchase an aggregate of 195,000
shares of the Company's common stock at a price of $8.57 per share. These
options were immediately exercisable. (Unaudited) If vested and not exercised,
the options will expire on the 10th anniversary of the date of grant.
(Unaudited)
Information regarding the Company's stock option plan is summarized below:
Restricted
Stock and
Options Options Granted Weighted Average
Available and Option Price
For Grant Outstanding Per Share
--------- ----------- ---------
Predecessor Company
-------------------
Balance, December 31, 2000 2,194,432 3,920,605 $11.65
Options granted (1,274,336) 1,274,336 5.88
Restricted stock granted (3,219,236) -- --
Restricted stock cancelled 88,200 -- --
Exercised -- (2,015) 0.68
Forfeited 4,799,573 (4,799,573) 10.28
----------- -----------
Balance, December 31, 2001 2,588,633 393,353 9.65
MTNT Restricted stock and options available for
grant cancelled (2,588,633) (393,353)
----------- -----------
Balance, April 30, 2002 (Predecessor Company) -- -- --
Successor Company
-----------------
Reorganized MNCP shares authorized for grant 2,993,024 -- 5.00 (1)
MNCP options granted (2,244,250) 2,244,250 --
Exercised 5.00
Forfeited -- -- 5.00
Balance, December 31, 2002 613,225 (613,225)
----------- -----------
1,361,999 1,631,025
Options granted (495,000) 495,000 5.18
Exercised 15,412 (15,412) 3.00
Forfeited 353,100 (353,100) 3.02
----------- -----------
Balance, December 31, 2003 1,235,511 1,757,513
(1) In March 2003, our board of directors approved the reduction in
the exercise price of all of the outstanding stock options from
$5.00 per share to $3.00 per share.
Exercise prices for options outstanding as of December 31, 2003, were as
follows:
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
as of Contractual Average as of Average
Range of December 31, Life Exercise December 31, Exercise
Exercise Prices 2003 Remaining Price 2003 Price
--------------- ---- --------- ----- ---- -----
$5.00(1) 1,265,513 9 years $3.00 426,289 $3.00
$5.15 467,000 10 years $5.15 -- $5.15
$5.65 25,000 10 years $5.65 -- $5.65
(1) In March 2003, our board of directors approved the reduction in the
exercise price of all of the outstanding stock options from $5.00 per
share to $3.00 per share.
7. INCOME TAXES
The following is a summary of the Company's net deferred tax assets.
Successor Company
-----------------
December 31,
2003 2002
---- ----
(in thousands)
Net Operating Loss Carryforwards $165,933 $148,699
Deferred Taxes Related to Temporary Differences:
Tangible asset bases, lives and depreciation methods (11,000) (13,736)
Other (8,515) (13,518)
-------- --------
Total deferred tax asset, net 146,418 121,445
Less valuation allowance (146,418) (121,445)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
Potential tax benefits, related to net operating losses and temporary
differences, have been recorded as an asset, and a valuation allowance for the
same amount has been established. The Company has paid no income taxes since
inception.
As of December 31, 2003 and 2002, the Company had estimated net operating loss
carryforwards ("NOLs") of $412 million and $370 million, respectively. In April
2002, due to the debt restructuring and reorganization, the Company has
triggered a change of control, which has limited the availability and
utilization of the NOLs. The Company's NOL's expire between 2004 and 2024.
8. DEBT & CAPITAL LEASES
Debt and capital leases consists of the following:
December 31,
------------
2003 2002
---- ----
(in thousands)
Rare Medium note payable, including accrued interest $22,016 $20,148
CSFB note payable, including accrued interest 869 795
Term Credit Facility 4,914 ---
Vendor financing, including accrued interest 4,814 5,947
Capital leases 3,096 6,250
----- -----
35,709 33,140
Less current maturities 3,867 4,051
----- -----
Long-term debt $31,842 $29,089
======= =======
F-33
The following table reflects the maturity of our various obligations over the
next five years:
Less then
Total 1 year 1-4 years After 5 years
----- ------ --------- -------------
(in thousands)
Operating leases (1) $33,685 $12,170 $19,031 $2,484
Capital lease obligations, including interest thereon (1) 3,504 1,752 1,752 ---
Notes Payables (2) 22,885 --- 22,885 ---
Term Credit Facility (3) 4,914 --- 4,914 ---
Vendor financing commitment and note payable (4) 4,814 2,413 2,401 ---
----- ----- ----- ------
Total Contractual Cash Obligations $69,802 $16,335 $50,983 $2,484
======= ======= ======= ======
(1) 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.
(2) These notes were paid in full in July 2004. (Unaudited)
(3) This facility was repaid in full in April 2004. (Unaudited)
(4) All obligations pursuant to this commitment and note were settled and
repaid in July 2004. (Unaudited)
Term Credit Facility
On January 27, 2003, the Company's wholly-owned subsidiary, Motient
Communications, closed a $12.5 million term credit agreement with a group of
lenders, including several of the Company's existing stockholders. The lenders
include the following entities or their affiliates: M&E Advisors, L.L.C., Bay
Harbour Partners, York Capital and Lampe Conway & Co. York Capital is affiliated
with JGD Management Corp. and James G. Dinan. JGD Management Corp., James G.
Dinan, James D. Dondero and Highland Capital Management each hold 5% or more of
Motient's common stock. The lenders also included Gary Singer, directly or
through one or more entities. Gary Singer is the brother of Steven G. Singer,
one of our directors.
Under the credit agreement, the lenders made commitments to lend Motient
Communications up to $12.5 million. Borrowing availability under Motient's term
credit facility terminated on December 31, 2003. On March 16, 2004, Motient
Communications entered into an amendment to the credit facility which extended
the borrowing availability period until December 31, 2004.
In each of April, June and August 2003 and March of 2004, the Company made draws
under the credit agreement in the amount of $1.5 million for an aggregate amount
of $6.0 million, all of which was repaid in April 2004. The Company used such
funds to fund general working capital requirements of operations.
For the monthly periods ended April 2003 through December 2003, and in September
2004 (unaudited), the Company reported events of default under the terms of the
credit facility to the lenders. These events of default related to
non-compliance with covenants requiring minimum monthly revenue, earnings before
interest, taxes and depreciation and amortization and free cash flow
performance. In each period, the lenders waived these events of default.
F-34
Borrowing availability under the facility terminated on December 31, 2004, and
the Company does not plan to attempt to extend the borrowing availability again.
All amounts due and owing under the facility were repaid prior to such
termination (unaudited).
On January 27, 2003, in connection with the signing of the credit agreement,
Motient issued warrants at closing to the lenders to purchase, in the aggregate,
3,125,000 shares of its common stock. The exercise price for these warrants is
$1.06 per share. The warrants were immediately exercisable upon issuance and
have a term of five years. The warrants were valued at $10 million using a
Black-Scholes pricing model and have been recorded as a debt discount and are
being amortized as additional interest expense over three years, the term of the
related debt. Upon closing of the credit agreement, the Company paid closing and
commitment fees to the lenders of $500,000. These fees have been recorded on the
Company's balance sheet and are being amortized as additional interest expense
over three years, the term of the related debt. Under the credit agreement, the
Company was required to pay an annual commitment fee of 1.25% of the daily
average of undrawn amounts of the aggregate commitments from the period from the
closing date to December 31, 2003. In December 2003, the Company paid the
lenders a commitment fee of approximately $113,000.
For further information about amendments to and repayments of amounts due and
owing under this Credit Agreement, please see Note 16 ("Subsequent Events").
$335 Million Unit Offering
On March 31, 1998, Motient Holdings Inc., a wholly-owned subsidiary of Motient,
issued $335 million of Units (the "Units") consisting of 12 1/4% Senior Notes
due 2008 (the "Senior Notes"), and one warrant to purchase 3.75749 shares of
common stock of the Company for each $1,000 principal amount of Senior Notes
(the "Warrants") at an exercise price of $12.51 per share. The Warrants were
valued at $8.5 million and were recorded as a debt discount. A portion of the
net proceeds of the sale of the Units were used to finance the Motient
Communications acquisition in 1998. In connection with the Senior Notes, Motient
Holdings Inc. purchased approximately $112.3 million of restricted investments
that were restricted for the payment of the first six interest payments on the
Senior Notes. Interest payments are due semi-annually, in arrears, beginning
October 1, 1998. As a result of the automatic application of certain adjustment
provisions following the issuance of 7.0 million shares of common stock in a
public offering in 1999, the exercise price of the warrants associated with the
Senior Notes was reduced to $12.28 per share, the number of shares per warrant
was increased to 3.83 shares for each $1,000 principal amount of Senior Notes,
and the aggregate number of shares issuable upon exercise of such warrants was
increased by 24,294. The additional Senior Note warrants and re-pricing were
valued at $440,000. This was recorded as additional debt discount in the third
quarter of 1999. The Senior Notes were jointly and severally guaranteed on a
full and unconditional basis by Motient Corporation and all of its subsidiaries.
The Company failed to make a semi-annual interest payment due October 1, 2001,
which failure constituted an event of default under the Senior Notes. As a
result of the Company's failure to make the required semi-annual interest
payment, the missed interest payment accrued interest at the annual rate of
13.25%. As a result of this event of default, the Company classified the Senior
Notes as current liabilities in the Consolidated Balance Sheet as of December
31, 2001.
As discussed above (please see Note 2, "Significant Accounting Policies"), as
part of the Company's Plan of Reorganization, the Senior Notes, including
accrued interest thereon, and related warrants were exchanged in full for new
equity of the reorganized Company.
Rare Medium Notes
In 2001, Motient issued two notes to Rare Medium in the aggregate principal
amount of $50 million, at 12.5% annual interest. These notes were collateralized
by five million of the Company's XM Radio shares. On October 12, 2001, in
accordance with the terms of the notes, the Company exchanged $26.2 million of
the Rare Medium notes, representing $23.8 million in principal and $2.4 million
of accrued interest, for five million of its XM Radio shares. The $26.9 million
of principal and accrued interest remaining outstanding at December 31, 2001 was
unsecured.
F-35
As a result of the delivery of the shares of XM Radio common stock described
above (see Note 13, "Business Acquisitions and Dispositions"), the maturity of
the Rare Medium notes was accelerated to November 19, 2001. As of December 31,
2001, the Rare Medium notes were in default; and, therefore, the Company
classified the Rare Medium notes as current liabilities in the Consolidated
Balance Sheet as of December 31, 2001.
Under the Company's Plan of Reorganization, the Rare Medium notes were cancelled
and replaced by a new note in the principal amount of $19.0 million. The new
note was issued by a new subsidiary of Motient Corporation that owns 100% of
Motient Ventures Holding Inc., which owns all of the Company's interests in MSV.
The new note had a term of three years and carried interest at 9%. The note
allowed the Company to elect to accrue interest and add it to the principal,
instead of paying interest in cash. In July 2004, the Company repaid all accrued
principal and interest on this note, in the amount of $22.6 million. (Unaudited)
CSFB Note
Under the Company's Plan of Reorganization, the Company issued a note to CSFB,
in satisfaction of certain claims by CSFB against Motient, in the principal
amount of $750,000. The new note was issued by a new subsidiary of Motient
Corporation that owns 100% of Motient Ventures Holding Inc., which owns all of
the Company's interests in MSV. The new note had a term of three years and
carried interest at 9%. The note allowed the Company to elect to accrue interest
and add it to the principal, instead of paying interest in cash. In July 2004,
the Company repaid all accrued principal and interest on this note, in the
amount of $0.9 million. (Unaudited)
Bank Financing
In March 1998, the Company entered into a $200 million bank financing (the "Bank
Financing") consisting of two facilities: (i) the revolving credit facility
("Revolving Credit Facility"), a $100 million unsecured five-year reducing
revolving credit facility maturing March 31, 2003, and (ii) the term loan
facility ("Term Loan Facility"), a $100 million five-year, term loan facility
with up to three additional one-year extensions subject to the lenders'
approval. In 1999, the Term Loan Facility was reduced to $41 million. In 2000,
the Term Loan Facility was reduced to $40 million, and the Revolving Credit
Facility was reduced to $71.3 million. During 2001, the Bank Financing was
completely extinguished.
The Term Loan Facility
The Term Loan Facility bore an interest rate, generally, of 100 basis points
above London Interbank Offered Rate ("LIBOR"). The Term Loan Agreement did not
include any scheduled amortization until maturity, but did contain certain
provisions for prepayment based on certain proceeds received by the Company,
unless otherwise waived by the banks and the Bank Facility Guarantors (as
defined below). During 2001, the Term Loan Facility was completely extinguished.
The Revolving Credit Facility
The Revolving Credit Facility bore an interest rate, generally, of 100 basis
points above LIBOR and was unsecured, with a negative pledge on the assets of
Motient Holdings and its subsidiaries and ranked pari passu with the Senior
Notes. Certain proceeds received by Motient Holdings were required to repay and
reduce the Revolving Credit Facility, unless otherwise waived by the banks and
the Bank Facility Guarantors (as defined below). During 2001, the Revolving
Credit Facility was completely extinguished.
F-36
The Guarantees
In connection with the Bank Financing, Hughes Electronics Corporation, Singapore
Telecommunications, Ltd. and Baron Capital Partners, L.P. (collectively, the
"Bank Facility Guarantors"), extended separate guarantees of the obligations of
each of Motient Holdings and the Company to the banks, which on a several basis
aggregated to $200 million. In their agreement with each of Motient Holdings and
the Company (the "Guarantee Issuance Agreement"), the Bank Facility Guarantors
agreed to make their guarantees available for the Bank Financing. In exchange
for the additional risks undertaken by the Bank Facility Guarantors in
connection with the Bank Financing, the Company agreed to compensate the Bank
Facility Guarantors, principally in the form of one million additional warrants
and re-pricing of 5.5 million warrants previously issued in connection with the
original Bank Facility (together, the "Guarantee Warrants"). The Guarantee
Warrants were issued with an exercise price of $12.51 and were valued at
approximately $17.7 million. The amounts initially assigned to the Guarantee
Warrants and subsequent repricings are recorded as Common Stock Purchase
Warrants and Unamortized Guarantee Warrants in the accompanying consolidated
balance sheets. The amount assigned to Unamortized Guarantee Warrants was
amortized to interest expense over the life of the related debt. On March 29,
1999, the Bank Facility Guarantors agreed to eliminate certain covenants
contained in the Guarantee Issuance Agreement relating to earnings before
interest, depreciation, amortization and taxes and service revenue. In exchange
for this elimination of covenants, the Company agreed to re-price their
Guarantee Warrants, effective April 1,1999, from $12.51 to $7.50. The value of
the re-pricing was approximately $1.5 million.
As a result of the automatic application of certain adjustment provisions
following the issuance of the 7.0 million shares in the August 1999 public
offering, the exercise price of the Guarantee Warrants was reduced to $7.3571
per share and the Guarantee Warrants became exercisable for an additional
126,250 shares. The additional Guarantee Warrants and re-pricing were valued at
$2.4 million. Additionally, in June 2000, the Bank Facility Guarantors agreed to
partially reduce the debt repayment requirements associated with the MSV
transaction. In exchange, the Company further reduced the price of the Guarantee
Warrants to $6.25, which was valued at $1.4 million. In 2001, the Bank Facility
Guarantors agreed to waive certain repayment obligations under the Bank
Financing. In exchange for these waivers, the Company re-priced the warrants
held by certain of the Bank Facility Guarantors from $6.25 to $1.31 per share,
and issued new warrants to one Bank Facility Guarantor with an exercise price of
$1.31 per share. The value of the re-pricing and warrant issuance was $2.3
million.
Further, in connection with the Guarantee Issuance Agreement, the Company had
agreed to reimburse the Bank Facility Guarantors in the event that the
Guarantors were required to make payment under the Bank Financing guarantees,
and, in connection with this reimbursement commitment it provided the Bank
Facility Guarantors a junior security interest with respect to the assets of the
Company, principally its stockholdings in XM Radio and Motient Holdings.
Debt Extinguishments
In 1999, the Company raised $116 million, net of underwriting discounts and
expenses, through the issuance of 7.0 million shares of common stock in a public
offering. Of the net proceeds, Motient used $59 million to pay down a portion of
the Term Loan Facility. In 2000, the Company paid down and permanently reduced
the Term Loan Facility by an additional $1 million with proceeds from stock and
warrant exercises, and the Revolving Credit Facility was permanently reduced by
$22.8 million with a portion of the proceeds of the MSV and Aether transactions.
In 2001, the Company sold 2.0 million shares of XM Radio stock and used $8.5
million of the proceeds to permanently reduce the Term Loan Facility.
Additionally, $12.25 million of proceeds from the Rare Medium note were used to
pay down and permanently reduce the Term Loan Facility.
On November 6, 2001, the agent for the bank lenders under the Bank Financing
declared all loans under the Bank Financing immediately due and payable, due to
the existence of several events of default under the Bank Financing. On the same
date, the bank lenders sought payment in full from the Bank Financing Guarantors
for the accelerated loan obligations. The Bank Facility Guarantors repaid all
such loans on November 14, 2001 in the amount of approximately $97.6 million. As
a result, the Company had a reimbursement obligation to the Bank Guarantors in
the amount of $97.6 million, which included accrued interest and fees.
F-37
On November 19, 2001, the Company sold 500,000 shares of its XM Radio common
stock through a broker for $9.50 per share, for aggregate proceeds of $4.75
million. The net proceeds from this sale were paid to the Bank Facility
Guarantors, thereby reducing the amount of the Company's reimbursement
obligation to the Bank Facility Guarantors by such amount. Also on November 19,
2001, the Company delivered all of its remaining 9,257,262 shares of XM Radio
common stock to the Bank Facility Guarantors in full satisfaction of the entire
remaining amount of its reimbursement obligations to the Bank Facility
Guarantors. Upon delivery of these shares, the Bank Facility Guarantors released
the Company from all of its remaining obligations to the Bank Facility
Guarantors under the Bank Financing and the related guarantees and reimbursement
and security agreements. The Company delivered 7,108,184 shares to Hughes
Electronics Corporation, 964,640 shares to Singapore Telecommunications, Ltd.,
and 1,184,438 shares to Baron Capital Partners, L.P.
As a result of the permanent reductions of the Term Facility and the Revolving
Credit Facility, the Company recorded a loss on extinguishment of debt of
approximately $1.2 million in 2001 and $3.0 million in 2000, which reflects the
write-down, on a pro-rata basis, of unamortized guarantee warrants and deferred
financing fees associated with the placement of the Bank Financing.
Interest Rate Swap Agreement
In connection with the Bank Financing in March 1998, the Company entered into an
interest rate swap agreement, with an implied annual rate of 6.51%. The swap
agreement reduced the impact of interest rate increases on the Term Loan
Facility. The Company paid a fixed fee of approximately $17.9 million for the
swap agreement. In return, the counter-party was obligated to pay a variable
rate equal to LIBOR plus 50 basis points, paid on a quarterly basis directly to
the respective banks on behalf of the Company, on a notional amount of $100
million until the termination date of March 31, 2001. In connection with the pay
down of a portion of the Term Loan Facility during 1999, the Company reduced the
notional amount of its swap agreement from $100 million to $41 million and
realized net proceeds of approximately $6 million due to early termination of a
portion of the swap agreement. The interest rate swap agreement expired in March
2001.
Motorola Vendor Financing
In June 1998, Motorola had entered into an agreement with the Company to provide
up to $15 million of vendor financing, to finance up to 75% of the purchase
price of network base stations. Loans under this facility bear interest at a
rate equal to LIBOR plus 7.0% and are guaranteed by the Company and each
subsidiary of Motient Holdings. The terms of the facility require that amounts
borrowed be secured by the equipment purchased therewith. Advances made during a
quarter constitute a loan, which is then amortized on a quarterly basis over
three years. As of December 31, 2003, $4.8 million was outstanding, including
accrued interest, under this facility at an interest rate of 5.4%. As of
December 31, 2002, $5.9 million was outstanding, including accrued interest,
under this facility at an interest rate of 9%. No additional amounts are
available for borrowing under this facility. In January 2003 and subsequently in
March 2004, the Company restructured this liability. In June 2004, the Company
negotiated a settlement of the entire amounts of these obligations. Please see
Note 16, ("Subsequent Events") for additional information.
Hewlett-Packard Capital Lease
The Company has a capital lease for network equipment with Hewlett-Packard, now
Compaq Corporation. The lease has an effective interest rate of 12.2%. This
capital lease was in default for non-payment at December 31, 2002, however, in
January 2003, this agreement was restructured to provide for a modified payment
schedule. In June 2004, the Company negotiated a settlement of the entire
amounts under this lease. Please see Note 16, ("Subsequent Events") for
additional information.
Assets Pledged and Secured
Prior to the Company's reorganization in May 2002, all wholly-owned subsidiaries
of the Company were subject to financing agreements that limited the amount of
cash dividends and loans that could be advanced to the Company. At December 31,
2001, all of the subsidiaries' net assets were restricted under these
agreements. At December 31, 2003 and 2002, the Company was subject to financing
F-38
agreements with Rare Medium, CSFB, Motorola and Hewlett-Packard that continued
to limit the amount of cash dividends and loans that could be advanced to the
Company. The Company's term credit facility that also restricts the Company's
ability to pay cash dividends and receive additional loans that could be
advanced to the Company. These restrictions will have an impact on Motient's
ability to pay dividends. Please see Note 16, "Subsequent Events" for additional
information on payment and settlement of certain of those obligations.
Restricted net assets of the Company's subsidiaries were approximately $35.7
million and $33.1 million at December 31, 2003 and December 31, 2002
respectively.
Covenants
The Company's historical and current debt agreements contain various
restrictions, covenants, defaults, and requirements customarily found in such
financing agreements. Among other restrictions, these provisions include
limitations on cash dividends, restrictions on transactions between Motient and
its subsidiaries, restrictions on capital acquisitions, material adverse change
clauses, and maintenance of specified insurance policies. Please see Note 16,
"Subsequent Events" for additional information on payment and settlement of
certain of these obligations.
9. RELATED PARTIES
The following table represents a summary of all related party transactions.
Successor Successor Predecessor Predecessor
Company Company Company Company
------- ------- ------- -------
Year Ended Eight Months Four Months (Restated)
December 31, Ended Ended Year Ended
2003 December 31, 2002 April 30, 2002 2001
---- ----------------- -------------- ----
Payments made to (from) related parties:
Proceeds from the sale of assets to MSV $ -- $ -- $ -- $(42,500)
Operating expenses 258 -- 49 125
Additional investment in MSV -- 957 -- --
Funding of future sub-lease
obligations to MSV -- -- 361 4,000
-------- -------- -------- --------
Net payments to (from) related parties $ 258 $ 957 $ 410 $(38,375)
-------- -------- -------- --------
Due to (from) related parties:
Operating expenses $ 322 $ (234) $ 618 $ (521)
Note Receivable from MSV (18,781) (18,732) (12,345) (15,000)
-------- -------- -------- --------
Net amounts due (from) to related parties $(18,459) $(18,966) $(11,727) $(15,521)
-------- -------- -------- --------
For the year ended December 31, 2003, the four months ended April 30, 2002,
eight months ended December 31, 2002, and for the year ended December 31, 2001,
the Company recorded revenue related to the MSV research and development
agreement in the amount of $0, $0, $0 and $2.6 million, respectively.
Communication Technology Advisors LLC
In May 2002, the Company entered into a consulting agreement with Communication
Technology Advisors LLC ("CTA") under which CTA provided consulting services to
the Company. CTA's chairman, Jared E. Abbruzzese, was a director of the Company
until June 20, 2003. Peter Aquino, elected to the Company's Board on June 20,
2003, was a senior managing director of CTA. Gerry S. Kittner, also a Motient
director, is an advisor and consultant for CTA.
F-39
CTA is a consulting and private advisory firm specializing in the technology and
telecommunications sectors. The Company's agreement with CTA had an initial term
of three months ending August 15, 2002, and was extended by mutual agreement for
several additional terms of two or three months each. For the first three months
of the agreement, CTA was paid a flat fee of $60,000 per month, and for the
period August 2002 to May 2003, the monthly fee was $55,000. Beginning in May
2003, the monthly fee was reduced to $39,000. The Company also agreed to
reimburse CTA for CTA's out-of-pocket expenses incurred in connection with
rendering services during the term of the agreement. This agreement was modified
on January 30, 2004.
CTA had previously acted as the spectrum and technology advisor to the official
committee of unsecured creditors in connection with the Company's Chapter 11
case. CTA received a total of $475,000 in fees for such advice and was
reimbursed a total of $4,896 for expenses in connection with the rendering of
such advice.
Except for the warrant offered to CTA described below and the warrants granted
to certain members of CTA in connection with the private placement of the
Company's common stock on April 7, 2004, neither CTA, nor any of its principals
or affiliates is a stockholder of Motient, nor does it hold any debt of Motient
(other than indebtedness as a result of consulting fees and expense
reimbursement owed to CTA in the ordinary course under the Company's existing
agreement with CTA). CTA has informed the Company that in connection with the
conduct of its business in the ordinary course, (i) it routinely advises clients
in and appears in restructuring cases involving telecommunications companies
throughout the country, and (ii) certain of the Company's stockholders and
bondholders and/or certain of their respective affiliates or principals, may be
considered to be (a) current clients of CTA in matters unrelated to Motient; (b)
former clients of CTA in matters unrelated to Motient; and (c) separate
affiliates of clients who are (or were) represented by CTA in matters unrelated
to Motient.
In July 2002, the Company's Board approved the offer and sale to CTA (or
affiliates thereof) of a warrant (or warrants) for 500,000 shares of the
Company's common stock, for an aggregate purchase price of $25,000. The warrant
has an exercise price of $3.00 per share and a term of five years. These
warrants were valued at $1.5 million and were recorded as a consultant
compensation expense in December of 2002. Certain affiliates of CTA purchased
the warrants in December 2002. Christopher W. Downie received a warrant for
100,000 of the 500,000 shares.
In November 2003, CTA was engaged to provide valuation of Motient's equity
interest in MSV as of December 31, 2002. CTA was paid $150,000 for this
valuation.
At December 31, 2003, CTA was owed $415,000.
On January 30, 2004, the Company engaged CTA to act as chief restructuring
entity. As consideration for this work, Motient agreed to pay to CTA a monthly
fee of $60,000, one-half of which will be paid monthly in cash and one-half of
which will deferred. The new agreement amends the consulting arrangement
discussed above. In April 2004, Motient paid CTA $440,000 for all past deferred
fees.
In April 2004 and July 2004, certain members of CTA were granted warrants to
purchase 400,000 shares and 340,000 shares, respectively, of common stock in
conjunction with the private placements of the Company's common stock on April
7, 2004 and July 1, 2004. The warrants have an exercise price of $5.50 and $8.57
per share, respectively, and a term of five years. In December 2004, certain
affiliates of CTA were granted options to purchase 125,000 shares of the
Company's common stock at a price of $8.57 per share. (Unaudited) The options
are immediately vested and have a term of 10 years. (Unaudited)
Mr. Abbruzzese, Mr. Kittner and Mr. Aquino did not participate in the
deliberations or vote of the Board with respect to the foregoing matters while
serving as a member of the Board.
10. LEASES
Capital Leases
The Company leases certain office equipment and switching equipment under
agreements accounted for as capital leases. Assets recorded as capital leases in
the accompanying balance sheets include the following:
F-40
Successor Company
-----------------
2003 2002
---- ----
(in thousands)
Switch equipment $9,795 $9,795
Office equipment -- 2,501
Less accumulated depreciation (5,280) (5,669)
------ ------
Total $4,515 $6,627
====== ======
Subsequent to the end of the period covered by this report, the Company
restructured certain of its existing lease obligations. Please see Note 16
("Subsequent Events").
Operating Leases
The Company leases substantially all of its base station sites through operating
leases. The majority of these leases provide for renewal options for various
periods at their fair rental value at the time of renewal. In the normal course
of business, the operating leases are generally renewed or replaced by other
leases. Additionally, the Company leases certain facilities and equipment under
arrangements accounted for as operating leases. Certain of these arrangements
have renewal terms. Total rent expense, under all operating leases, approximated
$15.2 million for the year ended December 31, 2003, $10.5 million for the eight
months ended December 31, 2002, $5.6 million for the four months ended April 30,
2002, and $13.4 million in for the year ended December 31 2001.
At December 31, 2003, minimum future lease payments under noncancelable
operating and capital leases are as follows:
Operating Capital
--------- -------
(in thousands)
2004 $12,170 $1,752
2005 9,238 1,752
2006 6,089 --
2007 2,090 --
2008 and thereafter 4,098 --
------- ------
Total $33,685 3,504
------- ------
Less: Interest (408)
------
Present value of minimum lease payments $3,096
Less: Current maturities, including those amounts
deemed to be in default (1,454)
------
Non current capital lease obligation $1,642
------
11. COMMITMENTS AND CONTINGENCIES
As of December 31, 2003, the Company had no contractual inventory commitments.
UPS, the Company's largest customer as of December 31, 2002, has substantially
completed its migration to next generation network technology, and its monthly
airtime usage of the Company's network has declined significantly. UPS was our
second largest customer for the twelve months ended December 31, 2003 and our
eighth largest customer for the three months ended December 31, 2003. There are
no minimum purchase requirements under the Company's contract with UPS and the
contract may be terminated by UPS on 30 days' notice at which point any
remaining prepayment would be require to be repaid. While the Company expects
that UPS will remain a customer for the foreseeable future, the bulk of UPS'
units have migrated to another network. As of September 30, 2004, UPS had
approximately 3,006 active units on Motient's network. (Unaudited)
F-41
Until June 2003, UPS had voluntarily maintained its historical level of payments
to mitigate the near-term revenue and cash flow impact of its recent and
anticipated continued reduced network usage. However, beginning in July 2003,
the revenues and cash flow from UPS declined significantly. Also, due to a
separate arrangement entered into in 2002 under which UPS prepaid for network
airtime to be used by it in 2004, the Company does not expect that UPS will be
required to make any cash payments to the Company in 2004 and 2005 for service
to be provided in 2004 and 2005. Pursuant to such agreement, and, as of November
30, 2004, UPS has not been required to make any cash payments to the Company in
2004, and the value of the Company's remaining airtime service obligations to
UPS in respect of the prepayment was approximately $4.0 million. (Unaudited) If
UPS terminates the contract, we will be required to refund any unused portion of
the prepayment to UPS.
As of December 31, 2003, we had the following outstanding cash contractual
commitments:
Total <1 year 1-3 years 3 - 5 years More than 5 years
----- ------- --------- ----------- -----------------
(in thousands)
Operating leases (1) $33,685 $12,170 $17,417 $1,614 $2,484
Capital lease obligations, including interest 3,504 1,752 1,752 --- ---
thereon (1)
Notes Payable (2) 22,885 --- 22,885 --- ---
Term Credit Facility (3) 4,914 --- 4,914 --- ---
Equipment financing commitment (4) 4,814 2,413 2,401 --- ---
----- ----- ----- ------ ------
Total Contractual Cash Obligations $69,802 $16,335 $49,369 $1,614 $2,484
======= ======= ======= ====== ======
(1) 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.
(2) These notes were paid in full in July 2004. (Unaudited)
(3) This facility was repaid in full in April 2004. (Unaudited)
(4) All obligations pursuant to this commitment and note were settled and repaid
in July 2004. (Unaudited)
In May 2002, the FCC filed a proof of claim with the United States Bankruptcy
Court, asserting a pre-petition claim in the approximate amount of $1.0 million
in fees incurred as a result of our withdrawal from certain auctions. Under our
court-approved Plan of Reorganization, subsequent to June 30, 2002 the FCC's
claim was classified as an "other unsecured" claim, and the FCC was issued a
pro-rata portion of 97,256 shares of common stock issued to creditors with
allowed claims in such class. We recorded a $1.0 million expense in April 2002
for this claim.
At April 30, 2002, we had certain contingent and/or disputed obligations under
our satellite construction contract entered into in 1995, which contained flight
performance incentives payable by us to the contractor if the satellite
performed according to the contract. Upon the implementation of the Plan of
Reorganization, this contract was terminated, and in satisfaction of all amounts
alleged to be owed by us under this contract, the contractor received a pro-rata
portion of the 97,256 shares issued to creditors holding allowed unsecured
claims. The shares were issued upon closure of the bankruptcy claims process.
12. EMPLOYEE BENEFITS
Prior to the Company's reorganization, the Company had several active stock
plans. All of these plans and the respective authorized and issued stock options
were cancelled as part of the Company's reorganization on May 1, 2002.
Defined Contribution Plan
The Company sponsored a 401(k) defined contribution plan ("401(k) Savings Plan")
in which all employees of Motient could participate. The 401(k) Savings Plan
provided for (i) a Company match of employee contributions, in the form of
common stock, at a rate of $1 for every $1 of an employee's contribution not to
exceed 4% of an employee's eligible compensation, (ii) a discretionary annual
employer non-elective contribution, (iii) the option to have plan benefits
distributed in the form of installment payments, and (iv) the reallocation of
F-42
forfeitures, if any, to active participants. In 2001, effective January 2002,
the Company amended its 401(k) Savings Plan to make the matching contributions
discretionary, as well as to allow the match to be made in either cash or shares
of common stock, at the Company's sole discretion. The Company's matching
expense was $0.36 million for 2003, $0 for 2002 and $1.1 million for 2001.
During 2001, the Company authorized an additional 5,025,000 shares for the
401(k) Savings Plan, and authorized an additional 268,000 shares in January
2002. As part of Company's plan of reorganization, all of the outstanding shares
of the Company's common stock were cancelled. During 2002, the Company
authorized 200,000 shares for the 401(K) Savings Plan.
Employee Stock Purchase Plan
The Company had an Employee Stock Purchase Plan ("Stock Purchase Plan") to allow
eligible employees to purchase shares of the Company's common stock at 85% of
the lower of market value on the first and last business day of the six-month
option period. An aggregate of 217,331 shares of common stock were issued under
the Stock Purchase Plan in 2001.
Effective January 2002, the Company discontinued the Stock Purchase Plan.
2002 Stock Option Plan
The Company's 2002 stock option plan was adopted by the Board on May 31, 2002
and received stockholder approval on July 11, 2002. A total of 2,993,024 shares
of common stock have been reserved for issuance under the 2002 stock option
plan. Under the 2002 stock option plan, the Company is authorized to grant
options to purchase shares of common stock intended to qualify as incentive
stock options, as defined under section 422 of the Internal Revenue Code of
1986, as amended, and non-qualified stock options to any employees, outside
directors, consultants, advisors and individual service providers whose
participation in the 2002 stock option plan is determined by the Company's
compensation and stock option committee to be in the Company's best interests.
The term of each stock option is fixed by the Board or the compensation and
stock option committee, and each stock option is exercisable within ten years of
the original grant date. Some change of control transactions involving the
Company, such as a sale of Motient, may cause awards granted under the 2002
stock option plan to vest. Generally, an option is not transferable by the
recipient except by will or the laws of descent and distribution. As of December
31, 2003, options to purchase 2,993,024 shares of common stock had been
authorized under the 2002 stock option plan at a price of $5.00 per share, of
which options to purchase 1,757,513 shares of the Company's common stock were
outstanding at December 31, 2003. In March 2003, the Board approved the
reduction in the exercise price of all of the outstanding stock options from
$5.00 per share to $3.00 per share.
A portion of the options granted under the plan will either vest or be rescinded
based on Motient's performance. These options are accounted for in accordance
with variable plan accounting, which requires that the value of these options be
measured at their intrinsic value and any change in that value be charged to the
income statement upon the determination that the fulfillment of the Company
performance criteria is probable. The other options are accounted for as a fixed
plan and in accordance with intrinsic value accounting, which requires that the
excess of the market price of stock over the exercise price of the options, if
any, at the time that both the exercise price and the number of options are
known be recorded as deferred compensation and amortized over the option vesting
period. As of the date of grant, the option price per share was in excess of the
market price; therefore, these options are not deemed to have any value and no
expense has been recorded to date.
The 2002 options are subject to vesting in two parts - 50% of the shares vest in
three equal parts on the first, second and third anniversary of the date of
grant, and the other 50% vest in three equal parts, or are rescinded, based on a
comparison of the Company's performance in 2002, 2003, and 2004 to certain
objectives established by the compensation and stock option committee of the
Board following the availability of the annual results. In May 2004, the
compensation committee of the Company's Board made a determination to vest a
portion of the 2003 performance options.
F-43
In July and September 2003, the compensation and stock option committee of the
Company's Board, acting pursuant to the Company's 2002 stock option plan,
granted 26 employees and officers options to purchase an aggregate of 470,000
shares of the Company's common stock at a price of $5.15 per share and 25,000
shares of the Company's common stock at a price of $5.65 per share. One-half of
each option grant vests with the passage of time and the continued employment of
the recipient, in three equal increments, on the first, second and third
anniversary of the date of grant. The other half of each grant will either vest
or be rescinded based on the performance of the Company in 2004. In August 2004,
the Company granted one employee options to purchase 100,000 shares of stock at
$5.65 per share. (Unaudited) In December 2004, the directors, one employee and
one consultant received options to purchase an aggregate of 195,000 shares of
the Company's common stock at a price of $8.57 per share. (Unaudited) These
options are exercisable immediately. (Unaudited) If vested and not exercised,
the options will expire on the 10th anniversary of the date of grant.
(Unaudited)
For additional information regarding the establishment of new employee benefit
plans, please see Section 16 ("Subsequent Events").
13. BUSINESS ACQUISITIONS AND DISPOSITIONS
Sale of Retail Transportation Business to Aether
In November 2000, Motient sold assets relating to its retail transportation
business to Aether Systems, Inc. ("Aether") and received approximately $45
million. This consisted of $30 million for the assets, of which $10 million was
held in an escrow account which was subsequently released in the fourth quarter
of 2001 upon the satisfaction of certain conditions, and $15 million for a
perpetual license to use and modify any intellectual property owned by or
licensed by Motient in connection with the retail transportation business.
Motient recognized an $8.3 million gain in the fourth quarter of 2001 when the
additional $10 million of proceeds were released from escrow. The $1.7 million
difference between the proceeds received and the gain recognized is a result of
pricing modifications that were made at the time of the release of the escrow
related to network capacity agreements. Motient amortized the $15 million
perpetual license payment, as restated, over a four year period through the
adoption of "fresh-start" accounting, which represented the life of the network
airtime agreement that Motient entered into with Aether at the time of the
closing of the asset sale.
Concurrent with the closing of the asset sale, the Company and Aether entered
into two long-term, prepaid network airtime agreements valued at $20 million, of
which $5 million was paid at closing, pursuant to which Aether agreed to
purchase airtime on the Company's satellite and terrestrial networks. Aether
also became an authorized reseller of the Company's eLink and BlackBerry TM by
Motient wireless email service offerings.
MSV
On June 29, 2000, the Company formed a joint venture subsidiary, MSV, in which
it owned until November 26, 2001, 80% of the membership interests in order to
conduct research and development activities. The remaining 20% interests in MSV
were owned by three investors unrelated to Motient. The other investors paid $50
million to MSV (in the aggregate), in exchange for their 20% interest. Motient
Services Inc. ("Motient Services") owned the Company's satellite and related
assets.
Of the $50 million payment received by MSV, $6.0 million was retained by MSV to
fund certain research and development activities, $24 million was paid to
Motient Services as a deposit on the purchase of the satellite assets, and $20
million was also paid to Motient Services for the use of the satellite and
frequency under a research and development agreement.
On November 26, 2001, Motient sold the assets comprising its satellite
communications business to MSV, as part of a transaction in which certain other
parties joined MSV, including TMI, a Canadian satellite services provider. In
consideration for its satellite business assets, Motient Services received the
following: (i) a $24 million cash payment in June 2000, (ii) a $41 million cash
F-44
payment paid at closing on November 26, 2001, net of $4 million retained by MSV
to fund the Company's future sublease obligations to MSV for rent and utilities
through August 2003 and (iii) a five-year $15 million note. In this transaction,
TMI also contributed its satellite communications business assets to MSV. In
addition, Motient purchased a $2.5 million convertible note issued by MSV, and
certain other investors, including a subsidiary of Rare Medium, purchased a
total of $52.5 million of convertible notes. The Company realized a gain of
approximately $29.8 million on the sale of its net assets; however, 48% of the
gain, or $14.3 million, was deferred and amortized over five years through the
adoption of "fresh-start" accounting.
MSV has also filed a separate application with the FCC with respect to MSV's
plans for a new generation satellite system utilizing ancillary terrestrial base
stations. For further information on the FCC approval process, see Note 16
("Subsequent Events").
In July 2002, MSV commenced a rights offering seeking total funding in the
amount of $3.0 million. While the Company was not obligated to participate in
the offering, the Company's board determined that it was in the Company's best
interests to participate so that its interest in MSV would not be diluted. On
August 12, 2002, the Company funded an additional $957,000 to MSV pursuant to
this offering, and received a new convertible note in such amount. This rights
offering did not impact the Company's ownership position in MSV.
As of December 31, 2002, the Company had an ownership percentage, on an
undiluted basis, of approximately 48% of the common and preferred units of MSV,
and approximately 55% of the common units. Assuming that all of MSV's
outstanding convertible notes are converted into limited partnership units of
MSV, as of December 31, 2002 Motient had a 33.3% partnership interest in MSV on
an "as converted" basis giving effect to the conversion of all outstanding
convertible notes of MSV, and 25.5% on a fully-diluted basis, assuming certain
other investors exercise their right to make additional investment in MSV as a
result of the FCC ancillary terrestrial components ("ATC") application process.
In February 2003, the FCC adopted the ATC Order, giving mobile satellite
operators broad authority to use their assigned spectrum to operate an ATC. The
ATC Order established a set of preconditions and technical limits for ATC
operations, as well as an application process for ATC approval of the specific
system incorporating the ATCs that the licensee intends to use. On November 18,
2003, MSV filed an application with the FCC to expand the use of its L-band
assets and construct its next-generation hybrid network with ATC. As part of
its next-generation system, MSV intends to use its L-band spectrum, which the
FCC had previously limited to satellite-only services, for terrestrial wireless
services in conjunction with mobile satellite services.
In addition, both proponents and opponents of ATC (including MSV) have filed for
reconsideration of the ATC Order, and the opponents of ATC have filed an appeal
with the U.S. Court of Appeals for the District of Columbia Circuit. Oppositions
to the petitions for reconsideration were filed August 20, 2003; replies were
filed September 2, 2003. The Court of Appeals has held the appeal in abeyance
pending resolution of the reconsideration requests. For information regarding
recent developments involving MSV, please see Note 16 ("Subsequent Events").
On August 21, 2003, two investors in MSV (excluding Motient) invested an
additional $3.7 million in MSV in exchange for Class A preferred units of
limited partnership interests in MSV. MSV used the proceeds from this investment
to repay other indebtedness that is senior in its right of repayment to
Motient's promissory note. Under the terms of the amended and restated
investment agreement, these investors also have the option of investing an
additional $17.6 million in MSV by December 31, 2003; however, if, prior to this
time, the FCC does not issue a decision addressing MSV's petition for
reconsideration with respect to the ATC Order (as hereinafter defined), the
option will be automatically extended to March 31, 2004.
On April 2, 2004, two exiting investors in MSV invested $17.6 million in MSV in
exchange for class A preferred units of limited partnership interests of MSV. In
connection with this investment, MSV's amended and restated investment agreement
was amended to provide that of the total $17.6 million in proceeds, $5.0 million
was used to repay certain outstanding indebtedness of MSV, including $2.0
million of accrued interest under the $15.0 million promissory note issued to
Motient by MSV. Motient was required to, and paid 25% of the $2.0 million it
received in this transaction, or $500,000, to prepay its existing notes owed to
Rare Medium Group and CSFB. The remainder of the proceeds from this investment
were used for general corporate purposes by MSV. As of the closing of the
additional investment on April 2, 2004, Motient's percentage ownership of MSV
was approximately 29.5% on an "as converted" basis giving effect to the
conversion of all outstanding convertible notes of MSV.
F-45
On May 17, 2004, MSV was awarded its first patent on a next generation satellite
system technology containing an ancillary terrestrial component (ATC)
innovation. MSV believes that patent will support its ability to deploy ATC in a
way that minimizes interference to other satellite systems, and addresses ways
to mitigate residual interference levels using interference-cancellation
techniques.
Please see note 2, "Significant Accounting Policies- Investment in MSV and Notes
Receivable from MSV" and note 16, "Subsequent Events-Developments Relating to
MSV."
For additional information regarding MSV, please see the financial statements of
MSV beginning on page M-1.
Sale of SMR Licenses to Nextel Communications, Inc.
On July 29, 2003, our wholly-owned subsidiary, Motient Communications, entered
into an asset purchase agreement with Nextel, under which Motient Communications
sold to Nextel certain of its SMR licenses issued by the FCC for $3.4 million.
The closing of this transaction occurred on November 7, 2003. On December 9,
2003, Motient Communications entered into a second asset purchase agreement,
under which Motient Communications will sell additional licenses to Nextel for
$2.75 million resulting in a $1.5 million loss which was recorded in December,
2003. In February 2004, the Company closed the sale of licenses covering
approximately $2.2 million of the purchase price, and in April 2004, the Company
closed the sale of approximately one-half of the remaining licenses. The
transfer of the other half of the remaining licenses has been challenged at the
FCC by a third-party. While the Company believes, based on the advice of
counsel, that the FCC will ultimately rule in its favor, the Company cannot be
assured that it will prevail, and, in any event, the timing of any final
resolution is uncertain. None of these licenses are necessary for Motient's
future network requirements. Motient has and expects to continue to use the
proceeds of the sales to fund its working capital requirements and for general
corporate purposes. The lenders under Motient Communications' Term Credit
Agreement consented to the sale of these licenses.
XM Radio
In January 2001, pursuant to FCC approval for Motient to cease to control XM
Radio, the number of directors that the Company appointed to XM Radio's Board of
Directors was reduced to less than 50% of XM Radio's directors, and the Company
converted a portion of its super-voting Class B common stock of XM Radio to
Class A common stock. As a result, the Company ceased to control XM Radio, and
as of January 1, 2001, the Company accounted for its investment in XM Radio
pursuant to the equity method of accounting.
In January and February 2001, the Company sold, in two separate transactions,
two million shares of its XM Radio Class A common stock, at an average price of
$16.77 per share, for total proceeds of $33.5 million. In October 2001, as noted
above, the Company repaid $26.2 million of the Rare Medium notes in exchange for
five million of its XM Radio shares. On November 19, 2001, the Company sold
500,000 shares of its XM Radio common stock through a broker for $9.50 per
share, for aggregate proceeds of $4.75 million. Also on November 19, 2001, as a
result of a series of transaction to cure defaults under its Bank Financing and
to the Bank Facility Guarantors, the Company sold and/or delivered all of its of
its remaining 9,257,262 shares of XM Radio common stock to the Bank Facility
Guarantors in full satisfaction of the entire remaining amount of its
reimbursement obligations to the Bank Facility Guarantors. The agent for the
bank lenders under the Bank Financing declared all loans under the Bank
Financing immediately due and payable, due to the existence of several events of
default under the Bank Financing. On the same date, the bank lenders sought
payment in full from the Bank Financing Guarantors for the accelerated loan
obligations. For the year ended December 31, 2001, the Company recorded proceeds
of approximately $38.3 million from the sale in 2001 of two million shares of
its XM Radio stock. For the year ended December 31, 2001, the Company recorded
equity in losses of XM Radio of $48.5 million. As of November 19, 2001, the
Company ceased to have any interest in XM Radio.
F-46
In anticipation of the exchange of the XM Radio shares for debt, the Company
recorded an impairment loss of $81.5 million in 2001. This loss represents the
write down of the Company's investment in XM Radio to the fair value on the date
of the exchange. Upon the actual exchange of shares, the Company recognized a
net extraordinary gain of $10.0 million, which represented the difference
between the fair market value of the XM Radio stock as compared to the value of
the debt cancelled in exchange for the shares. For the twelve months ended
December 31, 2001, the Company recorded equity in losses of XM Radio of $48.5
million.
Merger Agreement with Rare Medium Group, Inc.
On May 14, 2001, the Company signed a definitive merger agreement with Rare
Medium pursuant to which the Company would acquire Rare Medium. On October 1,
2001, the Company and Rare Medium announced their mutual termination of the
merger. The Company recorded a charge of $4.1 million in 2001 representing costs
incurred by the Company to pursue this transaction.
14. LEGAL AND REGULATORY MATTERS
Legal
Motient filed a voluntary petition for relief under Chapter 11 of the Bankruptcy
Code on January 10, 2002. The Bankruptcy Court confirmed Motient's Plan of
Reorganization on April 26, 2002, and Motient emerged from bankruptcy on May 1,
2002. For further details regarding this proceeding, please see Note 2
("Significant Accounting Policies -- Motient's Chapter 11 Filing and Plan of
Reorganization and "Fresh-Start" Accounting").
A former employee who was discharged as part of a reduction in force in July
2002 asserted a claim for a year's pay and attorney's fees under a Change of
Control Agreement that the employee had with the Company. This claim was subject
to binding arbitration. Although the Company believed that it had substantial
defenses on the merits, on July 11, 2003, the Company was informed that the
arbitrator ruled in the employee's favor. In August 2003, the Company made a
$200,000 payment to this employee for the disputed pay and related benefits
costs and legal fee reimbursement.
Motient's rights to use and sell the BlackBerryTM software and RIM's handheld
devices may be limited or made prohibitively expensive as a result of a patent
infringement lawsuit brought against RIM by NTP Inc. (NTP v. Research In Motion,
Civ. Action No. 3:01CV767 (E.D. Va.)). In that action, a jury concluded that
certain of RIM's BlackBerryTM products infringe on patents held by NTP covering
the use of wireless radio frequency information in email communications. On
August 5, 2003, the judge in the case ruled against RIM, awarding NTP $53.7
million in damages and enjoining RIM from making, using, or selling the
products, but stayed the injunction pending appeal by RIM. The appeal has not
yet been resolved. As a purchaser of those products, Motient could be adversely
affected by the outcome of that litigation.
For further details regarding legal matters related to periods after this
report, please see Note 16 ("Subsequent Events").
Regulatory
The terrestrial two-way wireless data network used in Motient's wireless
business is regulated to varying degrees at the federal, state, and local
levels. Various legislative and regulatory proposals under consideration from
time to time by Congress and the FCC have in the past materially affected and
may in the future materially affect the telecommunications industry in general,
and Motient's wireless business in particular. 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.
F-47
The ownership and operation of Motient's terrestrial network is subject to the
rules and regulations of the FCC, which acts under authority established by the
Communications Act of 1934, as amended, and related federal laws. Among other
things, the FCC allocates portions of the radio frequency spectrum to certain
services and grants licenses to and regulates individual entities using that
spectrum. Motient operates pursuant to various licenses granted by the FCC.
Motient is a commercial mobile radio service provider and therefore is regulated
as a common carrier. Motient must offer service at just and reasonable rates on
a first-come, first-served basis, without any unjust or unreasonable
discrimination, and Motient is subject to the FCC's complaint processes. The FCC
has forborne from applying numerous common carrier provisions of the
Communications Act to commercial mobile radio service providers. In particular,
Motient is not subject to traditional public utility rate-of-return regulation,
and is not required to file tariffs with the FCC.
The FCC's universal service fund supports the provision of affordable
telecommunications to high-cost areas, and the provision of advanced
telecommunications services to schools, libraries, and rural health care
providers. Under the FCC's current rules, end-user revenues derived from the
sale of information and other non-telecommunication services and certain
wholesale revenues derived from the sale of telecommunications services are not
subject to universal service fund obligations. Based on the nature of its
business, Motient is currently not required to contribute to the universal
service fund. Current rules also do not require that Motient impute to its
contribution base retail revenues derived when it uses its own transmission
facilities to provide a service that includes both information service and
telecommunications components. There can be no assurances that the FCC will
retain the exclusions described herein or its current policy regarding the scope
of a carrier's contribution base. Motient may also be required to contribute to
state universal service programs. The requirement to make these state universal
service payments, the amount of which in some cases may be subject to change and
is not yet determined, may have a material adverse effect on the conduct of
Motient's business.
Motient is subject to the Communications Assistance for Law Enforcement Act, or
CALEA. Under CALEA, Motient must ensure that law enforcement agencies can
intercept certain communications transmitted over its networks. Motient must
also ensure that law enforcement agencies are able to access certain
call-identifying information relating to communications over Motient's networks.
The deadline for complying with the CALEA requirements and any rules
subsequently promulgated was June 30, 2002. Based on discussions with Federal
law enforcement agencies regarding the applicability of CALEA's provisions to
the Company, the Company does not believe that its network, which uses packet
data technology, is subject to the requirements of CALEA. At the suggestion of
Federal law enforcement agencies, the Company has developed an alternative
methodology for intercepting certain communications over its network for the
purposes of law enforcement surveillance. The Company believes this alternative
methodology has substantially the same functionality as the standards provided
in CALEA. It is possible that the Company's alternative methodology may
ultimately be found not to comply with CALEA's requirements, or the Company's
interpretation that CALEA does not apply to its network may ultimately be found
to be incorrect. Should these events occur, the requirement to comply with CALEA
could have a material adverse effect on the conduct of the Company's business.
In addition, CALEA establishes a federal fund to compensate telecommunications
carriers for all reasonable costs directly associated with modifications
performed by carriers in connection with equipment, facilities, and services
installed or deployed on or before January 1, 1995. For equipment, facilities,
and services deployed after January 1, 1995, the CALEA fund is intended to
compensate carriers for any reasonable costs associated with modifications
required to make compliance "reasonably achievable." It is possible that all
necessary modifications will not qualify for this compensation and that the
available funds will not be sufficient to reimburse Motient. Therefore, the
requirement to comply with CALEA could have a material adverse effect on the
conduct of Motient's business.
Motient's FCC licenses are granted for a term of 10 years, subject to renewal.
For Motient's non-market-based licenses, or non-auction licenses, renewal is
granted in the ordinary course. Motient no longer holds any auction licenses.
All such licenses were sold in November 2003 to Nextel Communications and its
affiliates.
As a matter of general regulation by the FCC, Motient is subject to, among other
things, payment of regulatory fees and restrictions on the level of radio
frequency emissions of Motient's systems' mobile terminals and base stations.
Any of these regulations may have an adverse impact on the conduct of Motient's
business.
F-48
Motient's FCC licenses are subject to restrictions in the Communications Act
that (i) certain 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) that 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 the Company's 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, which could harm Motient's business.
Motient's terrestrial network consists of base stations licensed in the 800 MHz
business radio and specialized mobile radio services. The terrestrial network is
interconnected with the public switched telephone network.
The FCC's licensing regime in effect when the majority of authorizations used in
the terrestrial network were issued provided for individual, site-specific
licenses. The FCC has since modified the licensing process applicable to
specialized mobile radio licenses in the band. Specialized mobile radio licenses
are now issued by auction in wide-area, multi-channel blocks. The geographic
area and number of channels within a block vary depending on whether the
frequencies are in the so-called "Upper 200" specialized mobile radio channels,
the "General Category," or the "Lower 80." In addition, wide-area auction
winners in the Upper 200 have the right to relocate incumbent licensees to other
"comparable" spectrum. Auction winners in the General Category and Lower 80 do
not have these same relocation rights and must afford protection to incumbent
stations. Incumbent stations may not, however, expand their service areas.
Wide-area auction winners have substantial flexibility to install any number of
base stations including, in the case of the General Category and Lower 80
channels, base stations that operate on the same channels as incumbent
licensees. Motient was an incumbent in the Upper 200 and remains an incumbent on
certain General Category channels. Although the FCC requires General Category
and Lower 80 geographic licensees to protect incumbents from interference, there
is some concern that such interference may occur and that practical application
of the interference-protection rules may be uncertain.
Motient believes that it has licenses for a sufficient number of channels to
meet its current capacity needs on the terrestrial network.
Motient operates the terrestrial network under a number of waivers involving the
FCC's technical rules, including rules on station identification, for-profit use
of excess capacity, system loading, and multiple station ownership. Several of
these waivers were first obtained individually by IBM and Motorola, which
operated separate wireless data systems until forming the ARDIS joint venture in
1990. The FCC incorporated a number of these waivers into its regulations when
it implemented Congress's statutory provision creating the commercial mobile
radio service classification. As of March 3, 1999, Motient completed its planned
construction of base stations for which extended implementation was granted by
the FCC in 1996.
On March 14, 2002, the FCC adopted a notice of proposed rulemaking exploring
options and alternatives for improving the spectrum environment for public
safety operations in the 800 MHz band. This notice of proposed rulemaking was
issued by the FCC after a "white paper" proposal was submitted to the FCC by
Nextel Communications Inc. in November 2001 addressing largely the same issues.
In its white paper, Nextel proposed that certain of its wireless spectrum in the
700 MHz band, lower 800 MHz band, and 900 MHz band be exchanged for spectrum in
the upper 800 MHz band and in the 2.1 GHz band. Nextel's proposal addressed the
problem of interference to public safety agencies by creating blocks of
contiguous spectrum to be shared by public safety agencies. Since the notice of
proposed rulemaking was issued, Motient has been actively participating with
other affected licensees, including Nextel, to reach agreement on a voluntary
plan to re-allocate spectrum to alleviate interference to public safety
agencies. On December 24, 2002, a group of affected licensees, including
F-49
Motient, Nextel, and several other licensees, submitted a detailed proposal to
the FCC for accomplishing the re-allocation of spectrum over a period of several
years. These parties have also been negotiating a mechanism by which Nextel
would agree to reimburse costs, up to $850 million, incurred by affected
licensees in relocating to different parts of the spectrum band pursuant to the
rebanding plan.
In mid-April 2003, the FCC's Office of Engineering and Technology ("OET") sent a
letter to several manufacturers requesting additional practical, technical and
procedural solutions or information that may have yet to be considered. Upon
reviewing the filed comments, OET has indicated that other technical solutions
were possible and were being reviewed by the FCC. To date, no action has been
taken by the FCC. We cannot assure you that our operations will not be affected
by this proceeding.
For further details regarding regulatory matters related to periods after this
report, please see Note 16 ("Subsequent Events").
15. SUPPLEMENTAL CASH FLOW INFORMATION
Successor Company Predecessor Company
----------------- -------------------
(unaudited) (unaudited) Eight Four
Nine Months Nine Months Months Months (Restated)
Ended Ended Year Ended Ended Ended Year Ended
September 30, September 30, December 31, December 31, April 30, December 31,
2004 2003 2003 2002 2002 2001
---- ---- ---- ---- ---- ----
(in thousands)
Cash payments for interest $ 4,648 $ 1,459 $ 572 $ 396 $ 427 $ 26,240
Cash payment for income taxes -- -- -- -- -- --
Noncash investing and financing activities:
Leased asset and related obligations -- -- -- -- -- 632
Issuance of restricted stock -- -- -- -- -- 419
Cancellation of restricted stock -- -- -- -- -- (264)
Additional deferred compensation on non-cash
compensation -- -- -- -- 97 1,587
Issuance and repricing of common stock
purchase warrants 15,079 10,024 10,024 1,464 -- 2,326
Capital (loss) gain in connection with the
sale of stock by XM Radio -- -- -- -- -- (12,180)
Capital gain in connection with the sale of
stock by MSV -- -- -- -- -- 12,883
Vendor financing for property in service -- -- -- -- -- --
Vendor financing under maintenance agreement -- -- -- 2,631 -- --
Issuance of Common Stock under the Defined
Contribution Plan $ 150 $ 190 $ 280 $ -- $ (203) $ 1,151
16. SUBSEQUENT EVENTS
Private Placements
On April 7, 2004, Motient sold 4,215,910 shares of its common stock at a per
share price of $5.50 for an aggregate purchase price of $23.2 million to The
Raptor Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar
Rock Fund L.P., Tudor Proprietary Trading, L.L.C., Highland Crusader Offshore
Partners, L.P., York Distressed Opportunities Fund, L.P., York Select, L.P.,
York Select Unit Trust, M&E Advisors L.L.C., Catalyst Credit Opportunity Fund,
Catalyst Credit Opportunity Fund Offshore, DCM, Ltd., Greywolf Capital II LP and
Greywolf Capital Overseas Fund and LC Capital Master Fund. The sale of these
shares was not registered under the Securities Act of 1933, as amended and the
shares may not be sold in the United States absent registration or an applicable
exemption from registration requirements. The shares were offered and sold
pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. In connection with
this sale, Motient signed a registration rights agreement with the holders of
these shares. Motient also issued warrants to purchase an aggregate of 1,053,978
shares of its common stock to the investors listed above, at an exercise price
of $5.50 per share. Because Motient met certain conditions following the
issuance of the warrants, they will never vest (unaudited).
F-50
In connection with this sale, Motient issued to Tejas Securities Group, Inc.,
its placement agent for the private placement, and certain CTA affiliates,
warrants to purchase 600,000 and 400,000 shares, respectively, of its common
stock. The exercise price of these warrants is $5.50 per share. The warrants are
immediately exercisable upon issuance and have a term of five years. Motient
also paid Tejas Securities Group, Inc. a placement fee of $350,000 at closing.
The fair value of the warrants was estimated at $6.2 million using a
Black-Scholes model. (Unaudited) The shares were offered and sold pursuant to
the exemption from registration afforded by Rule 506 under the Securities Act
and/or Section 4(2) of the Securities Act.
On July 1, 2004, Motient sold 3,500,000 shares of its common stock at a per
share price of $8.57 for an aggregate purchase price of $30.0 million to The
Raptor Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar
Rock Fund L.P., Tudor Proprietary Trading, L.L.C., York Distressed Opportunities
Fund, L.P., York Select, L.P., York Select Unit Trust, York Global Value
Partner, L.P., Catalyst Credit Opportunity Fund, Catalyst Credit Opportunity
Fund Offshore, DCM, Ltd., Rockbay Capital Fund, LLC, Rockbay Capital Investment
Fund, LLC, Rockbay Capital Offshore Fund, Ltd., Glenview Capital Partner, L.P.,
Glenview Institutional Partners, L.P., Glenview Capital Master Fund, Ltd., GCM
Little Arbor Master Fund, Ltd., OZ Master Fund, Ltd., OZ Mac 13 Ltd., Fleet
Maritime, Inc., John Waterfall, Edwin Morgens, Greywolf Capital II, L.P.,
Greywolf Capital Overseas Fund, Highland Equity Focus Fund, L.P., Singer
Children's Management Trust, Highland Equity Fund, L.P., and Strome Hedgecap
Limited. The sale of these shares was not registered under the Securities Act
and the shares may not be sold in the United States absent registration or an
applicable exemption from registration requirements. The shares were offered and
sold pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. Motient also issued
warrants to purchase an aggregate of 525,000 shares of its common stock to the
investors listed above, at an exercise price of $8.57 per share. Because Motient
met certain conditions following the issuance of the warrants, they will never
vest (unaudited).
In connection with this sale, Motient issued to certain affiliates of CTA and
Tejas Securities Group, Inc., its placement agent for the private placement,
warrants to purchase 340,000 and 510,000 shares, respectively, of its common
stock. The exercise price of these warrants is $8.57 per share. The warrants are
immediately exercisable upon issuance and have a term of five years. Motient
also paid Tejas Securities Group, Inc. a placement fee of $850,000 at closing.
The shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act.
On November 12, 2004, Motient sold 15,353,609 shares of its common stock at a
per share price of $8.57. Motient received aggregate proceeds of $126,397,809,
net of $5,182,620 in commissions paid to its placement agent, Tejas Securities
Group, Inc. The approximately 60 purchasers included substantially all of the
purchasers from the April and July 2004 private placements, as well multiple new
investors. The sale of these shares was not registered under the Securities Act
and the shares may not be sold in the United States absent registration or an
applicable exemption from registration requirements. The shares were offered and
sold pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. In connection with
this sale, Motient signed a registration rights agreement with the holders of
these shares. Among other things, this registration rights agreement required us
to file and cause to make effective a registration statement permitting the
resale of the shares by the holders thereof. Motient also issued warrants to
purchase an aggregate of approximately 3,838,401 shares of its common stock to
the investors listed above, at an exercise price of $8.57 per share. These
warrants will vest if and only if Motient does not meet certain deadlines
between January and March 2005 with respect to certain requirements under the
registration rights agreement. If the warrants vest, they may be exercised by
the holders thereof at any time through November 11, 2009. (Unaudited)
Rights Offering (Unaudited)
On November 22, Motient announced that it will issue to each of its stockholders
of record one right for each share of Motient common stock held as of the close
of business on December 17, 2004. Each right will entitle any holder that did
F-51
not participate in the April, July or November 2004 private placement to
purchase 0.103 shares of its common stock at a price of $8.57 per share, with
fractions rounded up to the next whole share. A maximum of 2.5 million shares
may be sold in the Rights Offering, generating maximum aggregate proceeds of
approximately $21.4 million.
The rights will be non-transferable and will expire if not exercised within the
exercise period. The rights will not be exercisable until the registration
statement covering the rights and the shares of underlying common stock is
declared effective by the SEC, and the exercise period will expire 30 days after
the rights become exercisable. Motient has not filed a registration statement
relating to the rights offering, but intends to do so as soon as reasonably
practicable. Motient expects to consummate this rights offering in early 2005.
The holders of the rights will not have over-subscription rights, and there will
be no backstop to purchase unsubscribed shares. Purchasers that purchased shares
in the November 12, 2004 private placement of its common stock, which include
all purchasers in its April 2 and July 2004 private placements, have waived
their right to participate in the rights offering.
Motient reserves the right to abandon this rights offering at any time prior to
the effectiveness of the registration statement relating to the rights offering,
and upon any such abandonment, any and all of the rights previously issued will
be cancelled, will no longer be exercisable and will be of no further force or
effect.
Term Credit Facility
On March 16, 2004, Motient entered into an amendment to its credit facility
which extended the borrowing availability period until December 31, 2004. On
March 16, 2004, in connection with the execution of the amendment to the credit
agreement, the Company issued warrants to the lenders to purchase, in the
aggregate, 2,000,000 shares of Motient's common stock. The number of warrants
was reduced to an aggregate of 1,000,000 shares of common stock since, within 60
days after March 16, 2004, the Company obtained at least $7.5 million of
additional debt or equity financing. The exercise price of the warrants is $4.88
per share. The warrants were immediately exercisable upon issuance and have a
term of five years. The warrants were valued at $6.7 million using a
Black-Scholes pricing model and are being recorded as a debt discount and will
be amortized as additional interest expense over three years, the term of the
related debt. Motient registered the shares underlying the warrants in July
2004. (unaudited) The Company also paid a commitment fees to the lenders of
$320,000 which accrued into the principal balance at closing. These fees will be
recorded on Motient's balance sheet and will be amortized as additional interest
expense over three years, the term of the related debt.
On April 13, 2004, Motient repaid all principal amounts then owing under its
term credit facility, including accrued interest thereon, in an amount of $6.7
million. On December 31, 2004, borrowing availability under the facility
terminated, and the Company does not anticipate that it will be extended again
(unaudited).
Developments Relating to MSV
On April 2, 2004, two exiting investors in MSV invested $17.6 million in MSV in
exchange for class A preferred units of limited partnership interests of MSV. In
connection with this investment, MSV's amended and restated investment agreement
was amended to provide that of the total $17.6 million in proceeds, $5.0 million
was used to repay certain outstanding indebtedness of MSV, including $2.0
million of accrued interest under the $15.0 million promissory note issued to
Motient by MSV. Motient was required to use 25% of the $2.0 million it received
in this transaction, or $500,000, to prepay its existing notes owed to Rare
Medium Group and CSFB. The remainder of the proceeds from this investment were
used for general corporate purposes by MSV. As of the closing of the additional
investment on April 2, 2004, Motient's percentage ownership of MSV was
approximately 29.5% on an "as converted" basis giving effect to the conversion
of all outstanding convertible notes of MSV.
In June 2004, MSV obtained certain rights to receive nationwide spectrum in the
S-band (2.1 GHz range) from its affiliate, TMI Communications and Company,
Limited Partnership, or TMI, as a result of the FCC's reinstatement of TMI's
S-band authorization on June 29, 2004. This reinstatement of TMI's S-band
authorization is subject to certain conditions. The S-band authorization
requires the satisfaction of certain satellite construction and other
milestones. There can be no assurances that such conditions and milestones will
be satisfied.
F-52
On November 8, 2004, the FCC issued an order granting MSV an ancillary
terrestrial component, or ATC, license, the first ATC license ever granted by
the FCC. The FCC also approved several of MSV's waiver requests, allowing MSV to
further enhance its service and coverage, but it specifically deferred its
ruling on other MSV waiver requests. The order sets forth various limitations
and conditions necessary to the use of ATC by MSV, but there can be no
assurances that such conditions will be satisfied by MSV, or that such
limitations will not be unnecessarily burdensome to MSV. Please review the full
FCC order for additional important information regarding the authorizations and
waivers granted to MSV, and the limitations and conditions set forth therein.
The order may be found on the FCC's website, www.fcc.gov. (Unaudited)
On November 12, 2004, Motient purchased approximately 5.4 million MSV limited
partnership units, and a corresponding number of shares in MSV's general
partner, Mobile Satellite Ventures GP Inc. ("MSV GP"). As consideration, Motient
provided MSV with $125 million in cash, converted its outstanding $15 million
principal note (and all accrued interest thereon) issued by MSV, converted its
$3.5 million of convertible notes issued by MSV, and converted the accrued
interest on such convertible notes. In connection with Motient's investment, the
other limited partners of MSV exchanged their outstanding notes (and the accrued
interest thereon), and one limited partner contributed an additional $20 million
in cash, for limited partnership units and a corresponding number of MSV GP
shares. Such investments and conversions increased Motient's ownership of MSV
from 29.5% (assuming conversion of all outstanding convertible notes) to 38.6%.
Motient does not control MSV and continues to account for its investment under
the equity method. (Unaudited)
Motient's investment in MSV is governed by several agreements, including but not
limited to the limited partnership agreement of MSV and the stockholder's
agreement of MSV GP. The acquisition or disposition by MSV of its assets, the
acquisition or disposition of any limited partner's interest in MSV, subsequent
investment into MSV by any person, and any merger or other business combination
of MSV, would be subject to the control restrictions contained in such
documents. Such control restrictions include, but are not limited to, rights of
first refusal, tag along rights and drag along rights. Many of these actions,
among others, cannot occur without the consent of the majority of the ownership
interests of MSV. In addition several of the other limited partners of MSV
entered into a voting agreement amongst themselves, which may restrict any
signatories ability to give such consent absent the agreement of the majority of
the signatories to such voting agreement. MSV plans to use the proceeds from
this investment for general corporate purposes. (Unaudited)
For additional information regarding MSV, please see the financial statements of
MSV beginning on page M-1.
Rare Medium and CSFB Notes
On July 15, 2004, the Company paid all principal and interest due and owing on
its notes payable to Rare Medium and CSFB, in the aggregate amount of $23.5
million. (Unaudited)
Further Cost Reduction Actions
Please see Note 1, "Organization and Going Concern - - Cost Reduction Actions".
UPS Revenue
Please see Note 1, "Organization and Going Concern - - UPS Revenue".
Management and Board Changes
On February 10, 2004, the Company and Walter V. Purnell, Jr. mutually agreed to
end his employment as President and Chief Executive Officer of Motient and all
of its wholly owned subsidiaries. Concurrently, Mr. Purnell resigned as a
director of such entities and of MSV and all of its subsidiaries.
F-53
On February 18, 2004, Daniel Croft, Senior Vice President, Marketing and
Business Development, and Michael Fabbri, Senior Vice President, Sales, were
relieved of their duties as part of a reduction in force.
On March 18, 2004 the board of directors elected Christopher W. Downie to the
position of executive vice president, chief financial officer and treasurer, and
designated Mr. Downie as the Company's principal executive officer.
On May 6, 2004, the board of directors elected Raymond L. Steel to serve as a
member of the board. Mr. Steele was also elected to the Company's audit
committee.
On May 6, 2004 the board of directors elected Robert L. Macklin to the position
of General Counsel and Secretary.
On May 24, 2004 the board of directors designated Myrna J. Newman, the Company's
controller and chief accounting officer, as the principal financial officer of
the Company.
Also on May 24, 2004, the board of directors elected Christopher W. Downie to
the position of executive vice president, chief operating officer and treasurer.
Mr. Downie remains the principal executive officer.
On June 15, 2004, the board of directors designated Jonelle St. John and Raymond
J. Steele as the board's financial experts.
Change in Accountants
On March 2, 2004, Motient dismissed PricewaterhouseCoopers as its independent
auditors effective immediately. The audit committee of the Company's Board
approved the dismissal of PricewaterhouseCoopers. PricewaterhouseCoopers was
previously appointed to audit Motient's consolidated financial statements for
the period May 1, 2002 to December 31, 2002, and, by its terms, such engagement
was to terminate upon the completion of services related to such audit.
PricewaterhouseCoopers has not reported on Motient's consolidated financial
statements for such period or for any other fiscal period. On March 2, 2004, the
audit committee engaged Ehrenkrantz Sterling & Co. LLC as Motient's independent
auditors to replace PricewaterhouseCoopers to audit Motient's consolidated
financial statements for the period May 1, 2002 to December 31, 2002.
On June 1, 2004, Ehrenkrantz Sterling & Co. LLC, merged with the firm of
Friedman Alpren & Green LLP. The new entity, Friedman LLP has been retained by
Motient and the Audit Committee of Motient's Board of Directors approved this
decision on June 4, 2004.
For further details regarding the change in accountants, please see the
Company's current report on Form 8K filed with the SEC on April 23, 2003 and the
Company's amendment to its current report on Form 8-K/A filed with the SEC on
April 23, 2003 and March 9, 2004.
CTA Arrangements
On January 30, 2004, the Company engaged CTA to act as chief restructuring
entity. As consideration for this work, Motient agreed to pay to CTA a monthly
fee of $60,000. The new agreement amended the existing consulting arrangement
with CTA. In addition, since the initial engagement of CTA, the payment of
certain monthly fees to CTA has been deferred. In April 2004, Motient paid CTA
$440,000 for all past deferred fees. In December 2004, certain affiliates of CTA
were granted options to purchase 125,000 shares of the Company's common stock at
a price of $8.57 per share. (Unaudited) The options are immediately vested and
have a term of 10 years. (Unaudited)
In March 2004, Motient further restructured both the vendor financing facility
and the promissory note to Motorola, primarily to extend the amortization
periods for both the vendor financing facility and the promissory note. Motient
will amortize the combined balances in the amount of $100,000 per month
F-54
beginning in March 2004. Motient also agreed that interest would accrue on the
vendor financing facility at LIBOR plus 4%. As part of this restructuring,
Motient agreed to grant Motorola a second lien (junior to the lien held by the
lenders under our term credit facility) on the stock of Motient License. This
pledge secures Motient's obligations under both the vendor financing facility
and the promissory note.
Termination of Motorola and Hewlett-Packard Agreements (Unaudited)
In June 2004, the Company negotiated settlements terminating its outstanding
financing facilities with Motorola and its lease with Hewlett-Packard for
certain network equipment. The full amount due and owing under these agreements
was a combined $6.8 million. Motient paid a combined $3.9 million in cash and
will issue a warrant to Motorola to purchase 200,000 shares of the Company's
common stock at a price of $8.68, in full satisfaction of the outstanding
balances. In the case of Hewlett-Packard, the Company took title to all of the
leased equipment and software, and in the case of Motorola, there was no
equipment or service that Motorola was obligated to provide. Additionally,
Hewlett-Packard released to the Company its $1.1 million letter of credit.
Regulatory
It was reported that in March of 2004, the staff of the FCC circulated a draft
order to the five FCC Commissioners recommending adoption of the plan for the
reallocation of the 800 MHz spectrum commonly known as the "Consensus Plan".
However, the staff apparently also recommended the rejection of Nextel's offer
to pay $850 million to recover the costs of the re-allocation of the spectrum,
as the staff apparently felt this amount to be insufficient to cover the costs
of such re-allocation. On April 8, 2004, Motient filed a request with the FCC
asking that the FCC relocate Motient into the so called "upper-800 MHz band" as
part of the Consensus Plan. Seeking to resolve interference to public safety
users, on July 8, 2004, the FCC approved adoption of a reconfiguration plan for
the 800 MHz spectrum band. Under the plan, Nextel is allowed to occupy spectrum
in the 1.9 GHz band in exchange for, among other things, relocating and retuning
public safety licensees in the 800 MHz band. Motient has spectrum in both the
lower-800 MHz band and upper-800 MHz band, and on April 8, 2004, filed a request
with the FCC asking that the FCC relocate its lower-800 MHz band frequencies
into the upper-800 MHz band as part of the 800 MHz reconfiguration plan. On
August 6, 2004, the FCC released the text of its July 8, 2004 order. The text of
the order did not grant Motient's request, but neither did it explicitly deny
it. (Unaudited) On December 2, 2004, Motient filed comments with the FCC seeking
to clarify and implement Motient's original request of April 8, 2004.
(Unaudited) On December 22, 2004, the FCC clarified that Motient would generally
be allowed, subject to certain conditions, to move its 800 MHz frequencies to
the upper-800 MHz band. (Unaudited) Motient cannot assure that its operations
will be not affected by the adoption or implementation of this order or any
subsequent addenda.
Legal
On April 15, 2004, Motient filed a claim under the rules of the American
Arbitration Association in Fairfax County, VA, against Wireless Matrix
Corporation, a reseller of Motient's services, for the non-payment of certain
amounts due and owing under the "take-or-pay" agreement between Motient and
Wireless Matrix. Under this agreement, Wireless Matrix agreed to purchase
certain minimum amounts of air-time on the Motient network. In February 2004
Wireless Matrix informed Motient that it was terminating its agreement with
Motient. Motient did not believe that Wireless Matrix had any valid basis to do
so, and consequently filed the above mentioned claim seeking over $2.6 million
in damages, which amount represents Wireless Matrix's total prospective
commitment under the agreement. On May 10, 2004, Motient received notice of a
counter-claim by Wireless Matrix of approximately $1 million, representing such
amounts as Wireless Matrix claimed to have paid in excess of services rendered
under the agreement. In June 2004, Motient reached a favorable out of court
agreement with Wireless Matrix in which Wireless Matrix paid Motient $1.1
million.
On December 14, 2004, an appeals court found that Research in Motion had
violated several patents held by NTP, Inc., but also found fault with certain
instructions given to the jury in the initial patent infringement suit it filed
by NTP against Research In Motion. Consequently, the appeals court vacated the
injunction preventing the sale by RIM of certain of its products granted to NTP
by the lower court and remanded the case for further proceedings. (Unaudited)
F-55
2004 Restricted Stock Plan (Unaudited)
In August 2004, the Company adopted a restricted stock plan, and subsequently
registered the shares to be issued under such plan on a registration statement
on Form S-8. Pursuant to this plan, the Company may issue up to 1,000,000 shares
of restricted common stock to employees or directors. In September 2004, the
Company issued an aggregate of 15,400 shares of restricted stock to its
directors as partial compensation for their service on the board of directors.
Such shares will vest six months after issue, or upon a change of control of the
Company.
Reseller Agreements (Unaudited)
In October and November 2004, respectively, the Company terminated its dealer
agreements with Verizon and T-Mobile that allowed it to sell mobile internet
devices for use on their wireless networks. Concurrently with the termination of
the Company's agreement with T-Mobile, it signed a sub-dealer agreement with
RACO, Inc., that will allow the Company to continue to sell mobile internet
devices for use on T-Mobile's wireless network. Also in October and November
2004, respectively, the Company signed reseller agreements with AT&T Wireless
Services Inc., (now Cingular) and Sprint Spectrum, LP, allowing the Company to
sell and promote applications and solutions to enterprise accounts on their
networks.
iMotient Solutions (Unaudited)
In December 2004, the Company launched a new set of products and services
designed to integrate a suite of its own products and services into an
integrated, network agnostic, product called iMotient Solutions. iMotient allows
Motient's customers to use multiple networks via a single connection to Motient,
providing a one-source alternative for development, device management and
billing across multiple networks, including but not limited to GPRS, 1XRTT, and
DataTac. Once connected to iMotient, customers will receive a suite of
proprietary applications and services that Motient believes will reduce airtime
usage, improve performance and reduce costs.
F-56
QUARTERLY FINANCIAL DATA
(dollars in thousands, except for per share data)
(unaudited)
Successor Company
-----------------
2003-Quarters
-------------
3/31/03 6/30/03 9/30/03 12/31/03
------- ------- ------- --------
Revenues $14,370 $14,992 $12,051 $13,072
Operating expenses (1) 24,424 25,358 24,311 20,559
------ ------ ------ ------
Loss from operations (10,054) (10,366) (12,260) (7,487)
Net Income (loss) $(12,394) $(13,010) $(22,345) $(14,373)
Basic and Diluted Loss Per $(0.49) $(0.52) $(0.89) $(0.57)
Share of common stock
Weighted-average common 25,097 25,137 25,170 25,145
shares outstanding during the
period
Market price per share (3) $4.00 $2.00 $5.00 $5.45
High
Low $2.75 $5.75 $6.35 $3.95
Predecessor Company through April 30, 2002 and
Successor Company from May 1, 2002 to December 31, 2002 Predecessor Company
2002-Quarters 2001-Quarters (restated)
------------- ------------------------
(Predecessor (Successor
Company) Company)
1 Month 2 Months
(Predecessor Ended Ended (Successor (Successor
Company) April 30, June 30, Company) Company)
3/31/02 2002 2002 9/30/02 12/31/02 3/31/01 6/30/01 9/30/01 12/31/01
------- ---- ---- ------- -------- ------- ------- ------- --------
Revenues $16,683 $5,690 $8,719 $13,297 $14,601 $22,565 $22,641 $23,547 $21,513
Operating expenses (1) 32,445 11,358 19,796 25,426 25,195 48,225 47,832 50,342 41,092
------ ------ ------ ------ ------ ------ ------ ------ ------
Loss from operations (15,762) (5,668) (11,077) (12,129) (10,594) (25,660) (25,191) (26,795) (19,579)
Net Income (loss) $(35,429) 267,408 $(13,010) $(16,644) $(29,904) (54,948) (65,317) (49,636) (99,597)
Basic and Diluted Loss Per
Share of common stock $(0.61) $4.58 $(0.52) $(0.66) $(1.19) $(1.11) $(1.32) $(0.99) $(1.81)
Weighted-average common
shares outstanding during the
period 58,256 58,366 25,097 25,097 25,097 49,639 49,654 50,175 55,027
Market price per share (3)
High $0.45 $0.040 $5.90 $4.45 $3.40 $6.59 $2.05 $1.10 $0.60
Low $0.055 $0.080 $3.60 $0.40 $0.65 $1.25 $0.38 $0.09 $0.05
(1) Operating expenses include restructuring charges of approximately
$25,000 in the second quarter of 2002, $4.7 million in the third
quarter of 2001. Of the $4.7 million restructuring expense in 2001,
$3.8 million was paid in 2001. Of the $0.6 million restructuring
expense in 2002, $0.5 million was paid in 2002.
(2) Loss per share calculations for each of the quarters are based on the
weighted average number of shares outstanding for each of the periods,
and the sum of the quarters is not equal to the full year loss per
share amount due to rounding.
(3) Until January 14, 2002, the Company's common stock was listed under
the symbol MTNT on the Nasdaq Stock Market. The Company voluntarily
delisted from the Nasdaq Stock Market on January 14, 2002 as a result
of its Chapter 11 bankruptcy filing. The Company's common stock is
currently traded under the symbol MNCP on the Pink Sheets. The
quarterly high and low sales price represents the intra-day prices in
the Nasdaq Stock Market for the Company's pre-reorganization common
stock for the periods indicated for 2001 and the high and low bid
prices for Motient pre- and post-reorganization common stock for the
periods indicated. The quotations represent inter-dealer quotations,
without retail markups, markdowns or commissions, and may not
necessarily represent actual transactions. As of December 31, 2003,
there were 11 stockholders of record of the Company's common stock.
F-57
Summary of Impact of the Restatement of Financial Statements
The revised accounting treatment described in Note 2 ("Significant Accounting
Policies -- Restatement of Financial Statements") requires that certain
adjustments be made to the income statements and balance sheets for the
respective quarters of 2001 and the quarter ended March 31, 2002. The effect of
these adjustments is illustrated in the table below. The adjustments reflected
in the table below were reviewed by Motient's independent auditor, Ehrenkrantz
Sterling & Co. LLC. Certain of the adjustments are based on assumptions that
Motient has made about the fair value of certain assets.
Quarter Ended March 31, Quarter Ended June 30, Quarter Ended September 30,
2001 2001 2001
---- ---- ----
(Unaudited) (Unaudited) (unaudited)
As reported As restated As reported As restated As reported As restated
----------- ----------- ----------- ----------- ----------- -----------
(in thousands)
Net Revenue $23,407 $22,565 $23,657 $22,641 $24,447 $23,547
Loss from Operations (25,217) (25,660) (25,224) (25,191) (25,933) (26,795)
Net Loss (54,006) (54,948) (65,324) (65,317) (48,707) (49,636)
Basic and Fully
Diluted EPS $(1.09) $(1.11) $(1.32) $(1.32) $(0.97) $(0.99)
Total Assets 536,608 536,772 485,682 486,694 448,542 449,474
Total Liabilities 588,579 580,840 599,931 593,032 610,106 604,055
Stockholders' Deficit (51,971) (44,068) (114,249) (106,338) (161,564) (154,582)
Total Liabilities &
Stockholders' Deficit $536,608 $536,772 $485,682 $486,694 $448,542 $449,474
Quarter December 31, Year Ended December 31, Quarter Ended March 31,
2001 2001 2002
---- ---- ----
(Unaudited) (Unaudited) (unaudited)
As reported As restated As reported As restated As reported As restated
----------- ----------- ----------- ----------- ----------- -----------
(in thousands)
Net Revenue $21,782 $21,513 $93,293 $90,265 $16,495 $16,683
Loss from Operations (18,622) (19,579) (94,996) (97,223) (15,970) (15,763)
Net Loss (124,052) (99,597) (292,089) (269,497) (32,885) (35,430)
Basic and Fully
Diluted EPS $(2.25) $(1.81) $(5.71) $(5.27) $(0.56) $(0.61)
Total Assets 209,617 240,465 209,617 240,465 177,628 205,283
Total Liabilities 485,086 471,614 485,086 471,614 485,681 471,559
Stockholders' Deficit (275,469) (231,149) (275,469) (231,149) (308,053) (266,277)
Total Liabilities &
Stockholders' Deficit $209,617 $240,465 $209,617 $240,465 $177,628 $205,283
F-58
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED 2001(restated), FOUR MONTHS ENDED APRIL 30, 2002,
EIGHT MONTHS ENDED DECEMBER 31, 2002, and
YEAR ENDED DECEMBER 31, 2003
Charged
Balance at to Costs
Beginning and Balance at End of
Description of Period Expenses Deductions Period
----------- --------- -------- ---------- ------
Predecessor Company
-------------------
Year Ended December 31, 2001
Allowance for doubtful accounts $1,317 $1,375 $(1,728) $964
Four Months Ended April 30, 2002
Allowance for doubtful accounts $964 $(52) $(139) $773
Successor Company
-----------------
Eight Months Ended December 31, 2002
Allowance for doubtful accounts $773 $994 $(764) $1,003
Year Ended December 31, 2003
Allowance for doubtful accounts $1,003 $194 $(438) $759
Charged
Balance at to Costs
Beginning and Balance at End of
Description of Period Expenses Deductions Period
----------- --------- -------- ---------- ------
Predecessor Company
-------------------
Year Ended December 31, 2001
Allowance for Obsolescence $1,633 $7,891 $(2,451) $7,073
Four Months Ended April 30, 2002
Allowance for Obsolescence $7,073 $4,687 $(797) $10,963
Successor Company
-----------------
Eight Months Ended December 31, 2002
Allowance for Obsolescence $10,963 $287 $(1,699) $9,551
Year Ended December 31, 2003
Allowance for Obsolescence $9,551 $199 $(2,000) $7,750
F-59
Mobile Satellite Ventures LP and Subsidiaries
Index to the Consolidated Financial Statements
Contents
Report of Independent Auditors.............................................................................................. M-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2002 and 2003 and September 30, 2004 (unaudited)............................. M-2
Consolidated Statements of Operations for the years ended December 31, 2001, 2002, and 2003 and
the unaudited nine-month periods ended September 30, 2003 and 2004....................................................... M-3
Consolidated Statements of Partners' Equity (Deficit) for the years ended December 31, 2001, 2002, and 2003
and the unaudited nine-month period ended September 30, 2004............................................................. M-4
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002, and 2003 and the
unaudited nine-month periods ended September 30, 2003 and 2004........................................................... M-5
Notes to Consolidated Financial Statements.................................................................................. M-6
Report of Independent Auditors
General Partner and Unit Holders
Mobile Satellite Ventures LP
We have audited the accompanying consolidated balance sheets of Mobile Satellite
Ventures LP (a Delaware limited partnership) and subsidiaries (collectively, the
Company) as of December 31, 2002 and 2003, and the related consolidated
statements of operations, partners' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mobile Satellite Ventures LP
and subsidiaries as of December 31, 2002 and 2003, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
-------------------------------
Ernst & Young LLP
April 23, 2004
McLean, Virginia
M-1
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Balance Sheets
December 31 September 30
2002 2003 2004
------------------------------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,781,674 $ 3,981,624 $ 8,133,174
Restricted cash 652,860 74,246 74,612
Accounts receivable, net of allowance of
$785,195, $71,687, and $74,612 as of
December 31, 2002 and 2003 and
September 30, 2004 (unaudited), respectively 3,094,483 4,156,416 4,623,334
Inventory 2,118,583 1,406,604 772,152
Prepaid expenses and other current assets 735,384 1,058,942 631,265
------------- ------------- -------------
Total current assets 12,382,984 10,677,832 14,234,537
Property and equipment, net 28,767,458 23,598,573 17,925,524
Intangible assets, net 89,947,520 80,673,205 74,099,946
Goodwill 11,261,943 15,784,572 16,028,761
Other assets 1,935,553 84,779 1,584,779
------------- ------------- -------------
Total assets $ 144,295,458 $ 130,818,961 $ 123,873,547
============= ============= =============
Liabilities and partners' equity (deficit)
Current liabilities:
Accounts payable and accrued expenses $ 4,117,186 $ 4,172,297 $ 4,696,436
Vendor note payable, current portion -- 127,211 201,228
Deferred revenue, current portion 5,298,120 5,887,381 3,997,796
Due to Motient--related party 656,202 74,246 74,612
Other current liabilities 483,373 110,766 78,692
------------- ------------- -------------
Total current liabilities 10,554,881 10,371,901 9,048,764
Deferred revenue, net of current portion 16,633,917 20,865,511 20,269,517
Accrued interest, net of current portion 9,340,336 16,725,057 21,462,239
Vendor note payable, net of current portion -- 915,785 748,940
Notes payable to Investors 84,500,000 82,924,667 80,554,085
------------- ------------- -------------
Total liabilities 121,029,134 131,802,921 132,083,545
Commitments and contingencies
Partners' equity (deficit):
MSV general partner -- -- --
MSV limited partners 23,259,457 (1,041,013) (3,926,614)
Deferred compensation -- -- (3,824,403)
Accumulated other comprehensive income (loss) 6,867 57,053 (458,981)
------------- ------------- -------------
Total partners' equity (deficit) 23,266,324 (983,960) (8,209,998)
------------- ------------- -------------
Total liabilities and partners' equity (deficit) $ 144,295,458 $ 130,818,961 $ 123,873,547
============= ============= =============
See accompanying notes.
M-2
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Operations
Nine-month period ended
Year ended December 31 September 30
2001 2002 2003 2003 2004
-------------------------------------------------------------------------------------------------
(Unaudited)
Revenues:
Services and related
revenues $ 2,062,660 $ 24,389,482 $ 25,536,096 $ 18,780,917 $ 20,077,748
Equipment sales and other
revenues 32,266 464,833 1,588,294 936,155 1,800,367
------------ ------------ ------------ ------------ ------------
Total revenues 2,094,926 24,854,315 27,124,390 19,717,072 21,878,115
Operating expenses:
Satellite operations and
cost of services 7,254,606 10,532,376 10,604,156 7,959,908 7,827,011
Satellite capacity
purchased from MSV Canada 454,416 4,647,224 4,858,305 3,624,879 4,147,723
Next-generation research
and development
expenditures 271,134 1,621,886 2,119,303 1,544,810 2,178,586
Legal, regulatory, and
consulting 2,902,897 3,652,636 4,966,044 3,776,726 6,147,534
Sales and marketing 53,915 2,416,050 1,973,381 1,477,180 3,332,241
General and administrative 674,203 4,546,327 3,992,187 2,938,946 4,022,362
Depreciation and
amortization 1,733,709 18,235,030 17,942,672 13,526,559 13,776,414
Amortization of asset
purchase deposit 4,906,104 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total operating expenses 18,250,984 45,651,529 46,456,048 34,849,008 41,431,871
------------ ------------ ------------ ------------ ------------
Loss from operations (16,156,058) (20,797,214) (19,331,658) (15,131,936) (19,553,756)
Other income (expense):
Management fee from MSV Canada 321,631 3,100,847 3,199,974 2,407,982 2,629,906
Equity in losses of MSV
Canada (64,871) (373,738) (1,030,119) (626,593) (250,505)
Interest income 146,815 55,538 40,355 28,459 73,453
Interest expense (769,270) (8,577,407) (9,616,235) (7,092,030) (7,380,849)
Write-off of investment in
joint venture -- -- (2,000,000) (2,000,000) --
Other (expense) income, net (3,036) 424,490 737,213 269,141 13,472
------------ ------------ ------------ ------------ ------------
Net loss $(16,524,789) $(26,167,484) $(28,000,470) $(22,144,977) $(24,468,279)
============ ============ ============ ============ ============
See accompanying notes.
M-3
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Partners' Equity (Deficit)
MSV LLC MSV LLC Investor Units
Common Units Units and Warrants General Partner Limited Partners
---------------------------------------------------------------------------------
Number of Number of Number of Number of Deferred
Units Amount Units Amount Units Amount Units Amount Compensation
------------------------------------------------------------------------------------------------
Balance at December 31, 2000 80 $- 20 $23,106,111 - $- - $ - $ -
Net loss from January 1,
2001 to November 26, 2001 - - - (13,926,522) - - - - -
Conversion from LLC to LP (80) - (20) (9,179,589) - - 10,000,000 9,179,589 -
Issuance of MSV Common Units
to TMI - - - - - - 6,636,482 42,805,306 -
Issuance of MSV Common Units
to vendor - - - - - - 6,250 40,313 -
Net loss from November 27,
2001 to December 31, 2001 - - - - - - - (2,598,267) -
------------------------------------------------------------------------------------------------
Balance at December 31, 2001 - - - - - - 16,642,732 49,426,941 -
Total, December 31, 2001
Net loss - - - - - - - -
(26,167,484)
Translation adjustment - - - - - - - - -
------------------------------------------------------------------------------------------------
Balance at December 31, 2002 - - - - - - 16,642,732 23,259,457 -
Total, December 31, 2002
Issuance of MSV Class A - - - - - - 573,951 3,700,000 -
Preferred Units
Net loss - - - - - - - (28,000,470) -
Change in market value of
derivative instruments - - - - - - - - -
Translation adjustment - - - - - - - - -
------------------------------------------------------------------------------------------------
Balance at December 31, 2003 - - - - - - 17,216,683 (1,041,013) -
Total, December 31, 2003
Issuance of MSV Class A
Preferred Units (unaudited) - - - - - - 2,735,317 17,633,333 -
Issuance of stock options
(unaudited) - - - - - - - 3,949,345 (3,949,345)
Net loss (unaudited) - - - - - - - (24,468,279) -
Amortization of deferred
compensation (unaudited) - - - - - - - - 124,942
Change in market value of
derivative instruments
(unaudited) - - - - - - - - -
Translation adjustment
(unaudited) - - - - - - - - -
------------------------------------------------------------------------------------------------
Balance at September 30, 2004
(unaudited) - $- - $ - - $- 19,952,000 $(3,926,614) $(3,824,403)
================================================================================================
Total, September 30, 2004
(unaudited)
See accompanying notes.
M-4
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Partners' Equity (Deficit)
(Continued)
Accumulated Total
Other Partners'
Comprehensive Equity Comprehensive
Income (Deficit) Loss
-----------------------------------------
Balance at December 31, 2000 $ - $23,106,111
Net loss from January 1,
2001 to November 26, 2001 - (13,926,522)
Conversion from LLC to LP - -
Issuance of MSV Common Units
to TMI - 42,805,306
Issuance of MSV Common Units
to vendor - 40,313
Net loss from November 27,
2001 to December 31, 2001 - (2,598,267) $(2,598,267)
----------------------------------------
Balance at December 31, 2001 - 49,426,941
Total, December 31, 2001 $(2,598,267)
=============
Net loss - (26,167,484) $(26,167,484)
Translation adjustment 6,867 6,867 6,867
----------------------------------------
Balance at December 31, 2002 6,867 23,266,324
Total, December 31, 2002 $ (26,160,617)
=============
Issuance of MSV Class A - 3,700,000
Preferred Units
Net loss - (28,000,470) $(28,000,470)
Change in market value of
derivative instruments 81,712 81,712 81,712
Translation adjustment (31,526) (31,526) (31,526)
----------------------------------------
Balance at December 31, 2003 57,053 (983,960)
Total, December 31, 2003 $ (27,950,284)
=============
Issuance of MSV Class A
Preferred Units (unaudited) - 17,633,333
Issuance of stock options
(unaudited) - - -
Net loss (unaudited) - (24,468,279) $(24,468,279)
Amortization of deferred
compensation (unaudited) - 124,942 -
Change in market value of
derivative instruments
(unaudited) 39,563 39,563 39,563
Translation adjustment
(unaudited) (555,597) (555,597) (555,597)
----------------------------------------
Balance at September 30, 2004
(unaudited) $(458,981) $(8,209,998)
=======================
Total, September 30, 2004
(unaudited) $(24,984,313)
=============
See accompanying notes.
M-4
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Cash Flows
Nine-month periods ended
Year ended December 31 September 30
2001 2002 2003 2003 2004
-------------------------------------------------------------------------------
(Unaudited)
Operating activities
Net loss $(16,524,789) $(26,167,484) $(28,000,470) $(22,144,977) $(24,468,279)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,733,709 18,235,030 17,942,672 13,526,559 13,776,414
Amortization of prepaid satellite
capacity and services 6,610,552 -- -- -- --
Amortization of asset purchase deposit 4,906,104 -- -- -- --
Equity in losses of MSV Canada 64,871 373,738 1,030,119 626,593 250,505
Write-off of investment in joint venture -- -- 2,000,000 2,000,000 --
Amortization of deferred compensation 40,313 -- -- -- 124,942
Changes in operating assets and liabilities:
Accounts receivable (720,536) 471,009 (1,061,933) (187,997) (436,318)
Inventory 11,000 811,197 711,979 710,576 634,452
Prepaid expenses and other current assets (226,324) (353,808) (941,512) (1,225,804) 257,769
Accounts payable and accrued expenses (319,380) 1,076,582 290,671 (670,191) 375,573
Other current liabilities (8,891) (4,138,827) (751,514) (156,320) (328)
Accrued interest 768,482 8,571,854 7,384,721 4,965,223 4,737,182
Deferred revenue 3,040,307 723,136 1,274,075 (1,582,472) (2,871,932)
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (624,582) (397,573) (121,192) (4,138,810) (7,620,020)
Investing activities
Purchase of Motient Satellite business,
net of cash acquired (43,200,000) (2,200,000) (2,200,000) -- --
Purchase of TMI satellite business (7,500,000) -- -- -- --
Motient and TMI transaction costs (996,765) -- -- -- --
Purchase of property and equipment (105,416) (840,328) (1,316,512) (798,897) (1,344,289)
Purchase of option to form joint venture -- (1,000,000) (1,000,000) -- --
Purchase of intangible assets and other assets -- -- -- -- (2,000,000)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (51,802,181) (4,040,328) (4,516,512) (798,897) (3,344,289)
Financing activities
Proceeds from issuance of notes 55,000,000 3,000,000 -- -- --
Proceeds from issuance of Class A Preferred Units -- -- 3,700,000 3,700,000 17,633,333
Principal payments on notes payable -- -- (1,575,333) (1,575,333) (2,455,868)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing 55,000,000 3,000,000 2,124,667 2,124,667 15,177,465
activities
Effect of exchange rates on cash and
cash equivalents, including restricted cash -- 235,076 134,373 (417,868) (61,240)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents, including restricted cash 2,573,237 (1,202,825) (2,378,664) (3,230,908) 4,151,916
Cash and cash equivalents, including
restricted cash, beginning of period 5,064,122 7,637,359 6,434,534 6,434,534 4,055,870
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, including
restricted cash, end of period $ 7,637,359 $ 6,434,534 $ 4,055,870 $ 3,203,626 $ 8,207,786
============ ============ ============ ============ ============
Supplemental information:
Cash paid for interest $ -- $ 5,553 $ 2,124,667 $ 2,124,667 $ 2,700,142
============ ============ ============ ============ ============
Non-cash financing information
Equipment obtained through issuance of
notes to vendor $ -- $ -- $ 1,042,996 $ -- $ --
============ ============ ============ ============ ============
See accompanying notes.
M-5
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
1. Organization and Business
Mobile Satellite Venture LP's predecessor company, Motient Satellite Ventures
LLC, was organized as a limited liability company pursuant to the Delaware
Limited Liability Company Act on June 16, 2000 by Motient Corporation (Motient).
On December 19, 2000, Motient Satellite Ventures LLC changed its name to Mobile
Satellite Ventures LLC. The Company commenced operations in June 2000 and was
considered a development stage enterprise until November 26, 2001. On November
26, 2001, Mobile Satellite Ventures LLC (MSV LLC) was converted into a limited
partnership, Mobile Satellite Ventures LP (MSV or the Company), subject to the
laws of the state of Delaware. Concurrently, the Company acquired certain assets
and liabilities of the Motient and TMI Communications LP (TMI) satellite
businesses and issued $55.0 million of notes to certain existing and new
investors in exchange for cash. In connection with its purchase of TMI's
satellite business, the Company acquired a 20% equity interest in Mobile
Satellite Ventures (Canada) Inc. (MSV Canada) and 33-1/3% equity interest in
Mobile Satellite Ventures Holdings (Canada) Inc. (MSV Holdings).
The Company provides mobile satellite and communications services to individual
and corporate customers in the United States and Canada via its own satellite
and leased satellite capacity. The Company's operations are subject to
significant risks and uncertainties including technological, competitive,
financial, operational, and regulatory risks associated with the wireless
communications business. Uncertainties also exist regarding the Company's
ability to raise additional debt and equity financing and the ultimate
profitability of the Company's proposed next-generation wireless system. The
Company will require substantial additional capital resources to construct its
next-generation wireless system.
The Company's current operating assumptions and projections, which reflect
management's best estimate of future revenue and operating expenses, indicate
that anticipated operating expenditures through 2005 can be met by cash flows
from operations and available working capital; however, the Company's ability to
meet its projections is subject to uncertainties, and there can be no assurance
that the Company's current projections will be accurate. If the Company's cash
requirements are more than projected, the Company may require additional
financing. In addition, the Company entered into a satellite construction
contract (see Note 9) during 2002 and assumed certain obligations under another
system development contract in 2004 (see Note 3) that may require the Company to
obtain additional funding to finance the required payments unless one or both of
the contracts are either amended or terminated by the Company
M-6
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
1. Organization and Business (continued)
prior to certain payment due dates. The Company is not currently planning to
terminate the contracts, and there can be no assurance that the Company will be
able to enter into amendments that will defer payments in a manner consistent
with the Company's next-generation business plans. The type, timing, and terms
of financing, if required, selected by the Company will be dependent upon the
Company's cash needs, the availability of financing sources, and the prevailing
conditions in the financial markets. There can be no assurance that such
financing will be available to the Company at any given time or available on
favorable terms.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries prepared in accordance with accounting principles
generally accepted in the United States. All significant intercompany accounts
are eliminated upon consolidation.
Unaudited Interim Consolidated Financial Statements Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles in the
United States for interim financial information. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of financial position and results of
operations for the nine-month periods ended September 30, 2003 and 2004 have
been recorded. Operating results for the nine-month period ended September 30,
2004 are not necessarily indicative of the results that may be expected for the
entire fiscal year or for any future period.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates
M-7
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
2. Significant Accounting Policies (continued)
Use of Estimates (continued)
affecting the consolidated financial statements include management's judgments
regarding the allowance for doubtful accounts, reserves for inventory, future
cash flows expected from long-lived assets, and accrued expenses for probable
losses. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments such as money
market accounts with an original maturity of three months or less.
Restricted Cash
In connection with the purchase of the Motient satellite business, the Company
retained $4.0 million, which was restricted to pay Motient's rent obligation to
the Company for the lease of office space in the Company's headquarters and to
ensure the provision of certain services to the Company by Motient under a
transition services agreement. During the year ended December 31, 2002, the
agreement was amended, an additional $1,104,708 was released to Motient, and
$336,060 was released to MSV. During the years ended December 31, 2002 and 2003,
$955,533 and $530,742, respectively, was used to satisfy Motient's obligations
under its sublease with the Company. During the years ended December 31, 2002
and 2003, $1,011,002 and $50,708, respectively, was remitted to Motient for
services provided to MSV.
Inventory
Inventories consist of finished goods that are communication devices and are
stated at the lower of cost or market, average cost method. The Company
periodically assesses the market value of its inventory, based on sales trends
and forecasts and technological changes, and records a charge to current period
income when such factors indicate that a reduction in net realizable value is
appropriate.
M-8
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
2. Significant Accounting Policies (continued)
Prepaid Satellite Capacity and Services
During 2000, the Company prepaid for $14.6 million of satellite capacity and
related services provided by Motient and expected to be used by the Company for
certain research and development activities during the two-year period ending
June 30, 2002. The prepaid satellite capacity and related services was being
amortized over this two-year period. During the year ended December 31, 2001,
the Company recorded $6,610,552 of amortization. On November 26, 2001, the
unamortized balance of approximately $4.3 million was applied to the purchase
price of the Motient satellite business (see Note 3).
Property and Equipment
Property and equipment acquired in business combinations are recorded at their
estimated fair value on the date of acquisition. Purchases of property and
equipment are recorded at cost. Depreciation is computed using the straight-line
method over estimated useful lives, ranging from three to five years. Leasehold
improvements are amortized over the shorter of the estimated useful life of the
asset or the remaining lease term.
Property and equipment consisted of the following:
December 31 September 30
2002 2003 2004
---- ---- ----
(Unaudited)
Space and ground segments $ 36,791,020 $ 39,771,813 $ 40,053,417
System under construction 500,000 850,000 2,082,247
Office equipment and furniture 832,325 836,961 850,145
Leasehold improvements 300,000 300,000 300,000
------------ ------------ ------------
38,423,345 41,758,774 43,285,809
Accumulated depreciation (9,655,887) (18,160,201) (25,360,285)
------------ ------------ ------------
Property and equipment, net $ 28,767,458 $ 23,598,573 $ 17,925,524
============ ============ ============
M-9
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
2. Significant Accounting Policies (continued)
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Company
reviews its long-lived assets including property and equipment and intangible
assets other than goodwill, whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable. To
determine the recoverability of its long-lived assets, the Company evaluates the
probability that future estimated undiscounted net cash flows will be less than
the carrying amount of the assets. If such estimated cash flows are less than
the carrying amount of the long-lived assets, then such assets are written down
to their fair value. No impairment charges were recorded in the years ended
December 31, 2001, 2002 or 2003. No impairment charges were recorded in the
nine-month period ended September 30, 2004. The Company may reduce its estimates
of anticipated cash flows and the remaining estimated useful lives of long-lived
assets in the future. As a result, the carrying amount of long-lived assets may
be reduced in the future.
Goodwill
The Company's goodwill arose from the November 2001 Motient and TMI
acquisitions. Because these transactions were consummated after June 30, 2001,
the Company applies the non-amortization provisions of SFAS No. 142, Goodwill
and Other Intangible Assets. Under SFAS No. 142, goodwill is not amortized into
results of operations, but instead is reviewed for impairment and written down
and charged to results of operations only in the periods in which the recorded
value of goodwill is determined to be more than its estimated fair value. The
Company performs its annual impairment test on December 31, or when certain
triggering events occur. No impairment charges were recorded in the years ended
December 31, 2001, 2002 and 2003. No events have occurred during the nine-month
period ended September 30, 2004 to trigger an additional impairment test.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains cash balances at financial institutions that
may at times exceed federally insured limits. The Company maintains its cash and
cash equivalents at high credit quality institutions, and as a result,
management believes that credit risk related to its cash is not significant.
M-10
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
2. Significant Accounting Policies (continued)
Concentrations of Credit Risk (continued)
The Company generally grants credit to customers on an unsecured basis. Risk on
accounts receivable is reduced through ongoing evaluation of probability of
collection of amounts owed to the Company. The Company records an allowance for
doubtful accounts equal to the amount estimated to be potentially uncollectible.
The Company's significant customers, as measured by percentage of total
revenues, were as follows:
For the year ended December 31 Nine-months ended September 30
2001 2002 2003 2003 2004
---- ---- ---- ---- ----
(Unaudited)
Customer A 14% 13% 12% 13% *
Customer B 13% 13% * * *
Customer C * * 11% 10% *
Customer D * * 13% 13% 11%
The Company's significant customers, as measured by percentage of total accounts
receivable, were as follows:
December 31 September 30
2001 2002 2003 2004
---- ---- ---- ----
(Unaudited)
Customer C 14% 13% * *
Customer D 26% 15% * 15%
Customer E * * 14% *
Customer F * * 12% *
* Customer did not represent more than 10% for the period presented.
M-11
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
2. Significant Accounting Policies (continued)
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
December 31 September 30
2002 2003 2004
---- ---- ----
(Unaudited)
Accounts payable $ 976,611 $ 978,802 $1,176,856
Accrued expenses 965,492 1,117,369 1,234,257
Accrued compensation and benefits 1,448,434 1,680,210 1,808,022
Accrued interest 161,314 283,749 316,286
Other 565,335 112,167 161,015
---------- ---------- ----------
Total accounts payable and accrued expenses $4,117,186 $4,172,297 $4,696,436
========== ========== ==========
Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosures regarding the fair value of certain financial instruments. The
carrying amount of the Company's cash and cash equivalents, accounts receivable,
and accounts payable and accrued expenses approximates their fair value because
of the short-term maturity of these instruments. The Company estimates the fair
value of its notes payable using estimated market prices based upon the current
interest rate environment and the remaining term to maturity. The Company
believes the fair value of these liabilities approximates their carrying value.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans using the fair value method. The Company has chosen to
account for employee stock-based compensation using the intrinsic value method
as prescribed in Accounting Principles Board Opinion (APB Opinion) No. 25,
Accounting for Stock Issued to Employees, and its related interpretations.
M-12
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
2. Significant Accounting Policies (continued)
Stock-Based Compensation (continued)
The following illustrates the effect on net loss if the Company had applied the
fair value method of SFAS No. 123:
Nine-months ended
December 31 September 30
2001 2002 2003 2003 2004
---- ---- ---- ---- ----
(Unaudited)
Net loss, as reported $(16,524,789) $(26,167,484) $(28,000,470) $(22,144,977) $(24,468,279)
Add stock-based employee
compensation included in
reported net loss -- -- -- -- 124,942
Additional stock-based
employee compensation
expense determined under
fair value method (22,219) (621,148) (1,080,385) (837,764) (1,183,249)
------------ ------------ ------------ ------------ ------------
Pro forma net loss $(16,547,008) $(26,788,632) $(29,080,855) $(22,982,741) $(25,526,586)
============ ============ ============ ============ ============
In accordance with SFAS No. 123, the fair value of the options granted was
estimated at the grant date using an option-pricing model with the following
weighted-average assumptions: risk-free interest rates ranging from 4.5% to
3.5%, no dividends, expected life of the options of five years, no volatility.
Income Taxes
As a limited partnership, the Company is not subject to income tax directly.
Rather, each unit holder is subject to income taxation based on the unit
holder's portion of the Company's income or loss as defined in the limited
partnership agreement.
Derivatives
The Company accounts for derivatives in accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended, which requires
the recognition of all derivatives as either assets or liabilities measured at
fair value with changes in fair value of derivatives other than hedges reflected
as current period income (loss) unless the derivatives qualify as hedges of
future cash flows. For derivatives qualifying as hedges of future cash flows,
the effective portion of changes in fair value is
M-13
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
2. Significant Accounting Policies (continued)
Derivatives (continued)
recorded temporarily in equity and then recognized in earnings along with the
related effects of the hedged items. Any ineffective portion of hedges is
reported in earnings as it occurs.
In the normal course of business the Company is exposed to the impact of
fluctuations in the exchange rate with the Canadian dollar. The Company limits
this risk by following an established foreign currency financial management
policy. This policy provides for the use of forward and option contracts, which
limit the effects of exchange rate fluctuations of the Canadian dollar on
financial results. The Company does not use derivatives for trading or
speculative purposes.
As of December 31, 2003, the Company hedged aggregate exposures of $2,800,000,
by entering into forward exchange contracts requiring the purchase of the
Canadian dollar and the sale of the U.S. dollar. In general, the forward
exchange contracts have varying maturities up to, but not exceeding, one year
with cash settlements made at maturity based upon rates agreed to at contract
inception. These forward exchange contracts satisfy the hedge criteria of SFAS
No. 133, and therefore, the Company realized a gain on these contracts of
$81,712, for the year ended December 31, 2003, which is reflected as a component
of accumulated other comprehensive income and as an asset within prepaid
expenses and other current assets on the balance sheet in the accompanying
consolidated financial statements. As of September 30, 2004 and for the
nine-month period then ended, the Company had hedged aggregate exposures of
approximately $890,000 and realized a gain on these contracts of $39,563, which
is reflected as a component of accumulated other comprehensive income.
Revenue Recognition
The Company generates revenue primarily through the sale of wireless airtime
service and equipment. The Company recognizes revenue when the services are
performed or delivery has occurred, evidence of an arrangement exists, the fee
is fixed and determinable, and collectibility is probable. The Company receives
activation fees related to initial registration for retail customers. Revenue
from activation fees is deferred and recognized ratably over the customer's
contractual service period, generally one year.
M-14
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
2. Significant Accounting Policies (continued)
Foreign Currency and International Operations
The functional currency of one of the Company's subsidiaries is the Canadian
dollar. The financial statements of this subsidiary are translated to U.S.
dollars using period-end rates for assets and liabilities, which is included as
a component of accumulated other comprehensive income in the accompanying
balance sheet. In addition, the Company realized foreign exchange transaction
gains (losses), which are a component of other income in the accompanying
statements of operations. For the years ended December 31, 2002 and 2003,
realized foreign exchange transaction (losses) gains were $(266,507) and
$444,753, respectively. For the nine-month periods ended September 30, 2003 and
2004, the realized foreign exchange transaction gains (losses) were $40,695 and
$13,192, respectively.
Equity Method Investments
The Company accounts for its equity investments in MSV Canada and MSV Holdings
pursuant to the equity method of accounting. The carrying value of these
investments was $0 at each balance sheet date presented. Because the Company is
obligated to provide working capital financial support to MSV Canada through a
management agreement, the Company records losses related to such funding as
equity in losses of MSV Canada in the accompanying consolidated statements of
operations.
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with SFAS No. 130,
Reporting Comprehensive Income, which establishes rules for the reporting and
display of comprehensive income and its components. SFAS No. 130 requires
foreign currency translation adjustments and the change in market value of
effective derivative instruments to be included in other comprehensive income.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
M-15
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
2. Significant Accounting Policies (continued)
Recent Pronouncements
The Emerging Issues Task Force (EITF) issued EITF Issue 00-21, Revenue
Arrangements with Multiple Deliverables (EITF 00-21). EITF 00-21 provides
guidance on how to determine whether a revenue arrangement involving multiple
deliverable items contains more than one unit of accounting and, if so, requires
that revenue be allocated amongst the different units based on fair value. EITF
00-21 also requires that revenue on any item in a revenue arrangement with
multiple deliverables not delivered completely must be deferred until delivery
of the item is completed. The guidance in EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company implemented EITF 00-21 in 2003. Its implementation did not have a
material impact on the Company's consolidated results of operations or financial
position.
In January 2003, the FASB issued Financial Interpretation No. 46 (FIN),
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51, which requires the consolidation of an entity in which
an enterprise absorbs a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of
ownership or contractual or other financial interests in the entity. Currently,
an entity is generally consolidated by an enterprise when the enterprise has a
controlling financial interest in the entity through ownership of a majority
voting interest in the entity. The Company is currently evaluating the impact of
adoption of FIN 46, which will be required for the first annual period beginning
after December 15, 2004.
3. Acquisitions
Acquisition of the Motient Satellite Business
During 2000, the Company paid $10.8 million to Motient representing an asset
purchase deposit. The asset purchase deposit was being amortized over the
two-year period during which the Company had the right to close on the purchase
of the Motient satellite business. Pursuant to the Motient Asset Purchase
Agreement, the unamortized asset purchase deposit balance of approximately $3.2
million was included as part of the purchase price of the Motient satellite
business. During the year ended December 31, 2001, the Company recorded
$4,906,104 of amortization related to the asset purchase deposit.
M-16
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
3. Acquisitions (continued)
Motient Asset Purchase Agreement and Investment Agreement
Under the original terms of the Motient Asset Purchase Agreement, the Company
obtained from Motient the right to purchase (Motient Asset Purchase Deposit) the
Motient satellite business for an additional cash payment. In June 2000, certain
investors (Investors) unrelated to Motient paid $50 million to the Company (in
the aggregate) in exchange for a minority equity interest in the Company.
Pursuant to the Investment Agreement, the Investors also acquired certain rights
to convert, at their option, their initial investment in the Company into shares
of Motient's common stock (Motient Conversion Right).
In connection with the original terms of the Motient Asset Purchase Agreement,
the Company paid $29.4 million to Motient for the Motient Asset Purchase Deposit
and the Motient Conversion Right. This amount was allocated between the Motient
Asset Purchase Deposit ($10.8 million) and the Motient Conversion Right ($18.6
million) based on the relative fair value of each. Similarly, a portion ($18.6
million) of the proceeds of the sale of the minority equity interest in the
Company was allocated to the written call option that permitted the investors to
exercise the Motient Conversion Right. The remaining investment proceeds were
allocated to the purchase of the equity interest.
The Company estimated the fair value of both the call option purchase from
Motient on its common stock and the call option written to the Investors on the
Motient common stock based on advice from an independent appraiser to be
approximately $18.6 million using the Black-Scholes valuation model. The Company
accounted for both the purchased and written call options on Motient common
stock as derivatives pursuant to SFAS No. 133. During 2002 and 2001, Motient
underwent a restructuring and reorganization that resulted in such options
having no value. As a result, the fair value of both of these options at
December 31, 2002 was $0, and the net change in fair value of these derivatives
for the year then ended was $0.
M-17
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
3. Acquisitions (continued)
TMI Asset Purchase
In January 2001, the Company entered into certain agreements (January 2001
Agreements) with Motient, the Investors, and TMI. The January 2001 Agreements
provided for TMI to contribute the TMI satellite business to the Company in
exchange for certain equity interests in the Company, $7.5 million in cash, and
an $11.5 million five-year note. Pursuant to the January 2001 Agreements, a
portion of the Company's payment to TMI was to be funded by a loan from Motient
in the amount of $2.5 million, as evidenced by a note.
The January 2001 Agreements required that, upon closing, Motient contribute the
Motient satellite business to the Company in exchange for a cash payment of
$45.0 million and a $15.0 million five-year note. The January 2001 Agreements
were amended in October 2001 (October 2001 Agreements). Pursuant to the October
2001 Agreements, the Company issued $50.0 million of convertible notes
(Convertible Notes) to a New Investor, as well as $2.5 million of Convertible
Notes to the Investors and $2.5 million of Convertible Notes to Motient.
2001 Acquisitions
On November 26, 2001, MSV completed the acquisition of certain satellite assets
and related liabilities from Motient and TMI. The satellite businesses provide
satellite voice and data communications services to customers in North America.
These transactions were accounted for using the purchase method of accounting.
The consolidated financial statements include the results of operations of the
acquired Motient and TMI satellite businesses subsequent to November 26, 2001.
At the time of the acquisitions, the Company allocated the purchase price to the
assets acquired and liabilities assumed on the preliminary basis based on their
respective estimated fair values. During 2002, the Company revised its purchase
price allocation based upon changes in estimates related primarily to certain
liabilities assumed in the acquisition.
In addition, under the terms of the agreement, the Company paid a total of $6.6
million through December 31, 2003 in contingent consideration to Motient for the
provision of services to a customer under a contract assumed by the Company.
These payments were accounted for as contingent consideration and were included
in the determination of the purchase price when paid to Motient. The $2.2
million final payment made during 2003 served to increase recorded goodwill. As
of December 31, 2003, there were no contingent purchase payments remaining.
M-18
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
3. Acquisitions (continued)
2001 Acquisitions (continued)
The aggregate purchase price, including $6.6 million of contingent consideration
paid through December 31, 2003, and allocation to the assets acquired and
liabilities assumed based on their estimated fair values is as follows:
Cash paid $ 59,117,552
Transaction costs 1,829,926
Notes payable issued 26,500,000
Prepaid satellite capacity and asset purchase deposit 7,539,752
MSV Common Units issued 42,805,306
Current and noncurrent liabilities assumed 19,653,236
------------
$157,445,772
============
Current assets acquired $ 6,385,051
Property and equipment 37,443,345
Intangible assets 100,230,000
Goodwill 13,387,376
------------
$157,445,772
============
The increase in goodwill from December 31, 2002 to December 31, 2003 is a result
of the fluctuation of the exchange rate between the U.S. and Canadian dollar and
as a result of the $2.2 million contingent purchase price payment to Motient.
The increase in goodwill from December 31, 2003 to September 30, 2004 is a
result of the fluctuation of the exchange rate between the U.S. and Canadian
dollar.
The Company's identifiable intangible assets for acquisitions consist of the
following:
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
3. Acquisitions (continued)
2001 Acquisitions (continued)
Customer contracts and the next-generation intellectual property are being
amortized over 5 and 15 years, respectively. Management estimated the fair value
of identified intangibles based on a third-party appraisal. During the years
ended December 31, 2001, 2002, and 2003, the Company recorded approximately
$888,000, $9,401,000, and $9,427,000, respectively, of amortization expense
related to these intangible assets. For the nine-month periods ended September
30, 2003 and 2004, the Company recorded approximately $7,051,000 and $7,075,000,
respectively, of amortization expense related to these intangible assets. The
Company's next-generation intellectual property consists of a combination of
licenses and contractual rights to various authorizations, applications, certain
technology, and certain other rights, all of which resulted from the 2001
acquisitions.
Future amortization of intangible assets is as follows as of December 31, 2003:
In July 2004 MSV purchased certain intangible assets including intellectual
property and rights or rights to acquire spectrum access and rights or rights to
acquire related assets from third parties. At the time of these transactions,
MSV paid $2 million in cash of which $1.5 million is recorded in other assets
and $500,000 is recorded in intangible assets in the accompanying consolidated
balance sheet. Future payments under this agreement may range from $2.0 million
to $6.5 million in total payments through 2007, contingent upon certain
regulatory approvals, technology developments, operational milestones and in
certain instances, MSV's sole discretion.
As part of these transactions, MSV also acquired rights related to a system
development contract in exchange for MSV's assumption of payments through
January 2005. As of September 30, 2004, payments on this contract totaled
$750,000 with additional
M-20
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
3. Acquisitions (continued)
2004 Purchases (continued)
payments of $250,000 committed through January 2005. MSV may continue payments
on this contract at its sole discretion following these initial payments. These
payments have been capitalized as system under construction in property and
equipment in the accompanying consolidated balance sheets.
4. Long-Term Debt
Notes Payable
On November 26, 2001, the Company issued $55.0 million of Convertible Notes and
$26.5 million of Non-Convertible Notes, respectively (collectively, the Notes).
The Notes mature on November 26, 2006 and bear interest at 10% per annum,
compounded semi-annually and payable at maturity.
The Convertible Notes are convertible, at any time, into the Company's Class A
Preferred Units (Preferred Units) equal to a number of Preferred Units
determined by dividing the principal being converted by $6.45. The conversion
price of $6.45 (Conversion Price) is subject to adjustment in certain
circumstances. The terms of the Convertible Notes were amended during 2003 to
automatically convert into Preferred Units upon the Company's payment in full of
the principal and accrued interest on the Non-Convertible Notes and the accrued
interest on the Convertible Notes.
In August 2002, the Company issued an additional $3.0 million of Convertible
Notes. These notes were issued with terms identical to those of the Convertible
Notes issued in November 2001. In August 2003, the Company repaid approximately
$1.6 million of the principal and all of the accrued interest of approximately
$2.1 million, on one of the Non-Convertible Notes, as required by the Interim
Investment (Note 5).
In April 2004, the Company made payments totaling $5.0 million, approximately
$2.4 million of principal and $2.6 million of interest, respectively, on the
Non-Convertible Notes.
M-21
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
In February 2003, the Company entered into an agreement with a satellite
communications provider that is a related party (the Vendor) for the
construction and procurement of a ground station. The Vendor provided financing
for this project totaling approximately $1.3 million at an interest rate of 9.5
percent.
Future payments on the Vendor note payable as of December 31, 2003 are as
follows:
2004 $ 231,812
2005 279,523
2006 279,523
2007 279,523
2008 232,936
-----------
Total future payments 1,303,317
Less: interest (260,321)
-----------
Principal portion 1,042,996
Less: current portion (127,211)
-----------
Long-term portion of vendor note payable $ 915,785
===========
5. Partners' Equity
Prior to November 26, 2001, pursuant to the First Amended and Restated Limited
Liability Company Agreement (LLC Agreement) of the Company, the outstanding
members' interests in the Company were either MSV LLC Common Units or MSV LLC
Investor Units. All of the MSV LLC Common Units were owned by Motient. The MSV
LLC Investor Units were purchased by the Investors.
M-22
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
5. Partners' Equity (continued)
Effective November 26, 2001, pursuant to the Limited Partnership Agreement of
the Company, the partners' interests in the Company were either MSV Common Units
or MSV Class A Preferred Units. The Company's general partner, Mobile Satellite
Ventures GP Inc., a Delaware corporation, has no economic interest in the
Company and is owned by the Company's limited partners in proportion to their
fully diluted interests in the Company.
The Class A Preferred Units and Common Units carry many of the same rights and
privileges, except the Class A Preferred Units have preference over the Common
Units in receiving proceeds resulting from a distribution of assets in certain
circumstances. The general partner did not hold any units as of December 31,
2001, 2002, or 2003. As of December 31, 2001, 2002, and 2003, there were
14,642,732 Common Units held by limited partners. As of December 31, 2001, 2002,
and 2003, limited partners held 2,000,000, 2,000,000, and 2,573,951, Class A
Preferred Units, respectively. As of September 30, 2004, there were no units
held by the general partners, 14,642,732 Common Units held by limited partners
and 5,309,268 Class A Preferred Units held by limited partners (see Note 10).
Allocation of Profits and Losses
Prior to November 26, 2001, profits for any fiscal year were allocated to the
members, after giving effect to certain allocations, in the following order of
priority:
o First, among the Investors in proportion to, and to the extent of, any
prior allocations to the Investors of losses for all prior fiscal years
o Second, 100% to Motient until cumulative profits allocated to Motient for
all fiscal years are equal to the cumulative losses previously allocated to
Motient for all prior fiscal years
o Third, to each member in the proportion required such that the cumulative
profits allocated to each member for all fiscal years are equal to the
cumulative losses previously allocated to each such member for all prior
years
o Thereafter, the balance, if any, among the members in accordance with their
equity percentage interests
M-23
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
5. Partners' Equity (continued)
Allocation of Profits and Losses (continued)
Prior to November 26, 2001, losses for any fiscal year were allocated to the
members, after giving effect to certain allocations, in the following order of
priority:
o First, among the members in proportion to, and to the extent of, any prior
allocations to the members of profits for all prior fiscal years
o Second, among the members in proportion to their respective unreturned
subsequent capital contributions until the sum of the Investors' adjusted
capital account balances is equal to their initial capital contributions
o Third, 100% to Motient until its adjusted capital account balance has been
reduced to zero
o Thereafter, among the Investors in proportion to their respective adjusted
capital account balances
Effective November 26, 2001, profits and losses are allocated to the partners in
proportion to their economic interests. Losses allocated to any partner for any
fiscal year will not exceed the maximum amount of losses that may be allocated
to such partner without causing such partner to have an adjusted capital account
deficit at the end of such fiscal year. Any losses in excess of this limitation
shall be specially allocated solely to the other partners. Thereafter,
subsequent profits shall be allocated to reverse any such losses specially
allocated pursuant to the preceding sentence.
Distributions
Except for certain capital proceeds and upon liquidation, the Company shall make
distributions as determined by the Board of Directors to the partners in
proportion to their respective percentage interests.
M-24
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
5. Partners' Equity (continued)
Distributions (continued)
Upon dissolution of the Company, a liquidating trustee shall be appointed by the
Board, or under certain circumstances, the required investor majority, as
defined, who shall immediately commence to wind up the Company's affairs. The
proceeds of liquidation shall be distributed, in the following order:
o First, to creditors of the Company, including partners, in the order
provided by law
o Thereafter, to the partners in the same order as other distributions
Issuance of Class A Preferred Units
In August 2003, the Company amended the October 2001 Agreements and entered into
the First Amended and Restated Investment Agreement (Amended Agreement) with the
partners. Under the terms of the Amended Agreement, within 90 days of receipt of
the final approval from the FCC (as defined), and provided that the approval
occurred before March 31, 2004, the Investors would invest up to an additional
$21.3 million in the Company in return for additional equity interests. The
Amended Agreement extended this timeline and divided the investment originally
contemplated in the October 2001 agreements into two tranches: an Interim
Investment and a Subsequent Investment.
In August 2003, under the Interim Investment, the Company received $3.7 million
in exchange for the issuance of 573,951 Class A Preferred Units at $6.45 per
unit to the Investors in the amounts of their respective subscription and
contributions. The Company used these funds to repay approximately $1.6 million
of the principal and approximately $2.1 million of accrued interest on one of
the Non-Convertible Notes (see Note 4).
In April 2004, the Company received $17.6 million of Subsequent Investment
proceeds from the Investors in exchange for the issuance of 2,735,317 of Class A
Preferred Units to the Investors and repaid approximately $2.4 million of the
principal balance and approximately $2.6 million of accrued interest on
Non-Convertible Notes (see Notes 4 and 10).
M-25
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
6. Unit Option Plans
MSV Option Plan
In December 2001, the Company adopted a unit option incentive plan (Unit Option
Incentive Plan). Under the Unit Option Incentive Plan, the Company reserved for
issuance and may grant up to 5,000,000 options to acquire units to employees and
directors upon approval by the Board of Directors. Options to acquire units
generally vest over a three-year period and the options to acquire units have a
10-year life.
During 2004 the Company granted options at less than the estimated fair market
value of the related units on the option's grant date. As a result, the Company
recorded $3,949,345 in deferred compensation during the nine-month period ended
September 30, 2004. The deferred compensation is being amortized over the
options' three-year vesting period. For the nine-month period ended September
30, 2004, the Company recognized stock compensation expense of $124,942.
The Company has promised to grant an additional 235,000 options during the year
ended December 31, 2005 to certain executives of the Company of which 200,000
will have an exercise price of the lower of $6.45 or the price at which the most
recent financing transaction has occurred, and 35,000 will have an exercise
price of $6.45.
The following summarizes activity in the Unit Incentive Option Plan:
Options to Weighted-Average
Acquire Units Exercise Price
------------- --------------
Options outstanding at beginning of year, January 1, 2001 -- $ --
Granted 1,318,500 6.45
---------- ------
Options outstanding at December 31, 2001 1,318,500 6.45
Granted 89,000 6.45
---------- ------
Options outstanding at December 31, 2002 1,407,500 6.45
Granted 1,588,000 6.45
Canceled (107,332) 6.45
---------- ------
Options outstanding at December 31, 2003 2,888,168 6.45
Granted (Unaudited) 1,407,250 6.45
Canceled (Unaudited) (38,168) 6.45
---------- ------
Options outstanding at September 30, 2004 (Unaudited) 4,257,250 $ 6.45
========== ======
M-26
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
6. Unit Option Plans (continued)
MSV Option Plan (continued)
At December 31, 2002 and 2003, 439,500 and 468,435 options were exercisable,
respectively. At December 31, 2002 and 2003, the weighted-average remaining
contractual life for outstanding options was 8.6 years and 9.0 years,
respectively. The weighted-average fair value of unit options granted during the
years ended December 31, 2001, 2002 and 2003 was $1.30, $1.30, and $0.91 per
unit, respectively. As of September 30, 2004, 1,374,333 options were exercisable
and the weighted-average remaining contractual life for outstanding options was
8.3 years. The weighted-average fair value of unit options granted during the
nine-month periods ended September 30, 2003 and 2004 was $0.91 and $3.76 per
unit, respectively.
TerreStar Option Plan
In July 2002, the Board of Directors of TerreStar approved the 2002 TerreStar
Stock Incentive Plan. The plan terms are similar to the Unit Option Incentive
Plan. Options to acquire shares generally vest over a 3-year period and the
options to acquire units have a 10-year life. At December 31, 2002 and 2003, the
weighted-average remaining contractual life for outstanding options was 9.5 and
8.6 years, respectively. As of September 30, 2004, 1,146,466 options were
exercisable and the weighted-average remaining contractual life for outstanding
options was 8.2 years. (see Note 10)
The following summarizes activity in the TerreStar Option Plan:
Options to Weighted-Average
Acquire Exercise Price per
Shares Share
------ -----
Options outstanding at January 1, 2002 -- $ 0.70
Granted 1,781,596 0.70
---------- ------
Options outstanding at December 31, 2002 1,781,596 0.70
Granted 107,722 0.70
Canceled (36,517) 0.70
---------- ------
Options outstanding at December 31, 2003 1,852,801 0.70
Granted (Unaudited) 473,978 0.70
Canceled (Unaudited) (49,662) 0.70
---------- ------
Options outstanding at September 30, 2004 (Unaudited) 2,277,117 $ 0.70
========== ======
M-27
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
7. Related Party Transactions
During the years ended December 31, 2001, 2002, and 2003, the Company incurred
$479,161, $1,441,673, and $150,966 of administrative expenses related primarily
to services provided by Motient. During the nine-month periods ended September
30, 2003 and 2004, the Company incurred $125,709 and $1,180, respectively,
of administrative expenses primarily to services provided by Motient. In
addition, the Company provided facilities-related services to Motient of
$133,729 during the year ended December 31, 2003.
The Company has an arrangement with MSV Canada, under which the Company provides
management services to MSV Canada and purchases satellite capacity from MSV
Canada. MSV Canada owns the satellite formerly owned by TMI. The Company earns
the management fee under the management agreement by providing certain services
to MSV Canada such as allowing access to its intellectual property; providing
voice- and data-switching capabilities; providing backup, restoral, and
emergency spectrum and satellite capacity and providing accounting, customer
service, and billing services. The Company recognizes the related management fee
income in the month in which the rights and services are provided.
The Company leases satellite capacity from MSV Canada pursuant to a lease
agreement. The term of the lease extends for 25 years and may be terminated by
the Company with one year's notice or by either party in certain circumstances.
The amount of the lease payments is determined by the parties periodically based
upon the amount of capacity usage by the Company and market rates. Payments due
under the lease may be offset against amounts owed to the Company.
During the years ended December 31, 2001, 2002, and 2003, the Company incurred
$78,000, $117,000, and $36,025, respectively, of consulting expenses for
services provided by a company controlled by one of the Company's Investors,
which is included in legal, regulatory, and consulting expenses in the
accompanying consolidated statement of operations. During the nine-month periods
ended September 30, 2003 and 2004, the Company incurred $0 and $58,316,
respectively, for these services.
The Company leases office space from an affiliate of TMI (see Note 8). The
Company has also entered into an agreement with this company to obtain
telemetry, tracking, and control services. The agreement ends April 30, 2006,
with automatic extension for three successive additional renewal periods of one
year each. The agreement may be
M-28
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
7. Related Party Transactions (continued)
terminated at any time, provided that the Company makes a payment equal to the
lesser of 12 months of service or the remaining service fee. Under the services
agreement, the Company paid $28,443, $378,462, and $360,819, during the years
ended December 31, 2001, 2002, and 2003, respectively. During the nine-month
periods ended September 30, 2003 and 2004, the Company paid $217,053 and
$312,167, respectively, for these services.
8. Commitments and Contingencies
Leases
As of December 31, 2003, the Company has noncancelable operating leases,
expiring through August 2008. Rental expense, net of sublease income, for the
years ended December 31, 2001, 2002, and 2003, was approximately $67,000,
$1,800,000, and $1,100,000, respectively. During the nine-month periods ended
September 30, 2003 and 2004, the Company's rental expense, net of sublease
income was approximately $732,000 and $937,000, respectively.
Future minimum lease payments under noncancelable operating leases with initial
terms of one year or more are as follows for the years ended December 31:
The minimum lease payment for 2004 is net of expected sublease income of
approximately $67,000. Office facility leases may provide for periodic
escalations of rent, rent abatements during specified periods of the lease, and
payment of pro rata portions of building operating expenses, as defined. The
Company records rent expense for operating leases using the straight-line method
over the term of the lease agreement.
M-29
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
8. Commitments and Contingencies (continued)
Litigation and Claims
The Company is periodically a party to lawsuits and claims in the normal course
of business. While the outcome of the lawsuits and claims against the Company
cannot be predicted with certainty, management believes that the ultimate
resolution of the matters will not have a material adverse effect on the
financial position or results of operations of the Company.
Contingencies
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company records
contingent liabilities when it is probable that future expenditures will be made
and such expenditures can be reasonably estimated. As of December 31, 2003, the
Company accrued $400,000 in accounts payable and accrued expenses in the
accompanying consolidated balance sheet. This amount was paid during the nine
months ended September 30, 2004.
Regulatory Matters
During 2001, Motient applied to the FCC to transfer licenses and authorizations
related to its L-Band mobile satellite system (MSS) to MSV. Such transfer was
approved in November 2001. In connection with this application, Motient sought
FCC authority to launch and operate a next-generation MSS that will include the
deployment of satellites and terrestrial base stations operating in the same
frequencies as an integrated network. In February 2003, the FCC adopted general
rules based on the Company's proposal to develop an integrated
satellite-terrestrial system, subject to the requirement that the Company file
an additional application for a specific terrestrial component consistent with
the broader guidelines issued in the February 2003 ruling. These broad
guidelines govern issues such as aggregate system interference to other MSS
operators, the level of integration between satellite and terrestrial service
offerings, and specific requirements of the satellite component that the Company
currently meets by virtue of its existing satellite system. While the Company's
current satellite assets satisfy these requirements, the Company anticipates the
future need to construct and deploy more powerful satellites.
The Company believes that the ruling allows for significant commercial
opportunity related to the Company's next-generation system. Both proponents and
opponents of the Ancillary Terrestrial Component (ATC), including the Company,
have asked the FCC to
M-30
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
8. Commitments and Contingencies (continued)
Regulatory Matters (continued)
reconsider the rules adopted in the February 2003 ruling. Opponents of the
ruling have advocated changes that could adversely impact the Company's business
plans. The Company has also sought certain corrections and relaxations of
technical standards that would further enhance the commercial viability of the
next-generation system. Moreover, one terrestrial wireless carrier has filed an
appeal of the FCC's decision with a United States Court of Appeals, which has
been held in abeyance until the FCC rules on the reconsideration requests. In
November 2003, the Company applied for the authority to operate the ATC in
conjunction with the current and next-generation satellites of MSV and MSV
Canada.
The FCC's International Bureau granted this authorization, in part, in November
2004 and deferred certain issues to the FCC's rulemaking proceeding, which, as
noted above, is in its reconsideration phase. A decision in the rulemaking phase
is expected in 2005. One opponent of the Company's application has asked the FCC
to review the Company's ATC authorization. There can be no assurance that,
following the conclusion of the rulemaking and the other legal challenges, the
Company will have authority to operate a commercially viable next-generation
network.
9. TerreStar Networks
In February 2002, the Company established TerreStar Networks Inc. (TerreStar), a
wholly owned subsidiary, to develop business opportunities related to the
proposed receipt of certain licenses in the 2 GHz band.
Regulatory Matters
TMI holds the approval issued by Industry Canada for a 2 GHz space station
authorization and related spectrum licenses for the provision of MSS in the 2
GHz band as well as an authorization from the FCC for the provision of MSS in
the 2 GHz band (MSS authorization). These authorizations are subject to FCC and
Industry Canada milestones relating to construction, launch, and operational
date of the system. TMI plans to transfer the Canadian authorizations to an
entity that is eligible to hold the Canadian authorizations and in which
TerreStar and/or TMI will have an interest, subject to obtaining the necessary
Canadian regulatory approvals. In order to satisfy the milestone requirements
included within the
M-31
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
9. TerreStar Networks (continued)
Regulatory Matters (continued)
authorizations, TerreStar and TMI entered into an agreement in which TerreStar
agreed to enter into a non-contingent satellite procurement contract for the
construction and delivery to TMI of a satellite that is consistent with the
Canadian and FCC authorizations. Further, TMI agreed that at TerreStar's
election, TMI will transfer the 2 GHz assets to the entities described above,
subject to any necessary Canadian and U.S. regulatory approvals. In December
2002, TMI and TerreStar jointly applied to the FCC for authority to transfer
TMI's MSS authorization to TerreStar.
In August 2002, Industry Canada advised the Company that this arrangement met
the requirement that TMI demonstrate that it is bound to a contractual agreement
for the construction of the proposed satellite. However, certain wireless
carriers had urged the FCC to cancel TMI's MSS authorization. A similar group
also filed a petition in January 2003 asking the FCC to dismiss the application
to transfer TMI's MSS authorization to TerreStar. In February 2003, the FCC
adopted an order canceling TMI's MSS authorization due to an alleged failure to
enter into a noncontingent satellite construction contract before the specified
first milestone date. Also in February 2003, the FCC adopted an order allowing
MSS carriers, including those in the 2 GHz band, to provide an ATC. A number of
parties, principally wireless carriers, have challenged the validity of that
order (see Note 8).
In June 2004, 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
milestone 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.
M-32
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
9. TerreStar Networks (continued)
Joint Venture Option
During 2002, TerreStar acquired an option to establish a joint venture with a
third party to develop certain opportunities in the 2 GHz band. The FCC licensed
the third party to construct, launch, and operate a communications system
consisting of two geostationary satellites in the 2 GHz band, a communications
network, and user terminals. Consideration for the option consisted of
nonrefundable payments made by TerreStar of $1,000,000 during 2002 and $500,000
during 2003. In January 2003, TerreStar exercised its option to form the joint
venture. Under the terms of the memorandum of agreement (MOA), TerreStar
contributed an additional $500,000 to the joint venture upon signing of the
joint venture agreements. However, as a result of the FCC order canceling TMI's
2 GHz license, TerreStar and the third party mutually agreed to terminate the
option agreement and the joint venture and any remaining obligations or
liabilities related to these agreements in July 2003. As a result, TerreStar
wrote off its $2.0 million investment in the joint venture during the year ended
December 31, 2003.
Satellite Construction Contract
During 2002, TerreStar entered into a contract to purchase a satellite system,
including certain ground infrastructure for use with the 2 GHz band. The Company
continues to make payments according to a milestone payment plan. The Company
made payments of $500,000 and $350,000 during the years ended December 31, 2002
and 2003, respectively. Such payments have been capitalized as system under
construction in property and equipment in the accompanying consolidated balance
sheets.
Following the reinstatement of the TMI license in July 2004, the contract was
amended resulting in a reduced milestone payment plan. The Company made payments
of $400,000 during the nine-months ended September 30, 2004 related to this
contract. The satellite manufacturer may also be entitled to certain incentive
payments based upon the performance of the satellite once in operation. If the
Company terminates the contract, the manufacturer shall be entitled to payment
of a termination liability as prescribed in the contract. Through 2004, the
termination liability can be satisfied by amounts paid under the contract up to
the point of termination. Beginning in 2005, the termination liability will be
equal to amounts that would have otherwise been due on milestones scheduled
within 30 days following notice of termination by the Company. The satellite
represents one component of a communications system that would include
ground-switching infrastructure, launch costs, and insurance. Total cost of this
system could exceed
M-33
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
9. TerreStar Networks (continued)
Satellite Construction Contract (continued)
$500 million. In order to finance future payments, the Company 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 the Company or
available on terms acceptable to the Company.
10. Subsequent Events
November 2004 Financing
In November 2004, MSV received $145 million in gross proceeds from its existing
investors in exchange for the issuance of 4,923,599 Common Units. Concurrently,
approximately $27 million of notes and accrued interest was exchanged for
914,160 Common Units of MSV. Additionally, $58 million of Convertible Notes were
converted to 8,997,073 Class A Preferred Units in accordance with their terms.
The Non-Convertible Notes with a principal balance of $22.5 million were
exchanged for 765,843 Common Units. Approximately $18.7 million of accrued
interest was paid in cash, while the remaining $4.4 million was exchanged for
152,230 Common Units. As part of the transaction, the Company's limited
partnership agreement was amended to eliminate the distinction between Preferred
and Common Units, and all Preferred Units were converted to Common Units. At the
completion of this transaction, all outstanding principal and interest
obligations on the Convertible and Non-Convertible Notes had been extinguished.
TerreStar Rights Transaction
On December 20, 2004, the Company issued rights (the Rights) to receive an
aggregate of 23,265,428 shares of common stock, par value $.001 per share (the
TerreStar Stock), of TerreStar, representing all of the shares of TerreStar
Stock owned by the Company, to the limited partners of the Company, pro rata in
accordance with each limited partner's percentage ownership in the Company. The
Rights will be exchanged into shares of TerreStar Stock automatically on
February 25, 2005. In addition, in connection with this transaction, TerreStar
issued warrants (the Warrants) to purchase an aggregate of 666,972 shares of
TerreStar Stock to one of the Company's limited partners. The Warrants have an
exercise price of $0.21491 per share and may be exercised until the fifth
anniversary of the date of their issuance.
M-34
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 2004 and for the nine-month periods ended
September 30, 2003 and 2004 is unaudited)
10. Subsequent Events (continued)
TerreStar Rights Transaction (continued)
Concurrently, the Company authorized a 1 for 2 grant of additional options to
employee option holders of record at December 20, 2004.
Recent Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which is
a revision of SFAS No. 123, supersedes APB Opinion No. 25, and amends SFAS No.
95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is
similar to the approach described in SFAS No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative. The new standard will
be effective for the Company for the year ending December 31, 2006.
M-35
PART II
Information not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table shows the costs and expenses, other than underwriting
discounts and commissions, payable in connection with the sale and distribution
of the securities being registered. All of these expenses will be paid by
Motient. All amounts except the SEC registration fee are estimated.
Item 14. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses, including attorneys' fees, as well as judgments, fines and settlements
in nonderivative lawsuits, actually and reasonably incurred in connection with
the defense of any action, suit or proceeding in which they or any of them were
or are made parties or are threatened to be made parties by reason of their
serving or having served in such capacity. The DGCL provides, however, that such
person must have acted in good faith and in a manner such person reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
in the case of a criminal action, such person must have had no reasonable cause
to believe his or her conduct was unlawful. In addition, the DGCL does not
permit indemnification in an action or suit by or in the right of the
corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for costs the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
Our Restated Certificate of Incorporation provides that no director of Motient
shall be personally liable for breach of fiduciary duty as a director. Any
repeal or modification of such provision shall not adversely affect any right or
protection, or any limitation of the liability of, a director of Motient
existing at, or arising out of facts or incidents occurring prior to, the
effective date of such repeal or modification. Both our Restated Certificate of
Incorporation and our Amended and Restated Bylaws contain provisions that
further provide for the indemnification of directors and officers in accordance
with and to the fullest extent permitted by the DGCL.
Additionally, Motient has entered into indemnification agreements with certain
of its directors and officers which may, in certain cases, be broader than the
specific indemnification provisions contained under current applicable law. The
indemnification agreements may require Motient, among other things, to indemnify
such officers, directors and key personnel against certain liabilities that may
arise by reason of their status or service as directors, officers or employees
of Motient and to advance the expenses incurred by such parties as a result of
any threatened claims or proceedings brought against them as to which they could
be indemnified.
Item 15. Recent Sales of Unregistered Securities
On May 1, 2002, pursuant to Motient's plan of reorganization, 25,000,000 shares
of Motient's common stock, par value $.01 per share, were issued. An additional
97,256 shares of our common stock were issued to certain of our creditors upon
completion of the bankruptcy claims process.
Additionally, pursuant to our plan of reorganization, holders of our
pre-reorganization common stock became entitled to receive warrants to purchase
an aggregate of approximately 1,496,512 shares of common stock at a price of
$.01 per share. The holders were entitled to exercise such warrants to purchase
shares of our common stock prior May 1, 2004, if and only if the average closing
price of our common stock for ninety consecutive trading days was equal to or
greater than $15.44 per share. Since such condition was never satisfied, the no
warrants were ever exercised.
The shares of common stock and warrants to purchase shares of common stock
described above were not registered under the Securities Act of 1933. These
securities were issued in reliance upon the exemption contained in Section
1145(a) of the Bankruptcy Code, which exempts the offer and sale of securities
under a plan of reorganization from registration under the Securities Act.
In July 2002, our board of directors approved the offer and sale to CTA (or its
affiliates), a consultant to Motient, of warrants to purchase an aggregate of
500,000 shares of our common stock, for an aggregate purchase price of $25,000.
The warrants have an exercise price of $3.00 per share and a term of five years.
CTA purchased their warrants in December 2002. The warrants were valued at $1.5
million and recorded as a consultant compensation expense in December 2002. The
warrants were issued in reliance upon the exemption provided by Rule 506 under
the Securities Act of 1933, as amended, and/or in reliance on the exemption
afforded by Section 4(2) of the Securities Act.
On January 27, 2003, in connection with the execution of the credit agreement,
we issued warrants at closing to the lenders to purchase, in the aggregate,
3,125,000 shares of our common stock. The exercise price for these warrants is
$1.06 per share. The warrants were immediately exercisable upon issuance and
have a term of five years. The warrants were issued in reliance upon the
exemption afforded by Section 4(2) of the Securities Act.
On July 29, 2003, in connection with the execution of the letter agreement with
Further Lane, we issued Further Lane a warrant to purchase 200,000 shares of our
common stock. The exercise price of the warrant is $5.10 per share. The warrant
was immediately exercisable upon issuance and has a term of five years. The
warrant was issued in reliance upon the exemption afforded by Section 4(2) of
the Securities Act.
On March 16, 2004, in connection with the execution of the amendment to our
credit agreement, we issued warrants to the lenders to purchase, in the
aggregate, 2,000,000 shares of our common stock. The number of warrants will be
reduced to an aggregate of 1,000,000 shares of common stock because we obtained
at least $7.5 million of additional debt or equity financing within 60 days
after March 16, 2004. The exercise price of the warrants is $4.88 per share. The
warrants were immediately exercisable upon issuance and have a term of five
years. The warrants were issued in reliance upon the exemption afforded by
Section 4(2) of the Securities Act. The warrants are also subject to a
registration rights agreement. Under such agreement, we agreed to register the
shares underlying the warrants upon the request of a majority of the
warrantholders, or in conjunction with the registration of other common stock of
the company. We will bear all the expenses of such registration.
On April 7, 2004, we sold 4,215,910 shares of our common stock at a per share
price of $5.50 for an aggregate purchase price of $23.2 million to The Raptor
Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund
L.P., Tudor Proprietary Trading, L.L.C., Highland Crusader Offshore Partners,
L.P., York Distressed Opportunities Fund, L.P., York Select, L.P., York Select
Unit Trust, M&E Advisors L.L.C., Catalyst Credit Opportunity Fund, Catalyst
Credit Opportunity Fund Offshore, DCM, Ltd., Greywolf Capital II LP and Greywolf
Capital Overseas Fund and LC Capital Master Fund. The sale of these shares was
not registered under the Securities Act of 1933, as amended and the shares may
not be sold in the United States absent registration or an applicable exemption
from registration requirements. The shares were offered and sold pursuant to the
exemption from registration afforded by Rule 506 under the Securities Act and/or
Section 4(2) of the Securities Act. In connection with this sale, we signed a
registration rights agreement with the holders of these shares. We also issued
warrants to purchase an aggregate of 1,053,978 shares of our common stock to the
investors listed above, at an exercise price of $5.50 per share. However,
because we met certain conditions following the issuance of these warrants, they
will never vest.
In connection with this sale, we issued to Tejas Securities Group, Inc., our
placement agent for the private placement, and certain CTA affiliates, warrants
to purchase 600,000 and 400,000 shares, respectively, of our common stock. The
exercise price of these warrants is $5.50 per share. The warrants are
immediately exercisable upon issuance and have a term of five years. The fair
value of the warrants was estimated at $6.2 million using a Black-Scholes model.
The shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act.
In April 2004, Michael Fabbri, Daniel Croft and Walter V. Purnell, Jr., received
275,000 shares of common stock upon the exercise of certain of their outstanding
options under Motient's 2002 employee stock option plan. Additionally, in June
2004, Walter V. Purnell, Jr. received an approximately 16,600 additional shares
of common stock upon the exercise of additional outstanding options. All of the
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act.
In June 2004, in connection with the settlement of outstanding obligations due
to Motorola, Motient agreed to issue Motorola warrants to purchase 200,000 of
its common stock. The exercise price of these warrants is $8.68 per share. The
warrants are immediately exercisable upon issuance and have a term of five
years. The warrants were issued in reliance upon the exemption afforded by
Section 4(2) of the Securities Act.
On July 1, 2004, we sold 3,500,000 shares of our common stock at a per share
price of $8.57 for an aggregate purchase price of $30.0 million to The Raptor
Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund
L.P., Tudor Proprietary Trading, L.L.C., York Distressed Opportunities Fund,
L.P., York Select, L.P., York Select Unit Trust, York Global Value Partner,
L.P., Catalyst Credit Opportunity Fund, Catalyst Credit Opportunity Fund
Offshore, DCM, Ltd., Rockbay Capital Fund, LLC, Rockbay Capital Investment Fund,
LLC, Rockbay Capital Offshore Fund, Ltd., Glenview Capital Partner, L.P.,
Glenview Institutional Partners, L.P., Glenview Capital Master Fund, Ltd., GCM
Little Arbor Master Fund, Ltd., OZ Master Fund, Ltd., OZ Mac 13 Ltd., Fleet
Maritime, Inc., John Waterfall, Edwin Morgens, Greywolf Capital II, L.P.,
Greywolf Capital Overseas Fund, Highland Equity Focus Fund, L.P., Singer
Children's Management Trust, Highland Equity Fund, L.P., and Strome Hedgecap
Limited. The sale of these shares was not registered under the Securities Act
and the shares may not be sold in the United States absent registration or an
applicable exemption from registration requirements. The shares were offered and
sold pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. In connection with
this sale, we signed a registration rights agreement with the holders of these
shares. We also issued warrants to purchase an aggregate of 525,000 shares of
our common stock to the investors listed above, at an exercise price of $8.57
per share. However, because we met certain conditions following the issuance of
these warrants, they will never vest.
In connection with this sale, we issued to certain affiliates of CTA and Tejas
Securities Group, Inc., our placement agent for the private placement, warrants
to purchase 340,000 and 510,000 shares, respectively, of our common stock. The
exercise price of these warrants is $8.57 per share. The warrants are
immediately exercisable upon issuance and have a term of five years. The shares
were offered and sold pursuant to the exemption from registration afforded by
Rule 506 under the Securities Act and/or Section 4(2) of the Securities Act.
On November 12, 2004, Motient sold 15,353,609 shares of its common stock at a
per share price of $8.57. Motient received aggregate proceeds of $126,397,809,
net of $5,182,620 in commissions paid to Motient's placement agent, Tejas
Securities Group, Inc. The approximately 60 purchasers included substantially
all of the purchasers from the April and July 2004 private placements, as well
multiple new investors. The sale of these shares was not registered under the
Securities Act and the shares may not be sold in the United States absent
registration or an applicable exemption from registration requirements. The
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act. In connection with this sale, Motient signed a registration
rights agreement with the holders of these shares. Among other things, this
registration rights agreement requires Motient to file and cause to make
effective a registration statement permitting the resale of the shares by the
holders thereof. Motient also issued warrants to purchase an aggregate of
approximately 3,838,401 shares of its common stock to the investors listed
above, at an exercise price of $8.57 per share. These warrants will vest if and
only if Motient does not meet certain deadlines between January and March 2005
with respect to certain requirements under the registration rights agreement. If
the warrants vest, they may be exercised by the holders thereof at any time
through November 11, 2009.
No underwriters were involved in any of the foregoing distributions of
securities.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The Exhibit Index filed herewith is incorporated herein by reference.
(b) Financial Statement Schedules
Financial Statement Schedules not included below have been omitted
because they are not required or not applicable, or because the
required information is shown in the financial statements or notes
thereto.
Schedule II - Valuation and Qualifying Accounts.............. Page F-59
Item 17. Undertakings
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end
of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement;
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the information required to
be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by
the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration
statement.
2. That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
4. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the General Corporation Law of the State of
Delaware, the Restated Certificate of Incorporation, as amended, or the
Amended and Restated Bylaws of registrant, indemnification agreements
entered into between registrant and its officers and directors, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Signatures
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Lincolnshire,
Commonwealth of Illinois, on January 5, 2005.
MOTIENT CORPORATION
By: /s/ Christopher Downie
-------------------------------------------
Christopher Downie
Executive Vice President, Chief Operating
Officer and Treasurer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Robert L.
Macklin and Christopher W. Downie, his or her true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, from such person
and in each person's name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent or any
of them, or his, her or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
Name Title Date
---- ----- ----
/s/ Christopher Downie Executive Vice President, Chief Operating Officer and January 5, 2005
--------------------------------- Treasurer
Christopher Downie (Principal Executive Officer)
/s/ Myrna J. Newman Controller and Chief Accounting Officer January 5, 2005
--------------------------------- (Principal Financial Officer)
Myrna J. Newman
Director January 5, 2005
---------------------------------
Peter D. Aquino
Director January 5, 2005
---------------------------------
Gerry S. Kittner
/s/ Steven G. Singer Chairman, Director January 5, 2005
---------------------------------
Steven G. Singer
/s/ Jonelle St. John Director January 5, 2005
---------------------------------
Jonelle St. John
/s/ James D. Dondero Director January 5, 2005
---------------------------------
James D. Dondero
/s/ Raymond L. Steele Director January 5, 2005
---------------------------------
Raymond L. Steele
Exhibit Index
2.1 - Debtors' Amended Joint Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code, dated February 27, 2002
(incorporated by reference to Exhibit 99.2 to the
Registrant's Current Report on Form 8-K dated March 4,
2002 (File No. 0-23044)).
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 - Amended and Restated Bylaws of the Company (as amended and
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).
4.1 - Specimen of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 of the Company's Amendment No. 2
to Registration Statement on Form 8-A, filed May 1, 2002).
5.1 - Opinion of General Counsel of Motient Corporation,
regarding the legality of the common stock registered
hereby (filed herewith).
10.2 - Credit Agreement by and between Motorola Inc. and ARDIS
Company dated June 17, 1998 (incorporated by reference to
Exhibit 10.61 to the Company's Current Report on Form 10-Q
dated June 30, 1998 (File No. 0-23044)).
10.2a - Amendment No. 2, dated September 1, 2000, to the Credit
Agreement, dated as of June 17, 1998, by and between
Motorola, Inc. and Motient Communications Company
(formerly known as ARDIS Company) (incorporated by
reference to Exhibit 10.22a to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
2000 (File No. 0-23044)).
10.2b - Assumption, Release, Amendment and Waiver Agreement by and
among Motorola, Inc., Motient Communications Inc. and
Motient Communications Company, dated as of December 29,
2000 (incorporated by reference to Exhibit 10.22b to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (File No. 0-23044)).
10.3 - Investment Agreement dated as of June 22, 2000, by and
among the Company, Motient Satellite Ventures LLC, and
certain other investors (incorporated by reference to
Exhibit 10.41 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000 (File No.
0-23044)).
10.4 - Asset Sale Agreement between Motient Satellite Ventures
LLC and Motient Services Inc. dated as of June 29, 2000
(incorporated by reference to Exhibit 10.42 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 (File No. 0-23044)).
10.4a - Amendment No. 1, dated as of November 29, 2000, to Asset
Sale Agreement, dated as of June 29, 2000, between Motient
Satellite Ventures LLC and Motient Services Inc.
(incorporated by reference to Exhibit 10.42a to the
Company's annual report on Form 10-K for the year ended
December 31, 2000 (File No. 0-23044)).
10.4b - Amended and Restated Asset Sale Agreement, dated as of
January 8, 2001, between Mobile Satellite Ventures LLC and
Motient Services Inc. (incorporated by reference to
Exhibit 10.42b to the Company's annual report on Form 10-K
for the year ended December 31, 2000 (File No. 0-23044)).
10.4c - Amendment, dated as of October 12, 2001, to the Amended
and Restated Asset Sale Agreement, dated as of January 8,
2001, by and between Motient Services Inc. and Mobile
Satellite Ventures LLC (incorporated by reference to
Exhibit 10.42c to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 2001 (File No.
0-23044)).
10.5 - Asset Sale Agreement, dated November 29, 2000, by and
among the Company, Motient Services Inc. and Aether
Systems, Inc. (incorporated by reference to Exhibit 10.46
to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 (File No. 0-23044)).
10.6 - January 2001 Investment Agreement, dated as of January 8,
2001, by and among the Company, Mobile Satellite Ventures
LLC, TMI Communications and Company, Limited Partnership,
and the other investors named therein (incorporated by
reference to Exhibit 10.48 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000 (File
No. 0-23044)).
10.7 - Document Standstill and Termination Agreement, dated as of
January 8, 2001, by and among the Company, Mobile
Satellite Ventures LLC, Motient Services Inc., and certain
investors named therein (incorporated by reference to
Exhibit 10.50 to the Company's annual report on Form 10-K
for the year ended December 31, 2000 (File No. 0-23044)).
10.7a - Amended and Restated Document Standstill and Termination
Agreement, dated as of October 12, 2001 (incorporated by
reference to Exhibit 10.50a to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
2001 (File No. 0-23044)).
10.8 - Amended and Restated Investment Agreement, dated October
12, 2001, by and among Motient Corporation, Mobile
Satellite Ventures LLC, TMI Communications and Company,
Limited Partnership, and the other investors named therein
(incorporated by reference to Exhibit 10.55 to the
Company's quarterly report on Form 10-Q for the quarter
ended September 30, 2001 (File No. 0-23044)).
10.9 - Form of Stockholders' Agreement of Mobile Satellite
Ventures GP Inc. (incorporated by reference to Exhibit
10.56 to the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 2001 (File No. 0-23044)).
10.9a - Stockholders' Agreement, dated as of November 26, 2001,
of Mobile Satellite Ventures GP Inc. (incorporated by
reference to Exhibit 10.56a of the Company's Current
Report on Form 8-K dated November 19, 2001 (File No.
0-23044)).
10.10 - Form of Limited Partnership Agreement of Mobile Satellite
Ventures LP (incorporated by reference to Exhibit 10.57 to
the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 2001 (File No. 0-23044)).
10.11 - Form of Convertible Note of Mobile Satellite Ventures LP,
in the amount of $50.0 million issued to MSV Investors LLC
(incorporated by reference to Exhibit 10.58 to the
Company's quarterly report on Form 10-Q for the quarter
ended September 30, 2001 (File No. 0-23044)).
10.12 - Form of Promissory Note of Mobile Satellite Ventures LP,
in the amount of $15.0 million issued to Motient Services
Inc. (incorporated by reference to Exhibit 10.59 to the
Company's quarterly report on Form 10-Q for the quarter
ended September 30, 2001 (File No. 0-23044)).
10.13 - Registration Rights Agreement between the Company and
Highland Capital Management, L.P., and Morgan Stanley
Investment Management, dated May 1, 2002 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002)
(File No. 0-23044)).
10.14* - Form of Change of Control Agreement for Officers of the
Company (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002 (File No. 0-23044)).
10.15 - Senior Indebtedness Note of MVH Holdings Inc., in the
amount of $19.0 million issued to Rare Medium Group, Inc.,
dated May 1, 2002 (incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 (File No. 0-23044)).
10.16 - Senior Indebtedness Note of MVH Holdings Inc., in the
amount of $750,000 issued to Credit Suisse First Boston,
dated May 1, 2002 (incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 (File No. 0-23044)).
10.17 - Settlement Agreement by and among the Registrant and Rare
Medium Group, Inc., dated March 28, 2002 (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002
(File No. 0-23044)).
10.18 - Form of Warrant to purchase 343,450 shares of the
Company's common stock at an exercise price of $3.95 per
share issued to Evercore Partners, L.P. (incorporated by
reference to Exhibit 10.28 to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (File No.
333-87844)).
10.19 - Debtors' Amended Joint Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code, dated February 27, 2002
(incorporated by reference to Exhibit 99.2 to the
Registrant's Current Report on Form 8-K dated March 4,
2002 (File No. 0-23044)).
10.20* - Motient Corporation 2002 Stock Option Plan (incorporated
by reference to Exhibit 99.1 to the Company's registration
statement on Form S-8 (File No. 333-92326)).
10.21* - Form of Stock Option Agreement (incorporated by reference
to Exhibit 99.2 to the Company's registration statement on
Form S-8 (File No. 333-92326)).
10.22 - Form of Warrant to purchase up to 500,000 shares of the
Company's common stock at an exercise price of $3.00 per
share issued to certain affiliates of Communication
Technology Advisors LLC (incorporated by reference to
Exhibit 10.22 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002).
10.23* - Executive Retention Agreement, dated as of July 16, 2002,
by and between Walter V. Purnell, Jr. and the Company
(incorporated by reference to Exhibit 10.23 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002).
10.24 - Amended and Restated Term Credit Agreement, dated January
27, 2003, by and among the Company, Motient Communications
Inc., Motient Holdings Inc., the Lenders named therein,
and M&E Advisors, L.L.C., as Administrative Agent and
Collateral Agent (incorporated by reference to Exhibit
10.24 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002).
10.25 - Security Agreement, dated as of January 27, 2003, between
Motient Communications Inc. and M&E Advisors L.L.C. as
Collateral Agent (incorporated by reference to Exhibit
10.25 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002).
10.26 - First Amendment to Security Agreement, dated as of January
30, 2003, between Motient Communications Inc. and M&E
Advisors L.L.C. as Collateral Agent (incorporated by
reference to Exhibit 10.26 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2002).
10.27 - Motient Corporation Share Pledge Agreement, dated as of
January 27, 2003, between Motient Corporation and M&E
Advisors L.L.C., as Collateral Agent (incorporated by
reference to Exhibit 10.27 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2002).
10.28 - Motient Holdings Share Pledge Agreement, dated as of
January 27, 2003, between Motient Holdings Inc. and M&E
Advisors L.L.C., as Collateral Agent (incorporated by
reference to Exhibit 10.28 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2002).
10.29 - Form of Warrant to purchase shares of common stock of
Motient Corporation issued to lenders under the Amended
and Restated Term Credit Agreement dated as of January 27,
2003 (incorporated by reference to Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.30* - Letter amendment to Executive Retention Agreement, dated
as of February 10, 2004, by and between Walter V. Purnell,
Jr. and the Company (incorporated by reference to Exhibit
10.30 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002).
10.31 - Amendment No. 1 to Amended and Restated Term Credit
Agreement, dated March 16, 2004, by and among Motient
Communications Inc., Motient License Inc., the Required
Lenders party thereto, and M&E Advisors, L.L.C., as
Administrative Agent and Collateral Agent (incorporated by
reference to Exhibit 10.31 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2002).
10.32 - Omnibus Amendment to SLA Note and Credit Facility, dated
as of March 16, 2004, by and among Motient Communications
Inc., Motient Corporation, Motient Holdings Inc., Motient
Services Inc., and Motorola, Inc. (incorporated by
reference to Exhibit 10.32 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2002).
10.33 - Share Pledge Agreement, dated as of March 16, 2004, by and
between Motient Communications Inc. and M&E Advisors,
L.L.C. (incorporated by reference to Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.34 - Warrant to purchase shares of common stock of Motient
Corporation, issued to lenders under Amendment No. 1 to
Amended and Restated Term Credit Agreement, dated March
16, 2004 (incorporated by reference to Exhibit 10.34 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 2002).
10.35 - Registration Rights Agreement, dated March 16, 2004, by
and between Motient Corporation and M&E Advisors, L.L.C.
in its capacity as Administrative and Collateral Agent
under Amendment No. 1 to Amended and Restated Term Credit
Agreement (incorporated by reference to Exhibit 10.35 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 2002).
10.36 - Collateral Agency, Subordination and Intercreditor
Agreement, dated as of March 16, 2004, by and among
Motient Communications Inc., Motient License Inc., M&E
Advisors L.L.C., and Motorola, Inc. (incorporated by
reference to Exhibit 10.36 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2002).
10.37 - Subordinate Motient Communications Share Pledge Agreement,
dated as of March 16, 2004, by and between Motient
Communications Inc. and Motorola, Inc. (incorporated by
reference to Exhibit 10.37 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2002).
10.38 - Common Stock Purchase Agreement, dated as of April 7,
2004, by and among Motient Corporation and the Raptor
Global Portfolio, Ltd., et al (incorporated by reference
to Exhibit 10.38 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003).
10.39 - Registration Rights Agreement, dated as of April 7, 2004,
by and among Motient Corporation and the Raptor Global
Portfolio, Ltd., et al (incorporated by reference to
Exhibit 10.39 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003).
10.40 - Form of Common Stock Purchase Warrant, dated as of April
7, 2004 (incorporated by reference to Exhibit 10.40 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003).
10.41 - Form of Common Stock Purchase Warrant, dated as of April
7, 2004 (incorporated by reference to Exhibit 10.41 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004).
10.42 - Securities Purchase Agreement, dated as of June 30, 2004,
by and among Motient Corporation and the Raptor Global
Portfolio, Ltd., et al (incorporated by reference to
Exhibit 10.42 to the Company's Registration Statement on
Form S-1 filed on July 6, 2004)
10.43 - Registration Rights Agreement, dated as of June 30, 2004,
by and among Motient Corporation and the Raptor Global
Portfolio, Ltd., et al (incorporated by reference to
Exhibit 10.42 to the Company's Registration Statement on
Form S-1 filed on July 6, 2004)
10.44 - Form of Common Stock Purchase Warrant, dated as of June
30, 2004 (incorporated by reference to Exhibit 10.42 to
the Company's Registration Statement on Form S-1 filed on
July 6, 2004)
10.45 - Form of Common Stock Purchase Warrant, dated as of June
30, 2004 (incorporated by reference to Exhibit 10.42 to
the Company's Registration Statement on Form S-1 filed on
July 6, 2004)
10.46 - Warrant Issued to Motorola, Inc. (incorporated by
reference to Exhibit 10.42 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004)
10.47 - Common Stock Purchase Agreement, dated as of November 12,
2004, by and among Motient Corporation and the investors
listed therein (incorporated by reference to Exhibit 10.43
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004)
10.48 - Registration Rights Agreement, dated as of November 12,
2004, by and among Motient Corporation and the investors
listed therein (incorporated by reference to Exhibit 10.44
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004)
10.49 - Form of Common Stock Purchase Warrant, dated as of
November 12, 2004 (incorporated by reference to Exhibit
10.45 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004)
10.50 - Purchase Agreement, dated as of November 12, 2004, by and
among Motient Ventures Holding Inc., Mobile Satellite
Ventures LP, et al (incorporated by reference to Exhibit
10.46 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004)
10.51 - Note Exchange Agreement, dated as of November 12, 2004, by
and among Motient Ventures Holding Inc., Mobile Satellite
Ventures LP, et al (incorporated by reference to Exhibit
10.47 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004)
10.52 - Amended and Restated Limited Partnership Agreement, dated
as of November 12, 2004, by and among Motient Ventures
Holding Inc., Mobile Satellite Ventures LP, et al
(incorporated by reference to Exhibit 10.48 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004)
10.53 - Amended and Restated Stockholders Agreement, dated as of
November 12, 2004, by and among Motient Ventures Holding
Inc., Mobile Satellite Ventures GP Inc., et. al.
(incorporated by reference to Exhibit 10.49 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004)
10.54 - Second Amended and Restated Parent Transfer/Drag Along
Agreement, dated as of November 12, 2004, by and among
Motient Corporation, et. al. (incorporated by reference to
Exhibit 10.50 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2004)
16.1 - Letter from PricewaterhouseCoopers LLP to the Securities
and Exchange Commission dated April 22, 2003 (incorporated
by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K filed on April 23, 2003).
16.2 - Letter from PricewaterhouseCoopers LLP to the Securities
and Exchange Commission dated March 9, 2004 (incorporated
by reference to Exhibit 16.1 to the Company's Current
Report on Form 8-K filed on March 9, 2004).
16.3 - Letter from Friedman LLP to the Securities and Exchange
Commission dated June 7, 2004 (incorporated by reference
to Exhibit 16.1 to the Company's Current Report on Form
10-Q for the quarter ended September 30, 2003, filed on
June 7, 2004).
21.1 - Subsidiaries of the Company. (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003)
23.1 - Consent of General Counsel of Motient Corporation
(included in Exhibit 5.1)
23.2 - Consent of Friedman LLP, Independent Registered Public
Accounting Firm (filed herewith).
23.3 - Consent of Ernst & Young LLP, Independent Auditors (filed
herewith).
24.1 - Power of Attorney pursuant to which amendments to this
registration statement may be filed (included on the
signature page in Part II of this registration statement).
------------------------------------
*Management contract or compensatory plan or arrangement.
EXHIBIT 5.1
January 5, 2005
Board of Directors
Motient Corporation
300 Knightsbridge Pkwy.
Lincolnshire, IL 60069
Ladies and Gentlemen:
I, Robert Macklin, in my capacity as general counsel of Motient
Corporation, a Delaware corporation (the "Company"), issue this opinion in
connection with its registration statement on Form S-1 (the "Registration
Statement"), filed with the Securities and Exchange Commission and relating to
the resale of 16,255,636 shares of the Company's common stock, par value $0.01
per share (the "Shares"). This opinion letter is furnished to enable Motient to
fulfill the requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R. Section
229.601(b)(5), in connection with the Registration Statement.
For purposes of this opinion letter, I have examined copies of the
following documents:
1. An executed copy of the Registration Statement.
2. The Restated Certificate of Incorporation of the Company, as in effect on the
date hereof.
3. The Bylaws of the Company, as in effect on the date hereof.
In my examination of the aforesaid documents, I have assumed the
genuineness of all signatures, the legal capacity of all natural persons, the
accuracy and completeness of all documents submitted to me, the authenticity of
all original documents, and the conformity to authentic original documents of
all documents submitted to me as copies (including telecopies). This opinion
letter is given, and all statements herein are made, in the context of the
foregoing.
This opinion letter is based as to matters of law solely on the Delaware
General Corporation Law, as amended. I express no opinion herein as to any other
laws, statutes, ordinances, rules, or regulations. As used herein, the term
"Delaware General Corporation Law, as amended" includes the statutory provisions
contained therein, all applicable provisions of the Delaware Constitution and
reported judicial decisions interpreting these laws.
Based upon, subject to and limited by the foregoing, I am of the opinion
that the Shares are validly issued, fully paid, and nonassessable.
This opinion letter has been prepared for your use in connection with the
Registration Statement and speaks as of the date hereof. I assume no obligation
to advise you of any changes in the foregoing subsequent to the delivery of this
opinion letter.
I hereby consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement. In giving this consent, I do not thereby admit that I am
an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ Robert L. Macklin
-----------------------------
Robert L. Macklin
General Counsel and Secretary
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
We consent to the inclusion in this Registration Statement of Motient
Corporation and Subsidiaries on Form S-1 and the related prospectus, of our
report dated July 2, 2004 relating to the consolidated financial statements and
financial statement schedule, which appears in such Prospectus. We also consent
to the reference to us as "Experts" and "Summary Consolidated Financial Data" in
such Prospectus. However, it should be noted that Friedman LLP has not prepared
or certified such "Summary Consolidated Financial Data."
/s/ FRIEDMAN LLP
Livingston, New Jersey
January 5, 2005
Exhibit 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and the use
of our report dated April 23, 2004, with respect to the financial statements of
Mobile Satellite Ventures, LP included in the Registration Statement (Form S-1)
and related Prospectus of Motient Corporation for the registration of its common
stock.
/s/ Ernst & Young LLP
McLean, Virginia
January 4, 2005
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