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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission File No. 0-23044
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MOTIENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 93-0976127
(State or other jurisdiction of (I.R.S. Employee Identification Number)
Incorporation or organization)
300 Knightsbridge Parkway
Lincolnshire, IL 60069
847-478-4200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No[X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No[X]
Number of shares of common stock outstanding at March 10, 2004: 25,245,777
1
Introductory Note
This quarterly report on Form 10-Q relates to the quarter ended September 30,
2002. We did not file a report on Form 10-Q for this period previously because
we have only recently completed our financial statements for this period.
As previously disclosed in our current reports on Form 8-K dated August 19,
2002, November 14, 2002, March 14, 2003, August 6, 2003, November 4, 2003 and
February 12, 2004, we were not able to complete our financial statements for the
year ended December 31, 2002 and for the quarters ended June 30, 2002 and
September 30, 2002 until we resolved the appropriate accounting treatment with
respect to certain transactions that occurred in 2000 and 2001. We initiated a
review of the appropriate accounting treatment for these transactions following
the appointment of PricewaterhouseCoopers LLP, or PricewaterhouseCoopers, as our
independent auditors in July 2002. The transactions in question involved the
formation of and certain transactions with Mobile Satellite Ventures LP, or MSV,
in 2000 and 2001 and the sale of certain of our transportation assets to Aether
Systems, Inc. in 2000.
In November 2002, we initiated a process to seek the concurrence of the staff of
the Securities and Exchange Commission with respect to our conclusions of the
appropriate accounting for these matters. 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 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 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.
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. As noted above,
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. The audit committee appointed Ehrenkrantz Sterling & Co. LLC to replace
PricewaterhouseCoopers to audit Motient's consolidated financial statements for
the period ending May 1, 2002 to December 31, 2002. For further details, please
see the amendment to our current report on Form 8-K/A, filed with the SEC on
March 9, 2004.
We recently completed our financial statements as of and for the three-month and
nine-month periods ended September 30, 2002, which are included in this report.
These financial statements give effect to the accounting treatment with respect
to the MSV and Aether transactions that was agreed to be appropriate as a result
of the above-described process. In addition, as a result of the our reaudit of
the years ended December 31, 2000 and 2001 performed by our current independent
accounting firm, Ehrenkrantz Sterling & Co. LLC, certain additional financial
statement adjustments were proposed and accepted by us for the periods noted
above (See Note 2 of notes to consolidated financial statements). The 2001
comparative financial statements provided herein have been restated and have
been reviewed by Ehrenkrantz Sterling & Co. LLC (see Note 6 of notes to
consolidated financial statements, "Subsequent Events").
2
Concurrently with the filing of this report, we are also filing our quarterly
report on Form 10-Q for the quarter ended June 30, 2002, our annual report on
Form 10-K for the year ended December 31, 2002, and an amendment to our
quarterly report on Form 10-Q/A for the quarter ended March 31, 2002. Such
reports include financial statements that give effect to the accounting
treatment with respect to the MSV, Aether transactions and certain additional
financial statement adjustments that was agreed to be appropriate as a result of
the above-described process. The 2001 comparative financial statements provided
therein have been restated and have been reviewed by Ehrenkrantz Sterling & Co.
LLC.
There have been a number of significant developments regarding Motient's
business, operations, financial condition, liquidity, and outlook subsequent to
September 30, 2002. Information regarding such matters is contained in this
report in Note 6 ("Subsequent Events") of notes to consolidated financial
statements, as well as in our other reports that are being filed concurrently
with this report. We urge you to read our quarterly reports on Form 10-Q for the
quarter ended June 30, 2002, the Form 10-Q/A for the quarter ended March 31,
2002 and our annual report on Form 10-K for the year ended December 31, 2002, as
well as our reports and filings with the SEC filed after the date hereof, for
more information regarding recent developments and current matters.
On January 10, 2002, we filed for protection under Chapter 11 of the Bankruptcy
Code. Our Amended Joint Plan of Reorganization was filed with the United States
Bankruptcy Court for the Eastern District of Virginia on February 28, 2002. The
plan was confirmed on April 26, 2002, and became effective on May 1, 2002. In
the consolidated financial statements provided herein, all results for periods
prior to May 1, 2002 are referred to as those of the "Predecessor Company" and
all results for periods including and subsequent to May 1, 2002 are referred to
as those of the "Successor Company". Due to the effects of the "fresh start"
accounting, results for the Predecessor Company and the Successor Company are
not comparable (See Note 2, "Significant Accounting Policies," of notes to
consolidated financial statements).
References in this report to "Motient" and "we" or similar or related terms
refer to Motient Corporation and its wholly-owned subsidiaries together, unless
the context of such references requires otherwise.
3
MOTIENT CORPORATION
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PAGE
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Five
Months Ended September 30, 2002 5 (Successor Company), the Four
Months Ended April 30, 2002 (Predecessor Company) and the Three
and Nine Months Ended September 30, 2001 (Predecessor Company) 5
Consolidated Balance Sheets as of September 30, 2002 (Successor Company) and December 31, 6
2001 (Predecessor Company)
Condensed Consolidated Statements of Cash Flows for the Five Months Ended September 30, 7
2002 (Successor Company), the Four Months Ended April 30, 2002 (Predecessor Company), and
the Nine Months Ended September 30, 2001 (Predecessor Company)
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 46
Item 3. Quantitative and Qualitative Disclosures about Market Risk 69
Item 4. Controls and Procedures 69
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 74
Item 2. Changes in Securities and Use of Proceeds 74
Item 3. Defaults Upon Senior Securities 74
Item 6. Exhibits and Reports on Form 8-K 75
4
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Motient Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(Restated) (Restated)
Successor Successor Predecessor Predecessor Predecessor
Company Company Company Company Company
Three Months Five Months Four Months Three Months Nine Months
Ended Ended Ended Ended Ended
September 30, September 30, April 30, September 30, September 30,
2002 2002 2002 2001 2001
---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited)
REVENUES
Services and related revenue $12,953 $21,539 $16,809 $16,760 $52,423
Sales of equipment 344 477 5,564 6,787 16,329
--- --- ----- ----- ------
Total revenues 13,297 22,016 22,373 23,547 68,752
------ ------ ------ ------ ------
COSTS AND EXPENSES
Cost of services and operations (exclusive of 14,233 24,359 21,909 17,957 55,719
depreciation and amortization below)
Cost of equipment sold (exclusive of 438 1,258 5,980 9,079 24,713
depreciation and amortization below)
Sales and advertising 1,754 3,163 4,287 5,526 18,987
General and administrative 3,027 6,360 4,130 4,206 16,018
Restructuring Charge 25 25 584 4,739 4,739
Depreciation and amortization 5,949 10,057 6,913 8,835 26,220
----- ------ ----- ----- ------
Operating loss (12,129) (23,206) (21,430) (26,795) (77,644)
-------- -------- -------- -------- --------
Interest expense, net (575) (983) (1,850) (16,543) (46,971)
Interest and other income, net -- 15 1,270 -- 998
Gain (loss) on disposal of assets (1,193) (1,193) (591) -- (407)
Gain (loss) on sale of transportation assets -- -- 372 (67) (592)
Rare Medium merger costs -- -- -- (4,054) (4,054)
Gain on Rare Medium Note call option -- -- -- 15,312 1,512
Loss on extinguishment of debt -- -- -- (653) (2,578)
Equity in loss of XM Radio and Mobile Satellite
Ventures (2,747) (4,287) (1,909) (16,836) (40,163)
------- ------- ------- -------- --------
(Loss) income before reorganization items (16,644) (29,654) (24,138) (49,636) (169,899)
-------- -------- -------- -------- ---------
Reorganization items:
Costs associated with debt restructuring -- -- (22,324) -- --
Gain on extinguishment of debt -- -- 183,725 -- --
Gain on fair market adjustment of assets -- -- 94,715 -- --
------
(Loss) income before income taxes ($16,644) ($29,654) $231,978 ($49,636) ($169,899)
--------- --------- -------- --------- ----------
Income tax provision -- -- -- -- --
Net (loss) income ($16,644) ($29,654) $231,978 ($49,636) ($169,899)
========= ========= ======== ========= ==========
Basic and Diluted (Loss) Income Per Share of
Common Stock:
Net (Loss) Income, basic and diluted ($0.66) ($1.18) $3.98 ($0.99) ($3.39)
======= ======= ===== ======= =======
Weighted-Average Common Shares Outstanding - basic 25,097 25,097 58,251 50,175 50,175
and diluted ======== ======== ======== ========= ======
The accompanying notes are an integral part of these consolidated financial
statements.
5
Motient Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
(Restated)
Successor Predecessor
Company Company
September 30, 2002 December 31, 2001
ASSETS (Unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents $3,565 $33,387
Short-term investments 50 --
Accounts receivable-trade, net of allowance for doubtful accounts of
$1,869 at September 30, 2002 and $964 at December 31, 2001 10,884 11,491
Inventory 1,238 6,027
Due from Mobile Satellite Ventures, net 326 521
Deferred equipment costs 1,859 13,662
Other current assets 8,274 16,566
----- ------
Total current assets 26,196 81,654
------ ------
PROPERTY AND EQUIPMENT, net 50,371 64,001
FCC LICENSES AND OTHER INTANGIBLES, net 97,110 46,650
GOODWILL -- 4,981
INVESTMENT IN AND NOTES RECEIVABLE FROM MSV 50,527 30,126
DEFERRED CHARGES AND OTHER ASSETS 1,377 13,053
----- ------
Total assets $225,581 $240,465
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $14,475 50,274
Deferred revenue and other current liabilities 4,995 25,716
Senior Notes, net of discount -- 329,371
Rare Medium note payable -- 26,910
Vendor financing commitment, current 655 --
Obligations under capital leases, current 4,561 8,691
----- -----
Total current liabilities 24,686 440,962
------ -------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion 1,780 257
Vendor financing commitment , net of current portion 2,661 3,316
Notes payable, including accrued interest thereon 20,495 --
Other long-term liabilities 4,471 27,079
----- ------
Total long-term liabilities 29,407 30,652
------ ------
Total liabilities 54,093 471,614
------ -------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock; par value $0.01; authorized 5,000,000 shares at
September 30, 2002; authorized 200,000 shares at December 31, 2001;
no shares issued or outstanding at September 30, 2002 or
December 31, 2001 -- --
Common Stock; voting, par value $0.01; 100,000,000 shares authorized
and 25,097,256 shares issued and outstanding at September 30,
2002; 150,000,000 shares authorized and 55,027,000 shares issued
and outstanding at December 31, 2001 251 557
Additional paid-in capital 197,814 988,355
Deferred stock compensation -- (433)
Common stock purchase warrants 3,077 93,730
Accumulated deficit (29,654) (1,313,358)
-------- -----------
STOCKHOLDERS' EQUITY (DEFICIT) 171,488 (231,149)
------- ---------
Total liabilities and stockholders' equity (deficit) $225,581 $240,465
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
Motient Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Restated)
Predecessor
Successor Predecessor Company
Company Company Nine Months
Five Months Ended Four Months Ended
September 30, Ended April 30, September 30,
2002 2002 2001
---- ---- ----
(Unaudited) (audited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $(11,874) $(14,546) $(71,901)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term and restricted investments (50) -- 494
Proceeds from sales of assets 616 -- --
Proceeds from sales of transportation assets -- 372 --
Proceeds from the sale of XM Radio stock -- -- 33,539
Receipt of Senior Note interest from escrow -- -- 20,503
Investment in MSV (957) -- --
Additions to property and equipment (299) (494) (7,624)
----- ---- -------
Net cash (used in) provided by investing (690) (122) 46,912
----- ----- ------
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities -- 17 402
Principal payments under capital leases (1,334) (1,273) (5,840)
Principal payments under Vendor Financing -- -- (3,197)
Repayment of Bank Financing -- -- (20,750)
Proceeds from Bank Financing -- -- 6,000
Proceeds from Rare Medium Note -- -- 50,000
Debt issuance costs -- -- (1,062)
------- ------- -------
Net cash (used in) provided by financing activities (1,334) (1,256) 25,553
------- ------- ------
Net (decrease) increase in cash and cash equivalents (13,898) (15,924) 564
CASH AND CASH EQUIVALENTS, beginning of period 17,463 33,387 2,520
------ -------- -----
CASH AND CASH EQUIVALENTS, end of period $3,565 $17,463 $3,084
====== ======= ======
The accompanying notes are an integral part of these consolidated financial statements.
7
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2002
(Unaudited)
1. ORGANIZATION AND BUSINESS
Motient Corporation (with its subsidiaries, "Motient" or the "Company") provides
two-way mobile communications services principally to business-to-business
customers and enterprises. Motient serves a variety of markets including mobile
professionals, telemetry, transportation and field service. Motient provides its
eLinksm brand two-way wireless email services to customers accessing email
through corporate servers, Internet Service Providers, Mail Service Provider
accounts, and paging network service providers. Motient also offers BlackBerry
TM by Motient, a wireless email solution developed by Research In Motion ("RIM")
and licensed to operate on Motient's network. BlackBerry TM by Motient is
designed for large corporate accounts operating in a Microsoft Exchange or Lotus
Notes environment. The Company considers the two-way mobile communications
service described in this paragraph to be its core wireless business.
Motient presently has six wholly-owned subsidiaries. Motient had a 25.5%
interest (on a fully-diluted basis) in MSV as of September 30, 2002. For further
details regarding Motient's interest in MSV, please see Note 6 ("Subsequent
Events -- Developments Relating to MSV"). Motient Communications, Inc. ("Motient
Communications") owns the assets comprising Motient's core wireless business,
except for Motient's Federal Communication Commission ("FCC") licenses, which
are held in a separate subsidiary, Motient License Inc. ("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 held by Motient
Communications. A pledge of the stock of Motient License, along with the other
assets of Motient Communications, secures borrowings under the term credit
facility, and a pledge of the stock of Motient License secures, on a second
priority basis, borrowings under the Company's vendor financing facility with
Motorola. For further details regarding the formation of Motient License, please
see "Subsequent Events - $12.5 Million Term Credit Facility". Motient's other
four subsidiaries hold no material operating assets other than the stock of
other subsidiaries and Motient's interests in MSV. On a consolidated basis, we
refer to Motient Corporation and its six wholly-owned subsidiaries as "Motient."
Motient is devoting its efforts to 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 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 that have limited Motient's ability to generate greater demand,
unanticipated technological and development delays and general economic factors.
Motient's results in recent periods, including the period covered by this
report, have also been hindered by the downturn in the economy and capital
markets. These factors contributed to the Company's decision in January 2002 to
8
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. See Note 2 ("Significant
Accounting Policies -- Motient's Chapter 11 Filing and Plan of Reorganization
and "Fresh-Start" Accounting") below.
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 6 ("Subsequent Events"). The 2001 financial results and the 2002
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 September 30, 2002 included herein are referred to as
"Successor Company" results.
XM Radio
Throughout 2001, Motient disposed of its equity interest in XM Satellite Radio
Holdings Inc. ("XM Radio"), a public company, and as of November 19, 2001, 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. For the nine months ended June 30, 2001, the
Company recorded proceeds of approximately $33.5 million from the sale in 2001
of two million shares of its XM Radio stock. For the three-months and
nine-months ended September 30, 2001, the Company recorded equity in losses of
XM Radio of $16.8 million and $40.2 million, respectively.
Mobile Satellite Ventures LP
On June 29, 2000, the Company formed a joint venture subsidiary, Mobile
Satellite Ventures LP (formerly known as Mobile Satellite Ventures LLC) ("MSV"),
in which it owned, until November 26, 2001, 80% of the membership interests, in
order to conduct research and development activities. In June 2000, the
remaining 20% interests in MSV were purchased by three investors unrelated to
Motient for an aggregate purchase price of $50 million. 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
Inc. ("Motient Services"), which owned Motient's satellite and related assets,
as a deposit on the purchase of the satellite assets, and $20 million was paid
to Motient Services for the use of the satellite and frequency under a research
and development agreement.
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, 2001, Motient sold the assets comprising its satellite
communications business to MSV, as part of a transaction in which certain other
parties joined MSV, including TMI Communications and Company Limited Partnership
("TMI"), a Canadian satellite services provider. In consideration for its
satellite business assets, Motient received the following: (i) a $24 million
cash payment in June 2000, (ii) a $41 million cash 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 Group, Inc. ("Rare
Medium"), purchased a total of $52.5 million of convertible notes. The Company
9
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 will be recognized
over five years. Under SAB No. 51, Motient also recorded a write-up in its
investment in MSV of $12.7 million as a result of TMI's contribution of its
satellite business to MSV. Given the early-stage nature of MSV's operations,
this write-up was recorded directly to additional paid-in-capital.
As part of the November 2001 transaction, the Company had no prior basis in its
investment in MSV and had not recorded any prior equity method losses associated
with its investment in MSV. In November 2001, when the asset sale 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. When Motient agreed to take the $15 million note, it recorded
its share of the MSV losses that had not been previously recognized by Motient
($17.5 million), having the affect of completely writing off the notes
receivable in 2001. As part of Motient's restatement (see Note 2, "Significant
Accounting Policies -- Restatement of Financial Statements"), Motient has
determined that it should not have recorded any suspended losses of MSV, since
those losses would have been absorbed by certain of the senior equity holders in
MSV. As a result, Motient has concluded that it should not have written off its
portion ($17.5 million) of the prior MSV losses against the value of the notes
in 2001.
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 6
("Subsequent Events").
The Company's $15 million note from MSV is subject to prepayment in certain
circumstances where MSV receives cash proceeds from equity, debt or asset sale
transactions. There can be no assurance that any such transactions will occur,
nor can there be any assurance regarding the timing of such events. Any
additional investment in MSV and any related repayment of the $15.0 million note
may not occur before Motient needs the funds from the repayment of such note. In
addition, 25% of the proceeds of any repayment of the $15.0 million note from
MSV must be allocated to prepay pro-rata both the Rare Medium and CSFB notes.
The allocation of the 25.5% of the proceeds will be made in accordance with Rare
Medium's and CSFB's relative outstanding balance at the time of prepayment. If
not repaid earlier, the $15.0 million note from MSV, including accrued interest
thereon, becomes due and payable on November 25, 2006; however, there can be no
assurance that MSV would have the ability, at that time, to pay the amounts due
under the note. Motient has recorded the $15.0 million note receivable from MSV,
plus accrued interest thereon at its fair market value, estimated to be
approximately $13.0 million at the May 1, 2002 "fresh-start" accounting date,
after giving effect to discounted future cash flows at market interest rates.
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.
In November 2003, Motient engaged Communication Technology Advisors LLC ("CTA"),
to perform a valuation of its equity interests in MSV as of December 31, 2002.
Concurrent with CTA's valuation, Motient reduced the book value of its equity
interest in MSV from $54 million (inclusive of Motient's $2.5 million
convertible note from MSV) to $41 million as of May 1, 2002 to reflect certain
10
preference rights on liquidation of certain classes of equity holders in MSV.
Including its note receivable from MSV ($13 million carrying value 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.
As of September 30, 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 September 30, 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 ATC application process.
For a discussion of certain recent developments regarding MSV, please see Note 6
("Subsequent Events").
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared by the Company and are
unaudited. The results of operations for the three and five months ended
September 30, 2002, and the four months ended April 30, 2002, are not
necessarily indicative of the results to be expected for any future period or
for the full fiscal year. In the opinion of management, all adjustments
(consisting of normal recurring adjustments unless otherwise indicated)
necessary to present fairly the financial position, results of operations and
cash flows at September 30, 2002, and for all periods presented have been made.
Footnote disclosure has been condensed or omitted as permitted in interim
financial statements.
Motient's Chapter 11 Filing and Plan of Reorganization and "Fresh-Start"
Accounting
On January 10, 2002, the Company filed for protection under Chapter 11 of the
Bankruptcy Code. The Company's Amended Joint Plan of Reorganization was filed
with the United States Bankruptcy Court for the Eastern District of Virginia on
February 28, 2002. The cases were jointly administered under the case name "In
Re Motient Corporation, et. al.," Case No. 02-80125. The Company's Plan of
Reorganization was confirmed on April 26, 2002 and the Company's emergence from
bankruptcy became effective on May 1, 2002 (the "Effective Date"). The Company
adopted "fresh start" accounting as of May 1, 2002 in accordance with procedures
specified by AICPA Statement of Position ("SOP") No. 90-7, "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code." The Company determined
that its selection of May 1, 2002 versus April 26, 2002 for the "fresh start"
date was more convenient for financial reporting purposes and that the results
for the period from April 26, 2002 to May 1, 2002 were immaterial to the
consolidated financial statements. All results for periods prior to the
Effective Date are referred to as those of the "Predecessor Company" and all
results for periods including and subsequent to the Effective Date are referred
to as those of the "Successor Company."
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 Statement of
Financial Accounting Standards ("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 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
11
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 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
Stockholders' 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
recent valuation of the Company's software and estimates of replacement cost for
12
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:
Debt
Discharge Fresh
Preconfirmation and Start Reorganized
Predecessor Exchange Adjustments Successor
(in thousands) Company(j) of Stock (s) 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
(g)
Deferred revenue 23,284 (18,913) (e) 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
------- ------ ------
13
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
======== ========= ======= ========
(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".
14
(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 and the 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 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 may be exercised to
purchase shares of Motient common stock at a price of $.01 per share, will
expire May 1, 2004, or two years after the Effective Date, and will not be
exercisable unless and until the average closing price of Motient's common stock
over a period of ninety consecutive trading days is equal to or greater than
$15.44 per share. 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, given the perfunctory nature of the warrant issuance process
related to bankruptcy emergence.
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.
Restatement of Financial Statements
Subsequent to the issuance of the Company's financial statements for the quarter
ended March 31, 2002 and years ended December 31, 2000 and 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 Systems, Inc. ("Aether") in 2000, required
revision. These transactions were described in more detail in Motient's Forms
10-K for the periods ended December 31, 2000 and December 31, 2001, Note 13,
"Business Acquisitions and Dispositions". In addition, as a result of the
Company's re-audit of the years ended December 31, 2001 and 2000 performed by
15
the Company's current 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
Motient's original accounting treatment with respect to the MSV and Aether
transactions and the revised accounting treatment that it 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 has determined to
allocate the $44 million of proceeds first to the investor conversion option
based on its fair value, with the remainder to the research and development
agreement and asset deposit based on their relative fair values. The effect of
this reallocation is to increase shareholders' equity at the time of the initial
recording by $12 million, as well as to reduce subsequent service revenue by
$1.1 million and $3.3 million for the three and nine months ended September 30,
2001, respectively, as a result of the lower recorded value allocated to the
research and development agreement.
Recording of suspended losses associated with MSV in fourth quarter of 2001. In
November 2001, when the asset sale described above 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 has determined that it should not have recorded any
suspended losses of MSV, since those losses would have been already absorbed by
certain of the senior equity holders in MSV. As a result, Motient has 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 $12.7 million under Staff
Accounting Bulletin No. 51, "Accounting for Sales of Stock of a Subsidiary", and
an offsetting gain recorded directly to shareholders' equity. This restatement
occurred in the fourth quarter of 2001.
16
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.
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. This restatement occurred in the fourth
quarter of 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 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 by 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 the 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 has 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 $188,000 and $563,000 for the three and nine months ended
September 30, 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 the Company'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 no increases in
expenses for the three months ended September 30, 2001 and $1.0 million for the
nine months ended September 30, 2001.
Summary of Adjustments to Prior Period Financial Statements as a result of
re-audit of years ended December 31, 2000 and 2001
17
The following is a brief description of the differences between Motient's
original accounting treatment and the revised accounting treatment that it has
concluded was appropriate and has been reflected in the accompanying financial
statements for the respective periods.
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 $1.0 million, $0.6 million and $0.01
million for the years ended December 31, 1999, 2000 and 2001, respectively.
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.
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 Good 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 three
and nine months ended September 30, 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.
18
Three Months Nine Months
Ended Ended
September 30, September30,
2001 2001
---- ----
(in thousands)
Statement of operations data
Net Revenue, as previously reported $24,447 $71,511
Adjustments (900) (2,759)
As restated 23,547 68,752
Net Operating Loss, as previously reported (25,933) (76,374)
Adjustments (862) (1,270)
As restated (26,795) (77,644)
Net Loss, as previously reported (48,707) (168,037)
Adjustments (929) (1,862)
As restated (49,636) (169,899)
Basic and Fully Diluted Loss Per Share of
Common Stock, as previously reported (0.97) (3.36)
Adjustments (0.02) (0.03)
As restated (0.99) (3.39)
Balance sheet data
Total Assets, as previously reported 448,542 448,542
Adjustments 932 932
As restated 449,474 449,474
Total Liabilities, as previously reported 610,106 610,106
Adjustments (6,051) (6,051)
As restated 604,055 604,055
Stockholders' Equity, as previously
reported (161,564) (161,564)
Adjustments 6,910 6,910
As restated (154,654) (154,654)
Total Liabilities & Stockholders' Equity,
as previously reported 448,542 448,542
Adjustments 932 932
As restated $449,474 $449,474
Consolidation
The consolidated financial statements include the accounts of Motient and its
wholly-owned subsidiaries. All significant inter-company transactions and
accounts have been eliminated.
Cash Equivalents
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of three months or less at the time of
acquisition to be cash equivalents
Short-term Investments
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of between three months and one year to be
short-term investments.
19
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.
In April 2002, after assessing its ability to recover the full value of certain
components of its inventory associated with a product launched in March 2002 for
which the Company had not seen very substantial adoption rates, as well as the
Company's adoption of reduced pricing policies for older generation wireless
internet products in the second quarter of 2002 in order to incentivize certain
customers, the Company recorded inventory write-downs to cost of equipment sold
to reduce inventory amounts to its net realizable value, in the amount of $4.4
million (pre-May 1, 2002). The Company has no further plans or commitments to
purchase any additional older generation inventory. Additionally, the Company
recorded a charge in the five-month period ended September 30, 2002, of
approximately $0.7 million associated with prepaid license fees of this new
product.
Periodically, the Company will offer temporary discounts on equipment sales to
customers. The value of this discount is recorded as a cost of sale in the
period in which the sale occurs.
The Predecessor Company recorded a charge in the amount of $5.8 million in the
nine month period ended September 30, 2001, associated with the write down of
its inventory to estimated fair value.
Concentrations of Credit Risk
For the three months ended September 30, 2002, four customers accounted for
approximately 44% of the Company's service revenue, with two customers, United
Parcel Service of America, Inc. ("UPS") and SkyTel Communications, Inc.
("SkyTel"), each accounting for more than 10%, and one of those customers,
SkyTel, a subsidiary of MCI WorldCom, Inc., accounting for approximately 15% of
the Company's service revenue for the three month period. As of September 30,
2002, Skytel represented 24% of the Company's net accounts receivable, of which
42% was greater than 30 days past due.
For the five months ended September 30, 2002, four customers accounted for
approximately 44% of the Company's service revenue, with two of those customers,
UPS and SkyTel, each accounting for more than 10%, with SkyTel accounting for
approximately 14% of the Company's service revenue, excluding the amounts
reserved for below, all of which the Company believed was fully collectible.
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.
Due to the bankruptcy of WorldCom, as of September 30, 2002 the Company reserved
100% of all amounts then due from Skytel, until such time as the Company
determined that the amounts became fully collectible without any right of
recourse. In October of 2002, the Company received payment from SkyTel of a
significant portion of the amount of the Company's pre-petition claim amount.
Since the date of WorldCom's Chapter 11 filing, SkyTel has remained current on
its obligations under the Company's contract with SkyTel.
20
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." Net capitalized
internal use software costs are included in property and equipment in the
accompanying consolidated balance sheets and are amortized over three years.
Investment in MSV and Note Receivable from MSV
As disclosed in the Company's current report on Form 8-K dated March 14, 2003,
the Company has determined that certain adjustments to our historical financial
information for 2000, 2001 and 2002 are required to reflect the effects of
several complex transactions, including the formation of, and transactions with,
MSV. Please see the Company's Form 8-K dated March 14, 2003 for a complete
discussion of such adjustments.
The Predecessor Company had no basis in either its $15 million note receivable
from MSV or its $2.5 million convertible note receivable from MSV, as the
Company had fully written these off in 2001 through the recording of its equity
share of losses in MSV. It was determined that Motient should not have recorded
any suspended losses of MSV. As a result, it was concluded that Motient should
not have written off any prior MSV losses against the value of these notes.
As a result of the application of "fresh-start" accounting and the subsequent
modifications described below, the notes and investment in MSV were valued at
fair value and the Company recorded an asset in the amount of approximately
$53.9 million representing the estimated fair value of 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, the Company recorded its approximate 48% share of MSV losses against
this basis.
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. The Company
is amortizing this excess basis in accordance with the pro-rata allocation of
various components of MSV's intangible assets as determined by MSV through
recent independent valuations. Such assets consist of FCC licenses, intellectual
property and customer contracts, which are being amortized over a
weighted-average life of approximately 12 years.
Additionally, the Company has recorded the $15.0 million note receivable from
MSV, plus accrued interest thereon at its fair market value, estimated to be
approximately $13.0 million, after giving effect to discounted future cash flows
at market interest rates. This note matures in November 2006, but may be fully
or partially repaid prior to maturity, subject to certain conditions and
priorities with respect to payment of other indebtedness, in certain
circumstances involving the consummation of additional investments in MSV.
In November 2003, Motient engaged CTA to perform a valuation of its equity
interests in MSV as of December 31, 2002. Concurrent with CTA's valuation,
Motient reduced the book value of its equity interest in MSV from $54 million
(inclusive of Motient's $2.5 million convertible note from MSV) to $41 million
as of May 1, 2002 to reflect certain preference rights on liquidation of certain
classes of equity holders in MSV. Including its notes receivable from MSV ($13
million at May 1, 2002), the book value of Motient's aggregate interest in MSV
as of May 1, 2002 was reduced from $67 million to $53.9 million.
21
The valuation of Motient's investment in MSV and its note receivable from MSV
are ongoing assessments that are, by their nature, judgmental given that MSV is
not traded on a public market and is in the process of developing certain next
generation technologies, which depend on approval by the FCC. While the
financial statements currently assume that there is value in Motient's
investment in MSV and that the MSV note is collectible, there is the inherent
risk that this assessment will change in the future and Motient will have to
write down the value of this investment and note. For information regarding
recent developments involving MSV, please see Note 6 ("Subsequent Events").
For the five-month period ended September 30, 2002 and four-month period ended
April 30, 2002, MSV had revenues of $12.2 million and $9.0 million,
respectively, operating expenses of $10.6 million and $9.2 million,
respectively, and a net loss of $10.4 million and $9.3 million, respectively. As
discussed earlier, on November 26, 2001, Motient sold the assets comprising its
satellite communications business to MSV.
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. The Company has paid no income taxes since inception.
The Company has generated significant net operating losses for tax purposes
through September 30, 2002; however, it has had its ability to utilize these
losses limited on two occasions as a result of transactions that caused a change
of control in accordance with the Internal Revenue Service Code Section 382.
Additionally, since the Company has not yet generated taxable income, it
believes that its ability to use any remaining net operating losses has been
greatly reduced; therefore, the Company has established a valuation allowance
for any benefit that would have been available as a result of the Company's net
operating losses.
Revenue Recognition
The Company generates revenue principally through equipment sales and airtime
service agreements, and consulting services. In 2000, the Company adopted Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," issued by the SEC.
SAB 101 provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. In certain circumstances, SAB 101 requires the
deferral of the recognition of revenue and costs related to equipment sold as
part of a service agreement. Revenue is recognized as follows:
Service revenue: Revenues from 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 its network over an estimated customer life of two years.
22
Equipment and service sales: The Company sells equipment to resellers who market
its terrestrial product and airtime service to the public, and it also sells its
product directly to end-users. Revenue from the sale of the equipment, as well
as the cost of the equipment, are initially deferred and are recognized over a
period corresponding to the Company's estimated customer life of two years.
Equipment costs are deferred only to the extent of deferred revenue.
Property and Equipment
Property and equipment are recorded at cost and depreciated over its useful life
using the straight-line method. Assets recorded as capital leases are amortized
over the shorter of their useful lives or the term of the lease. The estimated
useful lives of office furniture and equipment vary from two to ten years, and
the network equipment is depreciated over seven years. The Company has also
capitalized certain costs to develop and implement its computerized billing
system. These costs are included in property and equipment and are depreciated
over three years. Repairs and maintenance do not significantly increase the
utility or useful life of an asset and are expensed as incurred.
Research and Development Costs
Research and development costs are expensed as incurred. Such costs include
internal research and development activities and expenses associated with
external product development agreements.
Advertising Costs
Advertising costs are charged to operations in the year incurred.
Stock-Based Compensation
The Company accounts for employee stock options using the method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Generally, no expense is recognized related to
the Company's stock options because the option's exercise price is set at the
stock's fair market value on the date the option is granted. In cases where the
Company issues shares of restricted stock, the Company will record an expense
based on the value of the restricted stock on the measurement date.
In May 2002, the Company's board approved a new employee stock option plan with
2,993,024 authorized shares of common stock, of which options to purchase
1,621,975 shares of the Company's common stock were outstanding at September 30,
2002. See Note 6 ("Subsequent Events"). Options to purchase 5,485,088 shares of
the Predecessor Company's stock were outstanding at June 30, 2001. These options
were cancelled as part of the Company's reorganization.
A portion of the options granted under the 2002 stock option plan have a Company
performance-based component. These options are accounted for in accordance with
23
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.
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting of
Comprehensive Income" requires "comprehensive income" and the components of
"other comprehensive income" to be reported in the financial statements. Since
the Company does not have any components of "other comprehensive income,"
reported net income is the same as "comprehensive income" for all periods
presented.
Derivatives
In September 1998, the Financial Accounting Standards Board ("FASB") 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 Company adopted SFAS No. 133 as of January 1, 2001, resulting in no
material impact upon adoption.
In April and July 2001, the Company sold notes to Rare Medium totaling $50
million. The notes were collateralized by up to 5 million of the Company's XM
Radio shares held at that time, 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. The Company determined the embedded call options in the notes,
which permitted Rare Medium to convert the borrowings into shares of XM Radio,
to be derivatives which were accounted for in accordance with SFAS No. 133 and
accordingly recorded a gain in the amount of $1.5 million in the third quarter
of 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 million as part of the Company's reorganization.
24
Segment Disclosures
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", the Company had one operating segment: its core
wireless business. The Company provides its core wireless business to the
continental United States, Alaska, Hawaii, and Puerto Rico. The following
summarizes the Company's core wireless business revenue by major market
segments:
Successor Company Predecessor Company
(Restated) (Restated)
Three Months Five Months Three Months Nine Months
Ended Ended Four Months Ended Ended Ended
September 30, September 30, April 30, September 30, September 30,
2002 2002 2002 2001 2001
---- ---- ---- ---- -----
Summary of Revenue
(in millions)
Wireless Internet $5.5 $8.9 $5.6 $3.2 $7.6
Field services 4.0 6.9 5.6 4.4 15.4
Transportation 2.8 4.5 4.1 3.6 11.8
Telemetry 0.6 1.0 0.8 0.7 2.1
Maritime and other 0.1 0.2 0.7 4.8 15.5
--- --- --- --- ----
Service revenue 13.0 21.5 16.8 16.7 52.4
Equipment revenue 0.3 0.5 5.6 6.8 16.3
--- --- --- --- ----
Total $13.3 $22.0 $22.4 $23.5 $68.7
===== ===== ===== ===== =====
The Company does not measure ultimate profit and loss or track its assets by
these market segments.
(Loss) Income 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.
Options and warrants to purchase shares of common stock were not included in the
computation of loss per share as the effect would be antidilutive for all
periods. As a result, the basic and diluted earnings per share amounts for all
periods presented are the same. As of September 30, 2002, there were warrants to
acquire approximately 1,839,962 shares of common stock and options outstanding
for 1,621,975 shares that were not included in this calculation because of their
antidilutive effect for the three and five months ended September 30, 2002. For
the four month period ended April 30, 2002, all options and warrants had
exercise prices in excess of the fair market value of the Company's common
stock, and thus options and warrants were not factored into the per share
calculation. Options to purchase 5,485,088 shares of the Predecessor Company's
stock were outstanding at June 30, 2001. These options were cancelled as part of
the Company's reorganization.
New Accounting Pronouncements
In January 2002, the Company adopted 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
25
the purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires that purchased
goodwill and indefinite-lived intangibles no longer be amortized but instead be
reviewed for impairment and written down in the periods in which the carrying
amount is more than fair value. The Company had approximately $5.0 million of
recorded goodwill as of January 1, 2002. However, as part of the Company's
adoption of fresh-start accounting, the Company's recorded goodwill was reduced
to zero.
The Company accounts for its FCC licenses as finite-lived intangibles and
amortizes them over a 20-year estimated life. As described in Note 6
("Subsequent Events"), the Company is monitoring a pending FCC rulemaking
proposal that may affect its 800 MHz spectrum, and the Company may change its
accounting policy for FCC licenses in the future as new information is
available.
The table below reflects the Company's financial results for the specified
periods as if it had adopted SFAS No. 142 effective January 1, 2001 and
accordingly not amortized its goodwill during 2001.
(Restated)
Predecessor Company
-------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2001
---- ----
(in thousands)
Net loss, as restated $(49,636) $(169,899)
Amortization of goodwill 77 230
-- ---
Pro forma net loss, as restated $(49,559) $(169,669)
========= ==========
Loss per share of common stock, as restated $(0.99) $(3.39)
Amortization of goodwill -- --
-- --
Pro forma loss per share of common stock, as restated $(0.99) $(3.39)
======= =======
On August 16, 2001 the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Specifically, this standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred and to capitalize
the asset retirement cost by increasing the carrying amount of the related
long-lived asset. The capitalized cost is then depreciated over the useful life
of the related asset and the liability is accreted as an operating expense to
the estimated settlement obligation amount. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or incurs a gain or
loss. The Company adopted SFAS No. 143 as of its "fresh-start" accounting date
of May 1, 2002. This adoption had no material impact on the Company's
consolidated financial statements.
On January 1, 2002, the Company 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
26
clearly distinguished from the rest of the entity that will be eliminated from
the ongoing operations of the entity in a disposal transaction. In February
2003, the Company engaged an outside valuation expert to value certain of its
assets as of December 31, 2002 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. The adoption of SFAS No. 144 had no material
impact on the Company's consolidated financial statements.
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 records
such consideration 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.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS
No. 145 rescinded three previously issued statements and amended SFAS No. 13,
"Accounting for Leases". The statement provides reporting standards for debt
extinguishments and provides accounting standards for certain lease
modifications that have economic effects similar to sale-leaseback transactions.
The Company adopted SFAS No. 145 as of its "fresh-start" accounting date of May
1, 2002. In accordance with SFAS No. 145, the Company has reclassified all prior
period extraordinary losses on extinguishment of debt as ordinary non-operating
losses on extinguishment of debt.
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. The Company adopted SFAS No. 146 as of
January 1, 2003.
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 does 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. 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 December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure - an Amendment to SFAS No. 123". SFAS
27
No. 148 provides alternative methods of transition for a voluntary change to the
fair value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 for
public companies. This statement is effective for fiscal years beginning after
December 15, 2002. The Company will adopt the disclosure requirements of SFAS
No. 148 as of January 1, 2003 and plans to continue to follow the provisions of
APB Opinion No. 25 for accounting for stock based compensation.
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. The Company has reviewed the implications that adoption of FIN No. 46
would have on our financial position and results of operations and does not
expect it to 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.
Related Parties
The Company made no payments to related parties for capital assets and
service-related-obligations for the four-month period ended April 30, 2002 and
$408,000 for the five-month period ended September 30, 2002, as compared to
$762,000 in the nine-month period ended September 30, 2001. From related parties
28
the Company did not receive any payments for the five-months ended September 30,
2002 as compared to $1.2 million in the first nine months of 2001. As of
September 30, 2002, the Company had a net due from related parties in the amount
of $0.3 million.
For the three and nine months ended September 30, 2001, the Company recorded
revenue from related parties in the amount of $0.7 million and $2.1 million,
respectively, related to the MSV satellite capacity agreement. There were no
revenues from related parties for the four months ended April 30, 2002 and the
five months ended September 30, 2002.
In May 2002, the Company entered into a consulting agreement with 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. 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 to September 2002, the monthly fee was $55,000. The Company has
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.
In July 2002, the Company's board of directors 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 of December of 2002. Certain affiliates of CTA purchased
the warrants in December 2002.
Mr. Abbruzzese did not participate in the deliberations or vote of the Board of
Directors with respect to the foregoing matters.
Except for the warrant offered to CTA described above, 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 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) some 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.
See Note 6 ("Subsequent Events") for further discussion of other subsequent
related party transactions.
3. LIQUIDITY AND FINANCING
29
Liquidity and Financing Requirements
In January 2002, the Company and three of its wholly-owned subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code. Motient Ventures Holding Inc. did not file for Chapter 11 and
had no activities during the periods presented. The only asset of this
subsidiary is the Company's interest in MSV.
The Company's Plan of Reorganization was confirmed on April 26, 2002 and became
effective on May 1, 2002. After confirmation of the plan, Motient had
approximately $30.7 million of debt, comprised of capital leases, notes payable
to Rare Medium and CSFB and a vendor financing facility with Motorola, Inc.
("Motorola").
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. For a description of the Company's significant cost reduction initiatives
after the end of the period covered by this report, please see Note 6
("Subsequent Events").
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 the Company's key
resellers, on whom the Company relies for a majority of its new revenue growth,
and the Company's continued limited liquidity which has hindered efforts at
demand generation.
In addition to cash generated from operations, the Company holds a $15 million
promissory note issued by MSV in November 2001. This note matures in November
2006, but may be fully or partially repaid prior to maturity, subject to certain
conditions and priorities with respect to payment of other indebtedness, in
certain circumstances involving the consummation of additional investments in
MSV. Under the terms of the Company's $19.75 million of notes issued to Rare
Medium and CSFB in connection with its Plan of Reorganization, in certain
circumstances the Company must use 25% of any proceeds from the repayment of the
$15 million note from MSV to repay the Rare Medium and CSFB notes, on a pro-rata
basis. For a discussion of certain recent developments regarding MSV, please see
Note 6 ("Subsequent Events"). There can be no assurance that the MSV note will
be repaid prior to maturity, or at all.
Subsequent to the end of the period covered by this report, the Company entered
into a $12.5 million term credit facility. Please see Note 6 ("Subsequent
Events") for a discussion of this facility and related defaults and waivers and
the borrowing availability period.
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.
The Company continues to pursue all potential funding alternatives. Among the
alternatives for raising additional funds are the issuance 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