Registration No. 333-[ ]
As filed with the Securities and Exchange Commission on November 2, 2005
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MOTIENT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 4812 93-0976127
(State of Incorporation) (Primary S.I.C. Code Number) (I.R.S. Employer
Identification No.)
300 Knightsbridge Pkwy.
Lincolnshire, IL 60069
(847) 478-4200
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Robert L. Macklin
General Counsel and Secretary
300 Knightsbridge Pkwy.
Lincolnshire, Il 60069
(847) 478-4200
(Name, Address, Including Zip Code, And Telephone Number,
Including Area Code, Of Agent For Service)
Approximate Date Of Commencement Of Proposed Sale To The Public:
From time to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Title of each class of Amount to Proposed maximum Proposed maximum aggregate Amount of
securities to be registered be registered(1)(2) offering price per share (3) offering price (3) registration fee
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<S> <C> <C> <C> <C>
Common Stock, par value 11,235,465 shares $16.00 $179,767,440 $21,159
$0.01 per share
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(1) This Registration Statement also relates to such indeterminate number of
additional shares of the registrant's common stock as may become issuable in the
event of a stock dividend, reverse stock split, split-up, recapitalization or
other similar event.
(2) Consists of (i) 9,509,019 shares of common stock issuable upon conversion of
shares of Series B Cumulative Convertible Preferred Stock only if the selling
stockholder elect to convert such shares into shares of common stock, (ii)
120,156 shares of common stock underlying unvested warrants that may be issued
to the selling stockholders only if and when such selling stockholders exercise
their warrants to acquire such shares, and (iii) 1,606,288 shares of common
stock that may be issued as dividends on the Series B Cumulative Convertible
Preferred Stock.
(3) Calculated in accordance with Rule 457(c) under the Securities Act of 1933
based on the average of the bid and asked price per share of our common stock on
October 31, 2005, as reported in the Pink Sheets.
----------------------
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said section 8(a),
may determine.
The information in this prospectus is not complete and is subject to change. The
selling stockholders may not sell these securities until the registration filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and we are not soliciting offers to buy these
securities in any state where an offer or sale of these securities is not
permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 2, 2005
PROSPECTUS
MOTIENT CORPORATION
11,235,465 SHARES
COMMON STOCK
This prospectus relates solely to the offer and sale by the selling
stockholders identified in this prospectus of up to 11,235,465 shares of our
common stock. The selling stockholders are offering all of the shares to be sold
in the offering, but they are not required to sell any of these shares. The
selling stockholders may sell the offered shares in public or private
transactions, at prevailing market prices or at privately negotiated prices in
transactions that may or may not involve the Pink Sheets. In connection with
these sales, the selling stockholders may use underwriters, broker-dealers, or
agents, who may receive compensation or commissions for the sales. We will incur
expenses in connection with the registration of the common stock, but we will
not receive any of the proceeds from the sale of our common stock by the selling
stockholders.
Our common stock is not listed on any national securities exchange or on the
NASDAQ Stock Market. Our common stock is quoted on the Pink Sheets under the
symbol "MNCP". On October 26, 2005, the last reported bid price for our common
stock was $16.90.
--------------------------
The purchase of our common stock involves a high degree of risk. See
"Risk Factors" beginning on Page 6 for a discussion of factors that you should
carefully consider before purchasing the shares offered by this prospectus.
--------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------------------
The date of this Prospectus is ______, 2005.
TABLE OF CONTENTS
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Page
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Cautionary Note Regarding Forward-Looking Statements............................................................ 1
Prospectus Summary.............................................................................................. 2
Risk Factors.................................................................................................... 6
Use of Proceeds................................................................................................. 12
Determination of Offering Price................................................................................. 12
Price and Related Information Concerning Registered Shares...................................................... 13
Selected Financial Data......................................................................................... 14
Selected Pro Forma Financial Data............................................................................... 18
Selected Quarterly Financial Data............................................................................... 24
Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 26
Business........................................................................................................ 60
Management...................................................................................................... 78
Certain Relationships and Related Transactions.................................................................. 83
Principal Stockholders.......................................................................................... 85
Selling Stockholders............................................................................................ 87
Description of Motient's Securities............................................................................. 91
Shares Eligible for Future Sale................................................................................. 96
Plan of Distribution............................................................................................ 97
Legal Matters................................................................................................... 98
Experts......................................................................................................... 98
Where You Can Find More Information............................................................................. 99
Index to Motient Financial Statements........................................................................... F-0
Index to TerreStar Financial Statements......................................................................... T-0
Index to MSV Financial Statements............................................................................... M-0
</TABLE>
If it is against the law in any state to make an offer to sell these shares, or
to solicit an offer from someone to buy these shares, then this prospectus does
not apply to any person in that state, and no offer or solicitation is made by
this prospectus to any such person.
You should rely only on the information provided or incorporated by reference in
this prospectus or any supplement. Neither we nor any of the selling
stockholders have authorized anyone to provide you with different information.
You should not assume that the information in this prospectus or any supplement
is accurate as of any date other than the date on the front of this prospectus
or any supplement.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements regarding our
expected financial position and operating results, our business strategy, and
our financing plans are forward-looking statements. These statements can
sometimes be identified by our use of forward-looking words such as "may,"
"will," "anticipate," "estimate," "expect," "project," or "intend." These
forward-looking statements reflect our plans, expectations and beliefs and,
accordingly, are subject to certain risks and uncertainties. We cannot guarantee
that any of such forward-looking statements will be realized.
Statements regarding factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements, or cautionary
statements, include, among others, those under the captions "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview," and elsewhere in this prospectus, including in
conjunction with the forward-looking statements included in this prospectus. All
of our subsequent written and oral forward-looking statements (or statements
that may be attributed to us) are expressly qualified by the cautionary
statements. You should carefully review the risk factors described in our other
filings with the Securities and Exchange Commission from time to time, including
our reports on Forms 10-Q and 10-K which will be filed in the future, as well as
our other reports and filings with the SEC.
Our forward-looking statements are based on information available to us today,
and we will not update these statements. Our actual results may differ
significantly from the results discussed.
1
PROSPECTUS SUMMARY
This summary outlines and highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including the "Risk
Factors" section and the financial statements and related notes before you make
an investment decision.
Whenever we refer in this prospectus to "Motient," "the Company," "we," "us," or
"our," we mean Motient Corporation, a Delaware Corporation, and, unless the
context indicates otherwise, its predecessors and subsidiaries, including its
majority owned subsidiary, TerreStar Networks Inc.
Our Business Segments
Motient owns, operates and develops two-way wireless communications businesses.
We are currently developing a satellite communications service via our majority
ownership of TerreStar Networks Inc., a development stage company in the process
of building its first satellite. TerreStar was formerly a subsidiary of another
satellite communications company, Mobile Satellite Ventures LP, or MSV, as it is
commonly known. We own 49% of MSV, but do not have operating control of its
business. In addition, we own and operate a two-way wireless data network (our
DataTac network) which we use to provide our customers with two-way wireless
data communication services, and we also have the capabilities to provide our
customers with convenient and cost-effective access to other wireless data
networks, such as the Sprint and Cingular networks.
In September, 2005, we announced a transaction that would result in the
consolidation of the ownership of MSV and TerreStar within Motient, thereby
simplifying the ownership and governance of both and better enabling them to
pursue more effectively their deployment of separate hybrid satellite and
terrestrial based communications networks. We also announced that this
transaction would likely lead to the spin-off of TerreStar as well.
Our Satellite Communications Business - TerreStar
On May 11, 2005, we acquired approximately an additional 13.4% ownership in
TerreStar Networks, Inc. for a total ownership interest of 61% in, and operating
control over TerreStar. Prior to that date, TerreStar was a subsidiary of MSV
established to, among other things, develop a satellite communications system
using frequencies in the 2 GHz frequency band that are part of what is often
known as the "S-band." We acquired our ownership interest in TerreStar when, in
conjunction with a spin-off of TerreStar to the owners of MSV, we purchased an
additional $200 million of newly-issued TerreStar common stock. In conjunction
with this transaction, TerreStar also received a perpetual, royalty-free license
to utilize MSV's patent portfolio, including those patents related to "ancillary
terrestrial component", or ATC, which we anticipate will allow us to deploy a
communications network that seamlessly integrates satellite and terrestrial
communications, giving a user ubiquitous wireless coverage across North America.
By offering Mobile Satellite Service, or MSS, in the S-band in conjunction with
ATC, TerreStar can effectively deploy a hybrid satellite and terrestrial
wireless communications network. This network could, for instance, eventually
allow a user to utilize a mobile device that would communicate with a
traditional land-based wireless network when in range of that network, but
communicate with a satellite when not in range of such a land-based network.
These mobile devices could be used for a myriad of communications applications,
including potentially voice, data and video services.
TerreStar is currently in the process of building its first satellite pursuant
to a construction contract with Space Systems/Loral, Inc. This satellite is
scheduled to be completed in November 2007, with commercial operations scheduled
to begin in 2008. Once launched, the satellite, with an antenna almost sixty
feet across, will be able to communicate with terrestrial base stations and
standard wireless devices.
2
Our ability to offer these services depends on TerreStar's right to receive
certain regulatory authorizations allowing it to provide MSS in the S-band.
These authorizations are subject to various regulatory milestones relating to
the construction, launch, and operational date of the satellite system required
to provide this service. In order to use ATC, TerreStar will need to apply for
authority with the FCC, which it has not yet done. For additional information
regarding TerreStar, please see the financial statements of TerreStar beginning
on page T-1.
Our Terrestrial Wireless Business - Motient Communications Inc.
We provide two-way, wireless data transmission services and wireless internet
access on a nationwide basis through our wholly-owned subsidiary, Motient
Communications Inc. Our customers can access several different wireless
communications networks, including the wireless networks of Sprint, Cingular and
our own DataTac network. We can also sell and support multiple software
applications and communications devices for use on all of those wireless
networks. Additionally, we can also design and manage various custom wireless
applications our customers may need. In seeking to meet the wireless needs our
customers, we have the ability to:
o provide access to multiple wireless networks, including GPRS
(Cingular), 1XRTT (Sprint), and our own proprietary DataTac network
and integrate the access to those networks in a single, seamless
solution;
o support wireless data systems used by companies involved in data
transmission and processing, so they can connect remote equipment,
such as wireless point-of-sale terminals, with a central monitoring
facility;
o support mobile data and mobile management systems used by
transportation and other companies so they can wirelessly coordinate
remote, mobile assets and personnel; and
o sell and support various two-way wireless internet services, including
BlackBerry TM wireless email service, providing personal consumers and
corporate customers with wireless access to a broad range of email and
information services via our own DataTac wireless radio data network
or via other GPRS or 1XRTT wireless radio data networks.
Mobile Satellite Ventures
We directly and indirectly own 49% of Mobile Satellite Ventures LP, or MSV, a
provider of mobile satellite-based communications services. MSV uses two
satellites to provide service, which allow customers access to satellite-based
wireless data, voice, fax and dispatch radio services almost anywhere in North
and Central America, northern South America, the Caribbean, Hawaii and in
various coastal waters.
MSV is also developing a next-generation system, a hybrid satellite/terrestrial
wireless network over North America that MSV expects will utilize new satellites
working with MSV's patented ATC technology. With access to over 28 MHz of L-band
spectrum, MSV expects to be able to deploy terrestrial two-way radio network
technology in thousands of locations across the United States, allowing
subscribers to integrate satellite-based communications services with more
traditional land-based wireless communications services. MSV is headquartered in
Reston, VA, with an office in Ottawa, ON, Canada.
3
MSV is structured as a limited partnership, of which Motient is one of the
limited partners. Motient also holds a proportionate ownership interest in the
corporate general partner. Motient has certain rights to appoint directors to
the sole general partner of the limited partnership, but does not have any
direct or indirect operating control over MSV. For additional information
regarding MSV, please see the financial statements of MSV beginning on page M-1.
Acquisition of MSV and TerreStar
On September 22, 2005, we announced that we had entered into a non-binding
letter of intent to consolidate the ownership of MSV and TerreStar within
Motient. We anticipate that this transaction will, if consummated, simplify the
ownership and governance of both MSV and TerreStar, better enabling both of them
to more effectively pursue deployment of their separate hybrid satellite and
terrestrial based communications networks. The networks will be able to provide
ubiquitous wireless coverage in North America in the L-band and S-band,
respectively. The letter of intent sets forth the basic terms of the proposed
transaction, which include, among other things, (i) our issuance of
approximately 93 million chares of our common stock in exchange for the MSV
interests and TerreStar shares not already owned by us, (ii) a possible spin-off
of TerreStar after the closing (the spin-off would be executed if it is judged
by Motient's Board of Directors to be in the best interests of its stockholders
following the closing), and (iii) the reconstitution of the boards of Motient,
MSV and TerreStar with nine members mutually acceptable to the parties and in
compliance with the independence rules and regulations of NASDAQ. The interests
of MSV and TerreStar held by one of the owners, TMI Communications and Company,
will not be transferred at the time of the closing. Instead, TMI would receive
the right to exchange its interests in MSV and TerreStar at any time at the same
exchange ratios that are being offered to the other shareholders and would
subscribe for shares of a new class of Motient preferred stock with nominal
economic value but having voting rights in Motient equivalent to those TMI would
receive upon exchange of its MSV and TerreStar interests for Motient common
stock. The consummation of the transaction will require successful completion of
due diligence, negotiation and execution of definitive documentation, board and
stockholder approval, and various regulatory approvals. Because the letter of
intent is non-binding, the parties have no obligation to negotiate such
documentation or otherwise consummate the transactions. Therefore, the
transactions may not be consummated on the currently proposed terms or may never
be consummated.
Business Structure
As of October 27, 2005, we have six wholly-owned subsidiaries, a 61% ownership
interest in, and operating control of, TerreStar, and a 49% direct and indirect
interest in MSV. Motient Communications Inc. owns the assets comprising
Motient's terrestrial wireless business, except for Motient's Federal
Communications Commission, or FCC, licenses, which are held in a separate
subsidiary, Motient License Inc. TerreStar holds all of the satellite assets
that Motient has operating control over. Motient's other subsidiaries have no
material assets other than Motient's ownership interests in MSV and Motient's
various subsidiaries.
We are a Delaware corporation with our principal executive offices located at
300 Knightsbridge Parkway, Lincolnshire, Illinois 60069. Our telephone number is
(847) 478-4200. TerreStar is headquartered in Reston, Virginia. You may find all
of our public filings with the Securities and Exchange Commission in the
"Investor Relations" section of our website, www.motient.com.
4
THE OFFERING
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<S> <C>
Common stock offered by the selling stockholders.................... 11,235,465 consisting of 9,509,019 shares of common stock
issuable upon conversion of shares of Series B Cumulative
Convertible Preferred Stock, 120,156 shares of common stock
underlying warrants, and 1,606,288 shares of common stock
that may be issued as dividends on the Series B Cumulative
Convertible Preferred Stock.
Common stock outstanding as of October 27, 2005..................... 62,527,413 shares
Series A preferred stock outstanding as of October 27, 2005......... 90,000 shares
Series B preferred stock outstanding as of October 27, 2005......... 318,500 shares
Use of proceeds..................................................... All of the net proceeds from the sale of the common
stock covered by this prospectus will go to the selling
stockholders who offer and sell shares of the common
stock. We will not receive any proceeds from the sale of
the common stock offered by the selling stockholders.
Trading symbol...................................................... MNCP
</TABLE>
SUMMARY FINANCIAL DATA
The following table summarizes our financial results as of and for the fiscal
years ended December 31, 2000 through December 31, 2004. The consolidated
balance sheet data and the consolidated statement of operations data as of
December 31, 2000, 2001 and 2002 are derived from the consolidated financial
statements of Motient, which were audited by Ehrenkrantz Sterling & Co. LLC, an
independent registered public accounting firm. The consolidated balance sheet
data and the consolidated statement of operations data as of December 31, 2003
and 2004 are derived from the consolidated financial statements of Motient,
which were audited by Friedman LLP, successors-in-interest to Ehrenkrantz
Sterling & Co. LLC, an independent registered public accounting firm. You should
also read the section in this prospectus captioned "Selected Financial Data,"
our audited financial statements and their accompanying notes, and "Management's
Discussion and Analysis of Financial Condition and Results of Operation," all of
which are included elsewhere in this prospectus. The financial statements for
certain historical periods have been restated to give effect to the accounting
treatment with respect to transactions and certain additional financial
statement adjustments discussed more fully in the notes to the consolidated
financial statements. Motient's plan of reorganization in bankruptcy became
effective on May 1, 2002.
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<CAPTION>
Years Ended December 31,
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2000 2001 2002 2003 2004
-------------- -------------- ------------- ------------ -------------
Income Statement Data: (dollars in thousands. except for per share data)
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<S> <C> <C> <C> <C> <C>
Revenues $ 95,756 $ 90,265 $ 58,990 $ 54,485 $ 36,880
Net income (loss) before XM Radio
preferred stock dividend and
beneficial conversion charges (142,563) (269,497) 172,420 (62,122) (72,329)
XM Radio preferred stock dividend
and beneficial conversion charges -- -- 49,519 -- --
Net income (loss) attributable to
Common Stockholders (192,082) (269,497) 172,420 (62,122) (72,329)
Basic and diluted Income (loss) per
common share $ (3.89) $ (5.27) $ 1.61 $ (2.47) $ (2.21)
Dividends on Common Stock -- -- -- -- --
Consolidated Balance Sheet Data:
Cash and Cash Equivalents $ 227,423 $ 33,387 $ 5,840 $ 3,618 $ 16,945
Property and Equipment, net 175,706 64,001 46,405 31,381 17,261
Total Assets 1,572,036 240,465 202,221 157,028 248,080
Current Liabilities 149,763 440,962 25,260 31,032 12,674
Long-Term Liabilities 753,376 30,652 33,913 33,189 675
Minority Interest 648,613 -- -- -- --
Stockholders' Equity (Deficit) $ 20,584 $ (231,149) $ 143,048 $ 92,807 $ 234,731
</TABLE>
5
RISK FACTORS
An investment in our common stock involves risks. Any of the following risks, as
well as other risks and uncertainties, could harm our business and financial
results and cause the value of our securities to decline, which in turn could
cause investors to lose all or part of their investment in us. The risks below
are not the only ones we face. Additional risks not currently known to us, or
that we currently deem immaterial also may impair our business.
We have undergone significant organizational restructuring and we face
substantial operational challenges in our Terrestrial wireless business.
We have been forced to take material actions to reduce operating costs in our
terrestrial wireless business. The elimination of certain sales and other
personnel may have a negative effect on our future revenues and growth prospects
and our ability to support new product initiatives and generate customer demand.
In addition, over the course of 2004 we removed unneeded capacity across the
network by deconstructing under-utilized and un-profitable base stations. In
addition, during the first quarter of 2005, Motient initiated a plan to refocus
its DataTac network primarily on the top 40 Metropolitan Statistical Areas
(MSAs). This plan involves the decommissioning of DataTac network components and
termination of service in previously served MSAs above Top 40, and is
substantially complete. Motient has been faced with the loss of certain FCC
licenses in those decommissioned areas. Motient anticipates that if it is not
able to sell, lease or otherwise monetize these frequencies promptly, it may be
forced to return the underlying licenses to the FCC. We have discussed these
changes to our network with many of our customers to assist them in evaluating
the potential impact, if any, to their respective communications requirements.
These reductions in network capacity and coverage may have a negative effect on
our future revenues and growth prospects.
We Are Not Cash Flow Positive, And We Will Need Additional Liquidity To Fund Our
Operations And Fully Fund All Of The Necessary TerreStar Capital Expenditures.
We do not generate sufficient cash from operations to cover our operating
expenses, and it is unclear when, or if, we will be able to do so. Even if we
begin to generate cash in excess of our operating expenses, we expect to require
additional funds to meet capital expenditures and other non-operating cash
expenses, including but not limited to capital expenditures required to complete
and launch TerreStar's satellite currently under construction. We currently
anticipate that the funding requirements of Motient (including TerreStar) for
the next 12 months should be met through a combination of various sources,
including:
o cash on hand,
o cash from our April 2005 private placement of preferred stock,
o cash from a rights offering announced in December 2004, and,
o cash from the exercise of outstanding options and warrants.
There can be no assurance that the foregoing sources of liquidity will provide
sufficient funds in the amounts or at the time that funding is required.
Moreover, TerreStar will continue to require significant additional funding
beyond these sources, and there can be no assurance that we will be able to
provide this funding when necessary.
In addition, if our ability to realize such liquidity from any such source is
delayed or the proceeds from any such source are insufficient to meet our
expenditure requirements as they arise, we will seek additional equity or debt
financing, although such additional financing may not be available on reasonable
terms, if at all.
6
We Will Continue To Incur Significant Losses.
If we do not become profitable, we could have difficulty obtaining funds to
continue our operations. We have incurred net losses every year since we began
operations. These losses are due to the costs of developing and building our
network and the costs of developing, selling and providing products and
services. Although we have significantly reduced our losses, we will continue to
have losses in the future.
We May Not Be Able To Realize Value From Our Investment In TerreStar Or MSV Due
To Risks Associated With Their Next-Generation Business Plans.
The business plans of both TerreStar and MSV involve the development of a
next-generation network that combines satellite services with ancillary
terrestrial components, or ATC, which is novel and without established
precedent. Neither TerreStar, MSV nor any other company has developed an
integrated hybrid network combining satellite services with ATC, and their
success will depend on several factors, including:
o the ultimate resolution of pending FCC and court proceedings with
respect to MSV's L-band license and TerreStar's S-band authorizations,
including but not limited to the ultimate S-band spectrum allocation
granted to TerreStar;
o TerreStar's and MSV's ability to effectively make use of spectrum;
o TerreStar's and MSV's ability to structure partnerships to fund its
next generation system consistent with various regulations governing
ownership and operation of satellite assets, regulations concerning
the utilization of ATC;
o TerreStar's and MSV's ability to coordinate with other satellite
system operators to optimize both its overall spectrum access and the
utility of its spectrum for certain wireless protocols;
o whether the price paid for spectrum in prior transactions is
indicative of the future value of TerreStar's and MSV's spectrum
assets and TerreStar's and MSV's ability to effect transactions that
realize the value of such spectrum assets;
o the supply of available wireless spectrum in the marketplace;
o TerreStar's and MSV's ability to develop and integrate the complex
technologies associated with its next-generation system as well as
appropriately and effectively manage interference;
o TerreStar's and MSV's ability to develop and deploy innovative network
management techniques to permit mobile devices to seamlessly
transition between satellite and terrestrial mode;
o the construction, delivery and launch of TerreStar's and MSV's
next-generation satellites and the maintenance of MSV's existing
geostationary satellites;
o TerreStar's and MSV's ability to obtain funding for the construction
of the satellite component of its next-generation service on favorable
terms;
7
o TerreStar's and MSV's dependence on one or more third party partners
to construct the terrestrial base station component of its
next-generation network, if it does not obtain other funding for this
construction;
o market acceptance and level of demand for TerreStar's and MSV's
next-generation network; and
o protection of MSV's proprietary information and intellectual property
rights, and the protection of TerreStar's license to such information
and rights.
If MSV or TerreStar is unable to implement its next-generation business
strategy, our investments in MSV and TerreStar could be materially and adversely
affected.
We May Not Be Able To Effectively Execute TerreStar's Business Plan.
As the majority shareholder of TerreStar, Motient will have the ability and
obligation to ensure that TerreStar can successfully execute its business plan.
We have not been a majority shareholder in a satellite communications company
since we sold MSV in November 2001. Accordingly, Motient has limited experience
in running a satellite communications business. If Motient is unable to retain
personnel with sufficient expertise in such matters, Motient may be unable to
execute the business plan of TerreStar. If Motient is unable to do so, the value
of our investment in TerreStar will be negatively impacted.
Funding Requirements For TerreStar May Jeopardize Our Investment In, And Control
Over, TerreStar.
The implementation of TerreStar's business plan, including the construction and
launch of a satellite system and the necessary terrestrial components of an
ATC-based communications system will require significant additional funding. If
Motient is unable or unwilling to provide such funding to TerreStar, then
TerreStar may be forced to seek funding from third parties that may dilute
Motient's equity investment in TerreStar. Such dilution, if sufficiently severe,
may limit Motient's control over TerreStar.
We Could Lose Market Share And Revenues As A Result Of Increasing Competition
From Companies In The Wireless Communications Industry That Have Greater
Resources, Name Recognition And Newer Technologies.
We face intense competition in all of our markets, which could result in
continuing losses of customers and lower revenues and could make it more
difficult for us to enter new markets. Our competitors include service providers
in several markets -- dedicated mobile data, personal communications service, or
PCS, narrowband PCS/enhanced paging and emerging technology platforms. The
growth in wireless data opportunities has led traditional hardware manufacturers
and software developers to invest in technologies that will allow the migration
of core products and services to a mobile environment.
We Generate A Large Part Of Our Revenues And Cash Flows From A Small Number Of
Customers On Our Datatac Network, And The Loss Of One Or More Key Customers
Could Result In A Significant Reduction In Revenues And Cash Flows.
For the year ended December 31, 2004, four customers accounted for approximately
40% of our service revenue, with one of those customers, SkyTel Communications,
Inc., accounting for more than 22%. None of these significant customers is
obligated to purchase any minimum quantity of airtime, service or hardware from
us. There can be no assurance that the revenue generated from our largest
8
customers will continue in future periods. We may lose certain revenues from
major customers due to churn, migration to alternative technologies, or the
impact of our recent network rationalization efforts. The loss of one or more of
our key customers, a material reduction in such customers' use of our network,
or any other event, occurrence or development which adversely affects our
relationship with one or more of these customers, could harm our business by
reducing revenue and reducing net cash flow from operations.
The Value Of Our Intangible Assets In Our Financial Statements Is Based On
Assumptions And Estimates, Which May Not Be Correct.
The valuation of our intangible assets is based various assumptions and other
considerations, including the assumptions and estimates related to future
periods that we used to determined these values. Although we have attempted to
be as accurate as possible in making and applying the assumptions and estimates
used in the valuation of our intangible assets, including but not limited to
those outlined here, we can provide no assurances that these assumptions and
estimates for future periods will ultimately be proven correct. Our actual
operating results for future periods may be materially different than our
assumptions and estimates for future periods, which may cause the actual value
of these assets to be materially different than our estimates. We will test
these assets in the future for impairment, which may result in the book value
of these assets to decrease.
We May Not Be Able To Develop, Acquire And Maintain Proprietary Information And
Intellectual Property Rights, Which Could Limit The Growth Of Our Business And
Reduce Our Market Share.
Our terrestrial and satellite wireless communications business depends on
technical knowledge, and we believe that our future success is based, in part,
on our ability to keep up with new technological developments and incorporate
them in our products and services. We own or have the right to use certain of
our work products, inventions, designs, software, systems and similar know-how.
While we have taken steps to diligently protect that information, there is no
assurance that the information will not be disclosed to others or that others
will not independently develop similar information, systems and know-how.
Protection of our information, systems and know-how may result in litigation,
the cost of which could be substantial. There is also no assurance that third
parties will not assert claims that our products or services infringe on their
proprietary rights.
We also rely on some technologies licensed from third parties, including but not
limited to the intellectual property related to ancillary terrestrial component
from MSV. We cannot be sure that these licenses will remain available on
commercially reasonable terms or at all. The loss of these technologies could
require us to obtain substitute technology of lower quality or performance
standards or at a greater cost, which could harm our business.
Government Regulation May Increase Our Cost Of Providing Services, Slow Our
Expansion Into New Markets, Subject Our Services To Additional Competitive
Pressures And Affect The Value Of Our Common Stock.
Motient's ownership and operation of wireless communication systems are subject
to significant regulation by the FCC under authority granted by the
Communications Act of 1934 and related federal laws. There is no assurance that
the rules and regulations of the FCC will continue to support our operations as
presently conducted, in the case of our DataTac network, or as we plan to
conduct such operations, in the case of TerreStar. Motient's 800 MHz licenses
are subject to renewal by the FCC, and we cannot guarantee that all such
licenses will be renewed and that the requisite frequencies will be coordinated.
Moreover, the recent changes to our wireless network, specifically the future
9
discontinuance of service to certain smaller markets, may result in the loss of
our FCC licenses in such markets. In addition, TerreStar has not yet secured the
transfer of the 2 GHz S-band authorizations from TMI Communications and Company
Limited. If it is unable to secure the transfer of those authorizations, it will
be unable to operate its planned 2 GHz satellite communications service. Current
federal law requires prior FCC approval of greater than 25% ownership of Motient
by citizens or entities of foreign countries, which could limit the value of our
common stock.
Motient's Competitive Position May Be Harmed If The Wireless Terrestrial Network
Technology It Licenses From Motorola Is Made Available To Competitors.
Motient holds a non-exclusive license to use a single frequency reuse
technology. The terrestrial network, and some of its competitive strengths, such
as in-building penetration, is based upon this technology. Under the terms of
the non-exclusive license, Motorola could enter into arrangements to license
this technology to any of our competitors, and those agreements could harm our
ability to compete.
We Do Not Expect To Pay Any Dividends On Our Common Stock For The Foreseeable
Future.
We have never paid cash dividends on our common stock and do not anticipated
that any cash dividends will be paid on the common stock for the foreseeable
future. The payment of any dividend by us will be at the discretion of our board
of directors and will depend on, among other things, our earnings, capital
requirements and financial condition. In addition, pursuant to the terms of the
Series A and Series B Preferred, no dividends may be declared or paid, and no
funds shall be set apart for payment, on shares of Motient common stock, unless
(i) written notice of such dividend is given to each holder of shares of Series
A and Series B Preferred not less than 15 days prior to the record date for such
dividend and (ii) a registration statement registering the resale of shares of
common stock issuable to the holders of the Series A and Series B Preferred has
been filed with the SEC and is effective on the date Motient declares such
dividend. Also, under Delaware law, a corporation cannot declare or pay
dividends on its capital stock unless it has an available surplus. Furthermore,
the terms of some of our financing arrangements directly limit our ability to
pay cash dividends on our common stock. The terms of any future indebtedness of
our subsidiaries also may generally restrict the ability of some of our
subsidiaries to distribute earnings or make other payments to us.
Future Sales Of Our Common Stock Could Adversely Affect Its Price And/Or Our
Ability To Raise Capital.
Sales of substantial amounts of common stock, or the perception that such sales
could occur, could adversely affect the prevailing market price of the common
stock and our ability to raise capital. We have announced a rights offering
pursuant to which we may sell up to 2.5 million shares of common stock at $8.57
per share.
We may issue additional common stock in future financing transactions or as
incentive compensation for our executives and other personnel, consultants and
advisors. Issuing any equity securities would be dilutive to the equity
interests represented by our then-outstanding shares of common stock. The market
price for our common stock could decrease as the market takes into account the
dilutive effect of any of these issuances. Finally, if Motient decides to file a
registration statement to raise additional capital (other than the rights
offering mentioned above), some of Motient's existing stockholders hold
piggyback registration rights that, if exercised, will require Motient to
include their shares in the registration statement. Any of these conditions
could adversely affect Motient's ability to raise needed capital.
10
Motient May Have To Take Actions Which Are Disruptive To Its Business To Avoid
Registration Under The Investment Company Act Of 1940.
Motient may have to take actions which are disruptive to its business if it is
deemed to be an investment company under the Investment Company Act of 1940.
Motient's equity investments, in particular its ownership interests in MSV, may
constitute investment securities under the Investment Company Act. A company may
be deemed to be an investment company if it owns investment securities with a
value exceeding 40% of its total assets excluding cash items and government
securities, subject to certain other exclusions. Investment companies are
required to register under and comply with the Investment Company Act unless an
exclusion or SEC safe harbor applies. If Motient were to be deemed an investment
company, it would become subject to the requirements of the Investment Company
Act. As a consequence, Motient would be prohibited from engaging in business as
it has in the past and might be subject to civil and criminal penalties for
noncompliance. In addition, certain of its contracts might be voidable, and a
court-appointed receiver could take control of Motient and liquidate its
business.
We Face Burdens Relating To The Recent Trend Toward Stricter Corporate
Governance And Financial Reporting Standards.
New legislation or regulations that follow the trend of imposing stricter
corporate governance and financial reporting standards, including compliance
with Section 404 of the Sarbanes-Oxley Act of 2002, may lead to an increase in
our costs of compliance. Beginning with our annual report on Form 10-K for the
year ended December 31, 2004, we became required to file our quarterly and
annual reports on an accelerated basis, which we have not been required to do in
the past. A failure to comply with these new laws and regulations may impact
market perception of our financial condition and could materially harm our
business. Additionally, it is unclear what additional laws or regulations may
develop, and we cannot predict the ultimate impact of any future changes.
Failure To Achieve And Maintain Effective Internal Control Over Financial
Reporting In Accordance With Rules Of The Securities And Exchange Commission
Promulgated Under Section 404 Of The Sarbanes-Oxley Act Could Harm Our Business
And Operating Results And/Or Result In A Loss Of Investor Confidence In Our
Financial Reports, Which Could In Turn Have A Material Adverse Effect On Our
Business And Stock Price.
Under rules of the Securities and Exchange Commission promulgated under Section
404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form
10-K for the fiscal year ended December 31, 2004, we were required to furnish a
report by our management on our internal control over financial reporting. In
the course of our assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004, which assessment was conducted
during the fourth quarter of 2004 and the first quarter of 2005 in connection
with the preparation of 2004 audited financial statements and this report, we
identified two material weaknesses in our internal control over financial
reporting. These material weaknesses in our internal control over financial
reporting, as well as any other weaknesses or deficiencies that may exist or
hereafter arise or be identified, could harm our business and operating results,
and could result in adverse publicity and a loss in investor confidence in the
accuracy and completeness of our financial reports, which in turn could have a
material adverse effect on our stock price, and, if such weaknesses are not
properly remediated, could adversely affect our ability to report our financial
results on a timely and accurate basis.
11
Although we believe that we have taken steps to remediate these material
weaknesses, we cannot assure you that this remediation will be successful or
that additional deficiencies or weaknesses in our controls and procedures will
not be identified. In addition, we cannot assure you that our independent
registered public accounting firm will agree with our assessment that our
material weaknesses have been remediated. Our control procedures have been
designed with our current staffing level in mind, and are dependent on each
individual's performance of controls in the required manner. The loss of key
accounting personnel would adversely impact the effectiveness of our control
environment and our internal controls, including our internal controls over
financial reporting.
The Consummation and Potential Impact of the Proposed Consolidation of MSV and
TerreStar by Motient is Uncertain
On September 22, 2005, we announced that we had entered into a non-binding
letter of intent with SkyTerra Communications, Inc. and TMI Communications &
Company, among others, relating to a transaction to consolidate the ownership of
MSV and TerreStar within Motient. The consummation of the transaction will
require successful completion of due diligence, negotiation and execution of
definitive documentation, Motient and SkyTerra board and stockholder approval,
and various regulatory approvals. Because the letter of intent is non-binding,
the parties have no obligation to negotiate such documentation or otherwise
consummate the transactions. Therefore, we can provide no assurances that the
transactions will be consummated on the currently proposed terms or will ever be
consummated, or that the required corporate or regulatory approvals will be
obtained. Moreover, we can provide no assurances that we will be able to
successfully integrate MSV and TerreStar into Motient, or that this integration
will not negatively impact our ability to successfully execute their business
plans.
Ongoing Litigation Could Negatively Impact Our Value and Our Ability to
Successfully Implement Our Business Plan
Certain stockholders affiliated with one of our directors, James D. Dondero,
have initiated multiple lawsuits against Motient. Collectively, these lawsuits
(i) seek damages related to the issuance of our Series A Preferred stock,
including rescission, (ii) seek to enjoin an exchange offer for the Series A
Preferred stock intended to cure any potential defect with the Series A
Preferred stock, and (iii) allege a variety of claims against certain directors,
officers and advisors of Motient, including unjust enrichment and breaches of
fiduciary duty. If Mr. Dondero is successful in his claims, these suits could
materially negatively impact the value of Motient, including but not limited to
requiring Motient to rescind the outstanding Series A Preferred Stock. Although
we believe these suits to be without merit, we can provide no assurances that we
will ultimately prevail in these matters.
USE OF PROCEEDS
The selling stockholders will receive all of the net proceeds from the sale of
the common stock offered by this prospectus. Accordingly, we will not receive
any proceeds from the sale of the common stock.
DETERMINATION OF OFFERING PRICE
The selling stockholders will determine at what price they may sell the offered
shares, and such sales may be made at prevailing market prices, or at privately
negotiated prices.
12
PRICE AND RELATED INFORMATION CONCERNING REGISTERED SHARES
Our common stock is not listed on any national securities exchange or on the
Nasdaq Stock Market. Our common stock has been quoted under the symbol "MNCP" on
the Pink Sheets since May 2, 2002.
The following tables set forth for the period indicated the high and low bid
prices for our common stock for the periods indicated for 2002, 2003, 2004 and
2005.
--------------------------------------------------------------------------------
2005 High Low
--------------------------------------------------------------------------------
First Quarter $ 31.45 $ 21.25
Second Quarter $ 29.00 $ 18.12
Third Quarter $ 26.25 $ 20.25
Fourth Quarter (through October 27, 2005) $ 20.69 $ 16.41
--------------------------------------------------------------------------------
2004 High Low
--------------------------------------------------------------------------------
First Quarter $ 7.45 $ 4.05
Second Quarter $ 14.01 $ 6.15
Third Quarter $ 13.75 $ 8.40
Fourth Quarter $ 23.95 $ 8.80
--------------------------------------------------------------------------------
2003 High Low
--------------------------------------------------------------------------------
First Quarter $ 4.00 $ 2.75
Second Quarter $ 5.75 $ 2.00
Third Quarter $ 6.35 $ 4.35
Fourth Quarter $ 5.55 $ 3.50
--------------------------------------------------------------------------------
2002 High Low
--------------------------------------------------------------------------------
Second Quarter (beginning May 1, 2002) $ 5.90 $ 3.60
Third Quarter $ 4.45 $ 0.75
Fourth Quarter $ 3.40 $ 0.65
The high and low sales prices represent the intra-day prices on the OTC Bulletin
Board during the periods in which we were quoted on the OTC Bulletin Board, and
on the Pink Sheets, thereafter. The quotations represent inter-dealer
quotations, without retail markups, markdowns or commissions, and may not
necessarily represent actual transactions.
On October 26, 2005, the last reported bid price of our common stock was $16.90
per share on the Pink Sheets. As of October 26, 2005, there were approximately
116 record holders of our common stock.
Dividends
We have never declared or paid any cash dividends on our capital stock and do
not plan to pay dividends on our common stock for the foreseeable future. The
payment of any dividend by us, other than dividends on our Series A and Series B
Preferred described above, will be at the discretion of our board of directors
and will depend on, among other things, our earnings, capital requirements and
financial condition. In addition, Pursuant to the terms of the Series A and
Series B Preferred, no dividends may be declared or paid, and no funds shall be
set apart for payment, on shares of Motient common stock, unless (i) written
notice of such dividend is given to each holder of shares of Series A and Series
13
B Preferred not less than 15 days prior to the record date for such dividend and
(ii) a registration statement registering the resale of shares of common stock
issuable to the holders of the Series A and Series B Preferred has been filed
with the SEC and is effective on the date Motient declares such dividend.
Further, under Delaware law, a corporation cannot declare or pay dividends on
its capital stock unless it has an available surplus. Furthermore, the terms of
some of our financing arrangements directly limit our ability to pay cash
dividends on our common stock. The terms of any future indebtedness of our
subsidiaries also may generally restrict the ability of some of our subsidiaries
to distribute earnings or make other payments to us.
Motient is obligated to pay dividends, to the extent we are legally able to do
so, on the Series A and Series B Preferred as follows:
o From April 15, 2005 to April 15, 2007, Motient is required to pay
dividends in cash at a rate of 5.25% per annum (the "Cash Rate") on
the shares of Series A and Series B Preferred. Motient was required to
place the aggregate amount of these cash dividends, $42,892,500, in an
escrow account. These cash dividends will be paid to the holders of
Series A and Series B Preferred from this escrow account in four
semi-annual payments, unless earlier paid pursuant to the terms
described below. The first of these dividends was paid on October 15,
2005.
o From April 15, 2007 to April 15, 2010, Motient is required to pay
dividends on each share of Series A and Series B Preferred either in
cash at the Cash Rate or in shares of Motient common stock at a rate
of 6.25% per annum.
SELECTED FINANCIAL DATA
The following table summarizes our financial results as of and for the fiscal
years ended December 31, 2000 and 2001, the four months ended April 30, 2002,
the eight months ended December 31, 2002, and the years ended December 31, 2003
and 2004. The consolidated balance sheet data and the other consolidated
statement of operations data are derived from the consolidated financial
statements of Motient, which were audited by Ehrenkrantz Sterling & Co. LLC,
independent public accounting firm, except for the December 31, 2003 and 2004
balance sheets, which were audited by Friedman LLP, successors-in-interest to
Ehrenkrantz Sterling & Co. LLC. All of the financial information for Motient up
to and including April 30, 2002 is referred to as "Predecessor Company" results.
The financial information for Motient for the periods subsequent to April 30,
2002 is referred to as the "Successor Company" results.
You should read our selected financial data in conjunction with the information
contained in "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes thereto included elsewhere in this report. In reading the
following selected financial data, please note the following:
o Effective May 1, 2002, as a result of our emergence from bankruptcy,
we adopted "fresh-start" accounting in accordance with American
Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the
Bankruptcy Code". "Fresh-start" accounting has resulted in material
changes to financial statements for periods beginning after May 1,
2002, to reflect adjustments required pursuant to SOP 90-7 to record
assets and liabilities at fair values in accordance with procedures
specified by Statement of Financial Accounting Standards No. 141,
"Business Combinations".
14
o Because the summary financial data below relates to periods prior to
May 1, 2002, the effective date we emerged from bankruptcy, we refer
to the summary financial data as that of the Predecessor Company. Due
to the reorganization and implementation of SOP 90-7, financial
statements issued for periods beginning after May 1, 2002 will not be
comparable to that of the Predecessor Company.
o In November 2002, we initiated a process to seek the concurrence of
the staff of the SEC with respect to our conclusions of the
appropriate accounting for the formation of and certain transactions
with MSV in 2000 and 2001 and the sale of certain of our
transportation assets to Aether Systems in 2000. This process was
completed in March 2003. The staff of the SEC did not object to
certain aspects of our prior accounting with respect to the MSV and
Aether Systems transactions, but did object to other aspects of our
prior accounting for these transactions. For a description of the
material differences between our original accounting treatment with
respect to the MSV and Aether Systems transactions and the revised
accounting treatment that we concluded is appropriate as a result of
this process, please see our current report on Form 8-K dated March
14, 2003.
o As a result of our re-audit of the years ended December 31, 2000 and
2001 performed by, Ehrenkrantz Sterling & Co. LLC, certain additional
financial statement adjustments were proposed and accepted by us for
the periods noted above.
<TABLE>
<CAPTION>
Successor Company
------------------------------------------------
Eight Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
2004 2003 2002
------------- ------------- ---------------
<S> <C> <C> <C>
Revenues $ 36,880 $ 54,485 $ 36,617
Operating Loss (46,587) (48,739) (35,531)
Income (loss) before reorganization items (72,329) (62,122) (58,786)
Reorganization items -- -- (772)
Income tax provision -- -- --
------------- ------------ -------------
Net (loss) income (72,329) (62,122) (59,558)
XM radio preferred stock dividend requirement -- -- --
XM beneficial conversion -- -- --
------------- ------------ -------------
Net (loss) income before cumulative
effect of accounting change $ (72,329) $ (62,122) $ (59,558)
============= ============= =============
Cumulative effect of change in accounting principle -- -- --
Net (loss) income attributable to common shareholders $ (72,329) $ (62,122) $ (59,558)
Basic and diluted net income (loss) per common share $ (2.21) $ (2.47) $ (2.37)
Weighted-average common shares outstanding during the period
- basic and diluted 32,771 25,145 25,097
Total assets 248,080 157,028 202,221
Long term liabilities $ 675 $ 33,189 $ 33,913
</TABLE>
15
<TABLE>
<CAPTION>
Predecessor Company(1)(2)(3)(4)
------------------------------------------------
Four Months (Restated) (Restated)
Ended Year Ended Year Ended
April 30, December 31, December 31,
2002 2001 2000
------------- ------------- ---------------
<S> <C> <C> <C>
Revenues $ 22,373 $ 90,265 $ 95,756
Operating Loss (21,649) (120,491) (191,845)
Income (loss) before reorganization items (24,138) (267,000) (134,851)
Reorganization items 256,116 (2,497) (3,035)
Income tax provision -- -- --
------------- ------------ -------------
Net (loss) income 231,978 (269,497) (137,886)
XM radio preferred stock dividend requirement -- -- (5,081)
XM beneficial conversion -- -- (44,438)
------------- ------------ -------------
Net (loss) income before cumulative effect of accounting change $ 231,978 $ (269,497) $ (187,405)
Cumulative effect of change in accounting principle -- -- (4,677)
------------- ------------ -------------
Net (loss) income attributable to common shareholders $ 231,978 $ (269,497) $ (192,082)
============= ============= =============
Basic and diluted net income (loss) per common share $ 3.98 $ (5.27) $ (3.89)
Weighted-average common shares outstanding during the period
- basic and diluted 58,251 51,136 49,425
Total assets 257,401 240,465 1,572,036
Long term liabilities $ 29,785 $ 30,652 $ 753,376
</TABLE>
(1) Motient restated certain of its financial data reflected above to reflect
certain transactions with MSV in 2000 and 2001, the sale of assets to
Aether Systems in 2000 and certain additional adjustments.
(2) As of December 31, 2000, we had an equity interest of approximately 33.1%
(or 21.3% on a fully diluted basis) in XM Radio, a public company that
launched its satellite radio service at the end of 2001, and we controlled
XM Radio through our board of director membership and common stock voting
rights. As a result, all of XM Radio's results for the period from July 7,
1999 (the date we acquired 100% voting interest of XM Radio) through
December 31, 2000 have been included in our consolidated financial
statements. Prior to July 7, 1999, our investment in XM Radio was accounted
for pursuant to the equity method of accounting. In January 2001, pursuant
to FCC approval to cease to control XM Radio, the number of directors that
we appointed to XM Radio's board of directors was reduced to less than 50%
of XM Radio's directors, and we converted a portion of our super-voting
Class B common stock of XM Radio to Class A common stock. As a result, we
ceased to control XM Radio, and as of January 1, 2001, we accounted for our
investment in XM Radio pursuant to the equity method of accounting. During
2001, we disposed of all of our remaining shares of XM Radio and ceased to
hold any interest in XM Radio as of November 19, 2001.
16
(3) In June 2000, we formed a joint venture subsidiary, MSV, in which we owned
80% of the membership interests. The remaining 20% interests in MSV were
owned by three investors unrelated to Motient; however, the minority
investors had the right to participate in certain MSV business decisions
that were made in the normal course of business; therefore, in accordance
with EITF Issue No 96-16, "Investor's Accounting for an Investee When the
Investor Has a Majority of the Voting Interest but the Minority Shareholder
or Shareholders Have Certain Approval or Veto Rights", our investment in
MSV has been recorded for all periods presented in the consolidated
financial statements included in this prospectus pursuant to the equity
method of accounting. On November 26, 2001, Motient sold the assets
comprising its satellite communications business to MSV.
(4) In November 2000, Motient sold assets related to its retail transportation
business to Aether Systems. Concurrently with the closing of the asset
sale, we and Aether Systems entered into two long-term, prepaid network
airtime agreements with a total value of $20 million, of which $5 million
was paid at closing, pursuant to which Aether Systems agreed to purchase
airtime on Motient's satellite and terrestrial networks. Aether Systems
also became an authorized reseller of Motient's eLink and BlackBerry TM by
Motient wireless email service offerings. Aether Systems acquired all of
the assets used or useful in the retail transportation business, and
assumed the related liabilities. Aether Systems also purchased the existing
inventory in the business.
17
PRO FORMA FINANCIAL DATA
Introduction to Unaudited Pro Forma Consolidated Financial Statements
The following unaudited pro forma financial statements reflect adjustments to
Motient's historical consolidated balance sheet as of June 30, 2005 and
statements of operations for the six months ended June 30, 2005 and the twelve
months ended December 31, 2004, to give effect to the May 11, 2005, purchase by
Motient of 8,190,008 shares of newly issued common stock of TerreStar Networks
Inc. for $200 million, and the simultaneous spin-off by Mobile Satellite
Ventures LP of TerreStar to MSV's owners. Motient anticipates that TerreStar
will allow it to provide Mobile Satellite Service, or MSS, in the S-band in
conjunction with ancillary terrestrial component, or ATC, which allows the
integration of satellite based two-way communications services with land-based
two-way communications services. ATC could eventually allow a user to utilize a
mobile phone which would communicate with a traditional land-based wireless
network when in range of that network, but communicate with a satellite when not
in range of such a land-based network. The unaudited consolidated pro forma
statements of operations for the six months ended June 30, 2005 and the twelve
months ended December 31, 2004 reflect adjustments to Motient's historical
consolidated statements of operations as if the spin-off of TerreStar and
Motient's subsequent investment had occurred at January 1, 2005 and January 1,
2004, respectively..
The unaudited consolidated balance sheet is as was reported in the interim
financial statements filed on Form 10-Q as of June 30, 2005. The initial Series
A Preferred Stock sale is included in the Balance Sheet at June 30, 2005.
Conversion rights would not result in any pro forma adjustment to the June 30,
2005 Balance Sheet as filed.
These unaudited pro forma consolidated financial statements are not necessarily
indicative of what the actual results of operations of Motient would have been
assuming these transactions had been completed, nor do they purport to represent
what Motient's consolidated financial statements will be for future periods.
They should be read in conjunction with the historical financial statements and
related notes of Motient.
18
Motient Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, 2005
-------------
ASSETS (Unaudited)
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 275,717
Restricted cash and short-term investments 18,317
Restricted cash for Series A Cumulative Convertible
Preferred Stock 21,446
Accounts receivable-trade, net of allowance for doubtful
accounts of $153 at June 30, 2005 and $256 at
December 31, 2004 1,286
Inventory 2
Due from Mobile Satellite Ventures, net ---
Deferred equipment costs 211
Issuance costs associated with Series A Cumulative
Convertible Preferred Stock 3,077
Assets held for sale 261
Other current assets 1,970
-----------
Total current assets $ 322,287
-----------
RESTRICTED INVESTMENTS $ 76
PROPERTY AND EQUIPMENT, net 15,232
INTANGIBLE ASSETS, net 139,315
INVESTMENT IN MSV 503,708
RESTRICTED CASH FOR SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK 21,446
ISSUANCE COSTS ASSOCIATED WITH SERIES A CUMULATIVE
CONVERTIBLE PREFERRED STOCK 13,792
DEFERRED CHARGES AND OTHER ASSETS ---
-----------
Total assets $ 1,015,856
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 8,556
Deferred equipment revenue 257
Deferred revenue and other current liabilities 5,179
Series A Cumulative Convertible Preferred Stock dividends 4,875
-----------
Total current liabilities 18,867
------
LONG-TERM LIABILITIES
Other long-term liabilities 521
-----------
Total long-term liabilities 521
-----------
Total liabilities 19,388
-----------
COMMITMENTS AND CONTINGENCIES ---
MINORITY INTEREST 77,635
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK ($0.01 par
value; 5,000,000 shares authorized at June 30, 2005 and
December 31, 2004, 408,500 and 0 shares issued and
outstanding at June 30, 2005 and December 31, 2004,
respectively) 408,500
STOCKHOLDERS' EQUITY:
Common Stock; voting, par value $0.01; 200,000,000 and
100,000,000 shares authorized and 65,248,788 and 51,544,596
shares issued and outstanding at June 30,
2005 and at December 31, 2004, respectively 652
Additional paid-in capital 740,866
Less: 2,900,000 common shares held in treasury stock (56,750)
Common stock purchase warrants 70,982
Accumulated deficit (245,417)
-----------
STOCKHOLDERS' EQUITY 510,333
-----------
Total liabilities and stockholders' equity $ 1,015,856
===========
</TABLE>
19
Intangible Assets
FCC licenses and other intangible assets consist of the following:
June 30,
2005
(unaudited)
(in thousands)
--------------
FCC 800 MHz licenses $ 76,141
FCC 2 GHz licenses 66,864
Intellectual property 11,707
Customer contracts 349
---------
155,061
Less accumulated amortization (15,746)
---------
FCC licenses and other intangible assets, net $ 139,315
=========
The Company has utilized numerous assumptions and estimates in applying its
valuation methodologies and in projecting future operating characteristics for
the TerreStar business enterprise. In general, the Company considered
population, market penetration, products and services offered, unit prices,
operating expenses, depreciation, taxes, capital expenditures and working
capital. The Company also considered competition, satellite and wireless
communications industry projections and trends, regulations, and general
economic conditions. In the application of its valuation methodologies, the
Company applies certain royalty and discount rates that are based on analyses of
public company information, assessment of risk and other factors and estimates.
The Company's valuation of TerreStar's intellectual property rights was
determined utilizing a form of the income approach referred to as the relief
from royalty valuation method. The Company assumed a 10% to 12% royalty rate
applied to a projected revenue stream generated by a hypothetical licensee
utilizing such intellectual property rights. The projected revenue was based on
a business case for the operations and consisted of the following principal
assumptions and estimates:
- A 20 year forecast period.
- Specific cash outflows in the first four years of the forecast period to
account for TerreStar's portion of satellite design, construction and
launch expenditures.
- Annual population growth of 1.6% based on U.S. Census Bureau estimates of
the U.S. population in 2004.
- Market penetration assumptions of zero to 7% to 12% over the forecast
period, depending on the specific market and when the market is launched.
- Average monthly revenue per customer of $40.00 when services are launched,
increasing to $44.50 over the forecast period. This increase equates to a
compound annual growth rate of 0.6%. A substantial portion of this revenue
is generated by the terrestrial component of the ATC network.
- Tax rate of 40% after the consumption of net operating losses generated in
the early years of the forecast period.
- A 25% discount rate based on a weighted average cost of capital (WACC)
determined by analyzing and weighting the cost of capital for a peer group
of publicly traded satellite service providers, wireless communications
companies and telecommunications companies in general.
20
The Company's valuation of its spectrum assets is based on a form of the income
approach known as the "Build-Out Method." The method applies a discounted cash
flow framework to the Company's "build-out" business case. This build-out
approach is intended to incorporate all of historical and future development
costs, as well as projected revenues, operating expenses and cash flows
generated from the build-out of a hybrid satellite and terrestrial
communications systems utilizing the Company's frequency assets. This "build-out
method" business case and the applied discounted cash flow valuation consisted
of the following principal assumptions and estimates:
- A 20-year forecast period, comprised of a high growth period for the first
10 years and a declining growth period beginning in year 11, and a terminal
period to perpetuity.
- Development cash outflows and capital expenditures related to the design
and construction of two satellites in the first 3 years of the forecast
period and the launch of one of these satellites in the fourth year of the
forecast period. Replacement costs for the construction and launch of one
satellite are included in the declining growth period.
- Satellite only revenues based on market size data for traditional satellite
segments (maritime, fleet management, public safety, telematics and
aeronautical) compiled generally by third party research groups and
penetration estimates of 10% to 40% of our potential customer base,
depending on the specific market segment addressed over the 20 year
forecast period.
- Terrestrial revenues calculated as eleven percent of the total revenues
generated by a joint or strategic partner with whom TerreStar would intend
to deploy a terrestrial infrastructure and launch terrestrial services.
Total partnership revenues are based on (i) market penetration assumptions
of zero to 7 to 12% over the forecast period depending on the specific city
and when the city is launched, (ii) average monthly revenue per customer of
$40.00 when services are launched, increasing to $44.50 over the forecast
period. This increase equates to a compound annual growth rate of 0.6%.
- Operating expenses covering the operation of satellite facilities. These
include a network operations center, tracking, telemetry and command
systems, interconnect costs, in-orbit insurance, technical staff, and
general and administrative personnel Under the projected expense structure,
EBITDA margins grow to 60% early in the forecast period and expand to 70%
later in the forecast period.
- All capital expenditures required to design and construct two satellites
and launch one satellite during the first four years of the forecast
period. Additional capital expenditures for constructing ground station
segments and investing in handset development.
- Tax rate of 40% after the consumption of net operating losses generated in
the early years of the forecast period.
- A 19 to 21% discount rate based on a weighted average cost of capital
(WACC) determined by analyzing and weighting the cost of capital for a peer
group of publicly traded satellite service providers, wireless
communications companies and telecommunications companies in general, with
more weight given to traditional satellite service providers. A terminal
value calculated using a WACC of 12% and a perpetuity growth rate of 2.5%.
The Company will test for impairment of its intangible assets by reviewing all
of the assumptions and estimates utilized relative to the valuation
methodologies discussed above. To the extent that it determines that these
assumptions and estimates are no longer accurate, either because actual results
have materially differed from the assumptions and estimates, or because changing
circumstances have caused the Company to reevaluate these assumptions and
estimates for future periods, the Company will revalue these intangible assets
based on revised assumptions and estimates.
21
Motient Corporation And Subsidiaries
Pro Forma Statement Of Operations
For The Six Months Ended June 30, 2005
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Motient TerreStar
Corporation Networks Inc. Pro Forma Pro Forma
Historical(a) Historical(b) Adjustments Total
------------- ------------- ----------- -----
<S> <C> <C> <C> <C>
Revenues
Services and related revenues $ 7,801 $ - $ - $ 7,801
Sales of equipment 757 - - 757
-------- -------- -------- --------
Total revenues 8,558 - - 8,558
-------- -------- -------- --------
Costs And Expenses
Cost of services and operations (including stock-based
compensation of $1,004; exclusive of depreciation
and amortization below) 12,823 - - 12,823
Cost of equipment sold (exclusive of depreciation
and amortization below) 738 - - 738
Sales and advertising (including stock-based
compensation of $91; exclusive of depreciation
and amortization below) 529 - - 529
General and administrative (including stock-based
compensation of $10,204; exclusive of depreciation
and amortization below) 18,291 745 2,750 (a) 21,786
Restructuring charges 5,665 - - 5,665
Research and Development - 351 - 351
Depreciation and amortization 7,995 733 1,886 (b) 10,614
(Gain) on disposal of asset (6) - - (6)
-------- -------- -------- --------
Total Costs and Expenses 46,035 1,829 4,636 52,500
-------- -------- -------- --------
Operating loss (37,477) (1,829) (4,636) (43,942)
Interest expense 1,318 797 (186)(a) 1,929
Other income, net 80 - - 80
Equity in losses of MSV (9,212) - - (9,212)
Minority interest in TerreStar - 404 1,888 (c) 2,292
-------- -------- -------- --------
Net (loss) $(45,291) $ (628) $ (2,934) $(48,853)
======== ======== ======== ========
Less:
Dividends on Series A Cumulative Convertible
Preferred Stock (4,875) - - (4,875)
Accretion of issuance costs associated with
Series A Cumulative Preferred Stock (614) - - (614)
-------- -------- -------- --------
Net loss available to Common Shareholders $(50,780) $ (628) $ (2,934) $(54,342)
======== ======== ======== ========
Net (loss) - basic $ (0.82) $ (0.88)
======== ========
Weighted-Average Common Shares Outstanding
- basic 61,683 61,683
</TABLE>
22
(a) The Registrant purchased the net assets of TerreStar Networks, Inc. on May
11, 2005. Reflects the operations of TerreStar Networks, Inc. from January
1, 2005 thru May 10, 2005.
(b) The Registrant purchased the net assets of TerreStar Networks, Inc. on May
11, 2005. Reflects incremental amortization of intangible assets resulting
from the purchase of the net assets of TerreStar Networks, Inc. as if the
Registrant owned the net assets of TerreStar Networks, Inc. January 1, 2005
thru May 10, 2005. Intangible assets have been amortized over a period of
15 years.
(c) Reflects the TerreStar Networks, Inc. pro forma proportionate share of the
losses to the Registrant for the six months ended June 30, 2005.
Motient Corporation And Subsidiaries
Pro Forma Statement Of Operations
For The Year Ended December 31, 2004
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Motient TerreStar
Corporation Networks Inc. Pro Forma Pro Forma
Historical(a) Historical(b) Adjustments Total
------------- ------------- ----------- -----
<S> <C> <C> <C> <C>
Revenues
Services and related revenues $ 32,378 $ - $ - $ 32,378
Sales of equipment 4,502 - - 4,502
-------- -------- -------- --------
Total revenues 36,880 - - 36,880
-------- -------- -------- --------
Costs and Expenses
Cost of services and operations (including stock-
based compensation of $4,401; exclusive of
depreciation and amortization below) 39,586 1,914 - 41,500
Cost of equipment sold (exclusive of depreciation
and amortization below) 4,329 - - 4,329
Sales and advertising (including stock-based
compensation of $372; exclusive of depreciation
and amortization below) 1,879 - - 1,879
General and administrative (including stock-
based compensation of $5,370; exclusive of
depreciation and amortization below) 13,223 6 - 13,229
Restructuring charges 6,264 - - 6,264
Depreciation and amortization 15,564 16 5,191 (c) 20,771
Loss on disposal of assets 2,669 - - 2,669
Loss on impairment of assets 755 - - 755
Gain on debt and capital lease retirement (802) - - (802)
-------- -------- -------- --------
Total Costs and Expenses 83,467 1,936 5,191 90,594
-------- -------- -------- --------
Operating loss (46,587) (1,936) (5,191) (53,714)
Interest and other income 343 - - 343
Write-off of deferred financing costs (12,035) - - (12,035)
Interest expense (4,106) (3) - (4,109)
Other income from Aether/MSV 1,953 - - 1,953
Equity in losses of MSV (11,897) - 902 (d) (10,995)
-------- -------- -------- --------
Net (loss) $(72,329) $ (1,939) $ (4,289) $(78,557)
======== ======== ======== ========
Net (loss) - basic and diluted $ (2.21) $ (2.40)
======== ========
Weighted-Average Common Shares Outstanding -
basic and diluted 32,771 32,771
</TABLE>
23
(a) Historical financial information is derived from the Registrant's annual
report filed on Form 10-K for the year ended December 31, 2004.
(b) Historical financial information is derived from the unaudited financial
information of TerreStar Networks Inc. for the year ended December 31,
2004.
(c) Amortization expense on portion of purchase price allocated to Intangible
Assets is recognized using the straight-line method over a 15-year life.
(d) Reflects the TerreStar proportionate share of losses to the Registrant
included in Equity in losses of MSV for the year ended December 31, 2004.
SELECTED QUARTERLY FINANCIAL DATA
(unaudited)
(dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
3/31/04 6/30/04 9/30/04 12/31/04 3/31/05 6/30/05
------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 11,500 $ 11,439 $ 8,353 $ 5,588 $ 5,013 $ 3,545
Operating expenses (1) 21,674 23,471 14,583 23,739 26,465 21,399
------ ------ ------ ------ ------ ------
Loss from operations (10,174) (12,032) (6,230) (18,151) (21,452) (17,854)
Net Income (loss) $ (13,517) $ (23,112) $ (9,849) $ (25,851) $ (28,540) $ (22,868)
Basic and Diluted Loss Per Share of
common stock (2) $ (0.54) $ (0.79) $ (0.29) $ (0.62) $ (0.48) $ (0.36)
Weighted-average common shares
outstanding during the period 25,232 29,338 33,418 41,944 59,580 63,762
Market price per share
High $ 7.45 $ 14.01 $ 13.75 $ 23.95 $ 31.45 $ 29.00
Low $ 4.05 $ 6.15 $ 8.40 $ 8.95 $ 21.25 $ 17.75
</TABLE>
24
<TABLE>
<CAPTION>
3/31/03 6/30/03 9/30/03 12/31/03
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues $ 14,370 $ 14,992 $ 12,051 $ 13,072
Operating expenses (1) 24,424 25,358 29,795 23,647
------ ------ ------ ------
Loss from operations (2) (10,054) (10,366) (17,744) (10,575)
Net Income (loss) $ (12,394) $ (13,010) $ (22,345) $ (14,373)
Basic and Diluted Loss Per Share of
common stock $ (0.49) $ (0.52) $ (0.89) $ (0.57)
Weighted-average common shares
outstanding during the period 25,097 25,137 25,170 25,145
Market price per share
High $ 4.00 $ 2.00 $ 5.00 $ 5.45
Low $ 2.75 $ 5.75 $ 6.35 $ 3.95
</TABLE>
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview And Introduction
The following Management's Discussion and Analysis is intended to help the
reader understand Motient Corporation. It is provided as a supplement to, and
should be read in conjunction with, our financial statements and the
accompanying notes.
It should also be read and understood in the context of several material
accounting issues, namely the effect of fresh-start accounting following our
emergence from bankruptcy on May 1, 2002.
Our Business Segments
Motient owns, operates and develops two-way wireless communications businesses.
In addition to our own two-way wireless data network (our DataTac network) which
we use to provide our customers with two-way wireless data communication
services, we have the capabilities to provide our customers with convenient
access to other wireless data networks, such as the Sprint and Cingular
networks. We also are in the process of developing a satellite communications
service via our majority ownership of TerreStar Networks Inc., a development
stage company in the process of building its first satellite. We acquired our
ownership in TerreStar in May 2005, after the reporting periods covered by this
Management's Discussion and Analysis. TerreStar was formerly a subsidiary of
another satellite communications company, Mobile Satellite Ventures, LP, or MSV,
as it is commonly known. We own 49% of MSV, but do not have operating control of
its business.
Acquisition of MSV and TerreStar
On September 22, 2005, Motient announced that it had entered into a non-binding
letter of intent with SkyTerra Communications, Inc. and TMI Communications &
Company, among others, relating to a transaction to consolidate the ownership of
MSV and TerreStar within Motient. The parties anticipate that these
transactions, if consummated, will simplify the ownership and governance of both
MSV and TerreStar, better enabling both of them to pursue more effectively
deployment of their separate hybrid satellite and terrestrial based
communications networks. The networks will be able to provide ubiquitous
wireless coverage in North America in the L-band and S-band, respectively.
The letter of intent sets forth the basic terms of the proposed transaction,
which include, among other things, the following:
o In connection with all the transactions contemplated by the letter of
intent, Motient would issue or commit to issue approximately 77
million shares of common stock in exchange for the outstanding MSV
interests not already owned by Motient, and approximately 16 million
shares for the outstanding TerreStar shares not already owned by
Motient.
o All of the outstanding MSV and TerreStar interests not already owned
by Motient, other than those held by TMI, would be transferred to
Motient at closing.
o TMI would receive the right to exchange its interests in MSV and
TerreStar at any time at the same exchange ratios that are being
offered to the other shareholders and would subscribe for shares of a
new class of Motient preferred stock with nominal economic value but
having voting rights in Motient equivalent to those TMI would receive
upon exchange of its MSV and TerreStar interests for Motient common
stock.
26
o SkyTerra would dividend to its securityholders shares of a newly
formed company that would hold all of its assets other than its
interests in MSV and TerreStar, and then SkyTerra, which would then
consist only of its stakes in MSV and TerreStar, would merge in a
tax-free transaction with and into a subsidiary of Motient. As a
result, in addition to the dividend, SkyTerra's stockholders would
receive Motient common stock at an exchange ratio reflecting
equivalent economic value for MSV/TerreStar as received by the other
MSV/TerreStar stockholders. In total, SkyTerra common and preferred
stockholders would receive approximately 26 million shares of Motient
common stock. SkyTerra's preferred stock would be retired in exchange
for Motient common stock with a value equal to its liquidation
preference and SkyTerra's common stockholders would receive the
balance of the Motient shares.
o The parties anticipate that, after the closing of the transaction,
TerreStar would likely be spun-off to the stockholders of Motient
(including those receiving shares in connection with these
transactions). However, this spin-off would be evaluated following the
closing of the other transactions, and would only be executed if it is
judged by Motient's Board of Directors to be in the best interests of
its stockholders at that time. In the event of a spin off of
TerreStar, the exchange ratios applicable to TMI's exchange right
would be modified accordingly.
o The boards of Motient, MSV and TerreStar would be reconstituted with
nine members mutually acceptable to the parties and in compliance with
the independence rules and regulations of NASDAQ. TerraStar would have
a similarly structured board after the completion of the transaction,
separate of Motient and MSV.
o The parties anticipate that Alex Good, CEO of MSV, would become
Motient's new CEO after the transaction. The parties also anticipate
that Robert Brumley, CEO of TerreStar, would continue in that role
after the transaction with TerraStar maintaining its own management
team.
The consummation of the transactions will require successful completion of due
diligence, negotiation and execution of definitive documentation, Motient and
SkyTerra board and stockholder approval, and various regulatory approvals.
Because the letter of intent is non-binding, the parties have no obligation to
negotiate such documentation or otherwise consummate the transactions.
Therefore, the parties can provide no assurances that the transactions will be
consummated on the currently proposed terms or will ever be consummated, or that
the required corporate or regulatory approvals will be obtained.
Our Terrestrial Wireless Business
We are a nationwide provider of two-way, wireless mobile data services and
mobile internet services. Owning and operating a wireless radio data network
that provides wireless mobile data service to customers across the United
States, we generate revenue primarily from the sale of airtime on our network
and from the sale of communications devices to our customers. Our customers use
our network and our wireless applications for wireless email messaging and
wireless data transmission, enabling businesses, mobile workers and consumers to
wirelessly transfer electronic information and messages and to access corporate
databases and the Internet.
27
In addition to selling wireless data services that use our own network, Motient
is also a reseller of airtime on the Cingular and Sprint wireless networks.
These arrangements allow Motient to provide integrated wireless data solutions
to its customers using a variety of networks. In December 2004, Motient launched
a new set of products and services designed to provide these integrated wireless
data solutions to its customers called iMotient Solutions TM. iMotient allows
Motient's customers to use these multiple networks via a single connection to
Motient's back-office systems, providing a single alternative for application
and software development, device management and billing across multiple
networks, including but not limited to GPRS, 1XRTT and our own DataTac network.
Once connected to iMotient, customers will receive proprietary applications and
services that reduce airtime usage, improve performance and reduce costs.
Motient has not yet generated material revenues from iMotient Solutions, but it
anticipates that iMotient revenues will increase over the course of 2005.
Motient cannot anticipate whether these revenues will increase rapidly enough to
offset anticipated revenue declines in other segments of its business.
Of our revenues for the year ended December 31, 2004, approximately 50% were
generated in connection with our BlackBerry TM by Motient wireless email service
and our own eLinkSM wireless email service, our "Wireless Internet" market
segment. These wireless email services are utilized by our customers primarily
in conjunction with Research In Motion's RIM 850 and 857 wireless handheld
devices, which are no longer produced by Research in Motion.
We believe that consumers, in general, wish to use and purchase wireless
internet devices that cannot be supported on our DataTac network, such as
wireless internet devices that are data and voice capable. We expect our
revenues from these products will continue to decline, but we will attempt to
capture revenue from the migration of our wireless internet customers to newer
technologies through, among other alternatives, our reseller agreements with
RACO Wireless, Inc. and eAccess Solutions, Inc. which allows us to receive a
one-time commission for signing up customers to use alternative network
providers wireless internet service. Motient is currently exploring ways to
offer Wireless Internet services under our iMotient Solutions TM platform, but
Motient can make no assurances that it will ever be able to effectively offer
such a product.
Our most significant ongoing cost reduction effort involves reducing the number
of base stations in our network in a coordinated effort to reduce network
operating costs. Over the course of 2004, Motient implemented and completed
certain initiatives to rationalize the size of its network, primarily to remove
unprofitable base stations and reduce unneeded capacity and coverage. During the
first quarter of 2005, Motient initiated a plan to refocus its DataTac network
primarily on the Top 40 Metropolitan Statistical Areas (MSAs). This plan
involved the decommissioning of DataTac network components and termination of
service in previously served MSAs above the Top 40. Given the similar coverage
profiles of the Cingular and Sprint networks, the significantly increased
bandwidth capabilities of these networks relative to the DataTac network and the
concentration of our revenues in the Top 40 MSAs, we determined that this plan
best allowed us to match our network infrastructure costs with our revenue base,
while continuing to meet the needs of as many of our customers as possible. We
have notified our customers of this change in our network coverage and this
decommissioning began on June 1, 2005. Although these actions resulted in a
decline in our revenues, we believe that the revenue decline will be offset by a
reduction in our network operating costs. These network changes may put negative
pressure on our revenues in all market segments in 2005 and beyond as customers
may elect to pursue other alternative network carriers with alternative
coverage. We are making every effort to retain our customers or migrate them to
our iMotient Solutions TM product and services, but Motient can make no
assurances that it will be able to retain these customers.
As a result of these network rationalization efforts, our 800 MHz FCC licenses
may be lost in markets to which we are discontinuing service. We believe that
the value of our FCC licenses in these smaller markets is very small compared to
the value of our FCC licenses in the Top 40 MSAs. While we are taking steps to
avoid this possibility, and while we believe that any such losses would not be
material to our business, we can provide no assurance that any such losses would
not negatively impact our business. If we were to lose any of these licenses, we
would have to write-off the value of these assets. We believe that the value of
the licenses that may be in jeopardy represents about 5% of the total value of
our 800 MHz FCC licenses. If our network rationalization efforts expanded into
the Top 40 MSAs, our write-off would be correspondingly larger if we were unable
to retain the FCC licenses in such markets.
28
Our Satellite Communications Business -
TerreStar Networks Inc.
On May 11, 2005, we acquired approximately an additional 13.4% ownership in
TerreStar Networks, Inc. for a total 61% ownership interest in, and operating
control over, TerreStar Networks Inc. Prior to that date, TerreStar was a
subsidiary of MSV established to, among other things, develop a satellite
communications system using frequencies in the 2 GHz band, that are part of what
is often known as the "S-band." We acquired our ownership interest in TerreStar
when, in conjunction of a spin-off of TerreStar to the owners of MSV, we
purchased an additional $200 million of newly issued TerreStar common stock. In
conjunction with this transaction, TerreStar also received a perpetual,
royalty-free license to utilize MSV's patent portfolio, including those patents
related to "ancillary terrestrial component", or ATC, which we anticipate will
allow us to deploy a communications network that seamlessly integrates satellite
and terrestrial communications, giving a user ubiquitous wireless coverage in
North America.
By offering Mobile Satellite Service, or MSS, in the S-band in conjunction with
ATC, TerreStar can effectively deploy a hybrid satellite and terrestrial
wireless communications network. This network could, for instance, eventually
allow a user to utilize a mobile device that would communicate with a
traditional land-based wireless network when in range of that network, but
communicate with a satellite when not in range of such a land-based network.
These mobile devices could be used for a myriad of communications applications,
including potentially voice, data and video services.
TerreStar is currently in the process of building its first satellite pursuant
to a construction contract with Space Systems/Loral, Inc. This satellite is
scheduled to be completed in November 2007, with commercial operations scheduled
to begin in 2008. Once launched, the satellite, with an antenna almost sixty
feet across, will be able to communicate with terrestrial base stations and
standard wireless devices. The construction, launch and operation of this
satellite will require significant additional capital, with satellite
construction costs alone expected to exceed $550 million, paid out over the next
several years.
Our ability to offer these services depends on TerreStar's right to receive
certain regulatory authorizations allowing it to provide MSS in the S-band.
These authorizations are subject to various regulatory milestones relating to
the construction, launch and operational date of the satellite system required
to provide this service. In order to use ATC, TerreStar will need to apply for
authority with the FCC, which has not yet done.
Given Motient's 61% interest in TerreStar, we will consolidate the financial
results of TerreStar on a going forward basis. However, as Motient did not own
TerreStar prior to the periods presented in this Management's Discussion and
Analysis, none of the discussions with respect to historical periods below
reflect the operations of TerreStar, and are solely based on the business
operations of our DataTac network and our iMotient Solutions platform. Over the
course of 2005 through 2008, we expect that TerreStar will continue to work on
building, testing and deploying its satellite communications system, which will
require large capital expenditures, as well as the incurrence of significant
operating expenses. During this period, we do not expect that TerreStar will
generate any revenues. Therefore, we anticipate that TerreStar will generate
operating losses during this period. We anticipate that TerreStar will not be in
a position to generate revenues from continuing business operations until 2008
at the earliest.
29
RESULTS OF OPERATIONS
Quarters Ended June 30 , 2004 And 2005
Due to our purchase of ownership interests in TerreStar on May 11, 2005 and our
consequent 61% ownership of TerreStar, the operating results for the six months
ended June 30, 2005 include the operating results of TerreStar from May 11, 2005
through June 30, 2005. We have identified the impact of TerreStar on our results
of operations where material.
Subscriber Statistics
Our customer base can be generally divided into six broad categories, Wireless
Internet, Field Services, Transportation, Telemetry, iMotient and Other.
Wireless Internet primarily consists of customers using our network and
applications to access certain internet functions, like email. Devices and
airtime used by transportation and shipping companies, or by personnel in the
field service industries (such as repair personnel), for dispatching, routing
and other vital communications functions are known as Transportation and Field
Service, respectively. Telemetry typically covers devices and airtime used to
connect remote equipment, such as wireless point-of-sale terminals, with a
central monitoring facility. iMotient consists of integrated wireless data
solutions revenues through the resale of airtime on the Cingular and Sprint
wireless networks. Other revenues may consist of sales commissions, consulting
fees or other fees. An explanation of certain changes in revenue and subscribers
is set forth below.
The table below summarizes the make up of our registered subscriber base.
Wireless devices may be divided into three categories, registered, billable and
active. Registered devices represent devices that our customers have registered
for use on our network. Certain numbers of these devices may be kept in
inventory by our customers for future use and generally are not revenue
producing. Customers then move such inventory into a production status upon
which it typically becomes billable and generates revenue. However, billable
units may not pass traffic and thus will not be counted as active. We count a
device as active when it is removed from inventory by the customer and transmits
greater than zero kilobytes of data traffic.
<TABLE>
<CAPTION>
As of June 30,
2005 2004 % Change
Registered Billable Active Registered Billable Active Registered Billable Active
---------- -------- ------ ---------- -------- ------ ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wireless Internet(1) 42,172 20,894 9,725 89,471 51,554 33,966 (53)% (59)% (71)%
Field Services 1,702 1,861 235 14,356 13,815 8,070 (88) (87) (97)
Transportation 48,671 39,586 39,840 46,986 38,707 38,505 4 2 3
Telemetry 26,118 19,263 8,546 31,002 25,157 15,576 (16) (23) (45)
iMotient 874 896 245 -- -- -- 100 100 100
All Other 221 140 92 722 645 524 (69) (78) (82)
------- ------ ------ ------- ------- ------ ----- ----- -----
Total 119,758 82,640 58,683 182,537 129,878 96,641 (34)% (36)% (39)%
======= ====== ====== ======= ======= ====== ===== ===== =====
</TABLE>
1) Reflects deregistration of units by SkyTel on December 30, 2004 of
approximately 30,000 units and deregistration of 9,000 units in the first
quarter of 2005 by certain other resellers.
30
Revenues
The tables below set forth, for the periods indicated, a year-over-year
comparison of the key components of revenue.
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------
Summary of Revenue 2005 2004 Change % Change
------------------ ---- ---- ------ --------
(in millions)
<S> <C> <C> <C> <C>
Wireless Internet $2.0 $5.2 (3.2) (62)%
Field Services 0.1 1.5 (1.4) (93)
Transportation 0.5 0.9 (0.4) (44)
Telemetry 0.4 0.6 (0.2) (33)
iMotient 0.1 0.0 0.1 N/m
All Other 0.1 1.9 (1.8) (95)
---- ----- ---- ----
Service Revenue 3.2 10.1 (6.9) (68)
Equipment Revenue 0.3 1.3 (1.0) (77)
---- ----- ----- ----
Total $3.5 $11.4 $(7.9) (69)%
==== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------
Summary of Revenue 2005 2004 Change % Change
------------------ ---- ---- ------ --------
(in millions)
<S> <C> <C> <C> <C>
Wireless Internet $4.6 $11.4 (6.8) (60)%
Field Services 0.9 3.3 (2.4) (73)
Transportation 1.1 1.8 (0.7) (39)
Telemetry 0.8 1.2 (0.4) (33)
iMotient 0.2 0.0 0.2 N/m
All Other 0.2 2.4 (2.2) (92)
---- ----- ------ ----
Service Revenue 7.8 20.1 (12.3) (61)
Equipment Revenue 0.8 2.8 (2.0) (71)
--- ----- ------ ----
Total $8.6 $22.9 $(14.3) (62)%
==== ===== ====== ====
</TABLE>
The decrease in service revenue was the result of a decrease in revenue in all
our market segments (except iMotient), primarily as a result of migration by our
customers to newer technologies with capabilities that our network is not
capable of supporting (such as voice enabled handheld devices), or more modern
networks with greater capacity than our own (such as so-called 2G or 3G networks
from providers such as Sprint, Cingular, Verizon or T-Mobile). We believe that
our network reduction efforts, announced to our customers in the first quarter,
may have also caused negative pressure on our revenues as certain customers may
have elected to terminate service with Motient in favor of other alternative
wireless carriers. If we cannot generate additional revenue from other sources
to offset this lost revenue, our overall revenues will decline in the future.
The decrease in total revenue was primarily a result of decreased service and
equipment revenues.
31
During the first quarter of 2005, Motient initiated a plan to refocus its
DataTac network primarily on the top 40 MSAs of the United States. This plan
involves the decommissioning of DataTac network components and termination of
service in previously served MSAs other than the top 40. Given the similar
coverage profiles of the Cingular and Sprint networks, the significantly
increased bandwidth capabilities of these networks relative to DataTac and the
concentration of our revenues in the top 40 MSAs, we determined that this plan
best allowed us to match our network infrastructure costs with our revenue base,
while continuing to meet the needs of as many of our customers as possible. This
decommissioning occurred in June 2005. We are making every effort to provide any
impacted customers with alternatives to migrate their services and applications
to either our new iMotient Solutions(TM) platform or to other networks using our
agreements with RACO Wireless, Inc. and eAccess Solutions, Inc. These network
changes may put negative pressure on our revenues in all market segments in 2005
as customers may elect to pursue other alternative network carriers with
alternative coverage. We are making every effort to retain our customers or
migrate them to our iMotient Solutions(TM) product and services, but Motient can
make no assurances that it will be able to retain these customers.
By revenue segment, we note that:
o Wireless Internet: The revenue decline in the Wireless Internet sector
during this period represented customer losses that we are experiencing in
both our direct and reseller channels as a result of the migration of
Wireless Internet customers to other networks with additional features,
such as voice-capable wireless internet devices. These customer losses have
been exacerbated because Research in Motion, or RIM, no longer manufactures
any devices which will operate on our DataTac network, which has and will
continue to negatively impact the ability of our resellers to add new
devices to our network to replace those that are migrating from their
respective customer bases. These factors, in addition to our network
reduction efforts discussed above, may lead to additional declining
Wireless Internet revenues in 2005. Motient is currently exploring ways to
offer Wireless Internet services under our iMotient Solutions(TM) platform,
but Motient can make no assurances that it will ever be able to effective
offer such a product.
o Field Services: The decrease in field service revenue was primarily the
result of the termination of several customer contracts, including IBM,
Brinks, Bannex, Pitney Bowes and Schindler, as well as the general
reduction of units and/or rates across the remainder of our field service
customer base. Our network changes, discussed above, may put negative
pressure on our revenues in this market segment in 2005. Motient believes
that this market segment will potentially present new opportunities to
generate new revenues with our iMotient Solutions(TM) products and
services.
o Transportation: The decrease in revenue from the transportation sector was
primarily the result of UPS removing units from our network. UPS
represented $0.1 million and $0.3 million of revenue for the three and six
months ended June 30, 2005 as compared to $0.2 million and $0.5 million of
revenue for the three and six months ended June 30, 2004. We did experience
growth during this period in other transportation accounts, most notably
Geologic Solutions, formerly d/b/a Aether Systems. Our network changes,
discussed above, may put negative pressure on our revenues in this market
segment in 2005. Motient believes that this market segment will potentially
present new opportunities to generate new revenues with our iMotient
Solutions(TM) products and services.
o Telemetry: While we experienced revenue growth in certain telemetry
customer accounts, this revenue growth was equally offset by customer
losses or negative rate changes in other telemetry accounts. Our network
changes, discussed above, may put negative pressure on our revenues in this
market segment in 2005. Motient believes that this market segment will
potentially present new opportunities to generate new revenues with our
iMotient Solutions(TM) products and services.
32
o iMotient: We activated our first customer units and generated our initial
revenue from the iMotient platform in February of 2005. As of June 30,
2005, we had 896 billable units utilizing our iMotient platform and
generated $0.2 million in revenues for the six months ended June 30, 2005.
We expect iMotient revenues to increase over the course of 2005.
o All Other: The decrease in other revenue was primarily due to the
termination of our agreements with Verizon and T-Mobile, which allowed us
to sell and promote wireless email and wireless internet applications on
their networks. We do not expect to generate significant revenues in this
product segment in the future.
o Equipment: The decrease in equipment revenues for these periods was the
result of the decline sales of devices attributable to our now-terminated
agency and dealer agreements with Verizon and T-Mobile.
Operating Expenses
The tables below summarize our operating expenses for the three and six months
ended June 30, 2005 and 2004. An explanation of certain changes in operating
expenses is set forth below.
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------
Summary of Expenses 2005 (1) 2004 (2) Change % Change
------------------- -------- -------- ------ --------
(in millions)
<S> <C> <C> <C> <C>
Cost of Service and Operations $5.3 $10.4 (5.1) (49)%
Cost of Equipment Sales 0.3 1.3 (1.0) (79)
Sales and Advertising 0.2 0.9 (0.7) (82)
General and Administration 4.7 2.5 2.2 88
Research and Development 0.3 0.0 0.3 --
Operational Restructuring Costs 5.6 5.1 0.5 9
Depreciation and Amortization 5.0 4.1 0.9 23
(Gain) on Debt & Capital Lease Retirement 0.0 (0.8) 0.8 (100)
----- ----- ----- ----
Total $21.4 $23.5 $(2.1) (9)%
===== ===== ===== ====
</TABLE>
(1) Includes compensation expense of $(0.3) million related to stock
compensation expense.
(2) Includes compensation expense of $2.4 million related to stock compensation
expense.
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
Summary of Expenses 2005 (1) 2004 (2) Change % Change
------------------- -------- -------- ------ --------
(in millions)
<S> <C> <C> <C> <C>
Cost of Service and Operations $12.8 $21.7 (8.9) (41)%
Cost of Equipment Sales 0.8 2.8 (2.0) (72)
Sales and Advertising 0.6 1.9 (1.3) (70)
General and Administration 19.0 4.9 14.1 288
Research and Development 0.3 0.0 0.3 --
Operational Restructuring Costs 5.7 6.3 (0.6) (10)
Depreciation and Amortization 8.7 8.4 0.3 4
(Gain)/Loss on Asset Disposal 0.0 0.0 0.0 0
(Gain) on Debt & Capital Lease Retirement 0.0 (0.8) 0.8 (100)
----- ----- ---- ----
Total $47.9 $45.2 $2.7 6%
===== ===== ==== ====
</TABLE>
(1) Includes compensation expense of $11.3 million related to stock compensation
expense.
(2) Includes compensation expense of $3.9 million related to stock compensation
expense.
33
o Cost of Service and Operations: Our largest single cost center is the cost
of service and operations, which includes costs to support subscribers,
such as network telecommunications charges and site rent for network
facilities, network operations employee salary and related costs, network
and hardware and software maintenance charges, among other things. The
decrease in these expenses was partially the result of lower employee
salary and related costs of $0.3 million and $0.8 million for the three and
six months ended June 30, 2005 as compared to the three and six months
ended June 30, 2004 due to a workforce reduction implemented in February
2004 and March 2005. The decrease in these expenses was also partially the
result of lower fees paid to RIM for licensing Blackberry as a result of
the decline of Wireless Internet units and revenues, which fees we
anticipate will continue to decline in the future as well. The decrease in
these expenses was also impacted by the continued removal of
older-generation base stations from the network and the removal of base
stations and other network equipment under our network rationalization
efforts initiated in the second quarter of 2004 and the resulting decreases
in telecommunications of $1.4 million and $3.3 million for the three and
six months ended June 30, 2005 as compared to the three and six months
ended June 30, 2004 and base station maintenance decreases of $0.2 million
and $0.4 million for the three and six months ended June 30, 2005 as
compared to the three and six months ended June 30, 2004. As we continue to
remove base stations from the network, in particular as a result of the
additional rationalization efforts completed in June 2005, these costs will
continue to decrease. The decrease in costs of service and operations was
also partially the result of reductions in hardware and software
maintenance costs as a result of the network rationalization efforts and
negotiation of lower rates on maintenance service contracts in 2004. The
decreases in costs discussed above were partially offset by compensation
expenses associated with stock options issued to employees of $(0.2) and
$1.0 million for the three and six months ended June 30, 2005. Compensation
expenses associated with stock options issued to employees totaled $1.5 and
$2.0 million for the three and six months ended June 30, 2004. Excluding
these compensation charges, cost of service and operations decreased $3.4
million, or 39%, for the three months ended June 30, 2005, and $7.9
million, or 40%, for the six months ended June 30, 2005 as compared to the
same periods in 2004. Given our ongoing cost-reduction efforts, we expect
these costs to continue to decrease. The extent of the decrease will depend
both upon our ability to successfully manage our cost-reduction efforts as
well as the necessity for these expenditures in the future if our customer
base declines.
o Cost of Equipment: The decrease in cost of equipment was the result of the
elimination of sales of devices attributable to agency and dealer
agreements with Verizon Wireless and T-Mobile USA. Our efforts to sell
under our agent relationships with T-Mobile USA and Verizon Wireless were
reduced significantly in the third and fourth quarter of 2004 and these
contracts were terminated in the fourth quarter of 2004 to accommodate our
agreements with Sprint and Cingular. We anticipate that these costs will be
minor in the future given the elimination of the T-Mobile USA and Verizon
Wireless reseller agreements.
o Sales and Advertising: The decrease in sales and advertising expenses was
primarily attributable to lower employee salary of $0.1 million and $0.5
million for the three and six months ended June 30, 2005 as compared to the
three and six months ended June 30, 2004 and related costs, including sales
commissions, due to lower sales volumes and the workforce reductions
implemented in February 2004 and March 2005. These decreases included
compensation expenses associated with stock options issued to employees of
$0.0 and $0.1 million for the three and six months ended June 30, 2005 as
compared to $0.5 and $0.9 million for the three and six months ended June
30, 2004. Excluding these compensation charges, sales and advertising
expense decreased $0.2 million, or 51%, for the three months ended June 30,
2005, and $0.5 million, or 50%, for the six months ended June 30, 2005 as
compared to the same periods in 2004. We anticipate that these costs will
increase in the future in conjunction with our increasing efforts to sell
and promote our iMotient Solutions(TM) platform.
34
o General and Administrative: The increase in general and administrative
expenses was primarily attributable to increases in legal, audit and
regulatory fees, fees paid to advisors and consultants and compensation
expenses associated with stock options issued to employees and directors.
Our audit expenses increased materially due to our requirements to comply
with Sarbanes-Oxley guidelines for 2004 and our corporate finance activity
in the first and second quarter of 2005. Legal and regulatory fees
increased materially as a result of our corporate finance activity in the
first and second quarter of 2005 and our related reporting and security
registration requirements, costs to support our developments efforts with
TerreStar and certain regulatory fees paid related to our rationalization
efforts and our Motient Communications frequencies. Consulting and advisory
fees increased materially due to certain corporate finance related fees
discussed below, fees paid to consultants to support our regulatory efforts
for both Motient Communications and TerreStar and consulting support we
utilize for our success-based site lease negotiation efforts. A consulting
fee of $3.7 million, consisting of $0.9 million in cash and 95,000 shares
of stock valued at $2.8 million, was paid to CTA and an affiliated entity
of Gary Singer in the first quarter of 2005 for services rendered in
conjunction with the acquisition of further MSV interests from Telcom
Ventures, Columbia Capital and Spectrum Equity in February 2005. These
increases were partially offset by site lease related expense decreases of
$0.7 million and $1.4 million for the three and six months ended June 30,
2005 as compared to the three and six months ended June 30, 2004, lower
employee salary and related costs of $0.4 million and $0.8 million for the
three and six months ended June 30, 2005 as compared to the three and six
months ended June 30, 2004 due to the workforce reductions implemented in
February 2004 and March 2005 and lower directors and officers liability
insurance costs. General and Administrative expenses include approximately
$0.7 million of general and administrative costs from TerreStar from the
period May 11, 2005 to June 30, 2005. We expect these costs from TerreStar
to increase in the future as development efforts on its satellite system
accelerate. Compensation expenses associated with stock options issued
under the Company's stock option plan and the stock issued to advisors as a
result of the corporate finance activity discussed above totaled $(0.1) and
$10.2 million for the three and six months ended June 30, 2005.
Compensation expenses associated with stock options issued to employees
totaled $0.4 and $1.0 million for the three and six months ended June 30,
2004. Excluding these compensation charges, general and administrative
expenses increased $2.6 million, or 126%, for the three months ended June
30, 2005, and $4.8 million, or 124%, for the six months ended June 30, 2005
as compared to the same periods in 2004. We anticipate that these costs
will decline in the future in conjunction with the completion of our
initial Sarbanes-Oxley report, and our overall cost-cutting efforts. As we
expand our efforts on TerreStar, however, related general and
administrative expenses are anticipated to increase.
o Research and Development: Research and development consists of
approximately $0.3 million of research and development costs from TerreStar
for the period May 11, 2005 to June 30, 2005. We expect these costs from
TerreStar to increase in the future as development efforts on its satellite
system accelerate.
o Operational Restructuring Charges: The 2005 operational restructuring
charges of $5.7 million include $0.1 million in the first quarter of 2005
resulting from the severance and related salary charges as a result of the
reductions in force in March 2005 and $5.6 million in the second quarter of
2005 resulting from additional network rationalization initiatives in June
2005. Operational restructuring charges of $6.3 million in 2004 consist of
$1.2 million in the first quarter of 2004 resulting from the severance and
related salary charges as a result of the reductions in force in February
2004 and $5.1 million in the second quarter of 2004 related to certain
network rationalization initiatives in June 2004.
o Depreciation and Amortization: Depreciation and amortization expense
increased $0.7 million as a result of the amortization of our intangible
assets of TerreStar and $1.8 million due to our June 2005 network
rationalization for which we accelerated the depreciation of certain base
station equipment. Excluding these items, our depreciation and amortization
expense declined $1.6 million or 39% and $2.2 million or 26% for the three
and six months ended June 30, 2005. Our depreciation expense declined as a
result of our decline in asset value related to network reduction efforts
in 2004 and 2005 and our write-down of related assets and reduced
35
amortization as a result of our additional impairment of our customer
contract intangibles in December 2004. As a result of continued network
restructuring initiatives planned in 2005, we expect depreciation and
amortization to continue to decrease in 2005.
Other Expenses & Income
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
Summary of Expenses 2005 2004 2005 2004
------------------- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Interest Expense, net $ 2,115 $(1,273) $ 2,115 $(3,039)
Write -off of deferred financing costs -- (8,052) -- (8,052)
Other Income, net -- 191 80 199
Other Income from Aether -- 662 -- 1,307
Equity in Losses of Mobile Satellite Ventures
Minority Interest in TerreStar (2,044) (2,608) (9,212) (4,838)
$ 404 $ -- $ 404 $ --
</TABLE>
o Interest expense is presented net of interest income on cash balances and
notes receivable. We generated interest income for the three and six months
ended June 30, 2005 on cash balances generated from proceeds of our
financing transactions. In 2004, we generated interest income on the
interest accrued on our note receivable from MSV, however, as a result of
November 2004 investment transaction into MSV, the principal and interest
outstanding under our note receivable from MSV was converted into limited
partnership units in MSV. Interest expense decreased for the three and six
months ended June 30, 2005 as compared to the same periods in 2004, due to
the April 2004 repayment of our term credit facility and its subsequent
termination on December 31, 2004.
o In April 2004, we expensed $8.1 million of deferred financing costs related
to the repayment of our term credit facility.
o We recorded equity in losses of MSV of $2.0 and $9.2 million for the three
and six months ended June 30, 2005, as compared to $2.6 and $4.8 million
for the same periods in 2004. The 2005 MSV losses are Motient's 38.6% and
48.8% of MSV's losses for the same period, and losses for 2004 are
Motient's 46.5% of MSV's losses for the same period. For the three and six
months ended June 30, 2005, MSV had revenues of $7.5 and $14.7 million,
operating expenses of $14.8 and $34.5 million and net losses of $6.7 and
$26.7 million, respectively.
o For the period ended June 30, 2005, the Company recorded approximately a
$1.0 million net loss for TerreStar Networks. The $0.4 million minority
interest in TerreStar represents the approximately 39% of TerreStar
Networks that is not owned by the Company.
Years Ended December 31, 2004 and 2003
In the year ended December 31, 2004, we experienced the loss of certain large
customer contracts, such as Schindler and Pitney Bowes, and a general erosion in
our customer base, primarily as a result of those customers' desire to utilize
newer wireless technologies, such as GPRS or CDMA, which we cannot support on
our wireless network. The majority of this decline in revenue was due to a
decline in our wireless internet segment, which was driven generally by the
aforementioned desire to move to newer technologies, as well as the termination
of the manufacture of RIM 857 devices by Research in Motion in late 2003, which
were the only RIM devices then produced for use on our network and the most
common wireless internet device used on our network. We are not able to utilize
any newer RIM devices on our network. As a result of this revenue decline, we
have been required to take numerous actions to reduce our cost structure and
change our operating strategy, which included reductions in the number of
employees and changes in senior management and a reduction in our DataTac
36
network coverage, among other things. We believe that several components of our
cost structure are much larger than required for our relative business size, and
we believe that we can continue to reduce our cost structure in our continued
efforts to improve our profitability. We are exploring alternatives ways to
provide comparable wireless internet services, using either our DataTac network
or our iMotient Solutions platform, however if we are unsuccessful in these
efforts, our wireless internet revenue base will continue to decline and we will
need to increase revenues from other sources. We believe our iMotient Solutions
suite of products and services will be our primary source of new revenue for
2005 and beyond, and we are focusing the majority of our development, sales and
marketing on this area.
Subscriber Statistics
<TABLE>
<CAPTION>
As of December 31,
2004 2003 % Change
Registered Billable Active Registered Billable Active Registered Billable Active
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wireless Internet 47,328(1) 35,366 20,126 106,600 69,673 51,179 (56)% (49)% (61)%
Field Services 7,437 7,360 4,896 17,468 16,415 9,851 (57)% (55)% (50)%
Transportation 46,721 41,013 40,621 45,902 39,344 39,513 2% 4% 2%
Telemetry 30,107 22,640 11,484 32,420 23,947 13,444 (7)% (5)% (15)%
All Other 256 180 156 1,305 1,043 584 (80)% (83)% (73)%
----------- ---------- ---------- --------- ---------- ---------- ----------- ----------- ---------
Total 131,849 106,559 77,283 203,695 150,422 114,571 (35)% (29)% (33)%
=========== ========== ========== ========= ========== ========== =========== =========== =========
</TABLE>
1) Reflects deregistration of units by SkyTel on December 30, 2004 of
approximately 30,000 units.
Revenue
The table below sets forth, for the periods indicated, a year-over-year
comparison of the key components of our revenue:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
Summary of Revenue 2004 2003 Change % Change
------------------ ---- ---- ------ --------
(in millions)
<S> <C> <C> <C> <C>
Wireless Internet $ 18.3 $ 27.8 $ (9.5) (34)%
Field Services 5.6 9.9 (4.3) (43)
Transportation 3.3 7.9 (4.6) (58)
Telemetry 2.3 2.3 0.0 0
All Other 2.9 1.4 1.5 107
----- ----- ----- ----
Service Revenue 32.4 49.3 (16.9) (34)%
Equipment Revenue 4.5 5.2 (0.7) (13)
----- ----- ----- ----
Total $ 36.9 $ 54.5 $ (17.6) (32)%
===== ===== ===== ====
</TABLE>
37
The decrease in service revenue in 2004 as compared to 2003 was primarily the
result of the loss of certain large accounts and a material decrease in wireless
internet revenue, with additional decreases in field services and transportation
revenues. UPS deactivated a significant number of units on our network during
the third and fourth quarters of 2003 and our revenue from UPS declined
significantly during this period, resulting in the majority of the decline in
transportation revenues. This revenue decline was marginally offset by our
ability to generate some commissions from the transition of our wireless
internet customers to newer technologies under our reseller agreements with
Verizon and T-Mobile (we terminated these agreements in the fourth quarter of
2004 in connection with entering into our agreements with Cingular and Sprint).
We anticipate that our wireless revenue will continue to decline in 2005 as a
result of the continued decrease in our wireless internet customer base. By
market segment, we note:
o Wireless Internet: The revenue decline in the wireless internet sector
during this period was driven almost exclusively by the migration of our
wireless internet customers to newer technologies and newer wireless
internet products (for example, RIM wireless email devices that incorporate
a wireless telephone, which cannot be used on our network). Additionally,
the termination of the manufacture of 857 devices by Research in Motion
greatly hampered our ability as well as our larger resellers' ability to
add new wireless internet customers to our network. We anticipate that our
wireless internet revenue will continue to decline in 2005 for similar
reasons.
o Field Service: The decrease in field service revenue is primarily the
result of the termination of several customer contracts, including
Schindler, Sears, Lanier, and Pitney Bowes, as well as the general
reduction of units and rates across the remainder of our field service
customer base. Schindler's revenue increased slightly due to a $0.25
million contract termination fee that was billed and collected in third
quarter of 2004. We believe that the technology requirements of this market
segment are more compatible with our network than the wireless internet
market segment, and we are making efforts to grow this segment.
o Transportation: The decrease in revenue from the transportation sector was
primarily the result of UPS, beginning in July 2003, having removed a
significant number of their units from our network. UPS represented $0.2
million and $0.9 million of revenue for the three and twelve months ended
December 31, 2004, as compared to $0.3 million and $5.5 million of revenue
for the three and twelve months ended December 31, 2003. We did, however,
also continue to experience growth during 2004 in other transportation
accounts, most notably Aether and Roadnet. We believe that the technology
requirements of this market segment are more compatible with our network
than the wireless internet market segment, and we are making efforts to
grow this segment.
o Telemetry: While we experienced revenue growth in certain telemetry
customer accounts, this revenue growth was equally offset by customer
losses or negative rate changes in other telemetry accounts. We believe
that the technology requirements of this market segment are more compatible
with our network than the wireless internet market segment, and we are
making efforts to grow this segment.
o Other Revenue: The increase in other revenue for the year ended December
31, 2004 was attributable to the settlement of a take-or-pay contract with
Wireless Matrix resulting in the recognition of $1.6 million of revenue and
approximately $0.7 million of commissions earned via the agency and dealer
agreements with Verizon Wireless and T-Mobile USA. Our efforts to sell and
promote wireless email and wireless internet applications to enterprise
accounts under our agent relationships with T-Mobile USA and Verizon
Wireless were reduced significantly in the third and fourth quarter of
2004, which we anticipate will lead to a decline in these revenues in the
future, unless we can improve our efforts in this area or refocus our
efforts in this revenue segment to a different vendor/strategy. We
terminated these agreements in order to enter into our resale agreements
with Cingular and Sprint and launch our new iMotient Solutions TM platform.
38
o Equipment Revenue: The decrease in equipment revenues for the year ended
December 31, 2004 was the result of the decline in sales of wireless
internet devices as compared to the year ended December 31, 2003 and the
third and fourth quarter decline in the sale of devices attributable to
agency and dealer agreements with Verizon Wireless and T-Mobile USA.
For the year ended December 31, 2004, four customers accounted for approximately
40% of our service revenue, with one customer, SkyTel, accounting for more than
22%. As of December 31, 2004, one customer, RIM, accounted for more than 13% of
our net accounts receivable. No other single customer accounted for more than
10% of our net accounts receivable. The revenue attributable to such customers
varies with the level of network airtime usage consumed by such customers, and
none of the service contracts with such customers requires that the customers
use any specified quantity of network airtime, nor do such contracts specify any
minimum level of revenue. There can be no assurance that the revenue generated
from these customers will continue in future periods.
Expenses
The table below summarizes, for the periods indicated, a year-over-year
comparison of the key components of our operating expenses.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
Summary of Expenses 2004(1) 2003(2) Change % Change
------------------- ------- ------- ------ --------
(in millions)
<S> <C> <C> <C> <C>
Cost of Service and Operations $ 39.6 $ 51.4 $ (11.8) (23)%
Cost of Equipment Sales 4.3 5.9 (1.6) (27)
Sales and Advertising 1.9 4.6 (2.7) (59)
General and Administration 13.2 11.3 1.9 17
Operational Restructuring and
Impairment Costs 6.3 -- 6.3 --
Depreciation and Amortization 15.6 21.5 (5.9) (27)
Loss on Disposal of Assets 2.7 3.0 (0.3) (10)
Loss on Impairment of Asset 0.8 5.5 (4.7) (85)
Gain on Debt and Capital Lease
Retirement (0.8) -- (0.8) --
--------- --------- -------- --------
Total Operating $ 83.6 $ 103.2 $ (19.6) (19)%
========= ========= ======== ========
</TABLE>
(1) Includes compensation expense of $6.5 million related to the market value
of employee stock options and $3.6 million of stock compensation expense
for director and consultants.
(2) Includes compensation expense of $0.6 million related to the market value
of employee stock options.
o Cost Of Service And Operations: Our largest single cost center is the
cost of service and operations, which includes costs to support
subscribers, such as network telecommunications charges and site rent
for network facilities, network operations employee salary and related
costs, network and hardware and software maintenance charges, among
other things. As a percentage of total revenues, these costs totaled
approximately 107% for 2004, as compared to 94% in 2003. Our aggregate
expenses in this area decreased $11.8 million, or $16.0 million,
excluding certain non-cash compensation charges. Given our ongoing
cost-reduction efforts described above, we expect these costs will
continue to decrease. The extent of the decrease will depend both upon
our ability to successfully manage our cost-reduction efforts as well
as the necessity for these expenditures in the future if our revenue
continues to decline. Additionally, any decreases would be offset by
additional non-cash compensation expense related to currently
outstanding employee stock options if the market price of our common
stock continues to increase. (See "--2002 Stock Option Plan" below).
The decrease in 2004 is primarily due to:
39
o lower employee salary and related costs due to the workforce
reductions implemented in March of 2003 and February of 2004, of
approximately $2.3 million from 2003 to 2004.
o the decrease in licensing fees paid primarily to RIM for licensing
Blackberry as a result of the decline of wireless internet units and
revenues, of approximately $0.8 million from 2003 to 2004.
o lower network maintenance costs as a result of the termination of our
national maintenance contract with Motorola at December 31, 2003, of
approximately $4.4 million from 2003 to 2004, as well as the continued
removal of older-generation base stations from the network and the
removal of base stations under our network rationalization efforts
initiated in the second quarter of 2004. We currently perform our
maintenance on our base stations by contracting directly with service
shops in respective regions, which has materially lowered our cost
relative to our prior national maintenance contract.
o lower site lease costs, of approximately $1.8 million from 2003 to
2004, and telecommunications costs, of approximately $3.0 million from
2003 to 2004, for base station locations as a result of the removal of
base stations as part of our efforts to remove older-generation
equipment from our network and the removal of base stations under our
network rationalization efforts initiated in the second quarter of
2004. As we continue to remove base stations from the network, we
anticipate that these costs will continue to decrease.
o reductions in hardware and software maintenance costs as a result of
the negotiation of lower rates on maintenance service contracts in
2003 and 2004, the reduction of software licenses as a result of
having fewer employees and a decrease in software development costs as
a result of a change in capitalization policy, of approximately $1.1
million from 2003 to 2004.
These decreases were partially offset by:
o higher compensation expenses associated with stock options issued to
employees of $4.4 million for the year ended December 31, 2004, as
compared to $0.2 million for the year ended December 31, 2003.
Excluding these compensation charges, cost of service and operations
decreased $16.0 million, or 31% for the year ended December 31, 2004,
as compared to the comparable period in 2003.
o Cost Of Equipment And Sales: The decrease in cost of equipment for the year
ended December 31, 2004 was the result of the decline in sales of wireless
internet devices and a decline in the third and fourth quarter of the sale
of devices attributable to agency and dealer agreements with Verizon
Wireless and T-Mobile USA. Our efforts to sell under our agent
relationships with T-Mobile USA and Verizon Wireless were reduced
significantly in the third and fourth quarter of 2004 and these contracts
were terminated in the fourth quarter of 2004 to accommodate our agreements
with Sprint and Cingular. As our sales of these devices will decrease in
the future, so will these costs.
o Sales And Advertising: Sales and advertising expenses as a percentage of
total revenue totaled approximately 5% for 2004, compared to 8% for 2003.
The decrease in sales and advertising expenses for the year ended December
31, 2004 was primarily attributable to lower employee salary and related
costs, of approximately $1.9 million from 2003 to 2004, including sales
commissions of approximately $0.5 million from 2003 to 2004, due to lower
sales volumes and the workforce reductions implemented in March 2003 and
February 2004. These decreases were also impacted by compensation charges
associated with stock options issued to employees of $0.4 million for the
year ended December 31, 2004, as compared to $0.2 million for the year
ended December 31, 2003. Excluding these compensation charges, sales and
advertising decreased $3.0 million, or 67% for the year ended December 31,
2004, as compared to the comparable period in 2003. We anticipate that
these costs will increase in the future in conjunction with our increasing
efforts to sell and promote our iMotient Solutions TM platform.
Additionally, we may experience additional non-cash compensation expense
related to currently outstanding employee stock options if the market price
of our common stock continues to increase. (See "--2002 Stock Option Plan"
below).
40
o General And Administrative: General and administrative expenses for the
core wireless business as a percentage of total revenue totaled
approximately 36% for 2004 as compared to 21% for 2003. Our aggregate
expenses in this area increased $1.9 million or 17%. However, excluding
certain compensation charges related to stock options, general and
administrative decreased $3.1 million, or 28% for the year ended December
31, 2004, as compared to 2003. The decrease in general and administrative
expenses was primarily attributable to:
o lower employee salary and related costs due to the workforce
reductions implemented in March of 2003 and February of 2004 of
approximately $0.4 million from 2003 to 2004,
o lower rent expense as a result of the closure of our Reston facility
in July 2003, of approximately $0.6 million from 2003 to 2004,
o lower audit and tax fees, of approximately $0.2 million from 2003 to
2004, and
o a reduction in bad debt reserves primarily due to lower accounts
receivables balances as a result of improvements in our collection
capabilities, of approximately $0.5 million from 2003 to 2004.
These decreases were offset by:
o increases in legal and regulatory fees, of approximately $0.1 million
from 2003 to 2004,
o higher consulting expenses as a result of the $1.8 million expensed in
2004 primarily related to CTA's monthly fees and certain stock options
issued to CTA in December of 2004. Compensation expenses in 2003 was
impacted by $0.9 million expensed for the Further Lane warrants in
2003,
o higher expenses related to Board compensation of $1.0 million, due
primarily to the issuance of restricted stock to the Board in 2004,
o higher bonus compensation expense due to the reversal of certain
accrued bonuses in 2003 as a result of workforce reductions, and
o increases in compensation expenses associated with stock options
issued to employees of $1.8 million and $3.6 million of stock
compensation expense for directors and consultants for the year ended
December 31, 2004, as compared to $0.2 million in 2003.
We anticipate that these costs will continue to decline in the future in
conjunction with our overall cost-cutting efforts. However, any decreases would
be offset by additional non-cash compensation expense related to currently
outstanding employee stock options if the market price of our common stock
continues to increase. (See "--2002 Stock Option Plan" below).
o Restructuring And Impairment Charges: There were no restructuring costs in
2003. The operational restructuring and impairment charges in the first
quarter of 2004 resulted from the severance and related salary charges as a
result of the reduction in force in February 2004 and certain costs as a
result of base station deconstruction activities as part of our on-going
network rationalization efforts. In the second quarter of 2004, we took an
operational restructuring charge of $5.2 million related to these network
rationalization efforts.
In the second quarter of 2004, we finalized plans to implement certain
network station rationalization initiatives. These initiatives involve the
de-commissioning of base stations from our network. We had 1,549 base
stations in our network as of March 31, 2004, and as of December 31, 2004,
we have 1,239 base stations in our network. We took these actions in a
coordinated effort to reduce network operating costs while also focusing on
41
minimizing the potential impact to our customers' communications and
coverage requirements. We were substantially complete with these network
rationalization initiatives in December 2004. Additionally, during the
first quarter of 2005, Motient initiated a plan to refocus its DataTac
network primarily on the Top 40 Metropolitan Statistical Areas (MSAs). This
plan involves the decommissioning of DataTac network components and
termination of service in previously served MSAs above the Top 40. Given
the similar coverage profiles of the Cingular and Sprint networks, the
significantly increased capacity capabilities of these networks relative to
DataTac and the concentration of our revenues in the Top 40 MSAs, we
determined that this plan best allowed us to match our network
infrastructure costs with our revenue base, while continuing to meet the
needs of as many of our customers as possible. We have notified our
customers of this change in our network coverage and this decommissioning
began on June 1, 2005. We are making every effort to provide any impacted
customers with alternatives to migrate their services and applications
either to our new iMotient Solutions platform, or to other networks using
our agreements with RACO Wireless, Inc. and eAccess Solutions, Inc. We
expect that the costs associated with this de-commissioning will be lower
than in 2004. We anticipate that a major component of these costs will be
the write-off of our de-commissioned base stations (anticipated to be
approximately $1.2 million). However, any future programs of
de-commissioning could result in increased expenditures in this area. No
such additional programs are planned at this time.
o Depreciation And Amortization: Depreciation and amortization for the core
wireless business was approximately 42% of total revenue for 2004, as
compared to 39% for 2003. The decrease in depreciation and amortization
expense in 2004 was partially attributable to the impairment of the value
of our customer contract intangibles as of September 2003, as well as the
write-off of certain base station assets in June 2004 as a result of our
network restructuring initiatives. As a result of our additional impairment
of our customer contract intangibles in December 2004 as well as continued
network restructuring initiatives planned in 2005, we expect depreciation
and amortization to continue to decrease in 2005.
o Loss On Impairment Of Assets And Loss On Disposal Of Assets: In May 2004,
we engaged a financial advisory firm to prepare a valuation of customer
contract intangibles as of September 2003. Due to the loss of UPS as a core
customer in 2003 as well as the migration and customer churn occurring in
our wireless internet base that is impacting the average life of a customer
in this base, among other things, we determined an impairment of the value
of these customer contracts was probable. As a result of this valuation,
the value of customer contract intangibles was determined to be impaired as
of September 2003 and was reduced by $5.5 million. In addition, in December
2004, we performed an additional analysis on the impact of our revenue
decline on our customer contract intangibles. As a result, we determined
that the value of our customer contract intangibles was further impaired
and was reduced by $0.8 million.
On July 29, 2003, our wholly-owned subsidiary, Motient Communications,
entered into an asset purchase agreement with Nextel, under which Motient
Communications sold to Nextel certain of its SMR licenses issued by the FCC
for $3.4 million. The closing of this transaction occurred on November 7,
2003. On December 9, 2003, Motient Communications entered into a second
asset purchase agreement, under which Motient Communications will sell
additional licenses to Nextel for $2.75 million resulting in a $1.5 million
loss which was recorded in December, 2003. In February, 2004, we closed the
sale of licenses covering approximately $2.2 million of the purchase price,
and we closed the sale of approximately one-half of the remaining licenses
in April 2004. The transfer of the other half of the remaining licenses has
been challenged at the FCC by a third-party. While we believe, based on the
advice of counsel, that the FCC will ultimately rule in our favor, we
cannot assure you that we will prevail, and, in any event, the timing of
any final resolution is uncertain. None of these licenses are necessary for
our future network requirements. We recorded a loss on the sale of certain
assets of $3.0 million, consisting of $1.5 million on the sale of
frequencies to Nextel (discussed above) and approximately $1.5 million
relating to the write-off of consulting costs and equipment purchased for
our project to convert our telecommunications circuits from an analog to a
digital base. This project was discontinued in favor of our TCPIP/Frame
Relay conversion project.
42
In June 2004, we negotiated settlements of our vendor financing and notes
payable with Motorola and our capital lease with Hewlett-Packard. These
settlements resulted in a gain on debt and capital lease retirements of
$0.8 million.
Other Expenses & Income
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
2004 2003
------------- -------------
Other Income/Expense
--------------------
(in thousands)
<S> <C> <C>
Interest Expense, net $ (4,106) $ (6,365)
Write -off of deferred financing costs (12,035) ---
Other Income, net 343 662
Other Income from Aether 1,953 2,203
Equity in Losses of Mobile Satellite Ventures $ (11,897) $ (9,883)
</TABLE>
Interest Expense: Interest expense decreased for the year ended December 31,
2004, as compared to the year ended December 31, 2003, due primarily to the
April 2004 repayment of our term credit facility and the July 2004 repayments of
our notes payable to Motorola, Rare Medium and CSFB, and the termination of our
capital lease with Hewlett-Packard.
Write-Off Of Deferred Financing Fees: The April 2004 repayment of our term
credit facility and the subsequent termination on December 31, 2004, resulted in
the requirement to immediately expense $12.0 million in financing fees related
to the credit facility. The financing fees related to the credit facility
represent the unamortized portion of the value ascribed to warrants provided to
the term credit facility lenders on our closing of our credit facility in
January of 2003 and the subsequent amendment in March 2004. We issued warrants
to these same lenders at closing of the subsequent amendment in March 2004 to
purchase, in the aggregate, 1,000,000 shares of our common stock. The exercise
price for these warrants is $4.88 per share. The warrants were valued at $6.7
million using a Black-Scholes pricing model, have been recorded as a debt
discount and were being amortized as additional interest expense over three
years, the term of the related debt. Upon closing of the amendment to the credit
agreement, we also paid closing and commitment fees to the lenders of $320,000,
which were also being amortized over three years.
Interest expense is presented net of interest income on our bank balances and
the interest accrued on our note receivable from MSV. As a result of November
2004 investment transaction into MSV, the principal and interest outstanding
under our note receivable from MSV was converted into limited partnership units
in MSV.
In July 2004, we repaid all amounts outstanding under our notes payable to Rare
Medium and CSFB.
Given our recent private placements of common stock and our repayment of our
outstanding debt, we expect interest expense to decline significantly in the
future. We have no current plans to seek any additional debt financing, and we
accordingly anticipate that we will not have any material interest expense in
2005, other than what may be associated with our trade credit.
Additionally, we recorded other charges in 2004 and 2003 as a result of various
transactions. For additional information concerning these charges, please see
"-- Liquidity and Capital Resources." We also recorded other income from Aether
in 2004 of $2.0 million, as compared to $2.2 million in 2003.
43
Effective May 1, 2002, we were required to reflect our equity share of the
losses of MSV. We recorded equity in losses of MSV of $11.9 million and $9.9
million for the years ended December 31, 2004 and 2003. The MSV losses for the
years ended December 31, 2004 and 2003 are Motient's 46.5% and 38.6% share of
MSV's losses for the same period reduced by the loans in priority. For the years
ended December 31, 2004 and 2003, MSV had revenues of $29.0 million and $27.1
million, operating expenses of $57.7 million and $46.5 million and a net loss of
$33.5 million and $28.0 million, respectively. Our calculations give effect to
the impairment of our investment in MSV in the fourth quarter of 2002 in the
amount of $15.4 million. We are unable to predict our equity share of MSV's gain
or losses in future periods, but we do not anticipate that MSV will be
profitable in the near future. See M-1 for MSV financial statements.
Years Ended December 31, 2003 And 2002
In the year ended December 31, 2003 as compared to the same period of 2002, we
experienced the loss of certain large customers, primarily as a result of those
customers' concern with regard to our financial constraints and the continued
viability of our business in the second half of 2002 and 2003. After our
reorganization, we were required to take numerous actions to reduce our cost
structure and change our operating strategy, which included reductions in the
number of employees and changes in senior management, among other things. These
actions were viewed negatively by certain of our customers and we were unable to
convince them otherwise despite expending considerable effort. During 2003, our
mobile wireless Internet revenue base continued to grow as compared to 2002 as
result of expanding our base of units in our existing corporate accounts in this
segment. Our existing reseller channel partners represented a significant
portion of the revenue growth during this period. The termination of the
manufacture of RIM 850 and 857 devices by Research in Motion, as well as the
increased competition from other wireless carriers offering converged voice and
data devices that utilize newer networks such as 1XRT and GPRS, will hamper our
ability to continue to grow wireless internet revenues in 2004. We are exploring
ways to protect against this anticipated revenue loss, such as our introduction
of the sale of products under our agreements with T-Mobile and Verizon Wireless.
We are also working proactively to lower our cost structure in anticipation of
this revenue loss. We believe that several components of our cost structure are
much larger than required for our relative business size. We have been
successful in dramatically reducing our cost structure in our continued efforts
to improve our profitability.
Subscriber Statistics
Our customer base can be generally divided into five broad categories, Wireless
Internet, Field Services, Transportation, Telemetry and Other. Wireless Internet
primarily consists of customers using our network and applications to access
certain Internet functions, like email. Devices and airtime used by
transportation and shipping companies, or by personnel in the field service
industries (such as repair personnel), for dispatching, routing and other vital
communications functions are known as Transportation and Field Service,
respectively. Telemetry typically covers devices and airtime used to connect
remote equipment, such as wireless point-of-sale terminals, with a central
monitoring facility. Other revenues may consist of sales commissions, consulting
fees or development fees.
The table below summarizes as of December 31, 2003 and 2002 the make up of our
subscriber base. Wireless devices may be divided into three categories:
registered, active and billable. Registered devices represent devices that our
customers have registered for use on our network. Certain numbers of these
devices may be kept in inventory by our customers for future use and generally
are not revenue producing. Customers can move such inventory into a production
status upon which it typically becomes billable and generates revenue. However,
billable units may not pass traffic and thus will not be counted as active. We
count a device as active when it is removed from inventory by the customer and
transmits greater than zero kilobytes of data traffic.
44
<TABLE>
<CAPTION>
As of December 31,
2003 2002 % Change
Registered Billable Active Registered Billable Active Registered Billable Active
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wireless Internet 106,600 69,673 51,179 106,082 71,620 56,070 0% (3) (9)%
Field Services 17,468 16,415 9,851 30,263 28,955 20,462 (42) (43) (52)
Transportation(1) 45,902 39,344 39,513 94,825 83,431 83,815 (52) (53) (53)
Telemetry 32,420 23,947 13,444 30,171 23,733 13,315 7 0 0
All Other 1,305 1,043 584 653 887 572 100 17 2
----------- ---------- ---------- --------- ---------- ---------- ---------- ----------- -------
Total 203,695 150,422 114,571 261,994 208,626 174,234 (22)% (28)% (34)%
=========== ========== ========== ========= ========== ========== =========== =========== =========
</TABLE>
(1) UPS migrated their units to another network over the course of the second
half of 2003. At December 31, 2002, UPS had 70,955 units registered on
Motient's network. At December 31, 2003, UPS had 11,829 units registered on
Motient's network.
Revenue
The table below sets forth, for the periods indicated, a year-over-year
comparison of the key components of our revenue:
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------- -------------------
Eight Months Four Months Combined Year
Year Ended Ended Ended Ended
December 31, December 31, April 30, December 31,
2003 2002 2002 2002 Change % Change
----------- ------------ ----------- ------------- --------- ---------
Summary of Revenue
------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Wireless Internet $ 27.8 $ 15.5 $ 5.6 $ 21.1 $ 6.7 32%
Field Services 9.9 10.5 5.6 16.1 (6.2) (39)
Transportation 7.9 7.4 4.1 11.5 (3.6) (31)
Telemetry 2.3 1.8 0.8 2.6 (0.3) (12)
All Other 1.4 0.3 0.7 1.0 0.4 40
----- ----- ----- ----- ---- ---
Service Revenue 49.3 35.5 16.8 52.3 (3.0) (6)
Equipment Revenue 5.2 1.1 5.6 6.7 (1.5) (22)
----- ----- ----- ----- ---- ---
Total $ 54.5 $ 36.6 $ 22.4 $ 59.0 $ (4.5) (8)%
===== ===== ===== ===== ==== ===
</TABLE>
The decrease in service revenue in 2003 revenue year-over-year was primarily the
result of decreases in field services and transportation revenues, partially
offset by an increase in revenue in the wireless internet segment.
UPS deactivated a significant number of units on our network during the third
and fourth quarters of 2003 and our revenue from UPS declined significantly
during this period. If we cannot generate additional revenue from other sources
to offset this lost revenue, our overall revenues will decline in the future.
Total revenues declined for the reasons given above, and also as a result of a
22% decrease in equipment revenue. By market segment, we note:
45
o Wireless Internet: The revenue growth in the Wireless Internet sector
during this period represented our focus on expanding the adoption of
eLink and BlackBerry TM wireless email offerings to corporate
customers with both direct sales people and reseller channel partners.
Our existing reseller channel partners represented a significant
portion of the revenue growth during this period. The number of
wireless internet units registered on our network did not change
materially from 2002 to 2003. The increase in revenues was a result of
the activation of existing registered units into service. The
termination of the manufacture of 850 and 857 devices by Research in
Motion, as well as the increased competition from other wireless
carriers offering converged voice and data devices that utilize newer
networks, will hamper our ability to continue to grow wireless
internet revenues in 2004.
o Field Service: The decrease in field service revenue is primarily the
result of the termination of several customer contracts, including NCR
Corporation, Sears, Lanier, and Bank of America, as well as the
general reduction of units and rates across the remainder of our field
service customer base, primarily IBM, and certain consulting revenues
included in 2002 that were not included in 2003. We believe that the
technology requirements of this market segment are more compatible
with our network than the wireless Internet market segment, and we are
making efforts to grow this segment.
o Transportation: The decrease in revenue from our transportation
segment was primarily the result of UPS migrating a majority of its
units to another network provider over the course of the second half
of 2003. UPS represented $0.3 million of revenue for the three months
ended December 31, 2003, as compared to $2.5 million for the three
months ended December 31, 2002. Another reason for the decrease was
the elimination, as part of fresh-start accounting, of the recognition
of deferred revenue that resulted from the sale of intellectual
property license sold to Aether Systems Inc. in 2000. These decreases
were partially offset by an increase in units and usage for AMSC and
Metra. We believe that the technology requirements of this market
segment are more compatible with our network than the wireless
Internet market segment, and we are making efforts to grow this
segment.
o Telemetry: Although subscriber units grew by 2,249 or 7%
year-over-year, this growth was offset by other churn and negative
rate changes in other telemetry accounts. We believe that the
technology requirements of this market segment are more compatible
with our network than the wireless Internet market segment, and we are
making efforts to grow this segment.
o Other Revenue: The increase in other revenue was primarily
attributable to commissions earned pursuant to the agency and dealer
agreements with Verizon Wireless and T-Mobile USA. Revenue growth in
this market segment will depend on our ability to generate new
customers for these products as well as migrating customers from our
own network to these newer technologies.
o Equipment Revenue: The decrease in equipment revenue was primarily a
result of our decision to decrease the prices for our equipment to
customers over the course of the second quarter of 2002 due to lower
sales of certain of our customer devices and our assessment of market
conditions, demand and competitive pricing dynamics. These reductions
in equipment revenue were partially offset by the sales of devices
attributable to the agency and dealer agreements with Verizon Wireless
and T-Mobile USA.
46
For the year ended December 31, 2003, five customers accounted for approximately
47% of our service revenue, with two customers, UPS and SkyTel, each accounting
for more than 11%. As of December 31, 2003, no single customer accounted for
more than 6% of our net accounts receivable. The revenue attributable to such
customers varies with the level of network airtime usage consumed by such
customers, and none of the service contracts with such customers requires that
the customers use any specified quantity of network airtime, nor do such
contracts specify any minimum level of revenue. There can be no assurance that
the revenue generated from these customers will continue in future periods.
Due to the bankruptcy of WorldCom, beginning in the quarter ended June 30, 2002,
we reserved 100% of all amounts then due from Skytel, a wholly-owned subsidiary
of WorldCom. In October 2002, we received payment from SkyTel of a significant
portion of the amount of our pre-petition claim amount. We have received full,
timely payments thereafter and believe that amounts from SkyTel are currently
fully collectible.
Expenses
The table below summarizes, for the periods indicated, a year-over- year
comparison of the key components of our operating expenses.
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------- -------------------
Eight Months Four Months Combined Year
Year Ended Ended Ended Ended
December 31, December 31, April 30, December 31,
2003 2002 2002 2002 Change % Change
----------- ------------ ----------- ------------- --------- -----------
Summary of Expense
------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Cost of Service and Operations $ 51.4 $ 38.1 $ 21.9 $ 60.0 $ (8.6) (14)%
Cost of Equipment Sales 5.9 2.2 6.0 8.2 (2.3) (28)
Sales and Advertising 4.6 4.8 4.3 9.1 (4.5) (49)
General and Administration 11.3 9.7 4.1 13.8 (2.5) (18)
Restructuring Charges -- -- 0.6 0.6 (0.6) (100)
Depreciation and Amortization 21.5 15.5 6.9 22.4 (0.9) (4)
Loss on Impairment of Asset 5.5 -- -- -- 5.5 --
(Gain) loss on disposal of assets 3.0 2.1 0.6 2.7 0.3 0.1
(Gain) on sale of transportation and
satellite assets -- (0.3) (0.4) (0.7) 0.7 100
-------- -------- -------- -------- -------- -----
Total Operating $ 103.2 $ 72.1 $ 44.0 $ 116.1 $ 12.9 (11)%
======== ======== ======== ======== ======== =====
</TABLE>
(1) Includes compensation expense of $603 thousand related to the market value
of employee stock options.
o Cost Of Service And Operations: Our largest single cost center is the cost
of service and operations, which includes costs to support subscribers,
such as network telecommunications charges and site rent for network
facilities, network operations employee salary and related costs, network
and hardware and software maintenance charges, among other things. As a
percentage of total revenues, these costs declined to approximately 94% for
2003, as compared to 102% in 2002. Given our ongoing cost-reduction efforts
described above, we expect these costs to continue to decrease. The extent
of the decrease will depend both upon our ability to successfully manage
our cost-reduction efforts as well as the necessity for these expenditures
in the future if our customer base declines. The decrease is primarily due
to:
o decreases in telecommunication charges associated with rate reductions
in certain telecommunication contracts of an estimated $907,000,
o decreases in site lease costs due to the removal of older-generation
base stations from our network of approximately $469,000,
47
o reductions in hardware and software maintenance costs as a result of
the reduction of personnel and the negotiation of lower rates on
maintenance service contracts of approximately $336,000,
o decreases in network maintenance costs as a result of the removal of
older-generation base stations from our network as well as the
reduction of rates under our national contract for these services of
approximately $2,112,000 and
o lower employee and related costs due to the workforce reductions
implemented in July and September 2002 and March 2003 of approximately
$4.2 million as well as the reversal of certain employee bonus
accruals from current and prior periods related to these workforce
reductions of approximately $1.5 million.
These decreases were partially offset by:
o an increase in the average lease rate for our site leases of
approximately $130,000,
o increases in licensing and commission payments to third parties with
whom we have partnered to provide certain eLink and BlackBerry TM by
Motient services, as a result of the revenue increase over the year in
our mobile internet segment of approximately $130,000,
o compensation expenses associated with stock options issued to
employees of $211 thousand for the 12 months ended December 31, 2003,
and
o certain expenditures for the removal of older-generation base stations
from our network of approximately $316,000.
o Cost Of Equipment And Sales: Cost of equipment sales expenses as a
percentage of total revenue were approximately 11% for 2003 as compared to
14% for 2002. The decrease in the cost of equipment sold expenses was
primarily the result of reduced terrestrial hardware sales prices during
2002, resulting from a variety of factors, including certain price
reductions on Research in Motion devices, partially offset by the increased
cost of sales of devices attributable to our agreements with Verizon
Wireless and T-Mobile USA. These newer devices used on the Verizon and
T-Mobile networks have increased functionality and, correspondingly,
increased cost, over previous generation devices. The Company also wrote
down the value of its inventory in the second quarter of 2002 by $4.5
million. To the extent we are unable to add new customers at previous
rates, these costs will likely decline in the future.
o Sales And Advertising: Sales and advertising expenses as a percentage of
total revenue were approximately 8% for 2003, compared to 15% for 2002. The
decrease in sales and advertising expenses from 2002 was primarily
attributable to lower employee salary and related costs due to the
workforce reductions implemented in July and September 2002 and March 2003
as well as significant reductions in or elimination of public relations
costs ($324,000, or 96%, year-to-year) and sales and marketing programs
($265,000, or 65%, year-to year) as a result of our reorganization in May
2002 and the reversal of certain employee bonus accruals from current and
prior periods related to these workforce reductions. These decreases were
partially offset by compensation expenses associated with stock options
issued to employees of $151 thousand for the 12 months ended December 31,
2003. There was no compensation expense associated with employee stock
options for the 12 months ended December 31, 2002. We anticipate that these
costs will continue to decline in the future in conjunction with our
overall cost-cutting efforts.
48
o General And Administrative: General and administrative expenses for the
core wireless business as a percentage of total revenue were approximately
21% for 2003 as compared to 23% for 2002. The decrease in 2003 costs over
2002 costs in the general and administrative expenses was primarily
attributable to lower employee salary and related costs due to the
workforce reductions implemented in July and September 2002 and March of
2003 as well as the reversal of certain employee bonus accruals from
current and prior periods related to these workforce reductions. In
addition, this decrease was attributable to lower rent expense from the
closure of our Reston facility in July 2003 of approximately $588,000,
lower directors and officers liability insurance costs subsequent to our
reorganization, of approximately $564,000, and a reduction in bad debt
charges primarily due to the lowering of our reserves after our
reorganization of approximately $584,000. These decreases were partially
offset by compensation expenses associated with stock options issued to
employees of $241 thousand for the 12 months ended December 31, 2003. There
was no compensation expense associated with employee stock options for the
12 months ended December 31, 2002. Increases in the consulting costs
related to the engagement and the related compensation costs of CTA and
Further Lane in May 2002 and July 2003, respectively, and increases in
audit, tax and legal fees related to our fiscal year 2002 audit and
re-audits of fiscal year 2001 and 2000, occurring principally during the
last nine months of 2003. Certain events in 2002 also contributed to this
decrease in general and administrative expenses from 2002 to 2003,
including the compensation expense associated with the issuance of warrants
to CTA in December 2002 and fees incurred as a result of Motient's
withdrawal from certain FCC frequency auctions in the second quarter of
2002. We anticipate that these costs will continue to decline in the future
in conjunction with our overall cost-cutting efforts.
o Restructuring Costs: There were no restructuring costs in 2003. Operational
restructuring costs in 2002 due to certain employee reduction initiatives
and reorganization expenses.
o Depreciation And Amortization: Depreciation and amortization for the core
wireless business was approximately 40% of total revenue for 2003, as
compared to 38% for 2002. The decrease in depreciation and amortization
expense in 2003 was partially attributable to the impairment of the value
of our customer contract intangibles as of September 2003.
o Loss On Impairment Of Asset: In May 2004, we engaged a financial advisory
firm to prepare a valuation of customer intangibles as of September 2003.
Due to the loss of UPS as a core customer in 2003 as well as the migration
and customer churn occurring in our mobile internet base that is impacting
the average life of a customer in this base, among other things, we
determined an impairment of the value of these customer contracts was
probable. As a result of this valuation, the value of customer intangibles
was determined to be impaired as of September 2003 and was reduced by $5.5
million.
o Interest Expense: Interest expense from May 1, 2002, is associated with our
various debt obligations, including the $19.75 million notes payable to
Rare Medium and CSFB, our capital lease obligations, our vendor financing
commitment and our term credit facility put in place in January of 2003. We
incurred $6.4 million of interest expense in 2003, compared to $3.8 million
during 2002. The $2.6 million increase was due primarily to the
amortization of fees and the value ascribed to warrants provided to the
term credit facility lenders on our closing of our term credit facility in
January of 2003. We issued warrants at closing to the lenders to purchase,
in the aggregate, 3,125,000 shares of our common stock. The exercise price
for these warrants is $1.06 per share. The warrants were valued at $10
million using a Black-Scholes pricing model and have been recorded as a
debt discount and are being amortized as additional interest expense over
three years, the term of the related debt. Upon the closing of the credit
agreement, we paid closing and commitment fees to the lenders of $500,000,
which are also being amortized over three years. Given our recent private
placements of common stock and our repayment of the term credit facility,
we expect interest expense to decline in the future as we will have less
debt financing in place.
49
o Other Expenses And Income: On July 29, 2003, our wholly-owned subsidiary,
Motient Communications, entered into an asset purchase agreement with
Nextel, under which Motient Communications sold to Nextel certain of its
SMR licenses issued by the FCC for $3.4 million. The closing of this
transaction occurred on November 7, 2003. On December 9, 2003, Motient
Communications entered into a second asset purchase agreement, under which
Motient Communications will sell additional licenses to Nextel for $2.75
million resulting in a $1.5 million loss which was recorded in December,
2003. In February, 2004, we closed the sale of licenses covering
approximately $2.2 million of the purchase price, and we closed the sale of
approximately one-half of the remaining licenses in April 2004. The
transfer of the other half of the remaining licenses has been challenged at
the FCC by a third-party. While we believe, based on the advice of counsel,
that the FCC will ultimately rule in our favor, we cannot assure you that
we will prevail, and, in any event, the timing of any final resolution is
uncertain. None of these licenses are necessary for our future network
requirements. We have and expect to continue to use the proceeds of the
sales to fund its working capital requirements and for general corporate
purposes. The lenders under our term credit agreement have consented to the
sale of these licenses.
Effective May 1, 2002, we were required to reflect our equity share of the
losses of MSV. We recorded equity in losses of MSV of $9.9 million and $8.8
million for the years ended December 31, 2003 and 2002. The MSV losses for the
years ended December 31, 2003 and 2002 are Motient's 46.5% and 48% share of
MSV's losses for the same period reduced by the loans in priority. For the years
ended December 31, 2003 and 2002, MSV had revenues of $27.1 million and $24.9
million, operating expenses of $46.5 million and $45.7 million and a net loss of
$28.0 million and $26.2 million, respectively. Our calculations give effect to
the impairment of our investment in MSV in the fourth quarter of 2002 in the
amount of $15.4 million. We are unable to predict our equity share of MSV's gain
or losses in future periods, but we do not anticipate that MSV will be
profitable in the near future.
We recorded other income from Aether in 2003 of $2.2 million, as compared to
$2.1 million in 2002.
Additionally, we recorded a number of other charges in 2003 and 2002 as a result
of various transactions. For additional information concerning these charges,
please see "-- Liquidity and Capital Resources."
In 2003:
o Loss on impairment of asset of $5.5 million, discussed above
o We recorded a loss on the sale of certain assets of $3.0 million,
consisting of $1.5 million on the sale of frequencies to Nextel
(discussed above) and approximately $1.5 million relating to the
write-off of consulting costs and equipment purchased for our project
to convert our telecommunications circuits from an analog to a digital
base. This project was discontinued in favor of our TCPIP/Frame Relay
conversion project.
In 2002:
o As a result of our debt restructuring efforts, we recorded costs of
$23.1 million.
o We recorded a gain on the sale of our transportation and satellite
assets of $0.8 million.
o We recorded a loss on the sale of certain assets of $1.2 million.
o Related to our reorganization in May of 2002, we recorded a gain on
fair market adjustment of $94.7 million and a gain on the
restructuring of debt of $183.7 million.
50
o Net capital expenditures for the year ended December 31, 2003 for
property and equipment were $0.2 million, as compared to $1.1 million
for 2002. Expenditures consisted primarily of assets related to our
terrestrial network.
2002 Stock Option Plan
Options to purchase 605,727 shares of our common stock were outstanding as of
December 31, 2004 under our 2002 stock option plan. Of these, 139,897 options
are accounted for in accordance with variable plan accounting, which requires
that the value of these options are measured at their intrinsic value and any
change in that value be charged to the income statement each quarter based on
the difference (if any) between the intrinsic value and the then-current market
value of the common stock. Therefore, for every $10 increase in our stock price,
we would incur $10 of non-cash expense for every variable option outstanding at
the end of the period.
Material Off-Balance Sheet Transactions
As of June 30, 2005, December 31, 2004, 2003 and 2002, we did not have any
material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) under
Regulation S-K.
Liquidity And Capital Resources
As of June 30, 2005, we had approximately $276 million of cash and cash
equivalents, which includes approximately $179 million of cash held by
TerreStar. Approximately $43 million of additional cash, in aggregate, is held
in an escrow account that will be used to make the first two years of dividend
payments on our Series A and Series B Preferred Stock. The first such payment,
representing interest earned for the first six months of such period, was made
on October 15, 2005. The increase of $264 million from June 30, 2004 is mainly
attributable to an increase in cash provided by financing activities, offset by
decreases in net cash used in operating and investing activities, as described
below. Our principal source of funds is currently, and as of June 30, 2005, cash
on hand.
As of December 31, 2004, we had approximately $16.9 million of cash and cash
equivalents on hand, compared to $3.6 million at December 31, 2003. In each case
the increase is mainly attributable to an increase in cash provided by financing
activities, offset by decreases in net cash used in operating and investing
activities, as described below.
Summary Of Cash Flows For The Six Months Ended June 30, 2005 and 2004, and The
Years Ended December 31, 2004 And 2003
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30, Year Ended Year Ended
2005 2004 December 31, December 31,
(Unaudited) (Unaudited) 2004 2003
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash (Used In) Provided by Operating Activities $ (13,009) $ (8,230) $ (18,354) $ (7,120)
--------- --------- --------- ---------
Cash (Used) Provided by Investing Activities (55,074) 1,455 (120,662) 4,893
--------- --------- --------- ---------
Cash (Used) Provided by Financing Activities:
Debt payments on capital leases and
vendor financing -- (3,101) (5,250) (4,006)
Net proceeds from debt issuances -- 1,500 1,500 4,500
Repayments of debts -- (6,785) (6,899) --
Repayment of notes (8,739) -- (23,990) --
Equity Issuances 116 23,188 192,024 --
Equity Issuance costs (9) (476) (6,974) --
Proceed from issuance of employee stock
options 1,220 1,003 2,032 (489)
Debt issuance costs and other charges -- -- (100) --
Proceeds from issuance of Series A Cumulative
Convertible Preferred Stock 408,500 -- -- --
51
Deferred financing fees on Series A Cumulative
Convertible Preferred Stock (17,483) -- -- --
Purchase of Treasury Stock (56,750) -- -- --
Cash Provided (Used) in Financing Activities 326,855 15,329 152,343 5
--------- --------- --------- ---------
Total Change in Cash 258,772 8,554 13,327 (2,222)
========= ========= ========= =========
Cash and Cash Equivalents, end of period $ 275,717 $ 12,172 $ 16,945 $ 3,618
========= ========= ========= =========
</TABLE>
Operating Activities: While we are attempting to reduce cash used in operating
activities as a result of our cost cutting efforts and through our attempts to
increase our revenues by focusing on our iMotient Solutions products and
services as well as on more network-appropriate market segments, it is possible
revenue declines will not be sufficient to offset or overtake the cash saved by
our cost cutting efforts in the future.
Cash used in operating activities during the six months ended June 30, 2005 as
compared to the same period in the prior year increased primarily as a result of
decreases in funds provided by revenue and increases in certain fees and
expenses related to financial reporting requirements and corporate finance
transactions. While we are attempting to reduce cash used in operating
activities as a result of our cost cutting efforts and through our attempts to
increase our revenues by focusing on our iMotient Solutions(TM) products and
services, it is possible revenue declines will be sufficient to offset or
overtake the cash saved by our cost cutting efforts in the future.
Net cash used in operating activities during the year ended December 31, 2004
was approximately $18.4 million as compared to $7.1 million for the year ended
December 31, 2003. The $18.4 million cash used in operating activities was
attributed mainly to our net loss of $72.0 million, which included non-cash
depreciation of $15.6 million, equity in losses of MSV of $11.9 million, asset
disposal and impairment charges of $5.8 million, amortization and write-off of
deferred financing fees of $14.5 million, 401K and stock compensation charges of
$10.3 million and gain on debt restructuring of $0.8 million.
Changes in assets and liabilities during the year ended December 31, 2004
resulted in an increase to operating cash flow of approximately $3.8 million,
consisting of a $5.6 million increase to cash used for accounts payable and
accrued expenses. This increase is a result of faster payments to vendors and
reduced accruals due to lower operating expenses and an increase in available
funds. Our $6.2 million increase in deferred revenue and other deferred items
was due to amortization of these costs and relatively small additions to
deferred revenue and other deferred items. A $0.1 million decrease in cash used
for inventory is a result of the termination of our T-Mobile and Verizon
contracts, end of life for RIM 857 devices and the decline in demand for devices
used on our DataTac network. A $1.9 million decrease in cash received from
accounts receivable is the result of our decline in sales. The $4.5 million
decrease in other current assets is primarily attributable to a decrease in
prepaid site rent and the $1.5 million decrease in accrued interest is a result
of the repayment of our notes and term credit facility.
Investing Activities:
The increase in cash used in investing activities for the six months ended June
30, 2005 as compared to the same period in the prior year was attributable to
increases in restricted cash consisting of approximately $18 million related to
the satellite construction contract for TerreStar Networks and approximately $43
million related to future interest payments on Series A Cumulative Convertible
Preferred Stock, offset by $6 million in restricted cash acquired in the
TerreStar purchase and lower capital equipment purchases of approximately $0.1
million in the first six months of 2005 as compared to the same period in 2004.
52
Net cash used in investing activities for the year ended December 31, 2004 was
$120.7 million as compared to $4.9 million provided by investing activities for
the year ended December 31, 2003. The $120.7 million cash used in investing
activities consists of our $125.0 million investment in MSV in November 2004,
offset by $2.1 million which reduced our notes receivable from MSV. Cash flows
from investing activities also increase due to the conversion of our $ 1.1
million letter of credit that secured our capital lease with Hewlett-Packard to
unrestricted cash, as part of our negotiated settlement of these obligations
with Hewlett-Packard in June 2004 and increased $0.4 million due to the
conversion of other unrestricted cash. Cash used in investing activities
decreased by our investments in property and equipment of $1.4 million
reflecting our investment in new telecommunications infrastructure costs, this
investment was offset by proceeds from the sale of certain frequency assets of
$2.1 million.
Financing Activities:
The increase in cash provided by financing activities for the six months ended
June 30, 2005 as compared to the same period in the prior year was the result of
the proceeds from the preferred stock financing completed in April 2005 and the
exercise of certain employee stock options and warrants, offset by the repayment
of the TerreStar note payable to MSV, the purchase of treasury stock and
deferred financing fees related to the Series A Cumulative Convertible Preferred
Stock.
Net cash provided by financing activities was $152.3 million for the year ended
December 31, 2004 as compared to $4.9 million for the year ended December 31,
2003. The $151.7 million increase in cash provided by financing activities was
the result of the proceeds from the exercise of certain employee stock options
and certain other warrants and our private placements of common stock completed
in April, July and November 2004. These proceeds were partially utilized in our
negotiated settlement of our vendor debt and capital lease obligations in the
second quarter of 2004, the repayment of all amounts outstanding under our term
credit facility in April 2004, the repayment of all amounts outstanding under
our debt obligations to Rare Medium and CSFB and our investment in MSV in
November 2004.
Specifically, our $152.3 million increase in cash provided by financing
activities during the year ended December 31, 2004 consist of $192.0 million in
proceeds from the issuance of stock, $2.0 million in proceeds from the exercise
of employee stock options and $1.5 million in proceeds from borrowings under our
term credit facility. These increases were offset by $24.0 million in repayment
of notes, $6.9 million in repayment of our term credit facility, payment of $0.1
million in deferred financing fees related to the term credit facility, $5.2
million in repayments of vendor and capital lease obligations and $7.0 million
for payment of stock issuance costs and related charges.
We believe that our funds available at June 30, 2005, together with, our planned
rights offering and the proceeds from the exercise of warrants and options, will
be adequate to satisfy our current and planned operations for at least the next
12 months. We have no definite plans with respect to the acquisition of any
additional debt or equity financing beyond the April 2005 private placement of
our preferred stock. However, to the extent that we require additional liquidity
to fund our operations (including, but not limited to, construction costs of
TerreStar's communications network), we may undertake additional debt or equity
financings.
Debt And Capital Lease Obligations
As of June 30, 2005, Motient had no outstanding debt obligations other than
obligations with respect to the repayment of its Series A Preferred Stock. If
not converted or repaid, the entire amount of $408.5 million will be due on
April 15, 2010. The first two years' dividend payments for approximately $43
million have been placed in escrow. Future dividend payments will be due
bi-annually, payable in cash (at a 5.25% annual interest rate) or in common
stock (at a 6.25% annual interest rate). As of December 31, 2004, Motient had no
outstanding debt or capital lease obligations.
53
Credit Facility Repayment: On April 13, 2004, Motient repaid the all principal
amounts then owing under its term credit facility, including accrued interest
thereon, in an amount of $6.8 million. The facility terminated on December 31,
2004, and the Company does not plan to attempt to extend the borrowing
availability again. The retirement and subsequent termination of the credit
facility on December 31, 2004 required the amortization of all remaining
interest expense associated with this facility.
United Parcel Service Prepayment: In December 2002, Motient entered into an
agreement with UPS pursuant to which UPS prepaid an aggregate of $5 million in
respect of network airtime service to be provided beginning January 1, 2004. In
April 2005, this agreement was amended, and then in September 2005, the
agreement was amended again. Motient made a payment of $2.0 to UPS, and in
exchange, all but $0.6 million of the outstanding prepayment of $3.7 million was
terminated. The remaining $0.6 million prepayment must be used by UPS prior to
March 31, 2006. If not used, UPS will forfeit this prepayment, and it will not
be repaid.
Rare Medium Note: On July 15, 2004, the Company paid all principal and interest
due and owing on this $19.0 million principal amount note, in the amount of
$22.6 million.
CSFB Note: On July 15, 2004, the Company paid all principal and interest due and
owing on this $750,000 principal amount note, in the amount of $0.9 million.
Termination Of Motorola And Hewlett-Packard Agreements: In June 2004, the
Company negotiated settlements of the entire amounts outstanding under its
financing facility with Motorola and its capital lease with Hewlett-Packard. The
full amounts due and owing under these agreements was $6.8 million. The Company
paid an aggregate of $3.9 million in cash to Motorola and Hewlett-Packard and
issued a warrant to Motorola to purchase 200,000 shares of the Company's common
stock at a price of $8.68, in full satisfaction of the outstanding balances. The
Company recorded a gain on the extinguishment of debt in the amount of $0.7
million on the Hewlett Packard settlement. The Company recorded a gain of $0.1
million on the Motorola settlement.
Commitments
As of June 30, 2005, we had no outstanding commitments to purchase inventory. As
of December 31, 2004, we had the following outstanding cash contractual
operating commitments:
<TABLE>
<CAPTION>
More than
Total <1 Year 1-3 Years 3-5 Years 5 Years
-------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
(in thousands)
Operating leases (1) $ 15,212 $ 5,173 $ 5,358 $ 3,424 $ 1,257
-------------- -------------- ------------- ------------ -------------
Total Contractual Cash Obligations $ 15,212 $ 5,173 $ 5,358 $ 3,424 $ 1,257
</TABLE>
(1) These commitments generally contain provisions that provide for an
acceleration of rent upon a default by us, except that certain long-term
real estate leases, categorized as Operating Leases, may not contain such
provisions.
On August 16, 2005, Highland Equity Focus Fund, L.P., Highland Crusader Offshore
Partners, L.P., Highland Capital Management Services, Inc., and Highland Capital
Management, L.P. filed a lawsuit in Dallas County, Texas against Motient
challenging the validity of the Series A Preferred on the basis of the confusion
regarding the voting rights of the Series A Preferred and seeking rescission of
their purchase of the shares of Series A Preferred that they purchased from
Motient in the private placement in April 2005. These entities acquired 90,000
shares of Series A Preferred for a purchase price of $90 million in that private
placement. Motient believes that this claim is without merit and intends to
vigorously defend this lawsuit.
54
In addition, we have certain liabilities, further described above, related to
the $5 million prepayment made to us by UPS in 2002.
Restructuring Costs
In February 2004, we recorded a restructuring charge for a workforce reduction
of $1.1 million. In June 2004, we recorded a restructuring charge of $5.1
million related to certain network rationalization initiatives, consisting of
base station deconstruct costs of $0.5 million, the loss on the retirement of
certain base station equipment of $2.8 million and termination liabilities of
$1.8 million for site leases no longer required for removed base stations. In
March 2005, we recorded a restructuring charge for a further workforce reduction
of $0.1 million. In June 2005, we recorded a restructuring charge of $5.6
million related to additional network rationalization initiatives, consisting of
base station deconstruct costs of $0.1 million, the loss on the cancellation of
frequencies of $3.6 million and termination liabilities of $1.9 million for site
leases no longer required for removed base stations. Of these amounts, as of
June 30, 2005, we had incurred workforce reduction cost of $0.9 million, base
station deconstruct costs of $0.5 million, the loss on the retirement of certain
base station equipment of $2.8 million, termination liabilities of $1.4 million
for site leases no longer required for removed base stations and $3.6 million
for the cancellation of frequencies.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2004 to June 30, 2005:
<TABLE>
<CAPTION>
Base Station FCC License
Employee FCC License Asset Base Station Termination Site Lease
Terminations Write-Offs Write-Offs Deconstruction Costs Terminations Total
------------ ---------- ---------- -------------- ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 2004 $ --- $ --- $ --- $ --- $ --- $ --- $ ---
----------------------------------------------------------------------------------------------------------------------------------
Restructure Charge (1,107) --- --- --- --- --- (1,107)
Deductions - Cash 333 --- --- --- --- --- 333
-------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 2004 (774) --- --- --- --- --- (774)
---------------------------------------------------------------------------------------------------------------------------------
Restructure Charge --- --- (2,801) (398) (113) (1,854) (5,166)
Deductions - Cash 242 --- --- 75 25 61 403
Deductions - Non-Cash --- --- 2,801 --- --- --- 2,801
----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2004 (532) --- --- (323) (88) (1,793) (2,736)
----------------------------------------------------------------------------------------------------------------------------------
Deductions - Cash 132 --- --- 252 39 416 839
----------------------------------------------------------------------------------------------------------------------------------
Balance September 30,
2004 (400) --- --- (71) (49) (1,377) (1,897)
----------------------------------------------------------------------------------------------------------------------------------
Deductions - Cash 50 --- --- 71 54 435 610
----------------------------------------------------------------------------------------------------------------------------------
Balance December 31,
2004 (350) --- --- --- 5 (942) (1,287)
----------------------------------------------------------------------------------------------------------------------------------
Restructure Charge (85) --- --- --- --- --- (85)
Deductions - Cash 39 --- --- --- --- 197 236
----------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 2005 (396) --- --- --- 5 (745) (1,136)
----------------------------------------------------------------------------------------------------------------------------------
Restructure Charge --- (3,581) --- (147) --- (1,852) (5,580)
----------------------------------------------------------------------------------------------------------------------------------
Deductions - Cash 164 --- 24 --- 498 686
----------------------------------------------------------------------------------------------------------------------------------
Deductions - Non-Cash --- 3,581 --- --- --- (206) (3,375)
----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2005 $ (232) $ --- $ --- $ (123) $ 5 $(2,305) $ (2,655)
</TABLE>
55
Other
On May 1, 2002, the effective date of our Plan of Reorganization, the financing
agreements that included restrictions on our ability to pay dividends were
terminated as part of the implementation of our Plan of Reorganization; however,
various financing documents prohibit us from paying cash dividends. We have
never paid dividends and do not expect to do so in the near future, except for
dividends required to be paid on our Series A and Series B Preferred Stock. The
cash required to make the dividend payments on this preferred stock has been
placed in escrow.
Critical Accounting Policies And Significant Estimates
Below are our accounting policies that are both important to our financial
condition and operating results, and require management's most difficult,
subjective and complex judgments in determining the underlying estimates and
assumptions. The estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates as they require assumptions that are inherently uncertain.
"Fresh-Start" Accounting
In accordance with SOP No. 90-7, effective May 1, 2002, we adopted "fresh-start"
accounting and allocated the reorganization value of $221.0 million to our net
assets in accordance with procedures specified by SFAS No. 141, "Business
Combinations".
We allocated the $221.0 million reorganization value among our net assets based
upon our estimates of the fair value of our assets and liabilities. In the case
of current assets, we concluded that their carrying values approximated fair
values. The values of our frequencies and its investment in and notes receivable
from MSV were based on independent analyses presented to the bankruptcy court
and subsequently modified as part of our valuation process in November 2003.
Please see Note 2, "Significant Accounting Policies - Restatement of Financial
Statements," and Note 21, "Subsequent Events," of notes to the consolidated
financial statements for further information concerning MSV. The value of our
fixed assets was based upon a valuation of our software and estimates of
replacement cost for network and other equipment, for which we believe that our
recent purchases represent a valid data point. The value of our other intangible
assets was based on third party valuations as of May 1, 2002.
For a complete description of the application of "fresh-start" accounting,
please refer to Note 2, "Significant Accounting Policies", of notes to the
consolidated financial statements.
TerreStar Asset Purchase
On May 11, 2005, Motient Ventures Holding Inc., or MVH, a wholly owned
subsidiary of Motient Corporation, purchased 8,190,008 shares of newly issued
common stock of TerreStar from TerreStar for $200 million pursuant to a Purchase
Agreement by and between MVH and TerreStar. On the same day, TerreStar was
spun-off by MSV to its limited partners and, in connection with that spin-off,
Motient acquired ownership of approximately 48% of the issued and outstanding
shares of capital stock of TerreStar and the subsequent $200 million stock
purchase increased Motient's ownership to its current 61% of TerreStar's issued
and outstanding common stock.
Assets acquired and liabilities assumed in the asset purchase were recorded on
the Company's Consolidated Balance Sheet as of the purchase date based upon
their fair values at such date. The results of operations of the net assets
acquired by the Company have been included in the Company's Statements of
Operations since its date of purchase. Approximately $78 million was allocated
to intangible assets that include the rights to receive licenses in the 2 GHz
band and other intangibles. These intangible assets are being amortized over an
average life of 15 years. Approximately $78 million represents the 39% minority
interest in TerreStar. There was no excess purchase price over the estimated
fair values of the underlying assets acquired and liabilities assumed. In
certain circumstances, the allocation of the purchase price is based upon
preliminary estimates and assumptions. Accordingly, the allocations are subject
to revision when the Company receives final information and other analyses.
Revisions to the fair values, which may be significant, will be recorded by the
Company as further adjustments to the purchase price allocations.
56
Deferred Taxes
We have generated significant net operating losses for tax purposes as of
December 31, 2003. We have had our ability to utilize these losses limited on
two occasions as a result of transactions that caused a change of control in
accordance with the Internal Revenue Service Code Section 382. Additionally,
since we have not yet generated taxable income, we believe that our ability to
use any remaining net operating losses has been greatly reduced; therefore, we
have provided a full valuation allowance for any benefit that would have been
available as a result of our net operating losses. See Note 2, "Significant
Accounting Policies - Deferred Taxes," of notes to the consolidated financial
statements for further details.
Revenue Recognition
We generate revenue principally through equipment sales and airtime service
agreements. In 2000, we adopted SAB No. 101, which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements. In
certain circumstances, SAB No. 101 requires us to defer the recognition of
revenue and costs related to equipment sold as part of a service agreement.
In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue
Recognition", which supersedes SAB No. 101, "Revenue Recognition in Financial
Statements." SAB No. 104's primary purpose is to rescind accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangements and to
rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers", or FAQ, issued with SAB No. 101. Selected portions of
the FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104
will not have a material impact on our revenue recognition policies.
Revenue is recognized as follows:
Service Revenue: Revenues from the Company's wireless services are recognized
when the services are performed, evidence of an arrangement exists, the fee is
fixed and determinable and collectibility is probable. Service discounts and
incentives are recorded as a reduction of revenue when granted, or ratably over
a contract period. The Company defers any revenue and costs associated with
activation of a subscriber on the Company's network over an estimated customer
life of two years.
We package airtime usage on our terrestrial network that involves a wide variety
of volume packaging, for example, anything from a 35 kilobytes per month plan up
to unlimited kilobyte usage per month, with various gradations in between.
Discounts may be applied when comparing one customer to another, and such
service discounts are recorded as a reduction of revenue when granted. The
Company does not offer incentives generally as part of its service offerings,
however, if offered they would be recorded as a reduction of revenue ratably
over a contract period.
Service discounts and incentives are recorded as a reduction of revenue when
granted, or ratably over a contract period. The Company defers any revenue and
costs associated with activation of a subscriber on the Company's network over
an estimated customer life of two years.
To date, the majority of the Company's business has been transacted with
telecommunications, field services, professional service and transportation
companies located throughout the United States. The Company grants credit based
on an evaluation of the customer's financial condition, generally without
requiring collateral or deposits. The Company establishes a valuation allowance
for doubtful accounts receivable for bad debt and other credit adjustments.
Valuation allowances for revenue credits are established through a charge to
revenue, while valuation allowances for bad debts are established through a
charge to general and administrative expenses. The Company assesses the adequacy
of these reserves quarterly, evaluating factors such as the length of time
individual receivables are past due, historical collection experience, the
economic environment and changes in credit worthiness of the Company's
customers. If circumstances related to specific customers change or economic
conditions worsen such that the Company's past collection experience and
assessments of the economic environment are no longer relevant, the Company's
estimate of the recoverability of its trade receivables could be further
reduced.
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Equipment And Service Sales: We sell equipment to resellers who market our
terrestrial product and airtime service to the public. We also sell our product
directly to end-users. Revenue from the sale of the equipment as well as the
cost of the equipment, are initially deferred and are recognized over a period
corresponding to our estimate of customer life of two years. Equipment costs are
deferred only to the extent of deferred revenue. As of June 30, 2005 and 2004,
the Company had capitalized a total of $0.3 million and $2.4 million of deferred
equipment revenue, respectively, and had deferred equipment costs of $0.2
million and $2.4 million, respectively.
Long-Lived Assets
On January 1, 2002, we adopted the provisions of SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against these new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively, amounts
initially recorded as goodwill may be separately identified and recognized apart
from goodwill. SFAS No. 142 requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. Under a non-amortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead will be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. As of January
1, 2002, we had approximately $5.0 million of recorded goodwill. However, as
part of our adoption of "fresh-start" accounting, our recorded goodwill was
reduced to zero.
We account for our frequencies as finite-lived intangibles and amortize them
over a 15 year estimated life. As described in Note 6 of notes to consolidated
financial statements, we are monitoring a pending FCC rulemaking proposal that
may affect our 800 MHz spectrum, and we may change our accounting policy for FCC
frequencies in the future as new information is available.
FCC licenses and other intangible assets consist of the following:
<TABLE>
June 30,
2005 December 31,
(unaudited) 2004 2003
----------- ---- ----
(in thousands)
---------------------------------------
<S> <C> <C> <C>
FCC 800 MHz licenses $ 76,141 $ 80,594 $80,594
FCC 2 GHz licenses 66,864 -- --
Intellectual property 11,707 -- --
Customer contracts 349 349 1,893
--- --- -----
155,061 80,943 82,487
Less accumulated amortization (15,746) (13,294) (8,466)
-------- -------- -------
FCC licenses and other intangible assets, net $139,315 $ 67,649 $74,021
======== ======== =======
</TABLE>
On January 1, 2002, we also adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of". The statement requires that all long-lived assets be measured at the lower
of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured on a net realizable value basis and will
not include amounts for future operating losses. The statement also broadens the
reporting requirements for discontinued operations to include disposal
transactions of all components of an entity (rather than segments of a
business). Components of an entity include operations and cash flows that can be
clearly distinguished from the rest of the entity that will be eliminated from
the ongoing operations of the entity in a disposal transaction. In 2004, we
engaged a financial advisor to evaluate the value of our customer-related
intangibles as of September 30, 2003 due primarily to the decline in revenue
from UPS in this time period. This valuation resulted in an impairment of the
customer-related intangibles of $5.5 million in the third quarter of 2003. In
addition, in December 2004, we performed an additional analysis on the impact of
our revenue decline on our customer intangibles. As a result, we determined that
the value of our customer intangibles was further impaired and was reduced by
$0.8 million. The adoption of SFAS No. 144 had no other material impact on our
financial statements.
58
Recent Accounting Standards
EITF 04-8
In October 2004, the FASB ratified EITF 04-8, "Accounting Issues Related to
Certain Features of Contingently Convertible Debt and the Effect on Diluted
Earnings Per Share." The new rules require companies to include shares issuable
upon conversion of contingently convertible debt in their diluted earnings per
share (EPS) calculations regardless of whether the debt has a market price
trigger that is above the current fair market value of the company's common
stock that makes the debt currently not convertible. The new rules are effective
for reporting periods ending on or after December 15, 2004.
Motient currently has no contingently convertible debt and does not expect to
enter into any transactions in which EITF 04-8 will apply.
SFAS No. 151
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs: an amendment
of ARB No. 43, Chapter 4," to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material. SFAS No. 151
is effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. We do not believe the provisions of SFAS No. 151, when applied,
will have an impact on our financial position or results of operations.
SFAS No. 123R
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment: an
amendment of FASB Statements No. 123 and 95," which requires companies to
recognize in their income statement the grant-date fair value of stock options
and other equity-based compensation issued to employees. SFAS No. 123R is
effective for interim or annual periods beginning after June 15, 2005.
Accordingly, we will adopt SFAS No. 123R in our fourth quarter of fiscal 2005.
Unamortized stock-based compensation expense, on a pro forma basis, as of
December 31, 2004 totaled $243,000, with the entire amount to be amortized in
fiscal 2005.
59
BUSINESS
Overview
Our Business Segments
Motient owns, operates and develops two-way wireless communications businesses.
We are currently developing a satellite communications service via our majority
ownership of TerreStar Networks Inc., a development stage company in the process
of building its first satellite. TerreStar was formerly a subsidiary of another
satellite communications company, MSV, as it is commonly known. We own 49% of
MSV, but do not have operating control of its business. In addition, we also own
and operate a two-way wireless data network (our DataTac network) which we use
to provide our customers with two-way wireless data communication services, and
we also have the capabilities to provide our customers with convenient and
cost-effective access to other wireless data networks, such as the Sprint and
Cingular networks.
Proposed Consolidation of Ownership of MSV and TerreStar
On September 22, 2005, Motient announced that it had entered into a non-binding
letter of intent with SkyTerra Communications, Inc. and TMI Communications &
Company, among others, relating to a transaction to consolidate the ownership of
MSV and TerreStar within Motient. The parties anticipate that these
transactions, if consummated, will simplify the ownership and governance of both
MSV and TerreStar, better enabling both of them to pursue more effectively
deployment of their separate hybrid satellite and terrestrial based
communications networks. The networks will be able to provide ubiquitous
wireless coverage in North America in the L-band and S-band, respectively.
The letter of intent sets forth the basic terms of the proposed transaction,
which include, among other things, the following:
o In connection with all the transactions contemplated by the letter of
intent, Motient would issue or commit to issue approximately 77
million shares of common stock in exchange for the outstanding MSV
interests not already owned by Motient, and approximately 16 million
shares for the outstanding TerreStar shares not already owned by
Motient.
o All of the outstanding MSV and TerreStar interests not already owned
by Motient, other than those held by TMI, would be transferred to
Motient at closing.
o TMI would receive the right to exchange its interests in MSV and
TerreStar at any time at the same exchange ratios that are being
offered to the other shareholders and would subscribe for shares of a
new class of Motient preferred stock with nominal economic value but
having voting rights in Motient equivalent to those TMI would receive
upon exchange of its MSV and TerreStar interests for Motient common
stock.
o SkyTerra would dividend to its securityholders shares of a newly
formed company that would hold all of its assets other than its
interests in MSV and TerreStar, and then SkyTerra, which would then
consist only of its stakes in MSV and TerreStar, would merge in a
tax-free transaction with and into a subsidiary of Motient. As a
result, in addition to the dividend, SkyTerra's stockholders would
receive Motient common stock at an exchange ratio reflecting
equivalent economic value for MSV/TerreStar as received by the other
MSV/TerreStar stockholders. In total, SkyTerra common and preferred
stockholders would receive approximately 26 million shares of Motient
common stock. SkyTerra's preferred stock would be retired in exchange
for Motient common stock with a value equal to its liquidation
preference and SkyTerra's common stockholders would receive the
balance of the Motient shares.
60
o The parties anticipate that, after the closing of the transaction,
TerreStar would likely be spun-off to the stockholders of Motient
(including those receiving shares in connection with these
transactions). However, this spin-off would be evaluated following the
closing of the other transactions, and would only be executed if it is
judged by Motient's Board of Directors to be in the best interests of
its stockholders at that time. In the event of a spin off of
TerreStar, the exchange ratios applicable to TMI's exchange right
would be modified accordingly.
o The boards of Motient, MSV and TerreStar would be reconstituted with
nine members mutually acceptable to the parties and in compliance with
the independence rules and regulations of NASDAQ. TerraStar would have
a similarly structured board after the completion of the transaction,
separate of Motient and MSV.
o The parties anticipate that Alex Good, CEO of MSV, would become
Motient's new CEO after the transaction. The parties also anticipate
that Robert Brumley, CEO of TerreStar, would continue in that role
after the transaction with TerraStar maintaining its own management
team.
The consummation of the transactions will require successful completion of due
diligence, negotiation and execution of definitive documentation, Motient and
SkyTerra board and stockholder approval, and various regulatory approvals.
Because the letter of intent is non-binding, the parties have no obligation to
negotiate such documentation or otherwise consummate the transactions.
Therefore, the parties can provide no assurances that the transactions will be
consummated on the currently proposed terms or will ever be consummated, or that
the required corporate or regulatory approvals will be obtained.
Our Satellite Communications Business - TerreStar Networks Inc.
In February 2002, MSV established TerreStar Networks Inc., as a wholly owned
subsidiary of MSV, to develop business opportunities related to the proposed
receipt of certain licenses to operate a satellite communications system in the
2 GHz band, also known as the "S-band". On December 20, 2004, MSV issued rights
to receive an aggregate of 23,265,428 shares of common stock of TerreStar
(representing all of the shares of TerreStar common stock owned by MSV), to the
limited partners of MSV, pro rata in accordance with each limited partner's
percentage ownership in MSV.
On May 11, 2005, Motient Ventures Holding Inc., or MVH, a wholly owned
subsidiary of Motient Corporation, purchased 8,190,008 shares of newly issued
common stock of TerreStar from TerreStar for $200 million pursuant to a Purchase
Agreement by and between MVH and TerreStar. On the same day, TerreStar was
spun-off by MSV to its limited partners and, in connection with that spin-off,
Motient acquired ownership of approximately 49% of the issued and outstanding
shares of capital stock of TerreStar and the subsequent stock purchase increased
Motient's ownership to its current 61% of TerreStar's issued and outstanding
common stock.
Motient also entered into the following agreements in connection with the
transaction, all dated May 11, 2005:
o A Conditional Waiver and Consent Agreement pursuant to which, subject
to the satisfaction of certain conditions, Motient has consented in
advance to the acquisition of all the MSV interests held by some or
all of the other limited partners of MSV, such that the ownership of
interests of MSV not held by Motient could be consolidated into a
single entity. The terms of such acquisition have yet to be negotiated
and may never occur. As the limited partners of MSV other than Motient
collectively own 51% of MSV, this transaction could result in a single
limited partner, other than Motient, controlling 51% of MSV, giving
such limited partner effective control of MSV. In such event, Motient
would be entitled to the benefit of a number of minority protection
provisions with respect to MSV.
61
o A Stockholders' Agreement pursuant to which Motient has the right to
designate four of the seven members of the Board of Directors of
TerreStar (one of whom must be independent of TerreStar) and contains
certain minority protection provisions for the other TerreStar
stockholders, including tag-along and preemptive rights, as well as a
drag-along provision.
o An Intellectual Property License Agreement pursuant to which TerreStar
received a perpetual, royalty-free license to utilize MSV's patent
portfolio, including those patents related to "ancillary terrestrial
component", or ATC, technology.
We anticipate that TerreStar will allow us to provide Mobile Satellite Service,
or MSS, in the S-band in conjunction with ancillary terrestrial component, or
ATC, which would allow us to integrate satellite based two-way communications
services with land-based two-way communications services. These mobile devices
could be used for a myriad of communications applications, including potentially
voice, data and video services. ATC can enhance satellite availability,
efficiency and economic viability by terrestrially reusing at least some of the
frequencies that are allocated to the satellite systems. Without ATC, it may be
challenging for mobile satellite systems to reliably serve densely populated
areas, because the satellite's signal may be blocked by high rise structures and
may not penetrate into buildings. As a result, the satellite spectrum may be
underutilized or unused in such areas. The use of ATC retransmission can reduce
or eliminate this problem.
ATC could, for instance, eventually allow a user to utilize a mobile phone which
would communicate with a traditional land-based wireless network when in range
of that network, but communicate with a satellite when not in range of such a
land-based network. Ideally, ATC would allow for a user to have a communications
device that would provide ubiquitous service across North America. TerreStar's
ability to effectively use ATC depends on its continued ability to license
certain intellectual property from MSV. TerreStar has a perpetual, royalty free
license to such technology.
During 2002, TerreStar entered into a contract to purchase a satellite system,
including certain ground infrastructure for use with the 2 GHz band. The
satellite represents one component of a communications system that would include
a spare satellite, ground-switching infrastructure, launch costs and insurance.
Total cost of this satellite system could exceed $550 million. In order to
finance future payments, TerreStar will be required to obtain additional debt or
equity financing, or may enter into various joint ventures to share the cost of
development. There can be no assurance that such financing or joint venture
opportunities will be available to TerreStar or available on terms acceptable to
TerreStar.
Our website is www.motient.com, and TerreStar's website is
www.terrestarnetworks.com. This prospectus does not incorporate by reference any
of the information on these websites, and we provide these website addresses
merely for the information of the reader.
Our Terrestrial Wireless Business - Motient Communications Inc.
We are a nationwide provider of two-way, wireless mobile data services and
wireless internet services. Owning and operating a wireless radio data network
that provides wireless mobile data service to customers across the United
States, we primarily generate revenue from the sale of airtime on our network
and from the sale of communications devices, which are manufactured by other
companies. Our customers use our network and our wireless applications for
wireless email messaging and wireless data communications services. This enables
businesses, mobile workers and consumers to wirelessly transfer electronic
information and messages and to wirelessly access corporate databases and the
Internet. Our network is designed to offer a broad array of wireless data
services, such as:
o two-way mobile Internet services, including our own eLink SM wireless
email service and our BlackBerry TM by Motient wireless email service,
each providing personal consumers and corporate customers with
wireless access to a broad range of email and information services;
o wireless data systems used by companies involved in data transmission
and processing, used to connect remote equipment, such as wireless
point-of-sale terminals, with a central monitoring facility; and
o mobile data and mobile management systems used by transportation and
other companies to wirelessly coordinate remote, mobile assets and
personnel.
62
Our eLink service and BlackBerry by Motient service are two-way wireless email
services that use our DataTac network. They allow users to remotely and
wirelessly access their email, and allow users to synchronize the calendar and
organizer functions of their desktop computer with a handheld device such as a
RIM 850 or 857 Wireless Handheld, a small, data-only wireless handheld device.
Research In Motion, Ltd., or RIM, has discontinued making these models, and
therefore sales of these devices have declined recently and we anticipate sales
of these devices will continue to decrease. Motient cannot use any newer RIM
devices on our network and currently has no alternative product for these
services. However, current users of eLink and BlackBerry by Motient may still
continue to use their devices on our network. We currently are exploring
different ways to provide similar wireless email services to our customers using
iMotient Solutions TM, which we discuss below.
In addition to selling wireless data services that use our own network, we are
also a reseller of airtime on the Cingular and Sprint wireless networks. We have
reseller agreements with these companies that allow us to sell and promote
wireless data applications and solutions to our customers using these networks,
which are more modern and have greater capacity than our own, while still
maintaining a direct relationship with the customer, since "back office"
functions like customer support, application design and implementation, and
billing, among other support services, are handled by Motient.
These arrangements allow us to provide integrated wireless data solutions to our
customers using a variety of networks. In December 2004, we launched a new set
of products and services designed to provide these integrated wireless data
solutions to our customers called iMotient Solutions. iMotient allows Motient's
customers to use these multiple networks via a single connection to Motient's
back-office systems, providing a single alternative for application and software
development, device management and billing across multiple networks, including
but not limited to GPRS, 1XRTT, and our own DataTac network. Once connected to
iMotient, customers will receive our proprietary applications and services that
reduce airtime usage, improve performance and reduce costs.
Our subscriber's wireless devices, which may be mobile or stationary, receive
and transmit wireless data messages to and from these terrestrial base stations
via radio frequencies. Terrestrial messages are then routed to their destination
via data switches that Motient owns, which connect to the public data network.
Motient's network is a wireless packet-switched network based on technologies
developed prior to newer networks built around CDMA or GSM technologies, and,
unlike those networks, cannot accommodate wireless telephony.
Over the course of 2004, Motient implemented and completed certain initiatives
to rationalize the size of its network, primarily to remove unprofitable base
stations and reduce unneeded coverage. During the first quarter of 2005, Motient
initiated a plan to refocus our DataTac network primarily on the top 40 MSAs.
This plan involves the decommissioning of DataTac network components and
termination of service in previously served MSAs other than the top 40. Given
the similar coverage profiles of the Cingular and Sprint networks, the
significantly increased bandwidth capabilities of these networks relative to
DataTac and the concentration of our revenues in the top 40 MSAs, we determined
that this plan best allowed us to match our network infrastructure costs with
our revenue base, while continuing to meet the needs of as many of our customers
as possible. We have notified our customers of this change in our network
coverage and this decommissioning began on June 1, 2005. We are making every
effort to provide any impacted customers with alternatives to migrate their
services and applications either to our new iMotient Solutions platform, or to
other networks using our agreements with RACO Wireless, Inc. and eAccess
Solutions, Inc.
As of December 31, 2003 and 2004, and June 30, 2005, there were approximately
204,000, 132,000 and 183,000 user devices registered, respectively, and 115,000,
77,000 and 59,000 user devices, respectively, with active usage on Motient's
network. Registered devices represent devices that our customers and resellers
have registered for use on our network. These devices may be kept in inventory
by our customers for future use, in which case they are not generally revenue
producing. We count a device as active when it is removed from inventory by the
customer and transmits data traffic.
63
In the fourth quarter of 2004, we performed an analysis of our registered user
devices from our larger resellers, which represent a majority of our registered
user devices not in service. Given the decline in our wireless internet base in
2004, the end-of-life of the RIM 857 devices and the general availability of
next-generation devices that were voice capable from wireless carrier such as
T-Mobile and Verizon, we determined that many of the devices registered by our
resellers on our network were not likely to be put back in service on our
network. As a result, during the fourth quarter of 2004 and the first quarter of
2005 approximately 39,000 user devices were deregistered from our network, of
which approximately 30,000 were de-registered by SkyTel Communications, Inc. on
December 30, 2004. The de-registration of these user devices did not impact our
revenue or our billable and active user devices and we believe that our
registered device counts now provide a more accurate representation of user
devices held in inventory by our customers that may be put back in service by
our customers in the future.
Mobile Satellite Ventures LP
MSV's Business
MSV is a provider of mobile satellite-based communications services. MSV
currently uses two satellites to provide service, which allow customers access
to satellite-based wireless data, voice, fax and dispatch radio services almost
anywhere in North and Central America, northern South America, the Caribbean,
Hawaii and in various coastal waters.
MSV, together with Mobile Satellite Ventures (Canada) Inc., licensed by Industry
Canada, has access to more than 28 MHz of L-band spectrum that is authorized for
use in every market in North America. The L-band spectrum is positioned within
the range of frequencies used by terrestrial wireless providers in North
America.
MSV is also developing a next-generation system, a hybrid satellite/terrestrial
wireless network over North America that MSV expects will utilize new satellites
working with MSV's patented "ancillary terrestrial component" technology. MSV
expects to be able to deploy terrestrial two-way wireless network technology in
thousands of locations across the United States, allowing subscribers to
integrate satellite-based communications services with more traditional
land-based wireless communications services. MSV is headquartered in Reston, VA,
with an office in Ottawa, ON, Canada.
MSV is structured as a limited partnership, of which Motient is one of the
limited partners. Motient holds a proportionate ownership interest in the
corporate general partner. Motient has certain rights to appoint directors to
the sole general partner of the limited partnership, but does not have any
direct or indirect operating control over MSV.
Until November 26, 2001, the entity that would become MSV was a majority owned
subsidiary of Motient. On that date, Motient sold the assets comprising its
satellite communications business as part of a transaction in which certain
other parties joined MSV, including TMI Communications and Company Limited
Partnership, a Canadian satellite services provider. In this transaction, TMI
also contributed its satellite communications business assets to MSV. At the
conclusion of this transaction and several minor secondary financings, Motient's
ownership interest in MSV was 29.5% (assuming conversion of all outstanding
convertible notes). In a subsequent financing on November 12, 2004, Motient
acquired additional interests in MSV in exchange for cash and the conversion and
cancellation of all outstanding notes issued to Motient by MSV (including all
accrued interest thereon), and as a result increased its ownership to 38.6%. In
February 2005, Motient acquired additional interests from several other MSV
equityholders, increasing its direct and indirect ownership to 49%. Motient
cannot increase its ownership of MSV any further without the consent of a
supermajority of the MSV equityholders.
For the three and six months ended June 30, 2005, MSV had revenues of $7.5 and
$14.7 million, operating expenses of $14.8 and $34.5 million and net losses of
$6.7 and $26.7 million, respectively.To the extent that MSV will need future
cash to support its operations, Motient is under no contractual obligation to
provide it, and the value of our investment in MSV could be negatively impacted
if MSV cannot meet any such funding requirements.
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MSV's Next-Generation Communications System: ATC
In February 2003, the FCC adopted an order granting MSS operators broad
authority to operate an ancillary terrestrial component, or ATC, using their
assigned spectrum. ATC technology allows a wireless provider to use satellite
communications technology in conjunction with more traditional land-based
wireless communications infrastructure, allowing a user to utilize a signal from
both satellite and terrestrial locations, depending on a variety of technical
and cost concerns. ATC can enhance satellite availability, efficiency, and
economic viability by terrestrially reusing frequencies that are allocated to
the satellite system.
Without ATC, it may be challenging for mobile satellite systems to reliably
serve densely populated areas, because the satellite's signal may be blocked by
high rise structures and may not penetrate into buildings. As a result, MSS
spectrum may be underutilized or unused in such areas. ATC can reduce or
eliminate this problem.
The ATC Order established a set of preconditions and technical limits for ATC
operations, as well as an application process for approval of the specific ATC
system proposed by the MSS operator. On November 18, 2003, MSV filed an
application with the FCC for approval of its ATC system. On November 8, 2004,
the FCC's International Bureau issued an order granting MSV the first ever ATC
license. The Bureau approved several of MSV's waiver requests, providing MSV
with increased flexibility to operate ATC. Among other things, the Bureau
permitted MSV to provide service with its current-generation satellite using
handsets that use a booster to communicate with the satellite. The Bureau
deferred ruling on some of MSV's other waiver requests.
On February 25, 2005, the FCC issued a revised set of rules for ATC. The revised
rules expand the technical and operational flexibility of ATC, allowing for
greater capacity in both the uplink and downlink directions beyond that
permitted in the February 2003 and November 2004 decisions. The decision
clarified the outstanding technical issues left open by the February 2003 and
November 2004 decisions. In particular, these revised rules allow MSV to (i)
significantly increase reuse of its frequencies for ATC, resulting in enhanced
ATC capacity and coverage; and (ii) increase base station power, permitting MSV
to deploy base stations in a more cost-effective manner and to offer innovative
services. MSV will need approval from the FCC to modify its ATC license to
conform with the revised rules. In the interim, MSV can operate an ATC network
pursuant to the November 2004 decision.
In May 2005, MSV received FCC authorization to launch and operate a next
generation L Band satellite. This authorization follows the April 2005 Industry
Canada authorization to MSV's Canadian affiliate for an L band satellite. Use of
the two authorizations together enables MSV to replace its existing satellites
and utilize the full complement of spectrum available to it.
One of MSV's competitors has asked the FCC to review the November 2004 and
February 2005 decisions. We cannot predict the outcome of this review.
The February 2003, November 2004, and February 2005 orders set forth various
limitations and conditions necessary to the use of ATC by MSV. There can be no
assurances that such conditions will be satisfied by MSV, or that such
limitations will not be unnecessarily burdensome.
For additional information regarding MSV, please see the financial statements of
MSV beginning on page M-1.
"Fresh-Start" Accounting
In January 2002, Motient and an informal committee of its senior noteholders
reached an agreement in principle with respect to the primary terms of a Plan of
Reorganization of Motient and its principal subsidiaries. Accordingly, on
January 10, 2002, Motient and certain of its subsidiaries filed for protection
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court
for the Eastern District of Virginia. The Bankruptcy Court confirmed the Plan of
Reorganization on April 26, 2002, and the Plan became effective on May 1, 2002.
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Upon effectiveness of the Plan, the ownership of Motient changed significantly,
with creditors becoming the new owners of substantially all of the equity of
Motient. Under the Plan, holders of the senior notes exchanged the principal
amount of their notes and all accrued interest thereon for shares of our common
stock. In addition, certain of our trade creditors received shares of our common
stock in settlement of their claims. All then outstanding shares of our
pre-reorganization common stock and all unexercised options and warrants were
cancelled. Holders of our pre-reorganization common stock received warrants to
purchase an aggregate of approximately 1,496,512 shares of common stock. These
warrants never vested and therefore they expired on May 1, 2004. Additionally,
our certificate of incorporation and bylaws were amended and restated. Our
restated certificate of incorporation authorizes Motient to issue up to 200
million shares of common stock and up to 5 million shares of preferred stock.
On the effective date of our Plan of Reorganization, a new board of directors of
Motient consisting of seven members was established. Effective May 1, 2002, we
adopted "fresh-start" accounting in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code". We determined that the
selection of May 1, 2002 versus April 26, 2002 for the "fresh-start" date was
more convenient for financial statement reporting purposes and that the results
for the period from April 26, 2002 to May 1, 2002 were immaterial to our
consolidated financial statements. Under "fresh-start" accounting, a new entity
has been deemed created for financial reporting purposes.
Further details regarding the Plan of Reorganization are contained in our
disclosure statement with respect to the Plan of Reorganization, which was filed
as Exhibit 99.2 to our current report on Form 8-K dated March 4, 2002.
Motient's Business Strategy
Motient's objective is to (i) via TerreStar (and indirectly through MSV), design
and develop a next-generation communications system involving a hybrid
satellite/terrestrial wireless network in North America, and (ii) via Motient
Communications, use its enterprise wireless data experience to continue to
penetrate the large markets for mobile data communications services and
solutions and wireless telemetry applications while keeping costs under control.
To meet these objectives, we intend to:
TerreStar Networks and MSV
Design And Develop A Next-Generation Communications System - A Hybrid
Satellite/Terrestrial Wireless Network Over North America. TerreStar and MSV are
each separately designing and developing next generation hybrid wireless
networks that will use powerful satellites working in unison with patented
ancillary terrestrial component (ATC) technology to deliver seamless wireless
services to end-users in North America over standard wireless devices. TerreStar
holds a perpetual, royalty-free license to utilize MSV's patent portfolio,
including those patents related to ATC. With the current right to receive 8 MHz
of S-band spectrum and potentially more under certain circumstances, TerreStar
will be able to deploy terrestrial two-way radio network technology in thousands
of locations across the United States, allowing subscribers to integrate
satellite-based communications services with more traditional land-based
wireless communications services. With access to over 25 MHs of L-Band spectrum,
MSV will be able to design and operate a similar system. TerreStar is currently
in the process of building its first satellite pursuant to a construction
contract with Space Systems/Loral, Inc. This satellite is scheduled to be
completed in November 2007, with commercial operations to commence in 2008.
Work With MSV To Develop And Protect Intellectual Property And Patents
Underlying Its Communications System Capabilities. MSV has established a series
of wide-ranging patents, covering systems and methods for coordinating
space-based and terrestrial use of satellite frequencies for a
satellite/terrestrial hybrid network, and TerreStar has a perpetual,
royalty-free, license to this intellectual property. MSV's portfolio of patents,
which covers over 800 claims, includes almost 20 issued US patents, and with 100
additional pending US patent applications directed to the space segment, the
terrestrial segment and the wireless terminals of an ATC network. We believe
this portfolio exceeds any other potential ATC portfolio both in breadth and in
depth.
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Motient Communications
Focus Growth Efforts On iMotient Solutions Service Platform. In December 2004,
we launched a new set of products and services designed to provide seamless
wireless date solutions to our customers over multiple networks called iMotient
Solutions TM. iMotient allows Motient's customers to use multiple networks via a
single connection to Motient's back-office systems, providing a one-source
alternative for development, device management and billing across multiple
networks, including but not limited to GPRS, 1XRTT, and DataTac. Once connected
to iMotient, customers will receive proprietary applications and services that
reduce airtime usage, improve performance and reduce costs. As part of the
iMotient Solutions platform, in addition to selling wireless services that use
our own network, we are also a reseller of airtime on the Cingular and Sprint
wireless networks. These reseller agreements allow us to sell and promote
applications and solutions to enterprise accounts on networks with greater
capacity than our own, while still maintaining a direct relationship with the
customer, since "back office" functions like customer support, application
design and implementation and billing, among other support services are handled
by Motient.
Leverage Motient's Expertise In Selling And Provisioning Complete Wireless Data
Solutions For Business Customers. A key strategic asset of Motient is its
experienced sales, customer care and technical support team. This team is
qualified to sell complete wireless data solutions, rather than simply devices
and network airtime, that may include network services that utilize more than
Motient's terrestrial network offerings, such as customer support and business
services.
Take Advantage Of Motient's Professional Service And Back-Office Capabilities To
Potentially Generate New Revenue Opportunities. Motient has deployed
comprehensive and customized wireless data communications solutions for
businesses for over a decade. These wireless data communications solutions have
often required specialized billing, data switching requirements and inventory
and reporting requirements, among other customized back-office capabilities.
With our new iMotient Solutions platform, these professional services and
back-office capabilities can be customized to satisfy existing and new customers
on Motient's network or alternative networks. Motient believes that these
professional services and back-office capabilities can be positioned as network
or carrier agnostic and thus provide customers potentially expansive network
capabilities and service at the lowest cost.
Motient's Wireless Service Offerings
General
Motient currently sells wireless devices, airtime and applications. Our wireless
data applications include wireless email, wireless internet and intranet access,
wireless faxing, paging and peer-to-peer communications, wireless asset tracking
and dispatching, and wireless point-of-sale and data monitoring applications.
Motient supports eight types of devices from eight different manufacturers for
use on our network. These devices include Research In Motion handheld devices,
ruggedized laptops, handheld digital assistants and wireless modems for personal
computers, or PCs. Motient has also developed proprietary software and has
engaged a variety of other software firms to develop other "middleware," to
assist its customers' development efforts in connecting their applications to
our network. Also, a number of off-the-shelf software packages enable popular
email software applications on Motient's network.
Motient also has agreements with Sprint and Cingular to resell airtime
subscriptions and communications devices for use on their next generation
high-speed networks for wireless data communications services. In doing so, we
believe we will be able to enhance our sales performance by offering enterprise
customers a full array of technology solutions that meet their needs,
independent of the network.
As a development-stage company, TerreStar, Motient's satellite communications
business, does not currently offer any products or services.
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iMotient Solutions
In December 2004, we announced the creation of iMotient Solutions TM and that we
are a reseller of airtime on the Cingular and Sprint wireless networks. These
reseller agreements allow us to sell and promote wireless data applications and
solutions to customers using networks that are more modern, and therefore have
greater capacity, than our own DataTac network, while still maintaining a direct
relationship with the customer, since "back office" functions like customer
support, application design and implementation and billing, among other things,
are handled by Motient.
The iMotient Solutions set of products and services allows Motient's customers
to use these multiple networks via a single connection to Motient's back-office
systems, providing a one-source alternative for software and application
development, device management and billing across multiple networks, including
but not limited to GPRS, 1XRTT and DataTac networks. Once connected to iMotient,
customers receive our proprietary applications and services that reduce airtime
usage, improve performance and reduce costs.
Wireless Internet
Motient offers a variety of wireless email solutions for its DataTac network,
including its own eLink wireless e-mail applications, as well as Research In
Motion's, or RIM's, BlackBerry TM wireless solution for use on its own network.
Motient's eLink and BlackBerry applications for use on Motient's DataTac network
are generally used on wireless handheld devices manufactured by Research In
Motion, including the RIM 850 and RIM 857 wireless handhelds. Production of the
RIM 850 and RIM 857 wireless handhelds has been discontinued by Research in
Motion, as they cannot offer many of the features, like voice capability, that
the newer RIM devices can. For these reasons, we do not anticipate significant
future sales of these wireless internet devices, applications and services. In
addition, due to the competitive nature of this market segment from wireless
carriers with greater financial resources than our own, we expect this revenue
segment to decline in the future as customers migrate to alternative networks.
Motient can offer its customers an opportunity to utilize T-Mobile's GPRS
network for their wireless email solutions via its sub-dealer agreement with
RACO Wireless, Inc., a T-Mobile master dealer. T-Mobile's network can support
newer devices from RIM that are voice capable, among other things. Motient also
can offer its customers access to other alternative networks through its
agreement with eAccess Solutions, Inc.
We are currently exploring ways to offer comparable wireless email solutions
utilizing our iMotient Solutions platform in order to expand sales in this
market segment. There is no assurance that we can be successful in these efforts
and we may not be able to offer comparable competitive products.
Field Service Applications
In the field service market, customers use Motient's wireless network, wireless
applications and professional support services and back-office capabilities to
enable their mobile field service technicians to stay connected. For these and
other field service customers, Motient also provides critical professional
support service and back-office functionality tailored to our customers'
respective communications requirements, such as specialized billing, data
switching, inventory tracking, customer support and reporting.
The iMotient Solutions set of products and services will allow Motient to expand
sales in this market segment by using the coverage and capacity of multiple
networks.
Transportation And Shipping
In the transportation and shipping market, customers take advantage of Motient's
network, data switching and routing capabilities and professional support
services and back-office capabilities to provide effective communications
solutions to transportation and shipping fleets and other similar mobile
customers. For these and other transportation and shipping customers, Motient
also provides critical professional support service and back-office functions
tailored to our customers' respective communications requirements, such as
specialized billing, data switching, inventory tracking, customer support and
reporting.
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The iMotient Solutions set of products and services will allow Motient to expand
its market presence in this vertical channel while leveraging the coverage and
capacity of multiple networks.
Telemetry
Telemetry involves the transmission of generally small amounts of data from a
remote device to a master collection or monitoring point. The data may be stored
in a mobile device and then transmitted when necessary or cost-effective.
Motient has signed agreements with a variety of resellers, device manufacturers
and software vendors in this market. We have also signed agreements with several
application service providers to develop and offer a variety of customer-driven
telemetry applications.
Applications include HVAC system monitoring, wireless point-of-sale systems,
energy monitoring, vending, medical devices and patient monitoring, office
machine automation and security/alarm monitoring. We believe that our expansive
wireless network and telemetry experience will allow us to provide
cost-effective and comprehensive solutions for these communication requirements.
The iMotient Solutions set of products and services will allow Motient to expand
sales in this market segment by using the coverage and capacity of multiple
networks.
Pricing Of Services
Motient's customers are generally charged a monthly access fee or minimum usage
fee. Unless on a flat rate plan, users also pay for usage depending on the
number of kilobytes of data transmitted. Motient's pricing plans offer a wide
variety of volume packaging options, consistent with customer demand and market
conditions, from flat-rate plans to per message or per kilobyte plans. In
certain cases, primarily as it relates to strategic resellers, a percentage of
these subscriber units do not become revenue producing for up to several months
from initial registration on the network.
Motient's Customers
As of June 30, 2005, there were approximately 120,000 user devices registered on
Motient's network, with 83,000in a billable status and 59,000 with active usage.
Motient's customer base consists of large corporations in the following market
categories:
Percentage Of
Market Categories Billable Units
----------------- --------------
Transportation and package delivery 48%
Field service 2
Telemetry and point of sale 23
Wireless internet or email 26
iMotient 1
---------
Total 100%
=========
For the six months ended June 30, 2005, four customers accounted for
approximately 42% of the Company's service revenue, with one customer, SkyTel,
accounting for more than 23%. For the year ended December 31, 2004, four
customers accounted for approximately 40% of Motient's service revenue, with one
of those customers, SkyTel, accounting for more than 22%. In March 2005, IBM
notified us that they were terminating their contract as of March 31, 2005. The
loss of one or more of these customers, or any event, occurrence or development,
which adversely affects Motient's relationship with one or more of these
customers, could harm Motient's business. IBM represented $0.6 million of
revenue for the first three months of 2005, or approximately 12% of revenues.
The contracts with these customers are generally multi-year contracts, and the
services provided pursuant to such contracts are generally customized
applications developed to work solely on Motient's network. UPS, Motient's
second largest customer for the year ended December 31, 2003 and tenth largest
customer for the year ended December 31, 2004, substantially completed its
migration to next generation network technology in the first six months of 2003,
and its monthly airtime usage of Motient's network declined significantly.
Consequently, the revenue and cash flows generated by UPS declined
significantly. While Motient expects that UPS will remain a customer for the
foreseeable future, there are no minimum purchase requirements under Motient's
contract with UPS and the contract may be terminated by UPS on 60 days' notice.
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In December 2002, Motient entered into an agreement with UPS pursuant to which
UPS prepaid an aggregate of $5 million in respect of network airtime service to
be provided beginning January 1, 2004. In April 2005, this agreement was
amended, and then in September 2005, the agreement was amended again. Motient
made a payment of $2.0 to UPS, and in exchange, all but $0.6 million of the
outstanding prepayment of $3.7 million was terminated. The remaining $0.6
million prepayment must be used by UPS prior to March 31, 2006. If not used, UPS
will forfeit this prepayment, and it will not be repaid.
Marketing And Distribution
Motient markets its wireless services through strategic distribution resellers
and its direct sales force.
Strategic Alliances With Resellers And Agents
To penetrate new wireless data markets, which Motient believes have significant
growth potential, we have signed contracts for a variety of strategic alliances
with multiple resellers and agents in our various market segments. Motient
intends to use the marketing and distribution resources and large existing
customer bases of these resellers and agents to address significantly more
potential customers than Motient would be able to address on its own. Motient is
continuing to seek additional strategic distribution channels to help us move
forward with our plan to more fully penetrate our existing markets and access
potential new markets on an incremental basis.
Furthermore, Motient has broadened its product line by entering into agreements
with Sprint and Cingular to include their next generation high-speed data
services in Motient's product offerings. By doing so, Motient believes that it
will be able to market itself as a "one-stop shop" for a full array of
technology and product offerings, not just those products operating on the
Motient DataTac network.
Direct Sales Force
Motient has a direct sales force that is experienced in selling its various
wireless services. Prior to making a buying decision, a majority of Motient's
potential customers exercise a due diligence process where competitive
alternatives are evaluated. Motient's employees often assist in developing
justification studies, application design support, hardware testing, planning
and training. Motient's internal sales force has been key to its ability to
convey customer feedback to its product management team, enabling Motient to
identify and develop new product and service features. Motient's internal sales
force is also supported by technical project managers that assist customers to
assess, design and implement their wireless data need and solutions.
Motient's DataTac Network
Motient's two-way wireless radio data network provides a wide range of mobile
data services. Users of Motient's network access it through subscriber units
that may be portable, mobile or stationary devices. Subscriber units receive and
transmit wireless data messages to and from terrestrial radio
transmitters/receivers, known as base stations, which are located on various
leased antenna sites across the United States. Terrestrial messages are then
routed to their destination via leased communications circuits and data switches
that Motient owns, which connect to the public data network.
Motient's terrestrial network delivers superior in-building penetration,
completion rates and response times compared to other wireless data networks
through the use of a patented single frequency reuse technology developed by
Motorola. Single frequency reuse technology enables multiple base stations in a
given area to use the same frequency. As a result, a message sent by a
subscriber can be received by a number of base stations. This technology
contrasts with more commonly used multiple frequency reuse systems, which
provide for only one transmission path for a given message at a particular
frequency. In comparison with multiple frequency reuse systems, Motient's
technology provides superior in-building penetration and response times and
enables it to incrementally deploy additional capacity as required, instead of
in larger increments as required by most wireless networks.
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Equipment And Supplier Relationships
DataTac: Motient has contracts with a variety of vendors to supply devices
designed to meet the requirements of specific end-user applications on its
DataTac network. Motient continues to pursue enhancements to these devices that
will result in additional desirable features and reduced cost of ownership.
Although many of the components of its products are available from a number of
different suppliers, Motient relies on a relatively small number of key
suppliers for devices for its DataTac network. The devices used with Motient's
services generally are subject to various product certification requirements and
regulatory approvals before they are delivered for use by its customers. There
are currently eight types of subscriber units available from eight different
manufacturers that can operate on Motient's terrestrial network. Examples of
portable subscriber units include ruggedized laptop computers, small external
modems, handheld or palmtop "assistants" and pen-based "tablets." Motient is
also working with other device manufacturers and software developers to bring
its network services to other existing popular PDA and wireless email platforms.
iMotient: Under our iMotient Solutions platform and our reseller agreements with
Cingular and Sprint, we have access to a variety of vendors to supply devices
designed to meet the requirements of specific end-user applications. These
vendors have certified devices for use on either or both of the Cingular or
Sprint networks, and we are able to use any certified device that supports GPRS
data on Cingular or any 1XRTT device on Sprint's network.
AT&T Corporation provides network telecommunications services, including a
nationwide wireline data network, and leased sites which house regional
switching equipment for Motient's terrestrial network. Motient also has a
relationship with AT&T as Motient's vendor for switched inbound and outbound
public switched telephone network services, which connect Motient's network to
the public telecommunications network.
Motient's terrestrial DataTac network, and certain of its competitive strengths
such as comparatively strong in-building penetration, is based upon single
frequency reuse technology. Motorola holds the patent for the single frequency
reuse technology. Motient has entered into several agreements with Motorola
historically under which Motorola provided certain continued support for the
terrestrial network infrastructure, and ongoing maintenance and service of the
terrestrial network base stations. We do not currently have any service
agreement with Motorola.
Competition
The wireless communications industry is highly competitive and is characterized
by constant technological innovation. Motient competes by providing access to
multiple networks, broad geographic coverage, deep in-building penetration,
demonstrated reliability and experience in designing and implementing software
and other wireless applications for enterprise customers. These features
distinguish Motient from the competition. Motient's wireless solutions are used
by businesses that need critical customer and operational information in a
mobile environment. Motient offers multiple business lines and competes with a
variety of service providers, from small startups to Fortune 500 companies.
Motient's competitors include service providers in several markets--dedicated
mobile data, PCS and cellular, narrowband PCS/enhanced paging and emerging
technology platforms. Motient's agreements with Sprint and Cingular are not
exclusive and other wireless services providers have similar agreements with
these carriers.
Employees
On December 31, 2004 and October 27, 2005, Motient had 95 and 82 employees,
respectively. None of Motient's employees are represented by a labor union.
Motient considers its relations with its employees to be good.
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Regulation
Overview
Motient's wireless communications business is regulated to varying degrees at
the federal, state and local levels. Various legislative and regulatory
proposals under consideration from time to time by Congress and the FCC have in
the past materially affected and may in the future materially affect the
telecommunications industry in general, and Motient's wireless business in
particular. The following is a summary of significant laws, regulations and
policies affecting the operation of Motient's wireless business. In addition,
many aspects of regulation at the federal, state and local level currently are
subject to judicial review or are the subject of administrative or legislative
proposals to modify, repeal, or adopt new laws and administrative regulations
and policies. Neither the outcome of these proceedings nor their impact on
Motient's operations can be predicted at this time.
The ownership and operation of Motient's terrestrial network is subject to the
rules and regulations of the FCC, which acts under authority established by the
Communications Act of 1934, as amended, and related federal laws. Among other
things, the FCC allocates portions of the radio frequency spectrum to certain
services and grants licenses to and regulates individual entities using that
spectrum. Motient operates pursuant to various licenses granted by the FCC.
Motient's FCC licenses are subject to restrictions in the Communications Act
that (i) some FCC licenses may not be held by a corporation of which more than
20% of its capital stock is directly owned of record or voted by non-U.S.
citizens or entities or their representatives and (ii) no such FCC license may
be held by a corporation controlled by another corporation, referred to as
indirect ownership, if more than 25% of the controlling corporation's capital
stock is owned of record or voted by non-U.S. citizens or entities or their
representatives, if the FCC finds that the public interest is served by the
refusal or revocation of such license. However, with the implementation of the
Basic Telecommunications Agreement, negotiated under the auspices of the World
Trade Organization and to which the United States is a party, the FCC will
presume that indirect ownership interests in our FCC licenses in excess of 25%
by non-U.S. citizens or entities will be permissible to the extent that the
ownership interests are from World Trade Organization-member countries. If the
25% foreign ownership limit is exceeded, the FCC could take a range of potential
actions that could harm Motient's business.
Regulation Of Our Datatac Network
The Federal Communications Commission licenses used in Motient's terrestrial
wireless business are renewable, site-based, 800 MHz licenses, granted for a
term of 10 years. Renewal is granted in the ordinary course for 800 MHz licenses
like those which Motient holds. As a commercial mobile radio service provider in
the 800 MHz terrestrial business, Motient is regulated as a common carrier.
Motient must therefore offer service at just and reasonable rates on a
first-come, first-served basis, without any unjust or unreasonable
discrimination, and Motient is subject to the FCC's complaint processes. The FCC
has decided not to apply or to withhold its right, at this time, to apply
numerous common carrier provisions of the Communications Act to commercial
mobile radio service providers. In particular, Motient is not subject to
traditional public utility rate-of-return regulation, and is not required to
file tariffs with the FCC.
In order to address certain concerns from wireless users in the public safety
community, such as fire and police departments, on July 8, 2004, the FCC
approved adoption of a reconfiguration plan for the 800 MHz spectrum band. Under
the plan, Nextel Communications Inc. will occupy spectrum in the 1.9 GHz band in
exchange for, among other things, (1) relocating and retuning public safety
licensees in the 800 MHz band, and (2) consolidating its own 800MHz frequencies
in the so-called "upper 800" MHz band. On December 22, 2004, the FCC clarified
that Motient would generally be allowed, subject to certain conditions, to move
its 800 MHz frequencies to the upper-800 MHz band. Motient cannot assure you
that its operations will be not affected by the adoption or implementation of
this order or any subsequent addenda.
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As a result of our ongoing network rationalization efforts, our 800 MHz FCC
licenses may be lost in markets to which we are discontinuing service. We
believe that the value of our FCC licenses in these smaller markets is very
small compared to the value of our FCC licenses in the top 40 MSAs. While we are
taking steps to avoid this possibility, and while we believe that any such
losses would not be material to our business, we can provide no assurance that
any such losses would not negatively impact our business.
Regulation Of TerreStar
ATC
In February 2003, the FCC adopted an order governing ancillary terrestrial
component, or ATC, technology, giving mobile satellite operators broad authority
to use their assigned spectrum to operate an ATC. This order was applicable to
both the L-band (MSV), and the S-band (TerreStar). The ATC Order established a
set of preconditions and technical limits for ATC operations, as well as an
application process for ATC approval of the specific system incorporating the
ATCs that the licensee intends to use. On November 18, 2003, MSV filed an
application with the FCC to expand the use of its L-band spectrum and construct
its next-generation hybrid network with ATC. On November 8, 2004 the FCC issued
an order granting MSV the first ATC license ever granted by the FCC. The FCC
also approved several of MSV's waiver requests, allowing MSV to further enhance
its service coverage, but it specifically deferred its ruling on other MSV
waiver requests. The order sets forth various limitations and conditions
necessary to the use of ATC by MSV, but there can be no assurances that such
conditions will be satisfied by MSV, or that such limitations will not be
unnecessarily burdensome to MSV. One of MSV's competitors has asked the FCC to
review the November 8, 2004 decision. We cannot predict the outcome of this
review. On February 25, 2005, the FCC issued a revised set of rules following a
detailed multi-year process for the use of ATC. The rules expanded the technical
and operational flexibility of ATC Services allowing for greater capacity in
both the uplink and downlink directions. One of MSV's competitors has asked the
FCC to review some of these revised rules. We cannot predict the outcome of this
review. TerreStar has not applied for ATC authority, and there are several
regulatory conditions that must be satisfied prior to any grant of ATC authority
by the FCC to TerreStar. As a result, Motient can provide no assurances that ATC
authority will be granted if and when TerreStar applies for such authority.
TerreStar Licenses
TMI holds the approval issued by Industry Canada for a 2 GHz space station
authorization and related spectrum licenses for the provision of Mobile
Satellite Service, or MSS, in the 2 GHz band in Canada, as well as an
authorization from the FCC for the provision of MSS in the 2 GHz band in the
United States. These authorizations are subject to various milestones relating
to the construction, launch, and operational date of the system. TMI is
obligated to transfer the authorizations to an entity designated by TerreStar
that is eligible to hold the authorizations, subject to obtaining the necessary
regulatory approvals.
In December 2002, TMI and TerreStar jointly applied to the FCC for authority to
transfer TMI's MSS authorization to TerreStar. However, certain wireless
carriers urged the FCC to cancel TMI's MSS authorization, and to dismiss the
application to transfer TMI's MSS authorization to TerreStar. In February 2003,
the FCC's International Bureau adopted an order canceling TMI's MSS
authorization due to an alleged failure to enter into a non-contingent satellite
construction contract before the specified first milestone date, and dismissing
the application for TMI to transfer its MSS authorization to TerreStar.
In June 2004, upon review of the International Bureau's decision, the FCC agreed
to waive aspects of the first milestone requirement applicable to TMI's MSS
authorization and, therefore, also reinstated that authorization, along with the
application to transfer TMI's MSS authorization to TerreStar. The FCC also
modified the milestone schedule applicable to TMI's MSS authorization. TMI
recently certified to the FCC its compliance with the second and third
milestones under its MSS authorization. The FCC is currently reviewing that
certification for compliance with the requirements of TMI's MSS authorization.
The application to transfer TMI's MSS authorization to TerreStar is still
pending before the FCC. The remaining milestones relate to satellite launch and
operation, and are in November 2007 and 2008, respectively.
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Currently, the FCC has provided TMI a reservation of 2 x 4 MHz of spectrum
within the 2GHz MSS band. TMI does not yet have a specific spectrum assignment
within that band, because current FCC rules do not allow it to request a
specific assignment until such time that its satellite reaches its intended
orbit. Spectrum in the 2 GHz MSS band is reserved on a pro rata basis among the
existing licensees. TMI's current spectrum reservation from the FCC and Industry
Canada reflect the cancellation of U.S. authorizations of three of the eight
entities that were authorized to provide 2 GHz MSS in 2001: Mobile
Communications Holding Inc. (MCHI), Constellation Communications Holdings, Inc.
(Constellation), and Globalstar LP. Globalstar LLC, the successor-in-interest to
Globalstar LP, along with another interested entity, Globalstar Satellite LP,
has collectively challenged cancellation of its license on reconsideration to
the FCC. MCHI and Constellation have jointly challenged cancellation of their
licenses on appeal to the U.S. Court of Appeals for the D.C. Circuit. If any or
all of those licenses were reinstated, TMI would likely have access to less
spectrum than it would otherwise. The FCC has not yet redistributed spectrum
surrendered in March 2005 by three of the then remaining five 2 GHz MSS
licensees to the current remaining two 2 GHz MSS licensees. In April 2005, TMI
and TerreStar filed a letter at the FCC requesting redistribution of half of the
surrendered MSS spectrum to TMI. A number of terrestrial wireless and MSS
entities opposed that request. In July 2005, the FCC issued public notices
opening two proceedings to manage redistribution of the surrendered MSS
spectrum. In the first proceeding, IB Docket No. 05-220, the FCC tentatively
concluded that it would distribute approximately 10.67 MHz of surrendered MSS
spectrum on a pro rata basis to TMI and ICO Satellite Services (ICO); it also
sought public comment on that tentative conclusion. If the FCC were to take such
action, TMI would have access to a total of approximately 2 x 6.67 MHz of MSS
spectrum. In the second proceeding, IB Docket No. 05-221, the FCC requested
comment on the following three possible options for distribution of the other
approximately 13.34 MHz of surrendered 2 GHz MSS spectrum: (1) distribute the
spectrum pro rata to TMI and ICO, (2) open a new MSS processing round to
distribute the spectrum to new MSS licensee(s) , or (3) initiate a rulemaking to
reallocate some or all of the remaining surrendered spectrum to another (i.e.,
non-MSS) service. Numerous parties, including MSS competitors Inmarsat and
Globalstar, as well as terrestrial wireless companies, have commented in these
proceedings to oppose distribution of any of the surrendered spectrum to TMI.
The FCC has not announced any decision as to how to distribute the surrendered
MSS spectrum at issue in IB Docket Nos. 05-220 and 05-221. Motient cannot
guarantee that TMI will receive access to more then the 2 x 4 MHz of spectrum
currently provided for in the MSS authorization issued by the FCC.
On July 26, 2005, Industry Canada modified TMI's S-band authorization to provide
for a 2 x 10 MHz reservation. Specifically, this reservation consists of 7 MHz
in each direction, with an additional 3 MHz in each direction available on the
condition that it does not constrain the entry of another MSS operator into the
Canadian market.
In September 2004, the FCC issued an order allowing PCS operation in the
1995-2000 MHz band, which may be adjacent to the 2 GHz frequencies ultimately
assigned to TMI. TerreStar has commented in the proceedings to establish service
rules for the 1995-2000 MHz band. There can be no assurance that the FCC will
not adopt service rules that will create interference to MSS operators in the 2
GHz band, including TerreStar.
The 2 GHz MSS band and certain adjacent bands are currently occupied by
broadcast auxiliary service licensees, cable television relay service licensees,
local television transmission service licensees, fixed service licensees, and
certain other licensees. Most if not all of those licensees, and especially
those in the broadcast auxiliary service, will need to relocate their operations
to a new band to accommodate 2 GHz MSS and other new entrants. As a 2 GHz MSS
entrant, TMI and/or TerreStar will have certain obligations to compensate those
incumbent licensees for their relocation costs and for the costs of providing
"comparable facilities" to them. However, the level to which TMI and/or
TerreStar will be required to participate in such reimbursement is uncertain due
to a variety of factors. Among other factors that could affect these
obligations, and, pursuant to a separate FCC order, Nextel Communications Inc.
(Nextel) must relocate incumbent broadcast auxiliary service licensees in the
1990-2025 MHz band by September 6, 2007. To the extent that Nextel complies with
its band clearing obligations, 2 GHz MSS entrants commencing operations after
Nextel has cleared the band would not have to clear the band themselves, but
could still have obligations to reimburse Nextel for certain of its band
clearing costs. Whether a 2GHz MSS entrant will be required to share in certain
of Nextel's relocation costs will likely depend upon whether that entrant
commences operations prior to June 27, 2008. By March 2006, Nextel must notify
the MSS licensees as to whether it will or will not be seeking reimbursement
from them. Even if Nextel bears all costs of relocating incumbent licensees in
the 1990-2025 MHz band, TMI and/or TerreStar will still likely be responsible
for relocating certain incumbent licensees in the 2165-2200 MHz band, although
it may have the right to recoup certain costs from wireless entrants in the
2165-2180 MHz band. We cannot predict what these band clearing costs will be to
TerreStar and/or TerreStar, if any.
74
Accounting And Auditing Matters
On March 2, 2004, we dismissed PricewaterhouseCoopers as our independent
auditors. The audit committee of our board of directors approved the dismissal
of PricewaterhouseCoopers. PricewaterhouseCoopers was previously appointed to
audit our consolidated financial statements for the period May 1, 2002 to
December 31, 2002, and, by its terms, such engagement was to terminate upon the
completion of services related to such audit.
PricewaterhouseCoopers has not reported on our consolidated financial statements
for such period or for any other fiscal period. On March 2, 2004, the audit
committee engaged Ehrenkrantz Sterling & Co. LLC as Motient's independent
auditors to audit our consolidated financial statements for the period May 1,
2002 to December 31, 2002 and for the fiscal year ended December 31, 2003.
On June 1, 2004, Ehrenkrantz Sterling & Co. LLC, merged with the firm of
Friedman Alpren & Green LLP. Motient has retained the new entity, Friedman LLP,
and the Audit Committee of Motient's Board of Directors approved this decision
on June 4, 2004.
Properties
Motient leases approximately 79,000 square feet for headquarters office space
and an operations center in Lincolnshire, IL, the lease for which expires
December 31, 2010. On April 1, 2003, Motient subleased approximately 8,500
square feet to a third party under a sublease agreement that expires on December
31, 2005.
Motient also leases site space for over 1,000 base stations and antennae across
the country for the terrestrial network under one to five-year lease contracts
with varied renewal provisions.
Motient believes that its existing facilities are adequate to meet its needs for
the foreseeable future.
Legal Proceedings
On August 16, 2005, Highland Legacy Limited, a stockholder of Motient, filed
suit in the Court of Chancery of the State of Delaware in and for New Castle
County against: Motient; Steven Singer, Gerald Kittner, Barry Williamson,
Raymond Steele and Gerald Goldsmith, directors of Motient; Peter D. Aquino, a
former director of Motient; Christopher Downie, Chief Operating Officer of
Motient; Gary Singer; Tejas Inc.; Tejas Securities, Inc.; Communications
Technology Advisors LLC; Capital & Technology Advisors, Inc.; and Jared
Abbruzzese. Highland Legacy Limited is an affiliate of James Dondero, a director
of Motient. The lawsuit alleges breaches of duties allegedly owed to Motient by
the defendants and seeks the recovery of fees from certain of these parties
relating to prior transactions with Motient. Most of these fees were approved by
Mr. Dondero in his capacity as a director of Motient. The defendants in this
lawsuit filed a motion to dismiss these claims on October 14, 2005. Motient's
independent audit committee, along with independent special counsel, has
conducted an investigation of Mr. Dondero's allegations and has found no basis
to his allegations.
On August 16, 2005, Highland Equity Focus Fund, L.P., Highland Crusader Offshore
Partners, L.P., Highland Capital Management Services, Inc., and Highland Capital
Management, L.P. filed a lawsuit in Dallas County, Texas against Motient
challenging the validity of the Series A Preferred on the basis of the confusion
regarding the voting rights of the Series A Preferred and seeking rescission of
their purchase of the shares of Series A Preferred that they purchased from
Motient in the private placement in April 2005. These entities acquired 90,000
shares of Series A Preferred for a purchase price of $90 million in that private
placement. Although Motient currently has sufficient cash to refund this
purchase price and rescind the purchase of Series A Preferred by these
investors, Motient believes that this claim is without merit and intends to
vigorously defend this lawsuit.
On October 7, 2005, Highland Equity Focus Fund, L.P., Highland Crusader Offshore
Partners, L.P., Highland Capital Management Services, Inc., Highland Capital
Management, L.P on behalf of themselves and all those similarly situated, filed
a class action lawsuit in the Court of Chancery of the State of Delaware against
Motient and each of its directors, other than Mr. Dondero, alleging that Motient
has provided inadequate information to the holders of Series A Preferred
relating to the Exchange Offer for the Series A Preferred, and that the Exchange
Offer is coercive. These parties have also requested that the court enjoin the
Exchange Offer. The Exchange Offer closed on October 26, 2005, and accordingly,
Motient has requested that this suit be dismissed as moot.
75
On October 19, 2005, Motient Corporation filed two lawsuits against James D.
Dondero, one in the United States District Court for the Northern Division of
Texas, and one in the District Court of Dallas County, Texas. The complaint
filed in state court alleges that Mr. Dondero has seriously and repeatedly
breached his fiduciary duties as a director of Motient in order to advance his
own personal interests. The complaint filed in Federal court alleges selective
disclosure of material inside information and other improper actions undertaken
by Mr. Dondero, the net result of which have been to drive down the price of
Motient's stock. It also alleges that Mr. Dondero has solicited, and is still
soliciting, the replacement of Motient's current board and management in
violation of federal law.
Issuance of Series A Preferred
Motient issued the Series A Preferred in a private placement on April 15, 2005.
As originally proposed, the Series A Preferred would have voted along with
Motient's common stock on all matters on an as-converted basis. During
negotiations with respect to the Series A Preferred, investors affiliated with
Jim Dondero, a director of Motient, requested that the voting rights of the
Series A Preferred be limited so that these investors would not be required to
file applications under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended ("HSR"). Motient agreed to limit the voting rights of the
Series A Preferred to the extent appropriate so that these investors would not
be required to file HSR applications. However, due to a mistake, the voting
rights were incorrectly stated in the Certificate of Designations for the Series
A Preferred as originally filed with the Secretary of State of Delaware. Upon
discovering this mistake, Motient promptly filed a Certificate of Corrections
with the Secretary of State of Delaware to correctly state the voting rights of
the Series A Preferred. Motient's Certificate of Incorporation contains a
provision that prohibits the issuance by Motient of "non-voting stock." As
described below, the investors affiliated with Jim Dondero who requested that
the voting rights of the Series A Preferred be limited have now filed lawsuits
against Motient claiming, among other things, that the Series A Preferred is
void because the limited voting rights set forth in the Certificate of
Incorporation make the Series A Preferred "non-voting stock" and that the
Certificate of Corrections is not effective to remedy this. Motient believes
that the Certificate of Corrections was effective to remedy any problems caused
by the mistake, and that the limited voting rights granted in the Certificate of
Designations were sufficient to make the Series A Preferred not be "non-voting
stock." Subsequent to our sale of Series A Preferred, entities affiliated with
Mr. Dondero filed an HSR application based on their purchases of Motient's
securities in February 2005, two months prior to our issuance of the Series A
Preferred.
Exchange Offer
On October 26, 2005, Motient completed an exchange offer in which it allowed
each Holder of Series A Preferred the opportunity to exchange their shares of
Series A Preferred and a release of any claims relating to the issuance of the
Series A Preferred for shares of Series B Preferred, which will have rights,
preferences and privileges substantially identical to the Series A Preferred,
except that upon (a) the accumulation of accrued and unpaid dividends on the
outstanding shares of Series B Preferred for two or more six month periods,
whether or not consecutive; (b) the failure of Motient to properly redeem the
Series B Preferred Stock, or (c) the failure of Motient to comply with any of
the other covenants or agreements set forth in the Certificate of Designations
for the Series B Preferred Stock, and the continuance of such failure for 30
consecutive days or more after receipt of notice of such failure from the
holders of at least 25% of the Series B Preferred then outstanding, then the
holders of at least a majority of the then-outstanding shares of Series B
Preferred, with the holders of shares of any parity securities upon which like
voting rights have been conferred and are exercisable, voting as a single class,
will be entitled to elect a majority of the members of Motient's Board of
Directors for successive one-year terms until such defect listed above has been
cured. All of the holders of the Series A Preferred except for those affiliated
with Highland Capital Management exchange their shares in this offer.
Accordingly, approximately $318.5 million in face amount of Series A Preferred
shares were exchanged for Series B Preferred shares of the same face amount, and
only $90 million in face amount of Series A Preferred shares remain outstanding.
76
Please also see our description of certain regulatory matters given above, which
involve certain legal matters.
From time to time, Motient is involved in legal proceedings in the ordinary
course of its business operations. Although there can be no assurance as to the
outcome or effect of any legal proceedings to which Motient is a party, Motient
does not believe, based on currently available information, that the ultimate
liabilities, if any, arising from any such legal proceedings not otherwise
disclosed would have a material adverse impact on its business, financial
condition, results of operations or cash flows.
77
MANAGEMENT
The following table sets forth certain information about our executive officers,
directors and key employees.
<TABLE>
Name Title Age Began Service
---- ----- --- -------------
<S> <C> <C> <C>
Christopher W. Downie Executive Vice President, Chief Operating
Officer and Treasurer 36 2003
Dennis W. Matheson Senior Vice President and Chief Technology
Officer 44 1993
Deborah L. Peterson Senior Vice President, Systems Engineering and
Solutions 49 1992
Richard V. Crawford Senior Vice President, Network Engineering 48 1991
Robert L. Macklin Vice President, General Counsel and Secretary 30 2003
Myrna J. Newman Vice President, Controller and
Chief Accounting Officer 48 2003
Steven G. Singer Director, Chairman 43 2002
Gerald S. Kittner Director 52 2002
Barry A. Williamson Director 47 2005
Jonelle St. John Director 50 2000
James D. Dondero Director 42 2002
Raymond L. Steele Director 69 2004
C. Gerald Goldsmith Director 77 2005
</TABLE>
Christopher W. Downie. Mr. Downie was appointed executive vice president, chief
operating officer and treasurer in May 2004. From March 2004 to May 2004, Mr.
Downie was appointed to the position of executive vice president, chief
financial officer and treasurer, and designated our principal executive officer.
>From April 2003 to March 2004, he served as vice president, chief financial
officer and treasurer. From May 2002 to April 2003, Mr. Downie worked as a
consultant for CTA, a communications consulting firm. While with CTA, Mr. Downie
was primarily engaged on Motient-related and other telecom-related matters. From
February 2000 to May 2002, Mr. Downie served as a senior vice president and
chief financial officer of BroadStreet Communications, Inc. From August 1993 to
February 2000, Mr. Downie was a vice president in the Investment Banking
Division of Daniels & Associates, LP, an investment bank focused on
communications industries. From 1991 to 1993, Mr. Downie served as a financial
analyst at Bear, Stearns & Co. Inc. Mr. Downie also serves on the board of
directors of TerreStar Networks Inc.
Dennis W. Matheson. Mr. Matheson has been Motient's senior vice president and
chief technology officer since March 2000. From 1993 to March 2000, Mr. Matheson
held other technical positions within Motient, most recently as vice president
of engineering and advanced technology. Before joining Motient, Mr. Matheson was
senior manager of systems architecture for Bell Northern Research, a subsidiary
of Nortel Networks Corporation (formerly known as Northern Telecom Limited).
Prior to that, he held various positions with Northern Telecom and Bell Northern
Research within the design and product management organizations and held various
engineering positions with Texas Instruments Incorporated.
Mr. Matheson was an executive officer of Motient at the time it filed for
Chapter 11 protection. Information regarding Motient's filing under Chapter 11
of the Bankruptcy Code is provided in "Business - Motient's Chapter 11 Filing,"
and is incorporated herein by reference.
Deborah L. Peterson. Ms. Peterson has served as Motient's vice president of
system engineering and solutions since 1998. From 1992 to 1998 she held various
other technical management positions with Motient. Prior to joining Motient,
Deborah was the MIS director at Armour Swift-Eckrich, a ConAgra company, from
1988 to 1992 where she led MIS strategic planning, systems development and
support, technical support services, data center operations, and voice and data
telecommunications network planning and management. From 1984 to 1988, Ms.
Peterson served as systems consultant and project manager at Beatrice Companies
where she developed systems plans for a wide range of process manufacturing
companies including consumer durable, refrigerated and dry grocery segments.
78
Richard V. Crawford. Mr. Crawford has served as Motient's vice president of
operations and engineering since July 2002. Since joining Motient in 1991, Mr.
Crawford has served in various positions in network operations, focused
primarily on the quality, timeliness and cost management of Motient's network
operations, including the deployment of several architecture plans. Prior to
joining Motient/ARDIS in 1991, Mr. Crawford held various management positions
for Shark Financial Services (a division of WANG financial) from 1985 to 1991
and Continental Illinois National Bank from 1980 to 1985.
Robert Macklin. Mr. Macklin has served as Motient's general counsel and
secretary since May 2004. From September 2003 to May 2004, Mr. Macklin served as
Motient's associate general counsel and secretary. From May 2001 to September
2003, he was in-house counsel to Herman Dodge & Son, Inc., a national housewares
manufacturer and distributor. Prior to May 2001, he was an associate in the
corporate department of Skadden, Arps, Slate, Meagher & Flom (Illinois).
Myrna J. Newman. Ms. Newman has served as Motient's controller, chief accounting
officer and principal financial officer since May 2004. From April 2003 to May
2004, she served as controller and chief accounting officer. From 2001 to 2003,
she was vice president of finance for Heads and Threads International LLC, a
subsidiary of Allegheny Corporation and distributor of fasteners. Prior to that,
from 1995 to 2001, she was the controller of Heads and Threads.
Steven G. Singer. Mr. Singer has been a Motient director since May 2002 and
chairman of the board since June 2003. Since November 2000, Mr. Singer has
served as chairman and chief executive officer of American Banknote Corporation,
a public company providing documents of value (such as currency, checks,
passports, and credit cards) and related services. American Banknote filed for
protection under Chapter 11 of the Bankruptcy Code in January 2005. Since 1994,
Mr. Singer has also been chairman and chief executive officer of Pure 1 Systems,
a privately held drinking water treatment company. From 1994 to 2000, Mr. Singer
was executive vice president and chief operating officer of Romulus Holdings,
Inc., a family-owned investment fund. Mr. Singer also currently serves as the
non-executive chairman of Globix Corporation, a public company.
Gerald S. Kittner. Mr. Kittner has been a Motient director since May 2002. Since
October 2001, Mr. Kittner has been an advisor and consultant for CTA. From 1996
to 1999, Mr. Kittner was a senior vice president for legislative and regulatory
affairs with CAI Wireless Systems. When CAI Wireless Systems was acquired by
WorldCom, Inc. (then MCI) in 1999, Mr. Kittner remained with WorldCom as a
senior vice president for approximately one year. From 1996 to 2000, Mr. Kittner
served on the board of directors of the Wireless Communications Association, and
was a member of its executive and government affairs committees. Previously, Mr.
Kittner was a partner with the law firm Arter & Hadden and worked with a variety
of telecommunications clients.
Mr. Kittner was involved with CAI Wireless Systems, Inc. when it filed for
protection under Chapter 11 of the Bankruptcy Code in 1998. During all relevant
time periods relating to the Chapter 11 proceeding captioned In re CAI Wireless
Systems, Inc., Debtor, Chapter 11 Case No. 98-1766 (JJF) and In re Philadelphia
Choice Television, Inc., Debtor, Chapter 11 Case No. 98-1765 (JJF), commenced in
the United States Bankruptcy Court for the District of Delaware on July 30,
1998, Mr. Kittner was a senior vice president of CAI Wireless Systems. CAI
Wireless Systems and Philadelphia Choice Television consummated their joint plan
of reorganization and emerged from bankruptcy on October 14, 1998.
Barry A. Williamson. Mr. Williamson became a Director in October 1999. Mr.
Williamson was elected in 1992 as the 38th Texas Railroad Commissioner and
served from January 1993 to January 1999. He served as the Railroad Commission's
Chairman in 1995. During the late 1980's and early 1990's, Mr. Williamson served
under the Bush administration at the U.S. Department of Interior as the Director
of Minerals Management Service. During the 1980's, Mr. Williamson served under
the Reagan administration as a principal advisor to the U.S. Secretary of Energy
in the creation and formation of a national energy policy. Mr. Williamson began
his career with the firm of Turpin, Smith, Dyer & Saxe, and in 1985 established
the Law Offices of Barry Williamson and founded an independent oil and gas
company. Mr. Williamson graduated from the University of Arkansas with a B.A. in
Political Science in 1979, and received his J.D. degree from the University of
Arkansas Law School in 1982.
79
Jonelle St. John. Ms. St. John has been a Motient director since November 2000.
Ms. St. John was the chief financial officer of MCI WorldCom International in
London from 1998 through 2000 following her positions as the treasurer of MCI
Communications Corporation from 1993 to 1998. Prior to working with WorldCom,
Ms. St. John was the vice president and treasurer and the vice president and
controller of Telecom*USA, which she joined in 1985. Before 1985, Ms. St. John
held various positions at Arthur Andersen LLP.
Ms. St. John was a director of Motient at the time it filed for Chapter 11
protection. Information regarding Motient's filing under Chapter 11 of the
Bankruptcy Code is provided in "Business - Motient's Chapter 11 Filing," and is
incorporated herein by reference.
James D. Dondero. Mr. Dondero has been a Motient director since July 2002. Mr.
Dondero has been president of Highland Capital Management, L.P. since 1993. Mr.
Dondero is also a director of Leap Wireless International, Inc. and American
Banknote Corporation, which are both public companies.
Raymond L. Steele. Mr. Steele was elected to the board of directors in May 2004.
Mr. Steele has been a director of Globix since June 2003, and is also a member
of the board of directors of Dualstar Technologies Corporation and American
Banknote Corporation. From August 1997 until October 2000, Mr. Steele served as
a board member of Video Services Corp. Prior to his retirement, Mr. Steele held
various senior positions such as Executive Vice President of Pacholder
Associates, Inc. (from August 1990 until September 1993), Executive Advisor at
the Nickert Group (from 1989 through 1990), and Vice President, Trust Officer
and Chief Investment Officer of the Provident Bank (from 1984 through 1988).
C. Gerald Goldsmith. Mr. Goldsmith has been an independent investor and
financial advisor since 1976. He is currently a director of American Banknote
Inc. and Plymouth Rubber Co., and he is Chairman of Property Corp.
International, a private real estate investment company. He has served as a
director of several banks and NYSE-listed companies and various philanthropic
organizations. He holds an A.B. from the University of Michigan and an M.B.A.
from Harvard Business School.
Audit Committee Financial Expert
Our board of directors has determined that Jonelle St. John and Raymond L.
Steele are "audit committee financial experts", as such term is defined under
Item 401(h) of Regulation S-K. Each of them is "independent" of management as
independence for audit committee members is defined by NASDAQ rules.
Stockholders should understand that this designation is a disclosure requirement
of the SEC related to Ms. St. John's and Mr. Steele's experience and
understanding with respect to certain accounting and auditing matters. The
designation does not impose on Ms. St. John or Mr. Steele any duties,
obligations or liability that are greater than are generally imposed on her as a
member of the audit committee and board of directors, and their designations as
audit committee financial experts pursuant to this SEC requirement does not
affect the duties, obligations or liability of any other member of the audit
committee or board of directors.
Board Compensation
Each non-employee member of the board of directors is entitled to receive $2,000
per month, and each member of the audit committee (currently Ms. St. John, Mr.
Goldsmith and Mr. Steele) and the compensation and stock option committee
(currently Mr. Kittner, Ms. St. John, Mr. Goldsmith and Mr. Steele) are entitled
to receive an additional $500 and $250 per month, respectively. The chairman of
the board is entitled to receive an additional $2,000 per month. All directors
are eligible to receive grants of restricted stock and grants of stock options
under Motient's 2004 Restricted Stock Plan and 2002 Stock Option Plan.
Executive Compensation.
The following tables set forth (a) the compensation paid or accrued by Motient
to Motient's chief executive officer and its five other most highly compensated
executive officers receiving over $100,000 per year in 2004, all of whom are
referred to herein as the "named executive officers" for services rendered
during the fiscal years ended December 31, 2002, 2003, and 2004 and (b) certain
information relating to options granted to such individuals.
80
Summary Compensation Table
<TABLE>
<CAPTION>
All Other
Annual Compensation Long-Term Compensation Compensation
-------------------------------------------------------------------------------------
Securities
Restricted Underlying
Other Annual Stock Options/
Year Salary Bonus Compensation(1) Awards SARs(2)
---- ------ ----- --------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Christopher W. Downie 2004 $ 225,707 $ 0 $ 264 $ 0 101,160
Executive Vice President, Chief 2003 $ 129,688 $ 0 $ 88 $ 0 40,000
Operating Officer and Treasurer (3)
Dennis W. Matheson 2004 $ 192,880 $ 89,908 $ 248 $ 0 0
Senior Vice President 2003 $ 181,067 $ 0 $ 168 $ 0 40,000
and Chief Technology Officer 2002 $ 177,923 $ 25,000 $ 476 $ 0 120,000
Deborah L. Peterson 2004 $ 143,246 $ 61,524 $ 177 $ 0 0
Vice President, Systems 2003 $ 165,890 $ 0 $ 219 $ 0 20,000
Engineering and Solutions 2002 $ 165,890 $ 20,000 $ 219 $ 0 50,000
Richard V. Crawford 2004 $ 149,064 $ 39,242 $ 220 $ 0 0
Vice President, Network 2003 $ 145,005 $ 0 $ 202 $ 0 20,000
Operations and Engineering 2002 $ 130,004 $ 5,000 $ 202 $ 0 50,000
Robert L. Macklin (4) 2004 $ 138,873 $ 0 $ 166 $ 0 10,619
General Counsel and Secretary 2003 $ 32,392 $ 0 $ 14 $ 0 25,000
Myrna J. Newman (5) 2004 $ 138,641 $ 0 $ 166 $ 0 0
Controller and Chief 2003 $ 80,985 $ 0 $ 87 $ 0 15,000
Accounting Officer
</TABLE>
(1) Includes group term life insurance premiums.
(2) Reflects grants of options to purchase shares of common stock under
Motient's 2002 stock option plan. Motient has not granted stock
appreciation rights, or SARs.
(3) Mr. Downie's employment began in April 2003.
(4) Mr. Macklin's employment began in September 2003.
(5) Ms. Newman's employment began in April 2003.
The following table sets forth each grant of stock options made during fiscal
year 2004 to each of the named executive officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation for
Individual Grants Option Term(1)
--------------------------------------------------------- --------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees/ Base Price Expiration
Granted(2) Fiscal Year ($/Share) Date 5% 10%
---------- ----------- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Christopher W. Downie 101,160 55% $ 5.15 (3) 8/2/2014 $ 326,000 $ 824,000
Dennis W. Matheson 0 0% NA NA
Deborah L. Peterson 0 0% NA NA
Richard V. Crawford 0 0% NA NA
Robert L. Macklin 10,619 5% $ 8.57 (4) 12/13/2014 $ 55,000 $ 140,000
Myrna J. Newman 0 0% NA NA
</TABLE>
(1) Based on actual option term and annual compounding.
(2) These options were fully vested upon grant
(3) 1,160 of these options have an exercise price of $3.00.
(4) 619 of these options have an exercise price of $3.00.
81
The following table sets forth, for each of the named executive officers, the
value of unexercised options at fiscal year-end.
Aggregated Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End
Option/SAR Values (1)
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options/SARs
Acquired at Fiscal at Fiscal
On Value- Year-End Year-End($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
---- --- --- ------------- -------------
<S> <C> <C> <C> <C>
Christopher W. Downie 40,000 $ 529,250 101,160/0 $1,848,664/0
Dennis W. Matheson 67,660 878,776 0/73,330 0/$1,424,268
Deborah L. Peterson 29,995 224,772 0/33,331 0/$644,121
Richard V. Crawford 25,750 189,288 3,334/33,331 $68,014/$644,121
Robert L. Macklin 0 -- 14,787/20,832 $234,910/$369,768
Myrna J. Newman 3,120 41,184 0/9,999 0/$203,980
</TABLE>
(1) Motient has not granted SARs.
Change Of Control Agreements
Pursuant to the Plan of Reorganization, Motient entered into a change of control
agreement, effective May 1, 2002, with each of Mr. Matheson, Ms. Peterson, and
eight other vice presidents of Motient. Under the agreements, each officer is
eligible to receive one year of their annual base salary (excluding cash bonus)
in the event that both (x) a "change in control" or an anticipated "change in
control," as defined in the change of control agreement, has occurred and (y)
the employee is terminated or his or her compensation or responsibilities are
reduced. The events constituting a "change of control" generally involve the
acquisition of greater than 50% of the voting securities of Motient, as well as
certain other transactions or events with a similar effect. Other than Mr.
Matheson and Ms. Peterson, the Company currently has no employees with such a
change of control agreement.
2002 Stock Option Plan
Our 2002 stock option plan was adopted by the board of directors on May 31, 2002
and received stockholder approval on July 11, 2002. It was amended on June 23,
2005 pursuant to stockholder approval given on June 15, 2005. A total of
5,493,024 shares of common stock have been reserved for issuance under the 2002
stock option plan. Under the 2002 stock option plan, we are authorized to grant
options to purchase shares of common stock intended to qualify as incentive
stock options, as defined under section 422 of the Internal Revenue Code of
1986, as amended, and non-qualified stock options to any employees, outside
directors, consultants, advisors and individual service providers whose
participation in the 2002 stock option plan is determined by our compensation
and stock option committee to be in our best interests. The directors or the
compensation committee fixes the term of each stock option, and each stock
option is exercisable within ten years of the original grant date. Generally, an
option is not transferable by the recipient except by will or the laws of
descent and distribution. Some change of control transactions, such as a sale of
Motient, may cause awards granted under the 2002 stock option plan to vest. As
of December 31, 2004, options to purchase 605,727 shares of our common stock
were outstanding. In August, 2005, the company granted options to purchase an
additional 425,000 of our common stock at a price of $23.15 per share.
2004 Restricted Stock Plan
In August 2004, the Company adopted a restricted stock plan, and subsequently
registered the shares to be issued under such plan on a registration statement
on Form S-8. Pursuant to this plan, the Company may issue up to 1,000,000 shares
of restricted common stock to employees or directors. In September 2004, the
Company issued an aggregate of 15,400 shares of restricted stock to its
directors as partial compensation for their service on the board of directors.
Such shares vested in February 2005. Also in February 2005, the Company issued
an aggregate of 95,286 shares of restricted stock to certain consultants and
advisors, which vested on February 18, 2005. In August, 2005, the Company issued
an additional 82,500 shares of restricted stock to directors, all of which have
vested.
82
Compensation And Stock Option Committee Interlocks And Insider Participation
In 2004, the compensation and stock option committee of Motient's board of
directors consisted of Messrs. Singer, Kittner and Dondero. During this time,
none of these individuals were executive officers of Motient.
Mr. Kittner has been, in the past, an advisor and consultant for CTA. During
2004, Motient and/or certain of its subsidiaries were party to certain contracts
and/or transactions with CTA. Motient's board of directors approved all of these
contracts and transactions, and Motient believes that the contracts and
transactions were made on terms substantially as favorable to Motient as could
have been obtained from unaffiliated third parties. The following is a
description of such contracts and transactions. In addition, this section
describes the relationship between Steven Singer and one of the lenders under
our credit facility. For additional information concerning these relationships,
see "Certain Relationships and Related Transactions."
On January 30, 2004, Motient engaged CTA to act as chief restructuring entity.
As consideration for this work, we agreed to pay to CTA a monthly fee of
$60,000. The new agreement modifies the consulting arrangement discussed above.
Except for the warrants and options offered and provided to CTA and certain of
its affiliates described below, neither CTA, nor any of its principals or
affiliates is a stockholder of Motient, nor does it hold any debt of Motient
(other than indebtedness as a result of consulting fees and expense
reimbursement owed to CTA in the ordinary course under our existing agreement
with CTA). CTA has informed us that in connection with the conduct of its
business in the ordinary course, (i) it routinely advises clients in and appears
in restructuring cases involving telecommunications companies throughout the
country, and (ii) certain of our stockholders and bondholders and/or certain of
their respective affiliates or principals, may be considered to be (A) current
clients of CTA in matters unrelated to Motient; (B) former clients of CTA in
matters unrelated to Motient; and (C) separate affiliates of clients who are (or
were) represented by CTA in matters unrelated to Motient.
In April and July 2004, as part of our private placements of common stock,
certain CTA affiliates were provided warrants for 400,000 and 340,000 shares,
respectively, of our common stock at an exercise price of $5.50 and $8.57,
respectively, per share. In December 2004, certain CTA affiliates were provided
options to purchase 125,000 shares of our common stock at a price of $8.57 per
share. In February 2005, the board approved a success-based consulting fee of
$3,709,796, payable 60% to CTA and certain of its affiliates, and 40% to The
Singer Children's Management Trust, a trust established for the benefit of the
children of Gary Singer, a former lender under the 2003 Term Credit Agreement
and the brother of Steven Singer, Motient's chairman of the board. The fee was
paid in cash and stock, and was related to the closing of Motient's acquisition
of certain interests in MSV. Such fee is equal to 1% of the aggregate
consideration paid by Motient for such MSV interests.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This section describes arrangements with CTA, an entity in which (i) Jared E.
Abbruzzese, a director until June 20, 2003, is the chairman, (ii) Gerald S.
Kittner, a Motient director, was formerly an advisor and consultant, (iii)
Christopher W. Downie, Motient's executive vice president, chief operating
officer and treasurer, was formerly affiliated with CTA as an independent
consultant and (iv) Peter Aquino, a former Motient director, was formerly a
senior managing director. Additionally, this section describes related party
transactions concerning our credit facility and our April, July and November
2004 private placements of common stock.
Communication Technology Advisors LLC
On January 30, 2004, we engaged CTA to act as our chief restructuring entity. As
consideration for this work, Motient agreed to pay to CTA a monthly fee of
$60,000. The new agreement amends the consulting arrangement discussed above. In
April 2004, Motient paid CTA $440,000 for all past deferred fees.
83
Except for the warrants and options offered to CTA described below, and certain
warrants received by certain CTA affiliates in connection with the April 7, 2004
private placement of our common stock, neither CTA, nor any of its principals or
affiliates is a stockholder of Motient, nor does CTA hold any debt of Motient
(other than indebtedness as a result of consulting fees and expense
reimbursement owed to CTA in the ordinary course under our existing agreement
with CTA). CTA has informed us that in connection with the conduct of its
business in the ordinary course, (i) it routinely advises clients in and appears
in restructuring cases involving telecommunications companies throughout the
country, and (ii) certain of our stockholders and bondholders and/or certain of
their respective affiliates or principals, may be considered to be (A) current
clients of CTA in matters unrelated to Motient; (B) former clients of CTA in
matters unrelated to Motient; and (C) separate affiliates of clients who are (or
were) represented by CTA in matters unrelated to Motient.
In April 2004, as part of our private placements of common stock, certain CTA
affiliates were provided warrant for 400,000 and 340,000 shares, respectively,
of our common stock at an exercise price of $5.50 and $8.57, respectively, per
share. In December 2004, certain CTA affiliates were provided options to
purchase 125,000 shares of our common stock at a price of $8.57 per share.
In February 2005, CTA and certain of its affiliates were paid a success-based
consulting fee of $3,709,796 in cash and stock in relation to the closing of
Motient's acquisition of certain interests in MSV. Such fee is equal to 1% of
the aggregate consideration paid by Motient for such MSV interests.
Mr. Abbruzzese, Mr. Kittner and Mr. Aquino did not participate in the
deliberations or vote of the Board with respect to the foregoing matters while
serving as a member of the Board.
Term Credit Facility
On January 27, 2003, our wholly-owned subsidiary, Motient Communications, closed
a $12.5 million term credit agreement with a group of lenders, including several
of our existing stockholders. The lenders include the following entities or
their affiliates: M&E Advisors, L.L.C, Highland Crusader Offshore Partners, LP,
Bay Harbour Partners, York Capital, and Lampe Conway & Co. Highland Crusader
Offshore Partners, LP is affiliated with James D. Dondero (a director of
Motient) and Highland Capital Management, LP. York Capital is affiliated with
James G. Dinan and JGD Management Corp. James D. Dondero, Highland Capital
Management, LP, JGD Management Corp. and James G. Dinan each hold 5% or more of
our common stock. The lenders also include Gary Singer, directly or through one
or more entities. Gary Singer is the brother of Steven G. Singer, one of our
directors. The facility terminated on December 31, 2004, and all amounts due and
owing pursuant to the facility have been repaid. We do not anticipate that it
borrowing availability will be extended again.
Private Placements Of Common Stock
Certain of our directors and holders of more than 5% of our common stock
participated in the April 7, July 1 and November 12, 2004 private placements of
our common stock and our April 15, 2005 private placement of our Series A
Cumulative Convertible Preferred Stock. PDA Group, LLC, a wholly-owned entity of
Peter D. Aquino, one of our directors, was assigned by Tejas Securities, our
placement agent, warrants to purchase 56,250 shares of our common stock at a
price of $5.50 per share. James D. Dondero, a director and beneficial owner of
more than 5% of our common stock, purchased an aggregate of 2,420,688 shares of
our common stock and 90,000 shares of preferred stock in such private
placements. In addition, he also received warrants to purchase 350,058 shares
and 33,951 shares of our common stock at a price of $8.57 per share and $26.51
per share, respectively, all of which will vest if and only if we do not meet
certain deadlines with respect to the registration of the common stock sold in
the private placement. Of the warrants to purchase 350,058 shares at $8.57 per
share, 25% will never vest and 75% have vested.
84
PRINCIPAL STOCKHOLDERS
The following table and the accompanying notes set forth certain information, as
of October 27, 2005 (or any other date that is indicated) concerning the
beneficial ownership of Motient's common stock by (i) each person who is known
by Motient to own beneficially more than five percent of Motient's common stock,
(ii) each director, (iii) each executive officer named in the summary
compensation table and (iv) all directors and executive officers as a group.
Except as otherwise indicated, each person listed in the table has informed
Motient that such person has sole voting and investment power with respect to
such person's shares of common stock and record and beneficial ownership with
respect to such person's shares of common stock.
<TABLE>
<CAPTION>
Number Of
Name Of Beneficial Owner Shares (1) % Of Class (1)
------------------------ ---------- --------------
<C> <C> <C>
Highland Capital Management, L.P. (2)
13445 Noel Road
Suite 3300 9,024,326 14.4%
Dallas, TX 75240
Paul Tudor Jones, II (3)
c/o Tudor Investment Corporation
1275 King St. 4,553,997 7.3%
Greenwich, CT 06831
George W. Haywood (4)
c/o Cronin & Vris, LLP
380 Madison Avenue 5,667,986 9.1%
24th Floor
New York, NY 10017
James G. Dinan (5)
York Capital Management & affiliates
350 Park Avenue 3,874,559 6.2%
4th Floor
New York, NY 10022
Rajendra Singh (6)
Telcom Ventures, L.L.C.
201 N. Union St., Suite 360 8,488,702 13.6%
Alexandria, VA 22314
Directors And Executive Officers
Dennis W. Matheson (7) 66,664 *
Christopher W. Downie (8) 101,160 *
Deborah L. Peterson (7) 16,666 *
Richard V. Crawford 3,333 *
Robert L. Macklin (7) 16,291 *
Myrna J. Newman (7) 3,499 *
Barry A. Williamson (9) 42,500 *
Gerald S. Kittner (7) 31,314 *
Steven G. Singer (7) 47,517 *
C. Gerald Goldsmith (7) 20,000 *
Jonelle St. John (7) 33,614 *
Raymond L. Steele (7) 15,300 *
James D. Dondero (2) 9,024,326 14.4%
--------- -----
All directors and named executive officers as a group
(13 persons) 9,422,184 15.1%
========= =====
</TABLE>
* Less than 1% of the outstanding shares.
(1) The information regarding beneficial ownership of our common stock has
been presented in accordance with the rules of the SEC and is not
necessarily indicative of beneficial ownership for any other purpose.
Under these rules, beneficial ownership of common stock includes any
shares as to which a person, directly or indirectly, has or shares voting
power or investment power and also any shares as to which a person has the
right to acquire such voting or investment power within 60 days through
the exercise of any stock option or other right. The percentage of
beneficial ownership as to any person as of a particular date is
calculated by dividing the number of shares beneficially owned by such
person by the sum of the number of shares outstanding as of such date and
the number of shares as to which such person has the right to acquire
voting or investment power within 60 days. As used in this report, "voting
power" is the power to vote or direct the voting of shares and "investment
power" is the power to dispose or direct the disposition of shares. Except
as noted, each stockholder listed has sole voting and investment power
with respect to the shares shown as beneficially owned by such
stockholder.
85
(2) Indirect ownership consists of shares of common stock held by a filing
group consisting of Highland Capital Management, L.P. ("Highland
Capital"); Strand Advisors, Inc. ("Strand"); Highland Capital Management
Services, Inc. ("Services") Highland Crusader Offshore Partners, L.P.
("Crusader"); Prospect Street High Income Portfolio, Inc. ("PHY");
Prospect Shares Income Shares, Inc. ("CNN"); Highland Legacy Limited
("Legacy"); PAMCO Cayman, Limited ("PAMCO"); Highland Select Equity Focus
Fund, L.P. ("Equity Focus"); Highland Select Equity Fund, L.P. ("Equity
Fund") and James D. Dondero. Highland Capital is the general partner of
Crusader, Equity Fund and Equity Focus, and the investment advisor for
PHY, CNN, Legacy and PAMCO. Strand is the general partner of Highland
Capital. Mr. Dondero is the President of Highland Capital and the
President and a director of Strand and Services. The amount also includes
warrants for the purchase of 825,000 additional shares, vested warrants
for the purchase of 262,542 additional shares, and 2,700,268 shares of
common stock that may be acquired upon the conversion of preferred stock.
Highland Capital, Strand, Services and Mr. Dondero expressly disclaim
beneficial ownership of the securities reported herein except to the
extent of their pecuniary interest therein.
(3) Includes 175,033 shares issuable upon exercise of vested warrants. The
shares of Common Stock reported herein as beneficially owned are owned
directly by Tudor Proprietary Trading, L.L.C. ("TPT"), The Alter Rock Fund
L.P. ("Altar Rock"), The Raptor Global Portfolio Ltd. ("Raptor") and The
Tudor BVI Global Portfolio Ltd. ("Tudor BVI"). Because Tudor Investment
Corporation ("TIC") is the sole general partner of Altar Rock and provides
investment advisory services to Altar Rock, Raptor and Tudor BVI, TIC may
be deemed beneficially to own the shares of Common Stock beneficially
owned by Altar Rock, Raptor and Tudor BVI. TIC expressly disclaims such
beneficial ownership. In addition, because Mr. Jones is the controlling
shareholder of TIC and the indirect controlling equity holder of TPT, Mr.
Jones may be deemed beneficially to own the shares of Common Stock
beneficially owned by Altar Rock, Raptor, Tudor BVI and TPT. Mr. Jones
expressly disclaims such beneficial ownership.
(4) Mr. Haywood's ownership includes 99,300 shares of Motient common stock
owned by his children and spouse, and 609,686 shares underlying warrants.
(5) James G. Dinan beneficially owns the 3,874,559 shares of our common stock,
which includes shares owned by various funds and accounts over which Mr.
Dinan has discretionary investment authority. Mr. Dinan is the senior
managing member and holder of a controlling interest in Dinan Management,
L.L.C., York Select Domestic Holdings, LLC, York Select Offshore Holdings,
LLC, York Offshore Holdings L.L.C. and York Distressed Domestic Holdings,
LLC. Mr. Dinan is also a director and holder of a controlling interest in
York Offshore Holdings, Limited. York Offshore Holdings is the investment
manager of York Investment. Dinan Management is the general partner of
York Capital Management. York Select Domestic Holdings is the general
partner of York Select. York Select Offshore Holdings is the investment
manager of York Select Unit Trust. York Distressed Domestic Holdings is
the investment manager of York Distressed Opportunities Fund. York
Offshore Holdings is the investment manager of York Offshore Investors.
Mr. Dinan is the president and sole stockholder of JGD Management Corp.,
which manages the other funds and accounts that hold our common stock over
which Mr. Dinan has discretionary investment authority. 300,000 of the
listed shares are shares of common stock that may be acquired upon the
conversion of preferred stock.
(6) Includes 27,634 shares underlying warrants to purchase common stock which
have vested. Includes 2,046,951 shares and 13,817 shares underlying
warrants to purchase common stock that are held by Dr. Singh's wife, Neera
Singh. Includes 4,093,902 shares of Motient common stock and 27,634 shares
of underlying warrants held by two irrevocable educational trusts
established for the benefit of Dr. Singh's children. Mrs. Singh is one of
the co-trustees of each trust. Dr. and Mrs. Singh disclaim any beneficial
ownership of such shares to the extent allowable by law. Includes 409,390
shares, and 9,211 shares underlying warrants, subject to an option in
favor of Rahul Prakash.
(7) Includes shares underlying stock options that are fully vested and
exercisable.
(8) Comprised of shares underlying options and a warrant that are fully vested
and exercisable.
86
SELLING STOCKHOLDERS
The following table and accompanying notes set forth certain information
regarding the selling stockholders as of October 27, 2005 unless otherwise
indicated. Under this prospectus, the selling stockholders and any of their
respective transferees, assignees, donees, distributees, pledgees or other
successors in interest may offer and sell from time to time an aggregate of
11,235,465 shares of common stock. In this prospectus, we refer to these holders
collectively as the selling stockholders. The shares are being registered to
permit public sales of the shares, and the selling stockholders may offer the
shares for resale from time to time. See "Plan of Distribution." The selling
stockholders may offer all, some or none of the common stock listed below.
The table below sets forth the names of the selling stockholders and the number
of shares owned, directly and beneficially, by such stockholders as of October
27, 2005 unless otherwise indicated. The number of shares of common stock
outstanding on October 27, 2005 unless otherwise indicated was 62,527,413.
Except as otherwise indicated, each selling stockholder listed in the table has
informed Motient that such selling stockholder has (1) voting and investment
power with respect to such selling stockholder's shares of common stock and (2)
record and beneficial ownership with respect to such selling stockholder's
shares of common stock. This table assumes that the selling stockholders will
fully exercise all vested warrants held by them and will offer for sale all of
the shares of common stock covered by this prospectus.
The shares offered pursuant to this prospectus include (1) shares of common
stock issuable upon conversion of shares of Series B Cumulative Convertible
Preferred Stock held by each selling stockholder, (2) shares of common stock
issuable upon the exercise of warrants held by each selling stockholder,
although such warrants are not generally vested and may never vest, and (3)
shares of common stock that may be issued as dividends on the shares of Series B
Preferred Stock held by each selling stockholder. There is no assurance that the
shares of Series B Preferred Stock will ever be converted into shares of common
stock, that the warrants will ever vest or that dividends payable in shares of
common stock will ever be paid on such shares of Series B Preferred Stock.
"Shares Beneficially Owned Prior to Offering" and "Shares Beneficially Owned
After Offering" includes shares of common stock into which the shares of Series
B Preferred Stock held by such selling stockholder are convertible. Each share
of Series B Preferred may be converted at any time by the selling stockholder
into approximately 30 shares of common stock. Such columns include the portion
of the shares of common stock issuable upon the exercise of certain warrants
dated April 15, 2005 held by the selling stockholders that we anticipate will be
exercisable within 60 days of October 27, 2005. Such columns do not include
shares of common stock issuable as dividends on the shares of Series B Preferred
Stock as Motient may never pay such dividends and, in any event, is required to
pay dividends only in cash until April 15, 2007.
If all of the shares are sold pursuant to this prospectus, then the selling
stockholders will sell 11,235,465 shares of our common stock, or 18.0% of
Motient's common stock outstanding as of October 27, 2005.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially Owned
Prior to Offering (1) After Offering (2)
--------------------- ------------------
Shares
Name of Beneficial Owner Number Percentage Offered (3) Number Percentage
------------------------ ------ ---------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Greywolf Capital Partners II LP (4) 808,485 1.4% 236,492 (5) 612,485 1.0%
Greywolf Capital Overseas Fund (4) 1,683,715 2.9% 469,032 (6) 1,329,715 2.3%
LC Capital Master Fund, Ltd. (7) 2,226,784 3.6% 352,763 (8) 1,925,617 3.1%
Millennium Partners, L.P. (9) 1,357,421 2.2% 705,524 (10) 755,088 1.2%
York Investment Limited (11) 1,536,406 2.5% 134,297 (12) 1,421,752 2.3%
York Capital Management, L.P. (11) 394,407 * 33,971 (13) 365,406 *
York Select Unit Trust (11) 285,443 * 30,267 (14) 259,604 *
York Select, L.P. (11) 417,913 * 44,306 (15) 380,088 *
York Global Value Partners, L.P. (11) 428,540 * 45,435 (16) 389,751 *
York Credit Opportunities Fund, L.P. (11) 468,740 * 52,526 (17) 423,897 *
</TABLE>
87
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
York/Green Capital Partners, L.P. (11) 117,083 * 11,959 (18) 106,874 *
Rockbay Capital Institutional Fund, LLC (19) 348,486 * 164,069 (20) 208,415 *
Rockbay Capital Offshore Fund, Ltd. (19) 880,759 1.4% 453,263 (21) 493,791 *
Glenview Capital Partners, L.P. (22) 161,806 * 55,171 (23) 114,705 *
Glenview Institutional Partners, L.P. (22) 556,815 * 202,626 (24) 383,825 *
Glenview Capital Master Fund, Ltd. (22) 1,132,279 1.8% 418,305 (25) 775,156 1.3%
GCM Little Arbor Master Fund, Ltd. (22) 67,699 * 25,046 (26) 46,317 *
GCM Little Arbor Institutional Partners, L.P.
(22) 13,769 * 4,374 (27) 10,405 *
OZ Master Fund, Ltd. (28) 2,764,815 4.4% 1,213,430 (29) 1,728,862
Fleet Maritime, Inc. (28) 45,872 * 21,236 (30) 27,743 *
Ore Hill Hub Fund, Ltd. (31) 486,113 * 352,763 (32) 184,946 *
Harbert Distressed Investment Master Fund, LTD 3,049,923 1.9% 859,857 (33) 2,315,829 *
Alpha Sub Fund VI LLC 97,083 * 22,047 (34) 78,261 *
Goldman Sachs & Co. 1,807,000 2.9% 2,116,571 (35) 0 -
Jana Master Fund, Ltd. 406,574 * 476,228 (36) 0 -
Portfolio Logic LLC (37) 282,700 * 211,658 (38) 102,000 *
Eton Park Fund, L.P. 263,520 * 308,667 (39) 0 -
Eton Park Master Fund, Ltd. 489,395 * 573,237 (40) 0 -
Long Meadow Holdings, LP (41) 120,466 * 141,105(42) 0 -
Lyxor/Jana Partners 45,174 * 52,914 (43) 0 -
Stanfield Offshore Leveraged Assets, Ltd. (44) 1,723,400 2.8% 1,058,286 (45) 820,000 1.3%
Loeb Partners Corporation 233,677 * 35,277 (46) 203,561 *
Strome Offshore Ltd. (47) 657,785 1.1% 211,658 (48) 474,821 *
Strome Alpha Fund, L.P. (47) 406,335 * 141,105 (49) 284,360 *
----------
* Less than 1% of the outstanding shares.
</TABLE>
(1) Pursuant to Rule 13d-3 of the Exchange Act, a person is deemed to be a
beneficial owner of a security if that person has the right to acquire
beneficial ownership of such security within 60 days, including the right
to acquire through the exercise of an option or warrant or through the
conversion of a security.
(2) Based on 62,527,413 outstanding shares of our common stock as of October
27, 2005 and assumes that the 154,109 shares of common stock issuable
upon the exercise of the warrants issued April 15, 2005 are not
outstanding.
(3) The share amount listed in this column assumes that the selling
stockholder will (i) convert all shares of Series B Cumulative
Convertible Preferred Stock into shares of common stock, (ii) exercise
all of their vested warrants and sell all of the shares of our common
stock covered by this prospectus, (iii) receive dividends in shares of
common stock on such shares of Series B Cumulative Convertible Preferred
Stock, and (iv) not sell any shares other than those covered by this
prospectus.
(4) Greywolf Capital Management LP, a Delaware limited partnership ("GCM"),
may be deemed to have voting control and investment discretion over
securities owned by Greywolf Capital Partners II LP and Greywolf Capital
Overseas Fund. Jonathan Savitz is the managing member of the general
partner of GCM, and consequently may be deemed to be the beneficial owner
of any securities deemed to be beneficially owned by GCM. The foregoing
should not be construed as an admission by either GCM or Mr. Savitz as to
beneficial ownership of the shares owned by Greywolf Capital Partners II
LP and Greywolf Capital Overseas Fund.
(5) Includes 201,140 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 2,529 shares of common stock issuable
upon exercise of a warrant and 32,823 shares of common stock which may be
issued as dividends on such shares of Series A Preferred Stock.
88
(6) Includes 398,919 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 5,016 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
65,097 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(7) LC Capital Master Fund, Ltd. was a lender under our term credit
agreement.
(8) Includes 300,030 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 3,773 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
48,960 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(9) Millennium Management, L.L.C., a Delaware limited liability company, is
the managing partner of Millennium Partners, L.P., a Cayman Islands
exempted limited partnership, and consequently may be deemed to have
voting control and investment discretion over securities owned by
Millennium Partners, L.P. Israel A. Englander is the managing member of
Millennium Management, L.L.C. As a result, Mr. Englander may be deemed to
be the beneficial owner of any shares deemed to be beneficially owned by
Millennium Management, L.L.C. The foregoing should not be construed in
and of itself as an admission by either of Millennium Management, L.L.C.
or Mr. Englander as to beneficial ownership of the shares of the
Company's common stock owned by Millennium Partners, L.P. Millennium
Partners, L.P. was a lender under the Company's term credit agreement.
(10)Includes 600,060 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 7,545 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
97,919 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(11)York Capital Management L.P., York Distressed Opportunities Fund, L.P.,
York Investment Limited were lenders under our term credit agreement.
(12)Includes 114,221 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 1,437 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
18,639 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(13)Includes 28,892 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 364 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 4,715
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
(14)Includes 25,742 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 324 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 4,201
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
(15)Includes 37,683 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 474 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 6,149
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
(16)Includes 38,643 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 486 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 6,306
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
(17)Includes 44,674 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 562 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 7,290
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
89
(18)Includes 10,171 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 128 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 1,660
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
(19)Atul Khanna and Jonathan Baron, affiliates of both Rockbay entities, may
be deemed to the beneficial owner of shares held by such entities. Mr.
Khanna and Mr. Baron each disclaim such beneficial ownership.
(20)Includes 139,543 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 1,755 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
22,771 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(21)Includes 385,508 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 4,847 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
62,908 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(22)Larry Robbins is the CEO and Senior Managing Member of Glenview Capital
Management, LLC, the Investment Manager of each of Glenview Capital
Partners, L.P., Glenview Institutional Partners, L.P., Glenview Capital
Master Fund, Ltd., GCM Little Arbor Master Fund, Ltd. and GCM Little
Arbor Institutional Partners, L.P. As such, he may be deemed to exercise
voting and investment control over the shares held by such entities.
(23)Includes 46,924 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 590 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 7,657
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
(24)Includes 172,337 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 2,167 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
28,122 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(25)Includes 355,775 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 4,474 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
58,056 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(26)Includes 21,302 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 268 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 3,476
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
(27)Includes 3,720 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 47 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 607
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
(28)Daniel S. Och is the Senior Managing Member of OZ Management, L.L.C., the
investment manager of each of OZ Master Fund, Ltd. and Fleet Maritime,
Inc. As such, Mr. Och may be deemed to exercise voting and investment
control over the shares held by such entities.
(29)Includes 1,032,043 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 12,976 shares of common stock
issuable upon exercise of a warrant that is not yet vested and may never
vest and 168,411 shares of common stock which may be issued as dividends
on such shares of Series B Preferred Stock.
90
(30)Includes 18,061 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 228 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 2,947
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
(31)Frederick Wahl and Ben Nickoll exercise voting and investment control
over the shares owned by Ore Hill Partners. They therefore may be deemed
to be the beneficial owner of such shares.
(32)Includes 300,030 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 3,773 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
48,960 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(33)Includes 731,323 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 9,195 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
119,339 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(34)Includes 18,751 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 236 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 3,060
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
(35)Includes 1,800,180 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 22,633 shares of common stock
issuable upon exercise of a warrant that is not yet vested and may never
vest and 293,758 shares of common stock which may be issued as dividends
on such shares of Series B Preferred Stock.
(36)Includes 405,040 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 5,093 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
66,095 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(37)Jeff Zients is the Managing Member of Portfolio Logic Management, LLC,
which is the Managing Member of Portfolio Logic LLC. As such, he is
deemed to exercise voting and investment control over the shares held by
Portfolio Logic LLC.
(38)Includes 180,018 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 2,264 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
29,376 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(39)Includes 262,526 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 3,301 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
42,840 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(40)Includes 487,548 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 6,130 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
79,559 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(41)Jonathan W. Old, III is the Managing Member of Long Meadow Investors,
LLC, which is the general partner of Long Meadow Holdings, LP. As such,
he is deemed to exercise voting and investment control over the shares
held by Long Meadow Holdings, LP.
(42)Includes 120,012 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 1,509 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
19,584 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
91
(43)Includes 45,004 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 566 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 7,344
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
(44)The following named persons serve on the management committee of
Stanfield Capital Partners LLC, the investment advisor to Stanfield
Offshore Leveraged Assets, Ltd. ("SOLA"), with sole voting or dispositive
power: Dan Baldwin, Stephen Alfieri, Chris Jansen, Kevin Murphy, Sarah E.
Street and Christopher V. Greetham. Each of the foregoing persons
disclaims beneficial ownership of the securities owned by SOLA.
(45)Includes 900,090 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 11,317 shares of common stock
issuable upon exercise of a warrant that is not yet vested and may never
vest and 146,879 shares of common stock which may be issued as dividends
on such shares of Series B Preferred Stock.
(46)Includes 30,003 shares of common stock issuable upon conversion of shares
of Series B Preferred Stock, 378 shares of common stock issuable upon
exercise of a warrant that is not yet vested and may never vest and 4,896
shares of common stock which may be issued as dividends on such shares of
Series B Preferred Stock.
(47)Strome Investment Management, L.P. (SIM) is a Delaware limited
partnership and a registered investment advisor. It is the sole
investment advisor to Strome Hedgecap Ltd. and Strome Offshore Ltd. - two
offshore investment corporations. SIM is also the sole general partner
and investment advisor to Strome Alpha Fund, L.P. SSCO, Inc. is the
general partner of SIM. The Mark E. Strome Living Trust is the
controlling shareholder of SSCO, Inc. Mark E. Strome is the settlor and
trustee of the trust. SIM's beneficial ownership of the stock is direct
because of its general partnership interest in the limited partnership
that directly owns shares of the stock. SIM also has direct beneficial
ownership of the stock as a result of its discretionary authority to buy,
sell, and vote shares of such stock for its advisory clients. SSCO,
Inc.'s the Trusts, and Mark Strome's ownership of the stock are indirect
as a result of their interests in SIM. The selling stockholder has
advised the Registrant that it and/or certain of its affiliates are NASD
registered broker-dealers. The selling stockholder has advised the
Registrant that it has purchased the securities covered by the
Registration Statement in the ordinary course of its business. The
selling stockholder has also advised the Registrant that, at the time of
the purchase of such securities, it did not have any agreements or
understandings, directly or indirectly, with any person to distribute the
securities.
(48)Includes 180,018 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 2,264 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
29,376 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
(49)Includes 120,012 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock, 1,509 shares of common stock issuable
upon exercise of a warrant that is not yet vested and may never vest and
19,584 shares of common stock which may be issued as dividends on such
shares of Series B Preferred Stock.
92
DESCRIPTION OF MOTIENT'S SECURITIES
Since May 1, 2002, the effective date of our plan of reorganization, we have
been governed by our Restated Certificate of Incorporation, which provides for
one hundred five million (105,000,000) shares of authorized capital stock,
consisting of one hundred million (100,000,000) shares of common stock, par
value $0.01 per share, and five million (5,000,000) shares of preferred stock,
par value $0.01 per share. On June 23, 2005, pursuant to the approval of our
stockholders, we amended our certificate of incorporation to authorize an
additional one hundred million (100,000,000) shares of common stock. In
accordance with Section 1123(a)(6) of the Bankruptcy Code, our Restated
Certificate of Incorporation prohibits the issuance of any shares of non-voting
securities. The following summary description of our capital stock is qualified
in its entirety by reference to our Restated Certificate of Incorporation and
Amended and Restated Bylaws, a copy of each of which is filed as an exhibit to
the registration statement of which this prospectus is a part.
Common Stock
We may issue up to two hundred million (200,000,000) shares of common stock. As
of October 27, 2005, 62,527,413 shares of common stock were outstanding. The
common stock has the following terms:
o The outstanding shares of our common stock are fully paid and
non-assessable.
o Holders of common stock are entitled to one vote per share for each
share held of record on all matters submitted to a vote of
stockholders and are entitled to receive ratably such dividends as may
be declared by the board of directors out of funds legally available
therefore.
o After satisfaction of the dividend rights of holders of any
outstanding preferred stock, holders of common stock will be entitled
to any dividend declared by the board of directors out of funds
legally available for this purpose. However, it is not anticipated
that any cash dividends will be paid on the common stock for the
foreseeable future.
o Upon a liquidation, dissolution or winding up of Motient, holders of
common stock will have the right to a ratable portion of assets
remaining after payment of liabilities and any payments due to holders
of outstanding preferred stock;
o The holders of common stock have no preemptive rights; and
o The rights, preferences and privileges of holders of common stock may
be adversely affected by the rights of the holders of shares of any
series of preferred stock that we may designate and issue in the
future.
Preferred Stock
We may issue up to five million (5,000,000) shares of preferred stock in one or
more series. As of October 27, 2005, there were 90,000 shares of Series A
Cumulative Convertible Preferred Stock outstanding, and 318,500 shares of Series
B Cumulative convertible Preferred Stock Outstanding.
The rights, preferences and privileges of the Series A and Series B Preferred
are contained in Certificates of Designations of the Series A and Series B
Cumulative Convertible Preferred Stock. The following is a summary of these
rights, preferences and privileges:
93
o The Series A Preferred Stock has voting rights limited to those listed
below, or except as required by applicable law. Upon (a) the
accumulation of accrued and unpaid dividends on the outstanding shares
of Series A Preferred for two or more six month periods, whether or
not consecutive; (b) the failure of the Corporation to properly redeem
the Series A Preferred Stock, or (c) the failure of the Corporation to
comply with any of the other covenants or agreements set forth in the
Certificate of Designations for the Series A Preferred Stock, and the
continuance of such failure for 30 consecutive days or more after
receipt of notice of such failure from the holders of at least 25% of
the Series A Preferred then outstanding then the holders of at least a
majority of the then-outstanding shares of Series A Preferred, with
the holders of shares of any parity securities issued after April 15,
2005 upon which like voting rights have been conferred and are
exercisable, voting as a single class, will be entitled to elect two
directors to Motient's Board of Directors for successive one-year
terms until such defect listed above has been cured. In addition,
Motient must obtain the approval of the holders of a majority of the
then outstanding shares of Series A Preferred to modify the rights,
preferences or privileges of the Series A Preferred in a manner
adverse to the holders of Series A Preferred.
o The Series B Preferred Stock has voting rights similar to the Series A
Preferred Stock, except that the series B would be entitled to elect a
majority of Motient's Board of Directors until the defaults have been
cured.
o From April 15, 2005 to April 15, 2007, Motient is required to pay
dividends in cash at a rate of 5.25% per annum (the "Cash Rate") on
the shares of Series A and Series B Preferred. Motient was required to
place the aggregate amount of these cash dividends, $42,892,500, in an
escrow account for the benefit of the Series A and Series B Preferred.
These cash dividends will be paid to the holders of Series A and
Series B Preferred from this escrow account in four semi-annual
payments, unless earlier paid pursuant to the terms described below.
o From April 15, 2007 to April 15, 2010, Motient is required to pay
dividends on each share of Series A and Series B Preferred either in
cash at the Cash Rate or in shares of Motient common stock at a rate
of 6.25% per annum.
o If any shares of Series A or Series B Preferred remain outstanding on
April 15, 2010, Motient is required to redeem such shares for an
amount equal to the purchase price paid per share plus any accrued but
unpaid dividends on such shares.
o Each holder of shares of Series A and Series B Preferred shall be
entitled to convert their shares into shares of Motient common stock
at any time. Each share of Series A and Series B Preferred will
initially be convertible into 30 shares of Motient common stock. Upon
conversion, any accrued but unpaid dividends on such shares will also
be issued as shares of common stock, in a number of shares determined
by dividing the aggregate value of such dividend by $33.33. In
addition, if the conversion takes place prior to April 15, 2007 (or if
any amounts remain in the escrow account on such date), the converting
holder will be entitled to the portion of the escrow account per share
of Series A and Series B Preferred Stock equal to $10.50 minus all
dividends that have been paid on such share from the escrow account
(such amount, the "Escrow Portion"). Upon conversion, all amounts paid
to holders of Series A and Series B Preferred will be paid in shares
of Motient common stock.
o Upon a change in control of Motient, each holder of Series A and
Series B Preferred shall be entitled to require Motient to redeem such
holder's shares of Series A and Series B Preferred for an amount in
cash equal to $1,080 per share plus all accrued and unpaid dividends
on such shares. In addition if the change in control takes place prior
to April 15, 2007 (or if any amounts remain in the escrow account on
such date), the holder electing to have such shares redeemed will be
entitled to the Escrow Portion remaining as to such share.
94
Upon the liquidation, dissolution or winding up of Motient, the holders of
Series A and Series B Preferred are entitled to receive, prior and in preference
to any distributions to holders shares of Motient common stock, an amount equal
to $1,000 per share plus all accrued and unpaid dividends on such shares. In
addition if the liquidation, dissolution or winding up takes place prior to
April 15, 2007 (or if any amounts remain in the escrow account on such date),
the holder of each share of Series A and Series B Preferred will be entitled the
Escrow Portion remaining as to such share.
Our board of directors may issue any additional shares of preferred stock, and
designate the terms thereof (including with respect to voting rights, dividends,
liquidation preferences and conversion rights), without the need for stockholder
approval. Other than the Series A and Series B Preferred Stock, there are no
shares of preferred stock outstanding, and, except for the preferred stock
anticipated to be issued to TMI upon the consummation of Motient's acquisition
of the outstanding interests of MSV and TerreStar, there are no agreements or
understandings for the designation of any series of preferred stock or the
issuance of shares thereunder. The existence of authorized but unissued
preferred stock may enable our board to render more difficult or to discourage
an attempt to obtain control of us by means of a merger, tender offer, proxy
contest or otherwise.
Foreign Ownership Restrictions
Under the Telecommunications Act of 1996, non-U.S. citizens or their
representatives, foreign governments or their representatives, or corporations
organized under the laws of a foreign country may not own, in the aggregate,
more than 20% of a common carrier licensee or more than 25% of the parent of a
common carrier licensee if the FCC determines that the public interest would be
served by prohibiting this ownership. Additionally, the FCC's rules may under
some conditions limit the size of investments by foreign telecommunications
carriers in U.S. international carriers.
Limitation Of Liability And Indemnification
Under Section 145 of the Delaware General Corporation Law, or DGCL, a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses, including attorneys' fees, as well as judgments, fines and settlements
in nonderivative lawsuits, actually and reasonably incurred in connection with
the defense of any action, suit or proceeding in which they or any of them were
or are made parties or are threatened to be made parties by reason of their
serving or having served in such capacity. The DGCL provides, however, that such
person must have acted in good faith and in a manner such person reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
in the case of a criminal action, such person must have had no reasonable cause
to believe his or her conduct was unlawful. In addition, the DGCL does not
permit indemnification in an action or suit by or in the right of the
corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for costs the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
Our Restated Certificate of Incorporation provides that no director of Motient
shall be personally liable for breach of fiduciary duty as a director. Any
repeal or modification of such provision shall not adversely affect any right or
protection, or any limitation of the liability of, a director of Motient
existing at, or arising out of facts or incidents occurring prior to, the
effective date of such repeal or modification. Both our Restated Certificate of
Incorporation and our Amended and Restated Bylaws contain provisions that
further provide for the indemnification of directors and officers in accordance
with and to the fullest extent permitted by the DGCL.
Additionally, Motient has entered into indemnification agreements with certain
of its directors and officers which may, in certain cases, be broader than the
specific indemnification provisions contained under current applicable law. The
indemnification agreements may require Motient, among other things, to indemnify
such officers, directors and key personnel against certain liabilities that may
arise by reason of their status or service as directors, officers or employees
of Motient and to advance the expenses incurred by such parties as a result of
any threatened claims or proceedings brought against them as to which they could
be indemnified.
Transfer Agent And Registrar
The transfer agent and registrar for our common stock is Computershare, 250
Royall St., Canton, MA 02021.
95
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect our common stock's prevailing market price, assuming an
established trading market for our common stock develops. As of October 21,
2005, we had outstanding 62,527,413 shares of our common stock. Approximately
30,286,739 of these shares are freely tradable without restriction or further
registration under the Securities Act, if they are held by persons other than
"affiliates" of Motient, as defined under the Securities Act. We believe that
17,910,886 shares of our common stock are held, or will be held, by holders who
may be affiliates. In addition, we have issued approximately 32,874,301 shares
of restricted common stock, which are not registered and may not be traded by
any holder of such stock absent an exemption from the Securities Act until
registered. All of the shares offered for sale pursuant to this prospectus may
be sold pursuant to this prospectus under the Securities Act, and will
thereafter be freely tradable so long as they are not held by affiliates or
underwriters. If the selling stockholders sell a large number of shares into the
public market at one time, such sales could have an adverse effect on the market
price of the common stock. We are not aware of any shares held by affiliates not
being offered for sale under this prospectus. If any such shares exist, these
shares may be sold under Rule 144 promulgated under the Securities Act of 1933.
Rule 144 permits sales by a holder within any three-month period of a number of
shares that does not exceed the greater of: (1) 1% of the number of shares of
common stock then outstanding or (2) the average weekly trading volume of the
common stock during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to those sales. Sales under Rule 144 are also governed by
manner of sale provisions and notice requirements, and current public
information about Motient must be available.
Also, we have issued certain parties warrants to purchase an aggregate of up to
7,327,503 shares of our common stock. The table below sets forth certain
relevant terms of these warrants.
<TABLE>
<CAPTION>
Issued To: Number Of Shares Exercise Price Term
---------- ---------------- -------------- ----
<S> <C> <C> <C>
Lenders under our term credit agreement -
January 2003 issuance 1,812,500 $1.06 5 year term, issued January 2003
Lenders under our term credit agreement -
March 2004 issuance 580,000 $4.88 None
Certain Affiliates of CTA 250,000 $3.00 5 year term, issued December 2002
Certain Affiliates of CTA 56,250 $5.50 10 year term, issued April 2004
Further Lane Asset Management 200,000 $5.10 5 year term, issued July 2003
Certain Affiliates of Tejas Securities, Inc. 600,000 $5.50 10 year term, issued April 2004
Certain Affiliates of Tejas Securities, Inc. 510,000 $8.57 10 year term, issued July 2004
Purchasers of our common stock in the
November 12, 2004 private placement 2,878,802 $8.57 5 year term, issued November 2004
Purchasers of our common stock in the
February 9, 2005 private placement 285,858 $22.50 5 year term, issued February 2005
Purchasers of our Series A Preferred Stock in
the April 15, 2005 private placement 154,093 $26.51 5 year term, issued April 2005
Total: 7,327,503(2)
</TABLE>
(1) Such warrants will vest if and only if we fail to meet certain conditions
regarding the registration of the shares sold in the private placement.
We anticipate that all these shares will vest.
(2) We have reserved 5,493,024 shares of common stock for issuance under our
2002 stock option plan. Such shares are not being registered pursuant to
this registration statement.
96
PLAN OF DISTRIBUTION
Motient has registered the shares offered by this prospectus on behalf of the
selling stockholders, and will not receive any proceeds from the sale of the
shares by the selling stockholders, although we will receive proceeds from the
exercise of some of our various outstanding warrants to the extent they are
exercised. These shares may be sold or distributed from time to time by the
selling stockholders and any of their respective transferees, assignees, donees,
distributees, pledgees or other successors in interest, all of whom we
collectively refer to in this prospectus as "selling stockholders." The selling
stockholders may sell their shares at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices,
or at fixed prices or in competitively bid transactions, which may be changed.
Each selling stockholder reserves the right to accept or reject, in whole or in
part, any proposed purchase of shares, whether the purchase is to be made
directly or through agents.
The selling stockholders may offer their shares at various times in one or more
of the following transactions:
o in ordinary brokers' transactions and transactions in which the broker
solicits purchasers;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account pursuant to this prospectus;
o in transactions involving cross or block trades;
o in transactions "at the market" to or through market makers in the
common stock or into an existing market for the common stock;
o in other ways not involving market makers or established trading
markets, including direct sales of the shares to purchasers or sales
of the shares effected through agents;
o through transactions in options, swaps or other derivatives which may
or may not be listed on an exchange;
o in privately negotiated transactions;
o in transactions to cover short sales;
o in underwritten transactions; or
o in a combination of any of the foregoing transactions.
The selling stockholders also may sell all or a portion of their shares in open
market transactions in accordance with Rule 144 under the Securities Act
provided that they meet the criteria and conform to the requirements of that
rule.
From time to time, one or more of the selling stockholders may pledge or grant a
security interest in some or all of the shares owned by them. If the selling
stockholders default in performance of their secured obligations, the pledgees
or secured parties may offer and sell the shares from time to time by this
prospectus. The selling stockholders also may transfer and donate shares in
other circumstances. The number of shares beneficially owned by selling
stockholders will decrease as and when the selling stockholders transfer or
donate their shares or default in performing obligations secured by their
shares. The plan of distribution for the shares offered and sold under this
prospectus will otherwise remain unchanged, except that the transferees, donees,
pledgees, other secured parties or other successors in interest will be selling
stockholders for purposes of this prospectus.
A selling stockholder may sell short the common stock. The selling stockholder
may deliver this prospectus in connection with such short sales and use the
shares offered by this prospectus to cover such short sales.
97
A selling stockholder may enter into hedging transactions with broker-dealers.
The broker-dealers may engage in short sales of the common stock in the course
of hedging the positions they assume with the selling stockholder, including
positions assumed in connection with distributions of the shares by such
broker-dealers. A selling stockholder also may enter into option or other
transactions with broker-dealers that involve the delivery of shares to the
broker-dealers, who may then resell or otherwise transfer such shares. In
addition, a selling stockholder may loan or pledge shares to a broker-dealer,
which may sell the loaned shares or, upon a default by the selling stockholder
of the secured obligation, may sell or otherwise transfer the pledged shares.
The selling stockholders may use brokers, dealers, underwriters or agents to
sell their shares. The persons acting as agents may receive compensation in the
form of commissions, discounts or concessions. This compensation may be paid by
the selling stockholders or the purchasers of the shares of whom such persons
may act as agent, or to whom they may sell as principal, or both. The
compensation as to a particular person may be less than or in excess of
customary commissions. The selling stockholders and any agents or broker-dealers
that participate with the selling stockholders in the offer and sale of the
shares may be deemed to be "underwriters" within the meaning of the Securities
Act. Any commissions they receive and any profit they realize on the resale of
the shares by them may be deemed to be underwriting discounts and commissions
under the Securities Act. Neither we nor any selling stockholders can presently
estimate the amount of such compensation.
Motient has advised the selling stockholders that during such time as they may
be engaged in a distribution of the shares, they are required to comply with
Regulation M under the Securities Exchange Act. With some exceptions, Regulation
M prohibits any selling stockholder, any affiliated purchasers and other persons
who participate in such a distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase, any security which is
the subject of the distribution until the entire distribution is complete.
Under Motient's registration rights agreement with certain of the selling
stockholders, Motient is required to bear the expenses relating to this
offering, excluding any underwriting discounts and fees, brokerage and sales
commissions, and stock transfer taxes relating to the sale or disposition of the
shares.
Motient has agreed to indemnify certain of the selling stockholders and their
respective controlling persons against some liabilities, including some
liabilities under the Securities Act.
It is possible that a significant number of shares could be sold at the same
time. Such sales, or the perception that such sales could occur, may adversely
affect prevailing market prices for the common stock.
This offering by any selling stockholder will terminate on the date on which the
selling stockholder has sold all of such selling stockholder's shares.
LEGAL MATTERS
For the purposes of this offering, the law firm of Andrews Kurth LLP has given
its opinion as to the validity of the shares of common stock offered by the
selling stockholders.
EXPERTS
The consolidated financial statements and schedules of Motient Corporation and
subsidiaries as of December 31, 2003 and 2004, and for each of the three years
in the period ended December 31, 2004, included in this prospectus, have been
audited by Ehrenkrantz Sterling & Co., LLC, with respect to 2002 and Friedman
LLP, successor-in-interest to Ehrenkrantz Sterling & Co., LLC, with respect to
2003 and 2004, an independent registered public accounting firm, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports. The financial
statements and schedules referred to above have been included in this prospectus
in reliance upon the authority of those firms as experts in giving said reports.
98
The consolidated financial statements and schedules of TerreStar Networks Inc.
December 31, 2003 and 2004, and for each of the three years in the period ended
December 31, 2004, included in this prospectus, have been audited by Friedman
LLP, as indicated in their reports with respect thereto, and are included herein
in reliance upon the authority of said firm as experts in giving said reports.
The financial statements and schedules referred to above have been included in
this prospectus in reliance upon the authority of those firms as experts in
giving said reports.
The consolidated financial statements of Mobile Satellite Ventures LP and
subsidiaries at December 31, 2003 and 2004, and for each of the three years in
the period ended December 31, 2004, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission, or SEC, to register the shares as required by the federal
securities laws. This prospectus, which constitutes a part of that registration
statement on Form S-1, omits certain information concerning us and our common
stock contained in the registration statement. Furthermore, statements contained
in this prospectus concerning any document filed as an exhibit are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the registration statement. Accordingly,
you should reference the registration statement and its exhibits for further
information with respect to us and the shares offered under this prospectus.
We also file annual, quarterly and special reports, proxy statements and other
information with the SEC under the Securities Exchange Act of 1934, as amended.
Our Exchange Act file number for our SEC filings is 0-23044. You may read and
copy any document we file with the SEC at the following SEC public reference
room:
Public Reference Room
100 F St. N.E.
Washington, D.C. 20549
You may obtain information on the operation of the SEC's Public Reference Room
by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, including Motient, who file
electronically with the SEC. The address of that site is http://www.sec.gov.
You should rely only on the information or representations provided in this
prospectus and the registration statement. We have not authorized anyone to
provide you with different information. The information contained in this
document speaks only as of the date of this document unless the information
specifically indicates that another date applies.
99
INDEX TO FINANCIAL STATEMENTS
MOTIENT CORPORATION AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Registered Public Accounting Firm........................................................... F-1
Consolidated Statements of Operations............................................................................. F-2
Consolidated Balance Sheets....................................................................................... F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficit).............................................. F-4
Consolidated Statements of Cash Flows............................................................................. F-5
Notes to Consolidated Financial Statements........................................................................ F-6
Quarterly Financial Data.......................................................................................... F-41
</TABLE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Motient Corporation:
We have audited the accompanying consolidated balance sheets of Motient
Corporation and Subsidiaries (the "Company") as of December 31, 2004 and 2003
(Successor Company), and the related consolidated statements of operations,
changes in stockholders' equity (deficit) and cash flows for the years ended
December 31, 2004 and 2003 (Successor Company), the eight months ended December
31, 2002 (Successor Company), and the four months ended April 30, 2002
(Predecessor Company). Our audits also included the financial statement schedule
listed in the index at Item 15(2). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Motient Corporation
and Subsidiaries as of December 31, 2004 and 2003 (Successor Company) and the
results of their operations and their cash flows for the years ended December
31, 2004 and 2003 (Successor Company), the eight months ended December 31, 2002
(Successor Company), and the four months ended April 30, 2002 (Predecessor
Company), in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ Friedman LLP
----------------
East Hanover, New Jersey
March 30, 2005
F-1
Motient Corporation and Subsidiaries
Consolidated Statements of Operations
For the Six Months Ended June 30, 2005 and 2004 (unaudited),
the Years Ended December 31, 2004 and 2003,
the Eight Months Ended December 31, 2002, and
the Four Months Ended April 30, 2002
(in thousands, except per share data)
<TABLE>
<CAPTION>
Successor Company Predecessor
----------------- Company
-------
Six Months Six Months
Ended Ended Year Year Eight Months Four Months
June 30, June 30, Ended Ended Ended Ended
2005 2004 December 31, December 31, December 31, December 31,
(Unaudited) (Unaudited) 2004 2003 2002 2002
----------- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Services and related revenues $ 7,801 $ 20,117 $ 32,378 $ 49,275 $ 35,501 $ 16,809
Sales of equipment 757 2,822 4,502 5,210 1,116 5,564
-------- -------- -------- -------- -------- --------
Total revenues 8,558 22,939 36,880 54,485 36,617 22,373
-------- -------- -------- -------- -------- --------
COSTS AND EXPENSES
Cost of services and operations
(including stock-based compensation of
$1,004 and $1,959 for the six months
ended June 30, 2005 and 2004, respectively
(unaudited), and $4,401 and $211 for the
years ended December 31, 2004 and 2003,
respectively; exclusive of depreciation
and amortization below). 12,823 21,764 39,586 51,393 38,141 21,909
Cost of equipment sold (exclusive of
depreciation and amortization) 738 2,766 4,329 5,942 2,226 5,980
Sales and advertising (including
stock-based compensation of $91 and $889
for the six months ended June 30, 2005 and
2004, respectively (unaudited), and $372
and $151 for the years ended December 31,
2004 and 2003, respectively; exclusive of
depreciation and amortization below). 529 1,892 1,879 4,552 4,825 4,287
General and administrative (including
stock-based compensation of $10,204 and
$1,029 for the six months ended June 30,
2005 and 2004, respectively (unaudited),
and $5,370 and $241 for the years ended
December 31, 2004 and 2003, respectively;
exclusive of depreciation and amortization
below). 19,036 4,876 13,223 11,299 9,691 4,130
Research and development 351 -- -- -- -- --
Restructuring charges and impairment
charges 5,665 6,264 6,264 -- 25 584
Depreciation and amortization 8,728 8,385 15,564 21,466 15,509 6,913
Loss on disposal of assets (6) -- 2,669 3,037 2,116 591
Loss on impairment of assets -- -- 755 5,535 -- --
Gain on sale of transportation and
satellite assets -- -- -- -- (385) (372)
Gain on debt and capital lease retirement -- (802) (802) -- -- --
-------- -------- -------- -------- -------- --------
Total Costs and Expenses 47,864 45,145 83,467 103,224 72,148 44,022
-------- -------- -------- -------- -------- --------
Operating loss (39,306) (22,206) (46,587) (48,739) (35,531) (21,649)
Interest and other income (expense) 80 199 343 662 (89) 145
Write-off of deferred financing costs -- (8,052) (12,035) -- -- --
Interest income (expense), net 2,115 (3,039) (4,106) (6,365) (1,910) (1,850)
Other income from Aether/MSV -- 1,307 1,953 2,203 1,017 1,125
Minority interest in TerreStar Networks,
Inc. 404 -- -- -- -- --
Equity in losses of MSV (9,212) (4,838) (11,897) (9,883) (22,273) (1,909)
-------- ------- -------- ------- -------- -------
Loss before reorganization items (45,919) (36,629) (72,329) (62,122) (58,786) (24,138)
Reorganization items:
Costs associated with debt restructuring -- -- -- -- (772) (22,324)
Gain on extinguishment of debt -- -- -- -- -- 183,725
Gain on fair market adjustment of
assets/liabilities -- -- -- -- -- 94,715
-------- -------- -------- -------- -------- --------
Net (loss) available to Common
Stockholders (45,919) (36,629) (72,329) (62,122) (59,558) 231,978
Less:
Accretion of issuance costs associated
with Series A Cumulative Convertible
Preferred Stock (614) -- -- -- -- --
Dividends on Series A Cumulative
Convertible Preferred Stock (4,875) -- -- -- -- --
Net (loss) income $(51,408) $(36,629) $(72,329) $(62,122) $(59,558) $231,978
======== ======== ========= ======== ======== ========
Net (loss) income - basic $(0.83) $(1.34) $(2.21) $(2.47) $(2.37) $3.98
======== ======== ======== ======== ======== ========
Weighted-Average Common Shares
Outstanding - basic and diluted 61,683 27,285 32,771 25,145 25,097 58,251
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
Motient Corporation and Subsidiaries
Consolidated Balance Sheets
as of June 30, 2005 (unaudited), December 31, 2004 and 2003
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30,
2005 December 31, December 31,
(Unaudited) 2004 2003
----------- ---- ----
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 275,717 $ 16,945 $ 3,618
Restricted cash and short-term investments 18,317 -- 504
Restricted cash for Series A Cumulative Convertible Preferred Stock 21,446 -- --
Accounts receivable-trade, net of allowance for doubtful accounts of
$153 at June 30, 2005 (unaudited), and $256 and $759 at December 31,
2004 and 2003, respectively 1,286 1,917 3,804
Inventory 2 75 240
Due from Mobile Satellite Ventures LP, net -- 5 93
Assets held for sale 261 261 2,734
Deferred equipment costs 211 874 3,765
Issuance costs associated with Series A Cumulative Convertible
Preferred Stock 3,077 -- --
Other current assets 1,970 1,348 5,091
Total current assets 322,287 21,425 19,849
----------- ----------- -----------
RESTRICTED INVESTMENTS 76 76 1,091
PROPERTY AND EQUIPMENT, net 15,232 17,261 31,381
FCC LICENSES AND OTHER INTANGIBLES, net 139,315 67,649 74,021
INVESTMENT IN AND NOTES RECEIVABLE FROM MSV 503,708 141,635 22,610
RESTRICTED CASH FOR SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK 21,446 -- --
ISSUANCE COSTS ASSOCIATED WITH SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK 13,792 -- --
DEFERRED CHARGES AND OTHER ASSETS -- 34 8,076
----------- ----------- -----------
Total assets $ 1,015,856 $ 248,080 $ 157,028
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 8,556 $ 6,327 $ 12,365
Deferred equipment revenue 257 933 3,795
Deferred revenue and other current liabilities 5,179 5,414 11,005
Obligations under capital leases, current -- -- 1,454
Vendor financing commitment, current -- -- 2,413
Series A Cumulative Convertible Preferred Stock dividends 4,875 -- --
----------- ----------- -----------
Total current liabilities 18,867 12,674 31,032
----------- ----------- -----------
LONG-TERM LIABILITIES:
Notes payable, including accrued interest thereon -- -- 22,885
Term Credit Facility -- -- 4,914
Capital lease obligations, net of current portion -- -- 1,642
Vendor financing commitment, net of current portion -- -- 2,401
Other long-term liabilities 521 675 1,347
----------- ----------- -----------
Total long-term liabilities 521 675 33,189
----------- ----------- -----------
Total liabilities 19,388 13,349 64,221
=========== =========== ===========
COMMITMENTS AND CONTINGENCIES -- -- --
MINORITY INTEREST 77,635 -- --
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
($0.01 par value; 5,000,000 shares authorized at June 30, 2005
(unaudited), December 31, 2004 and December 31, 2003; 408,500,
0 and 0 shares issued and outstanding at June 30, 2005,
December 31, 2004 and December 31, 2003, respectively) 408,500 -- --
STOCKHOLDERS' EQUITY:
Common Stock; voting, par value $0.01; authorized 100,000,000
shares; 62,348,788, 51,544,596 and 25,196,840 shares issued and
outstanding at June 30, 2005 (unaudited), December 31, 2004 and
2003, respectively 652 516 252
Additional paid-in capital 740,866 399,635 198,743
Less: 2,900,000 common shares held in treasury stock (56,750) -- --
Common stock purchase warrants 70,982 28,589 15,492
Accumulated deficit (245,417) (194,009) (121,680)
----------- ----------- -----------
STOCKHOLDERS' EQUITY 510,333 234,731 92,807
----------- ----------- -----------
Total liabilities, and stockholders' equity $ 1,015,856 $ 248,080 $ 157,028
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
Motient Corporation and Subsidiaries
Consolidated Statements of Changes In Stockholders' Equity (Deficit)
For the Six Months Ended June 30, 2005
(unandited), and Years Ended December 31, 2004
and 2003, the Eight Months Ended December 31,
2002, and the Four Months Ended April 30, 2002
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Deferred Common
Par Paid-In Stock Stock
Shares Value Capital Compen- Purchase Treasury Accumulated
sation Warrants Stock Deficit Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Predecessor Company
BALANCE, December 31, 2001 55,717,257 $557 $988,355 $(433) $93,730 $ -- $(1,313,358) $(231,149)
Common Stock issued under the 401(k) Savings
& Stock Purchase Plan 2,718,041 27 176 -- -- -- -- 203
Change in deferred compensation on
non-cash compensation -- -- -- 97 -- -- -- 97
Net Income - Predecessor Company -- -- -- -- -- -- 231,978 231,978
-------------------------------------------------------------------------------
Balance before fresh-start-Predecessor Company 58,435,298 $584 $988,531 $(336) $93,730 $ -- $(1,081,380) $ 1,129
===============================================================================
Successor Company
Issuance of New Equity through bankruptcy 25,097,256 $251 $197,814 $ -- $ -- $ -- $ -- $ 198,065
Issuance of Common Stock Warrants -- -- -- -- 3,077 -- -- 3,077
-------------------------------------------------------------------------------
BALANCE, April 30, 2002 25,097,256 251 197,814 -- 3,077 -- -- 201,142
Issuance of Common Stock Warrants -- -- -- -- 1,464 -- -- 1,464
Net Loss -- -- -- -- -- -- (59,558) (59,558)
-------------------------------------------------------------------------------
BALANCE, December 31, 2002 25,097,256 251 197,814 -- 4,541 -- (59,558) 143,048
Common Stock issued under the 401(k) Savings
& Stock Purchase Plan 84,172 1 280 -- -- -- -- 281
Common Stock issued for exercise of stock options 15,412 -- 46 -- -- -- -- 46
Issuance of Common Stock Warrants -- -- -- -- 10,951 -- -- 10,951
Compensatory stock options issued to employees
and consultants -- -- 603 -- -- -- -- 603
Net loss -- -- -- -- -- -- (62,122) (62,122)
------------------------------------------------------------------------------
BALANCE, December 31, 2003 25,196,840 252 198,743 -- 15,492 -- (121,680) 92,807
Common Stock issued under the 401(k) Savings
& Stock Purchase Plan 38,276 2 192 -- -- -- -- 194
Sales of Common Stock, Net of Expenses 23,084,640 231 159,730 -- 17,829 -- -- 177,790
Common Stock issued for exercise of stock options 630,685 6 2,032 -- -- -- -- 2,038
Issuance of Common Stock Warrants -- -- -- -- 8,844 -- -- 8,844
Common Stock issued for exercise/expiration
of common stock purchasewarrants 2,594,155 25 20,802 -- (13,576) -- -- 7,251
Compensatory stock options issued to employees
and consultants -- -- 10,143 -- -- -- -- 10,143
Capital gain in connection with sale of
stock by MSV -- -- 7,993 -- -- -- -- 7,993
Net loss -- -- -- -- -- -- (72,329) (72,329)
-------------------------------------------------------------------------------
BALANCE, December 31, 2004 51,544,596 516 399,635 -- 28,589 -- (194,009) 234,731
Common Stock issued under the 401(k) Savings
& Stock Purchase Plan
10,407 -- 154 -- -- -- -- 154
Issuance of Common Stock 12,704,782 127 370,853 -- -- -- -- 370,980
Common Stock issued for exercise of stock options 531,867 4 1,207 -- -- -- -- 1,211
Issuance of Common Stock Warrants -- -- (48,908) -- 48,908 -- -- --
Common Stock issued for exercise/expiration
of common stock purchasewarrants 457,136 5 6,542 -- (6,515) -- -- 32
Compensatory stock options issued to employees
and consultants -- -- 11,383 -- -- -- -- 11,383
Less: 2,900,000 common shares held in
treasury stock (2,900,000) -- -- -- -- (56,750) -- (56,750)
Net loss -- -- -- -- -- -- (45,919) (45,919)
Dividends on Series A Cumulative Convertible
Preferred Stock -- -- -- -- -- -- (4,875) (4,875)
Accretion of issuance costs associated with
Series A Cumulative Convertible Preferred Stock -- -- -- -- -- -- (614) (614)
-------------------------------------------------------------------------------
BALANCE, June 30, 2005 (unaudited) 62,348,788 $652 $740,866 $ -- $70,982 $(56,750) $ (245,417) $ 510,333
===============================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
Motient Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months ended June 30, 2005 and 2004
(unaudited), the Years Ended December 31, 2004
and 2003, the Eight Months Ended December 31,
2002, and the Four Months Ended April 30, 2002
(in thousands)
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
----------------- -------
Six Months Six Months
Ended Ended Year Year Eight Months Four Months
June 30, June 30, Ended Ended Ended Ended
2005 2004 December 31, December 31, December 31, December 31,
(Unaudited) (Unaudited) 2004 2003 2002 2002
----------- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (45,919) $ (36,629) $ (72,329) $ (62,122) $ (59,558) $ 231,978
Adjustments to reconcile net (loss) income to
net cash (used in) operating activities:
Amortization of Guarantee Warrants and
debt related costs -- -- -- -- -- 5,629
Depreciation and amortization 8,728 8,385 15,564 21,466 15,509 6,913
Equity in losses of MSV 9,212 4,838 11,897 9,883 22,319 1,909
Minority interests in losses of TerreStar (404) -- -- -- -- --
Restructuring and impairment charges,
asset and intangible disposals 3,580 2,847 2,801 -- -- --
(Gain)/Loss on disposal of assets (6) -- 2,669 8,572 2,116 591
(Gain) on sale of transportation assets -- -- -- -- (385) (372)
(Gain) loss on extinguishment of debt -- (802) (802) -- -- (183,725)
Gain on debt restructuring -- 8,052 -- (573) -- --
Impairment of assets -- -- 755 -- -- --
Write off of deferred financing costs -- -- 12,035 -- -- --
Issuance of warrants -- -- -- 927 -- --
Fresh-Start valuation and other non-cash
adjustments -- -- -- -- -- (94,715)
Non cash amortization of deferred
financing costs -- 1,571 2,485 3,292 -- --
Non cash 401(k) match -- -- 192 -- -- --
Stock based compensation expense 11,453 3,877 10,143 603 -- --
Changes in assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable -- trade 631 388 1,887 5,535 782 1,370
Inventory 73 48 165 837 2,765 (2,167)
Other current assets (582) 6,308 4,506 (80) 4,263 15,833
Accounts payable and accrued expenses 627 (1,991) (5,610) (255) (217) 7,619
Accrued interest -- 575 1,523 2,510 1,193 1,320
Deferred revenue and other current
liabilities (402) (5,697) (6,235) 2,285 2,305 (6,729)
--------- --------- --------- --------- --------- ---------
Net cash (used in) operating activities (13,009) (8,230) (18,354) (7,120) (8,908) (14,546)
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property & equipment 6 2 60 -- -- --
Proceeds from sale of FCC licenses -- -- 2,045 6,116 616 --
Proceeds from sale of transportation assets -- -- -- -- 385 372
Proceeds (purchase) of restricted
investments (61,209) 106 1,519 (991) (604) --
Cash acquired in TerreStar asset
purchase 6,165 -- -- -- -- --
Investment in MSV -- (125,000) -- (957) --
Proceeds from MSV note -- 2,000 2,071 -- -- --
Additions to property and equipment (36) (653) (1,357) (232) (613) (494)
--------- --------- --------- --------- --------- ---------
Net cash (used in) provided by investing
activities (55,074) 1,455 (120,662) 4,893 (1,173) (122)
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities 116 23,188 192,024 -- -- 17
Stock issuance costs and other charges (9) (476) (6,974) -- -- --
Principal payments under capital leases -- (2,419) (2,605) (2,986) (1,425) (1,273)
Principal payments under vendor financing -- (682) (2,645) (1,020) -- --
Repayment of Term Credit Facility -- (6,785) (6,899) -- -- --
Repayments of notes payable (8,739) -- (23,990) -- -- --
Proceeds from Term Credit Facility -- 1,500 1,500 4,500 -- --
Proceeds from issuance of employee stock
options 1,220 1,003 2,032 47 -- --
Proceeds from issuance of Series A
Cumulative Convertible Preferred Stock 408,500 -- -- -- -- --
Issuance costs associated with Series A
Cumulative Convertible Preferred Stock (17,483) -- -- -- -- --
Purchase of treasury stock (56,750) -- -- -- -- --
Debt issuance costs and other charges -- -- (100) (536) (117) --
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities 326,855 15,329 152,343 5 (1,542) (1,256)
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 258,772 8,554 13,327 (2,222) (11,623) (15,924)
CASH AND CASH EQUIVALENTS, beginning of period 16,945 3,618 3,618 5,840 17,463 33,387
--------- --------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 275,717 $ 12,172 $ 16,945 $ 3,618 $ 5,840 $ 17,463
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
1. Organization
Motient Corporation (with its subsidiaries, "Motient" or the "Company") provides
two-way, wireless mobile data services and wireless internet services. Motient
allows its customers access to multiple communications networks for a variety of
wireless data communications services, including email messaging and other
services that enable businesses, mobile workers and machines to transfer
electronic information and messages and access corporate databases and the
internet.
In addition to selling wireless services that use its own terrestrial DataTac
network, it is also a reseller of airtime for data communications services on
the Cingular and Sprint wireless networks. These arrangements allow Motient to
provide integrated seamless solutions to its customers using a variety of
networks. In December 2004, Motient launched a new set of products and services
designed to provide these seamless solutions to our customers called iMotient
Solutions TM. iMotient allows Motient's customers to use these multiple networks
via a single connection to Motient's back-office systems, providing a one-source
alternative for development, device management and billing across multiple
networks, including but not limited to GPRS, 1XRTT, and DataTac. The Company
considers the two-way mobile communications service described in this paragraph
to be its core wireless business.
Motient presently has six wholly-owned subsidiaries and a 49% interest in Mobile
Satellite Ventures LP (MSV). Motient Communications Inc., a wholly owned
subsidiary, owns the assets comprising Motient's core wireless business, except
for Motient's Federal Communications Commission, or FCC, licenses, which are
held in a separate subsidiary, Motient License Inc. Motient's other four
subsidiaries hold no material operating assets other than the stock of other
subsidiaries and Motient's interests in MSV.
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 21 ("Subsequent Events").
Mobile Satellite Ventures LP
On June 29, 2000, the Company formed a joint venture subsidiary, MSV, with
certain other parties, in which it owned 80% of the membership interests.
Through November 2001, MSV used the Company's satellite network to conduct
research and development activities. The remaining 20% interests in MSV were
owned by three investors unrelated to Motient. The minority investors had
certain participating rights which provided for their participation in certain
major 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 12, 2004, Motient acquired approximately 5.4 million MSV limited
partnership units, and a corresponding number of shares in MSV's general
partner, Mobile Satellite Ventures GP Inc. ("MSV GP"). These units consist of
4.2 million units purchased for $125 million in cash and 1.2 million units
received in exchange for the cancellation of our $15 million principal note (and
all accrued interest thereon) issued by MSV and the conversion of $3.5 million
of convertible notes issued by MSV (including the cancellation of the accrued
interest on such convertible notes). In connection with our investment, the
other limited partners of MSV exchanged their outstanding notes (but not
generally the accrued interest thereon), and one limited partner contributed an
additional $20 million of cash, for limited partnership units and a
corresponding number of MSV GP shares.
As a result of MSV's capital transactions in 2004, Motient recorded a change of
interest loss of $3.1 million directly to shareholder's equity in accordance
with Staff Accounting Bulletin No. 51 "Accounting for Sales of Stock of a
Subsidiary" as our ownership interest decreased from 48% to 30%, prior to our
additional $125 million investment, in MSV.
As of December 31, 2003 and 2004, Motient held a 29.5% (assuming conversion of
all outstanding convertible notes) and 38.6% interest, respectively, in MSV. As
of March 1, 2005, Motient's direct and indirect interest in MSV is 49%. Please
see Note 21 ("Subsequent Events"). For additional information regarding MSV,
please see the financial statements of MSV beginning on page M-1.
F-6
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
2. Significant Accounting Policies
Basis Of Presentation
Reorganization
The consolidated financial statements included herein include the accounts of
the Company and its wholly and majority owned subsidiaries. In accordance with
the American Institute of Certified Public Accountants Statement of Position
90-7. Financial Reporting by Entities in Reorganization under the Bankruptcy
Code, the Company adopted fresh-start accounting as of May 1, 2002, and the
Company's emergence from Chapter 11 resulted in a new reporting entity. The
periods as of and prior to May 1, 2002, have been designated as "Predecessor
Company" and the periods subsequent to May 1, 2002, have been designated as
"Successor Company." Under fresh-start accounting, the reorganization equity
value of the company was allocated to the assets and liabilities based on their
respective fair value and was in conformity with SFAS No. 141 "Business
Combinations." As a result of the implementation of fresh-start accounting, the
financial statements of the Company after the effective date are not comparable
to the Company's financial statements for prior periods. All intercompany
accounts and transactions have been eliminated. See Note 20 for additional
information about our emergence from bankruptcy and fresh-start accounting.
The results of MSV have been accounted for pursuant to the equity method of
accounting.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company's most significant estimates relate to the valuation of
its net assets and liabilities in "fresh-start" accounting, the valuation on its
investment in MSV, the allowance for doubtful accounts receivable, the valuation
of deferred tax assets and the ability to realize long-lived assets.
Cash Equivalents
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of three months or less to be cash
equivalents.
Restricted Investments
The Company had $0.8 million and $1.6 million of restricted investments at
December 31, 2004 and 2003, respectively. The restricted investments included
securities that were classified as held-to-maturity under the provision of SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The
Company classified restricted investment amounts which would mature within one
year as current assets in the accompanying balance sheet. The Company accounted
for these investments at their amortized cost.
Allowance For Doubtful Accounts
The Company records an allowance for doubtful accounts based on historical
trends, customer knowledge, any known disputes, and the aging of accounts
receivable balance combined with management's estimate of future potential
recoverability, based on our knowledge of customer's financial condition.
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.
F-7
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Property And Equipment
Property and equipment additions are recorded at cost for the Successor Company
and adjusted for impairment, and includes "fresh-start" adjustments and
depreciated over their useful life using the straight-line method. All
identifiable assets recognized in accordance with "fresh-start" accounting were
recorded at the effective date based upon independent appraisal. Assets recorded
as capital leases are amortized over the shorter of their useful lives or the
term of the lease. The estimated useful lives of office furniture and equipment
vary from two to ten years, and the network equipment is depreciated over seven
years. The Company has also capitalized certain costs to develop and implement
its computerized billing system. These costs are included in property and
equipment and are depreciated over three years. Repairs and maintenance do not
significantly increase the utility or useful life of an asset and are expensed
as incurred.
Software Development Costs
The Company capitalized certain costs valued in connection with developing or
obtaining internal use software in accordance with American Institute of
Certified Public Accountants Statement of Position 98-1. "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." As of
December 31, 2004 and 2003, net capitalized internal use software costs were
$0.3 million and $1.3 million, respectively, are included in property and
equipment in the accompanying consolidated balance sheets and are amortized on a
straight-line basis over three years.
Long-Lived Assets
We account for long-lived assets in accordance with SFAS No. 144, Accounting For
The Impairment Or Disposal Of Long-Lived Assets. Other long-term assets,
including property and equipment, and other intangibles, are amortized over
their expected lives, which are estimated by management. Management also makes
estimates of the impairment of long-term assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the actual useful life of a long-term asset is shorter than the
useful life estimated by us, the assets may be deemed to be impaired and,
accordingly, a write-down of the value of the assets or a shorter amortization
period may be required.
Investment In MSV And Notes Receivables From MSV
The Company uses the equity method of accounting for its investment in MSV. The
company considers whether the fair value of its investment has declined below
its carrying value whenever adverse events or circumstances indicate that the
recorded value may not be recoverable. If the Company considers such decline to
be other than temporary, a write down would be recorded to estimate fair value.
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.
Fair Value Of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosures of the fair value of certain financial instruments. The Company has
used available information to derive its estimates. However, because these
estimates are made as of a specific point in time, they are not necessarily
indicative of amounts the Company could realize currently. The use of different
assumptions or estimating methods may have a material effect on the estimated
fair value amounts. The carrying amount for cash and cash equivalents,
short-term investments, accounts receivable, non-trade receivables included in
other assets, accounts payable and accrued expenses, and deferred revenues
approximates their fair values. For debt issues that are not quoted on an
exchange, interest rates currently available to the Company for issuance of debt
with similar terms and remaining maturities are used to estimate fair value. The
fair value of the Company's equity investment in MSV was determined by an
independent third-party valuation performed in November 2003 as part of
Company's preparation of its December 31, 2002 financial statements. This same
F-8
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
valuation methodology was utilized to value the Company's equity interest in MSV
as of December 31, 2003. The fair value of the notes receivable from MSV
approximated its carrying value as of December 31, 2003. These notes receivable
were exchanged into equity of MSV as part of the Company's investment in MSV in
November 2004. Given the investment transaction by Motient into MSV in November
2004, the fair value of the Company's equity investment in MSV was determined by
the carrying amount of the Company's investment in MSV and adjusted for the
Company's change in ownership interest upon the conversion of the notes.
<TABLE>
<CAPTION>
As of December 31, 2004 As of December 31, 2003
------------------------ ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
(in thousands)
Assets:
Restricted investments $ 75 $ 75 $ 1,595 $ 1,595
Investment in and notes receivable from MSV 141,635 141,635 22,610 31,294
Liabilities:
Rare Medium Note $ 0 $ 0 $ 22,016 $ 22,016
CSFB Note 0 0 869 869
Term Credit Facility 0 0 4,914 4,914
Vendor financing commitment 0 0 4,814 4,814
Capital leases $ 0 $ 0 $ 3,096 $ 3,096
</TABLE>
Revenue Recognition
The Company generates revenue through equipment sales, airtime service
agreements and consulting services. In 2000, the Company adopted SAB No. 101,
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. In certain circumstances, SAB No. 101 requires
the Company to defer the recognition of revenue and costs related to equipment
sold as part of a service agreement.
In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue
Recognition", which supersedes SAB No. 101, "Revenue Recognition in Financial
Statements." SAB No. 104's primary purpose is to rescind accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangements and to
rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers" ("FAQ") issued with SAB No. 101. Selected portions of the
FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104 did not
have a material impact on the Company's revenue recognition policies.
Effective July 1, 2003, the Company adopted Emerging Issues Task Force (EITF)
No. 00-21, Accounting For Revenue Arrangements With Multiple Deliverables, which
is being applied on a prospective basis. The consensus addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services and/or rights to use assets. Revenue arrangements with
multiple deliverables are required to be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration must be allocated among the separate units of
accounting based on their relative fair values. The consensus also supersedes
certain guidance set forth in Securities and Exchange Commission (SEC) Staff
Accounting Bulletin Number 101, Revenue Recognition In Financial Statements (SAB
101). SAB 101 was amended in December 2003 by Staff Accounting Bulletin Number
104 (SAB 104).
Revenue is recognized as follows:
Service Revenue: Revenues from the Company's wireless services are recognized
when the services are performed, evidence of an arrangement exists, the fee is
fixed and determinable and collectability is probable. Service discounts and
incentives are recorded as a reduction of revenue when granted, or ratably over
a contract period. The Company defers and amortizes any revenue and costs
associated with activation of a subscriber on the Company's network over an
estimated customer life of two years.
The Company packages airtime usage on its network that involves a wide variety
of volume packaging, anything from a 35 kilobytes per month plan up to unlimited
kilobyte usage per month, with various gradations in between. Discounts may be
applied when comparing one customer to another, and such service discounts are
recorded as a reduction of revenue when granted.
F-9
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Service discounts and incentives are recorded as a reduction of revenue when
granted, or ratably over a contract period. The Company does not offer
incentives generally as part of its service offerings, however, if offered they
would be recorded as a reduction of revenue ratably over a contract period.
To date, the majority of the Company's business has been transacted with
telecommunications, field services, professional service and transportation
companies located throughout the United States. The Company grants credit based
on an evaluation of the customer's financial condition, generally without
requiring collateral or deposits. The Company establishes a valuation allowance
for doubtful accounts receivable for bad debt and other credit adjustments.
Valuation allowances for revenue credits are established through a charge to
revenue, while valuation allowances for bad debts are established through a
charge to general and administrative expenses. The Company assesses the adequacy
of these reserves quarterly, evaluating factors such as the length of time
individual receivables are past due, historical collection experience, the
economic environment and changes in credit worthiness of the Company's
customers. If circumstances related to specific customers change or economic
conditions worsen such that the Company's past collection experience and
assessments of the economic environment are no longer relevant, the Company's
estimate of the recoverability of its trade receivables could be further
reduced.
Equipment And Service Sales: The Company sells equipment to resellers who market
its terrestrial product and airtime service to the public. The Company also
sells its product directly to end-users. Revenue from the sale of the equipment,
as well as the cost of the equipment, are initially deferred and are recognized
over a period corresponding to the Company's estimate of customer life of two
years. Equipment costs are deferred only to the extent of deferred revenue.
As of December 31, 2004 and 2003, the Company had capitalized a total of $1.0
million and $4.5 million of deferred equipment revenue, respectively, and had
deferred equipment costs of $0.9 million and $4.3 million, respectively.
Advertising Costs
Advertising costs (inclusive of airtime commissions) are charged to operations
as incurred and totaled $4.0 million in 2004, $6.6 million in 2003, $4.3 million
for the eight months ended December 31, 2002 and $2.5 million for the four
months ended April 30, 2002.
Reorganization Items
Reorganization items relate to income recorded and expenses incurred as a direct
result of the filing and include professional fees, adjustments to carrying
value of debt, and fresh-start accounting adjustments. Reorganization items are
separately identified on the Consolidated Statements of Operations.
Stock-Based Compensation
The Company accounts for stock options issued to non-employees, under Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." The Company's issuance of employee stock options is accounted for
using the intrinsic value method under APB Opinion No. 25, Accounting for Stock
issued to Employees ("APB 25").
Statement of Financial Accounting Standards No. 123 "Accounting for Stock --
based Compensation," ("SFAS No. 123") as amended by Statement of Financial
Accounting Standards No. 148 "Accounting for Stock-Based Compensation --
Transition and Disclosure" requires the Company to provide pro forma information
regarding net earnings and earnings per common share as if compensation cost for
the Company's stock options had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. The fair value of the options
granted in 2004, 2003 and 2002 were estimated by using the Black-Scholes pricing
model with the following assumptions: (i) expected life of the options of 10
years for 2003 and 2004 and 10 years for 2002, (ii) expected volatility in the
market price of the Company's common stock of 162-375% for 2004 and 148-162% and
173% for 2003 and 2002, (iii) no expected dividends, and (iv) a risk free
interest rate of .92-2.18%, .88-.93% and 1.71% in 2004, 2003 and 2002.
F-10
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
We have granted stock options to our employees at exercise prices equal to or
greater than the fair value of the shares at the date of grant and accounted for
these stock option grants in accordance with APB 25. Under APB 25, when stock
options are issued with an exercise price equal to the market price of the
underlying stock on the date of grant, no compensation expense is recognized in
the statement of operations. Because we recognized that APB 25 was in the
process of being rescinded, in 2004 we amended our stock option plan to provide
for the grants of restricted stock and other forms of equity compensation in
addition to stock options. In December 2004, APB 25 was replaced by Statement of
Financial Accounting Standards No. 123 (Revised) ("Statement 123(R)") which will
be effective for all accounting periods beginning after December 15, 2005. The
Company will adopt Statement 123(R) on January 1, 2006, and will be required to
recognize an expense for the fair value of its outstanding stock options. Under
Statement 123(R), The Company must determine the transition method to be used at
the date of adoption, the appropriate fair value model to be used for valuing
share-based payments and the amortization method for compensation cost. The
transition methods include prospective and retroactive adoption methods. Under
the retroactive method, prior periods may be restated either as of the beginning
of the year of adoption or for all periods presented. The prospective option
requires that compensation expense be recorded for all unvested stock options
and restricted stock at the beginning of the first quarter of adoption of
Statement 123(R), while the retroactive option would record compensation expense
for all unvested stock options and restricted stock beginning with the first
period restated. Both transition methods would require management to make
accounting estimates. The Company has not yet concluded which method it will
utilize, nor has it determined what the impact will be on its earnings per
share.
The following table illustrates the effect on income (loss) attributable to
common stockholders and earnings (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
----------------- -------
Eight Four
Year Year Months Months
Six Months Six Months Ended Ended Ended Ended
Ended June Ended June December December December April
30, 2005 30, 2004 31, 2004 31, 2003 31, 2002 30, 2002
-------- -------- -------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net loss, as reported ($51,408) $(36,629) $(71,964) $(62,122) $(59,558) $231,978
Add: Stock-based employee compensation
expense included in net income, net of
related tax effects 11,299 3,877 10,143 603 --- ---
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of tax related effects (13,169) (428) (6,726) (2,488) (567) (57)
-------- ----- ------- ------- ----- ----
Pro forma net loss (53,278) (33,180) $(68,547) $(64,007) $(60,125) $231,921
Weighted average common shares outstanding 61,683 27,285 32,771 25,145 25,097 58,251
Earnings per share:
Basic and diluted---as reported $(0.83) $(1.34) $(2.20) $(2.47) $(2.37) $3.98
Basic and diluted---pro-forma $(0.86) $(1.22) $(2.09) $(2.55) $(2.40) $3.98
</TABLE>
Under SFAS No. 123 the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
----------------- -------
Six Months Six Months Eight Months Four Months
Ended Ended Year Ended Year Ended Ended Ended
June 30, June 30, December 31, December 31, December 31, April 30,
2005 2004 2004 2003 2002 2002
---- ---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years) 10 10 10 10 10 10
Risk-free interest rate 2.28%- 0.88% 0.92% 0.88% 1.71% 1.71%
2.85% -0.93% -2.18% -0.93%
Volatility 456%- 146% 162% 148% 173% 197%
773% -162% -375% -162%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
</TABLE>
F-11
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Segment Reporting
In June 1997, the FASB issued Statement No. 131. SFAS No. 131 establishes annual
and interim reporting standards for operating segments of a company. It also
requires entity wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenues,
and its major customers. We are not organized by multiple operating segments for
the purpose of making operating decisions or assessing performance. Accordingly,
we operate as one operating segment and report applicable enterprise-wide
disclosures.
Prior to issuing its quarterly report on Form 10-Q for the quarter ended June
30, 2005, the company reevaluated this position. Accordingly, the Company
examined SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which requires companies to report financial and descriptive
information about their reportable operating segments, including segment profit
or loss, certain specific revenue and expense items and segment assets as well
as information about the revenues derived from the company's products and
services and major customers. This statement requires the use of the management
approach to determine the information to be reported. The management approach is
based on the way management organizes the enterprise to assess performance and
make operating decisions regarding the allocation of resources. It is
management's opinion that the Company has two reportable segments, Motient
Communications and TerreStar Networks Inc. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. (Unaudited)
The Company's core customer base can be generally divided into six broad
categories, Wireless Internet, Field Services, Transportation, Telemetry,
iMotient and Other. Wireless Internet primarily consists of customers using the
Company's network and applications to access certain internet functions, like
email. Devices and airtime used by transportation and shipping companies, or by
personnel in the field service industries (such as repair personnel), for
dispatching, routing and other vital communications functions are known as
transportation and field service, respectively. Telemetry typically covers
devices and airtime to connect remote equipment, such as wireless point-of-sale
terminals, with a central monitoring facility. iMotient consists of integrated
wireless data solutions revenues through the resale of airtime on the Cingular
and Sprint wireless networks. Other revenues may consist of sales commissions,
consulting fees or other fees. (Unaudited)
The Company has one operating segment: its core wireless business. The Company
provides its core wireless business to the continental United States, Alaska and
Hawaii. The following summarizes the Company's core wireless business revenue by
major market categories:
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
----------------- -------
Six Months Six Months Year Year Eight Months Four Months
Ended Ended Ended Ended Ended Ended
Summary of Revenue June 30, June 30, December 31, December 31, December 31, April 30,
2005 2004 2004 2003 2002 2002
---- ---- ---- ---- ---- ----
(in millions) (unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Wireless Internet $ 4.7 $ 11.6 $ 18.3 $ 27.8 $ 15.5 $ 5.6
Field Services 0.9 3.2 5.6 9.9 10.5 5.6
Transportation 1.0 1.8 3.3 7.9 7.4 4.1
Telemetry 0.9 1.2 2.3 2.3 1.8 0.8
iMotient 0.1 --
All other 0.2 2.3 2.9 1.4 0.3 0.7
---- ----- ----- ----- ----- -----
Service Revenue 7.8 20.1 32.4 49.3 35.5 16.8
Equipment Revenue 0.8 2.8 4.5 5.2 1.1 5.6
---- ----- ----- ----- ----- -----
Total $ 8.6 $ 22.9 $ 36.9 $ 54.5 $ 36.6 $ 22.4
==== ===== ===== ===== ===== =====
</TABLE>
F-12
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
The Company does not measure ultimate income or loss or track its assets by
these market categories. (However, see the unaudited disclosure above regarding
a change in this policy).
TerreStar does not currently generate any revenues and we do not anticipate that
it will do so until 2008. Additional financial information concerning the
Company's reportable segments is shown in the following table (in thousands):
(Unaudited)
Six Months Ended June 30, 2005
(Unaudited)
Motient TerreStar Total
------- --------- -----
Operating (loss) $ (38.2) $ (1.1) $ (39.3)
Depreciation expense $ 5.4 $ -- $ 5.4
Amortization expense $ 2.6 $ 0.7 $ 3.3
Identifiable assets $ 742.0 $ 278.7 $ 1,020.7
Capital expenditures $ 36.0 $ -- $ 36.0
Loss Per Share
Basic earnings per share is computed by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding during
the accounting period. Diluted EPS reflects the potential increase in
outstanding shares that could result from exercising in-the-money stock options
plus the estimated number of non-vested restricted shares.
Options and warrants to purchase shares of common stock were not included in the
computation of loss per share as the effect would be antidilutive for the years
ended December 31, 2004 and 2003 and for the four and eight months ended April
30, 2002 and December 31, 2002, respectively. As a result, the basic and diluted
earnings per share amounts for all periods presented are the same. As of
December 31, 2004, there were warrants to acquire 4,594,327 shares of common
stock and options outstanding for 605,727 shares that were not included in this
calculation because of their anti-dilutive effect. As of December 31, 2003,
there were warrants to acquire approximately 5,664,962 shares of common stock
and 1,757,513 options outstanding that were not included in this calculation
because of their antidilutive effect. As of December 31, 2002, there were
warrants to acquire approximately 2,339,962 shares of common stock and 1,631,025
options outstanding that were not included in this calculation because of their
antidilutive effect. For the four months ended April 30, 2002, no options or
warrants had exercise prices in excess of the fair market value of the Company's
common stock and thus were not factored into the per share calculation.
Reclassification
We have reclassified some prior period amounts to conform to our current year
presentation.
Concentrations Of Credit Risk And Major Customers
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, short term investments, and accounts
receivable. The Company periodically invests its cash balances in temporary or
overnight investments. The Company's short term investments included debt
securities such as commercial paper, time deposits, certificates of deposit,
banker acceptances, and marketable direct obligations of the United States
Treasury. At December 31, 2004, the Company had approximately $16.7 million of
cash deposits in excess of amounts insured by the Federal Deposit Insurance
Corporation.
F-13
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
To date, the majority of the Company's business has been transacted with
telecommunications, field services, professional service and transportation
companies located throughout the United States. The Company grants credit based
on an evaluation of the customer's financial condition, generally without
requiring collateral or deposits. Exposure to losses on trade accounts
receivable, for both service and for equipment sales, is principally dependent
on each customer's financial condition.
For the six months ended June 30, 2005, four customers accounted for
approximately 42% of the Company's service revenue, with one customer, SkyTel
Communications, Inc. ("SkyTel"), accounting for more than 23%. As of June 30,
2005, one customer, Geologic Solutions accounted for approximately 17% of our
net accounts receivable. No other single customer accounted for more than 10% of
our net accounts receivable. For the six months ended June 30, 2004, five
customers accounted for approximately 47% of the Company's service revenue, with
one customer, SkyTel, accounting for more than 21%. No single customer accounted
for more than 9% of the Company's net accounts receivable at June 30, 2004.
(unaudited)
For the year ended December 31, 2004, five customers accounted for approximately
43% of the Company's service revenue, with one customer, SkyTel, accounting for
more than 22% of the Company's service revenue. As of December 31, 2004, one
customer, RIM, accounted for more than 14% of our net accounts receivable. No
other single customer accounted for more than 10% of our net accounts
receivable.
For the year ended December 31, 2003, five customers accounted for approximately
47% of the Company's service revenue, with two of those customers, SkyTel and
UPS, each accounting for more than 11% of the Company's service revenue. As of
December 31, 2003, no single customer accounted for more than 6% of the
Company's net accounts receivable.
For the four months ended April 30, 2002 and the eight months ended December 31,
2002, SkyTel and UPS accounted for 11% and 16%, respectively, and 15% and 18%,
respectively, of the Company's service revenue.
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.
Recent Accounting Pronouncements
In October 2004, the FASB ratified EITF 04-8, "Accounting Issues Related to
Certain Features of Contingently Convertible Debt and the Effect on Diluted
Earnings Per Share." The new rules require companies to include shares issuable
upon conversion of contingently convertible debt in their diluted earnings per
share (EPS) calculations regardless of whether the debt has a market price
trigger that is above the current fair market value of the company's common
stock that makes the debt currently not convertible. The new rules are effective
for reporting periods ending on or after December 15, 2004. At December 31,
2004, Motient had no contingently convertible debt.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities". In December 2003, the FASB issued
FIN No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation
issues. This interpretation requires that the assets, liabilities, and results
of activities of a Variable Interest Entity ("VIE") be consolidated into the
financial statements of the enterprise that has a controlling interest in the
VIE. FIN 46-R also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. For entities acquired or created
before February 1, 2003, this interpretation is effective no later than the end
of the first interim or reporting period ending after March 15, 2004, except for
those VIE's that are considered to be special purpose entities, for which the
effective date is no later than the end of the first interim or annual reporting
period ending after December 15, 2003.
F-14
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For all entities that were acquired subsequent to January 31, 2003, this
interpretation is effective as of the first interim or annual period ending
after December 31, 2003. The adoption of the provisions of this interpretation
did not have a material effect on our financial condition or results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This standard amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts,
collectively referred to as derivatives, and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Relationships." SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships after June 30, 2003. The adoption of this
statement did not have a material impact on our results of operations or
financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
clarifies the accounting for certain financial instruments with characteristics
of both liabilities and equity and requires that those instruments be classified
as liabilities in statements of financial condition. Previously, many of those
financial instruments were classified as equity.
SFAS No. 150 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 adoption the provisions of
SFAS No. 150 did not have a material effect on our results of operations or
financial condition.
In December 2003, the SEC issued Staff Accounting Bulletin No. 104, "Revenue
Recognition" ("SAB 104"), which supersedes SAB 101, "Revenue Recognition in
Financial Statements." The primary purpose of SAB 104 is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
which was superseded as a result of the issuance of EITF 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." While the wording of SAB 104
has changed to reflect the issuance of EITF 00-21, the revenue recognition
principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The
adoption of SAB 104 did not have a material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" ("SFAS No. 123R") that addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for (a)
equity instruments of the company or (b) liabilities that are based on the fair
value of the company's equity instruments or that may be settled by the issuance
of such equity instruments. SFAS No. 123R addresses all forms of share-based
payment awards, including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, "Accounting for Stock Issued to Employees", that was
provided in Statement 123 as originally issued. Under SFAS No. 123R companies
are required to record compensation expense for all share based payment award
transactions measured at fair value. This statement is effective for quarters
ending after December 15, 2005. We have not yet determined the impact of
applying the various provisions of SFAS No. 123R.
In December 2004, the FASB issued SFAS No. 153, Exchanges Of Nonmonetary Assets
-- An Amendment Of APB Opinion No. 29, Accounting For Nonmonetary Transactions
(SFAS 153). SFAS 153 eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, Accounting For Nonmonetary Transactions, and replaces it with an
exception for exchanges that do not have commercial substance. SFAS 153
specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for the fiscal periods beginning after June 15,
2005 and is required to be adopted by the Company in the third quarter of 2005.
The Company is currently evaluating the effect that the adoption of SFAS 153
will have on its consolidated results of operations and financial condition but
does not expect it to have a material impact.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs: an amendment
of ARB No. 43, Chapter 4," to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material. SFAS No. 151
is effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. We do not believe the provisions of SFAS No. 151, when applied,
will have an impact on our financial position or results of operations.
F-15
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
3. Assets Held For Sale
On July 29, 2003, Motient Communications, entered into an asset purchase
agreement with Nextel, under which Motient Communications sold to Nextel certain
of its SMR licenses issued by the FCC for $3.4 million. The closing of this
transaction occurred on November 7, 2003. On December 9, 2003, Motient
Communications entered into a second asset purchase agreement, under which
Motient Communications sold additional licenses to Nextel for $2.75 million
resulting in a $1.5 million loss which was recorded in December 2003.
In February 2004, the Company closed the sale of licenses covering approximately
$2.2 million of the purchase price, and in April 2004, the Company closed the
sale of approximately one-half of the remaining licenses. The transfer of the
remaining licenses has been challenged at the FCC by a third-party. While the
Company believes, based on the advice of counsel, that the FCC will ultimately
rule in its favor, the Company cannot be assured that it will prevail, and in
any event, the timing of any final resolution is uncertain. None of these
licenses are necessary for Motient's future network requirements. The net
realizable value of these frequencies at December 31, 2004 and 2003 were
approximately, $0.26 million and $2.7 million respectively.
4. Other Current Assets
Other current assets consist of the following:
December 31,
------------
2004 2003
---- ----
(in thousands)
Prepaid site rent $ 387 $3,416
Prepaid maintenance 75 271
Prepaid expenses - other 582 806
Deposits 68 10
Non-trade receivables and other 236 588
------ ------
$1,348 $5,091
====== ======
5. Property And Equipment
Property and equipment consists of the following:
December 31,
------------
2004 2003
-------- --------
(in thousands)
Network equipment $ 30,598 $ 35,865
Office equipment 2,838 2,846
-------- --------
33,436 38,711
Less accumulated depreciation and
amortization (16,175) (7,330)
-------- --------
Property and equipment, net $ 17,261 $ 31,381
======== ========
Depreciation expense totaled $10,033, $13,770, $9,816 and $5,924 for the years
ended December 31, 2004 and 2003, and the eight months ended December 31, 2002
and the four months ended April 30, 2002, respectively.
The Company leases certain office equipment and switching equipment under
agreements accounted for as capital leases. Assets recorded as capital leases in
the accompanying balance sheets include the following:
December 31,
-----------
2004 2003
----- -------
(in thousands)
Switch equipment $ -- $ 9,795
Office equipment -- --
Less accumulated depreciation -- (5,280)
----- -------
Total $ -- $ 4,515
===== =======
6. FCC Licenses And Other Intangible Assets
FCC licenses and other intangible assets consist of the following:
F-16
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
June 30,
2005 December 31,
(unaudited) 2004 2003
----------- ---- ----
(in thousands)
--------------------------------
FCC 800 MHz licenses $ 76,141 $ 80,594 $ 80,594
FCC 2 GHz licenses 66,864 -- --
Intellectual property 11,707 -- --
Customer contracts 349 349 1,893
-------- -------- --------
155,061 80,943 82,487
Less accumulated amortization (15,746) (13,294) (8,466)
-------- -------- --------
FCC licenses and other intangible assets, net $139,315 $ 67,649 $ 74,021
======== ======== ========
Amortization totaled $5,616, $7,696, $5,693 and $989 for the years ended
December 31, 2004 and 2003 and the eight months ended December 31, 2002 and the
four months ended April 30, 2002, respectively.
Motient accounts for its frequencies as finite-lived intangibles and amortizes
them over a 15-year estimated life. Motient amortizes customer contracts over a
three-year life.
We engaged a financial advisor to reevaluate the value of our customer-
contracts intangibles as of September 30, 2003 due primarily to the decline in
revenue from UPS in this time period. This valuation resulted in an impairment
of the customer-related intangibles of $5.5 million in the third quarter of
2003. We subsequently reevaluated the value of our customer-related intangibles
as of December 31, 2004 due primarily to the decline in revenue from our
wireless internet customer segment. This valuation resulted in an impairment of
the customer-related intangibles of $0.8 million in the fourth quarter of 2004.
The table below outlines Motient's amortization requirements for the five year
period from December 31, 2004.
December 31,
2005 2006 2007 2008 2009 Thereafter
------- ------- ------- ------ ------- -------
FCC Licenses $ 4,985 $ 4,985 $ 4,985 $4,985 $ 4,985 $42,375
Customer contracts 116 116 117 -- -- --
Intangible Assets (Unaudited)
The Company has utilized numerous assumptions and estimates in applying its
valuation methodologies and in projecting future operating characteristics for
the TerreStar business enterprise. In general, the Company considered
population, market penetration, products and services offered, unit prices,
operating expenses, depreciation, taxes, capital expenditures and working
capital. The Company also considered competition, satellite and wireless
communications industry projections and trends, regulations and general economic
conditions. In the application of its valuation methodologies, the Company
applies certain royalty and discount rates that are based on analyses of public
company information, assessment of risk and other factors and estimates.
(Unaudited)
The Company's valuation of TerreStar's intellectual property rights was
determined utilizing a form of the income approach referred to as the relief
from royalty valuation method. The Company assumed a 10% to 12% royalty rate
applied to a projected revenue stream generated by a hypothetical licensee
utilizing such intellectual property rights. The projected revenue was based on
a business case for the operations and consisted of the following principal
assumptions and estimates: (Unaudited)
- A 20 year forecast period. (Unaudited)
- Specific cash outflows in the first four years of the forecast period to
account for TerreStar's portion of satellite design, construction and
launch expenditures. (Unaudited)
- Annual population growth of 1.6% based on U.S. Census Bureau estimates of
the U.S. population in 2004. (Unaudited)
- Market penetration assumptions of zero to 7% to 12% over the forecast
period, depending on the specific market and when the market is launched.
(Unaudited)
- Monthly revenue per customer of $40.00 when services are launched,
increasing to $44.50 over the forecast period. This increase equates to a
compound annual growth rate of 0.6%. A substantial portion of this revenue
is generated by the terrestrial component of the ATC network. (Unaudited)
- Tax rate of 40% after the consumption of net operating losses generated in
the early years of the forecast period. (Unaudited)
- A 25% discount rate based on a weighted average cost of capital (WACC)
determined by analyzing and weighting the cost of capital for a peer group
of publicly traded satellite service providers, wireless communications
companies and telecommunications companies in general. (Unaudited)
F-17
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
- The Company's valuation of its spectrum assets is based on a form of the
income approach known as the "Build-Out Method." The method applies a
discounted cash flow framework to the Company's "build-out" business case.
This build-out approach is intended to incorporate all of historical and
future development costs, as well as projected revenues, operating expenses
and cash flows generated from the build-out of a hybrid satellite and
terrestrial communications system utilizing the Company's frequency assets.
This "build-out method" business case and the applied discounted cash flow
valuation consisted of the following principal assumptions and estimates:
(Unaudited)
- A 20-year forecast period, comprised of a high growth period for the first
10 years and a declining growth period beginning in year 11, and a terminal
period to perpetuity. (Unaudited)
- Development cash outflows and capital expenditures related to the design
and construction of two satellites in the first 3 years of the forecast
period and the launch of one of these satellites in the fourth year of the
forecast period. Replacement costs for the construction and launch of one
satellite are included in the declining growth period.
(Unaudited)
- Satellite only revenues based on market size data for traditional satellite
segments (maritime, fleet management, public safety, telematics, and
aeronautical) compiled by a third party research group and penetration
estimates of 10% to 40% of our customer base, depending on the specific
market segment addressed. (Unaudited)
- Terrestrial revenues calculated as eleven percent of the total revenues
generated by a joint or strategic partner with whom TerreStar would intend
to deploy a terrestrial infrastructure and launch terrestrial services.
Total partnership revenues are based on (i) market penetration assumptions
of zero to 7 to 12% over the forecast period depending on the specific city
and when the city is launched. (ii) monthly revenue per customer of $40.00
when services are launched, increasing to $44.50 over the forecast period.
This increase equates to a compound annual growth rate of 0.6%. (Unaudited)
- Operating expenses covering the operation of satellite facilities. These
include a network operations center, tracking, telemetry and command
systems, interconnect costs, in-orbit insurance, technical staff, and
general and administrative personnel Under the projected expense structure,
EBITDA margins are 60% early in the forecast period and expand to 70% later
in the forecast period. (Unaudited)
- All capital expenditures required to design and construct two satellites
and launch one satellite during the first four years of the forecast
period. Additional capital expenditures for constructing a ground station
and investing in handset development. (Unaudited)
- Tax rate of 40% after the consumption of net operating losses generated in
the early years of the forecast period. (Unaudited)
- A 19 to 21% discount rate based on a weighted average cost of capital
(WACC) determined by analyzing and weighting the cost of capital for a peer
group of publicly traded satellite service providers, wireless
communications companies and telecommunications companies in general, with
more weight given to traditional satellite service providers. A terminal
value calculated using a WACC of 12%and a perpetuity growth rate of 2.5%.
(Unaudited)
The Company will test for impairment of its intangible assets by reviewing all
of the assumptions and estimates utilized relative to the valuation
methodologies discussed above. To the extent that it determines that these
assumptions and estimates are no longer accurate, either because actual results
have materially differed from the assumptions and estimates, or because changing
circumstances have caused the Company to reevaluate these assumptions and
estimates for future periods, the Company will revalue these intangible assets
based on revised assumptions and estimates. (Unaudited)
7. Deferred Charges And Other Assets
Deferred charges and other assets consist of the following:
December 31,
------------
2004 2003
----- ----
(in thousands)
Deferred equipment costs $ 34 $ 709
Term credit facility financing fees -- 7,367
------ ------
$ 34 $8,076
Financing costs are amortized over the term of the related facility using the
straight-line method, which approximates the effective interest method. The term
credit facility expired on December 31, 2004.
Amortization of term credit facility financing fees, which are a component of
interest expense, for the years ended December 31, 2004 and 2003 totaled $2,485
and $3,292, respectively.
F-18
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
8. Accounts Payable And Accrued Expenses
Accounts payable and accrued expenses consist of the following
December 31,
------------
2004 2003
---- ----
(in thousands)
Accounts Payable Trade $ 1,900 $ 5,778
Accrued Site Rent 1,512 806
Accrued Restructuring 1,287 --
Accrued Operating and Other 1,628 5,781
------- -------
$ 6,327 $12,365
9. Deferred Revenue And Other Current Liabilities
Deferred revenue and other current liabilities consist of the following:
December 31,
-----------
2004 2003
---- ----
(in thousands)
Deferred Revenue - UPS $ 4,025 $ 4,678
Deferred Revenue - Aether 472 3,447
Deferred Revenue - RIM 755 1,397
Deferred Registration fees 153 175
Deposits - other -- 693
Deferred Revenue - other 9 615
------- -------
$ 5,414 $11,005
See Note 11 - Commitments and contingencies for disclosure regarding deferred
revenue - UPS, as well as Note 21 - Subsequent Events (unaudited).
10. Debt & Capital Leases
Debt and capital leases consists of the following:
December 31,
------------
2004 2003
---- ----
(in thousands)
Rare Medium note payable, including accrued interest $ -- $22,016
CSFB note payable, including accrued interest -- 869
Term Credit Facility -- 4,914
Vendor financing, including accrued interest -- 4,814
Capital leases -- 3,096
-------
-- 35,709
Less current maturities -- 3,867
-------
Long-term debt $ -- $31,842
===== =======
Term Credit Facility
On January 27, 2003, Motient Communications, closed a $12.5 million term credit
agreement with a group of lenders, including several of the Company's existing
stockholders. An indirect lender, Highland Capital Management holds 5% or more
of Motient's common stock. James D. Dondero, a director of Motient, is the
principal of Highland Capital Management. The lenders also included Gary Singer,
directly or through one or more entities. Gary Singer is the brother of Steven
G. Singer, one of Motient's directors.
On January 27, 2003, in connection with the signing of the credit agreement,
Motient issued warrants at closing to the lenders to purchase, in the aggregate,
3,125,000 shares of its common stock. The exercise price for these warrants is
$1.06 per share. The warrants were immediately exercisable upon issuance and
have a term of five years. The warrants were valued at $10 million using a
Black-Scholes pricing model and recorded as a debt discount, amortized as
additional interest expense over three years, the term of the related debt. Upon
closing of the credit agreement, the Company paid closing and commitment fees to
the lenders of $500,000. These fees were recorded on the Company's balance sheet
and amortized as additional interest expense over three years, the term of the
related debt. Under the credit agreement, the Company was required to pay an
annual commitment fee of 1.25% of the daily average of undrawn amounts of the
aggregate commitments from the period from the closing date to December 31,
2003. In December 2003, the Company paid the lenders a commitment fee of
approximately $113,000.
F-19
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
On March 16, 2004, Motient entered into an amendment to its credit facility,
which extended the borrowing availability period until December 31, 2004. On
March 16, 2004, in connection with the execution of the amendment to the credit
agreement, the Company issued warrants to the lenders to purchase, in the
aggregate, 2,000,000 shares of Motient's common stock. The number of warrants
was reduced to an aggregate of 1,000,000 shares of common stock since, within 60
days after March 16, 2004, as the Company obtained at least $7.5 million of
additional debt or equity financing. The exercise price of the warrants is $4.88
per share. The warrants were immediately exercisable upon issuance and have a
term of five years. The warrants were valued at $6.7 million using a
Black-Scholes pricing model and recorded as a debt discount and amortized as
additional interest expense over three years, the term of the related debt.
Motient registered the shares underlying the warrants in July 2004. The Company
also paid a commitment fee to the lenders of $320,000 which accrued into the
principal balance at closing. These fees were recorded on Motient's balance
sheet and amortized as additional interest expense over three years, the term of
the related debt.
In each of April, June and August 2003 and March of 2004, the Company made draws
under the credit agreement in the amount of $1.5 million for an aggregate amount
of $6.0 million, all of which was repaid in April 2004. Each of these
borrowings, along with any accrued and unpaid interest, respectively, would have
been due three years from the date of borrowing. The Company used such funds to
fund general working capital requirements of operations.
For the monthly periods ended April 2003 through December 2003, and in September
2004, the Company reported events of default under the terms of the credit
facility to the lenders. These events of default related to non-compliance with
covenants requiring minimum monthly revenue, earnings before interest, taxes and
depreciation and amortization and free cash flow performance. In each period,
the lenders waived these events of default.
On April 13, 2004, Motient repaid all principal amounts then owing under its
term credit facility, including accrued interest thereon, in an amount of $6.7
million. On December 31, 2004, borrowing availability under the facility
terminated. The company immediately expensed approximately $8.1 million of
deferred financing costs, in connection with the repayment as the Company's
availability to borrow under the term credit agreement was reduced to $5.9
million. On December 31, 2004, the March 16, 2004 amendment expired and the
Company immediately expensed the remainder of the approximately $3.9 million of
deferred financing costs.
Rare Medium Notes
Under the Company's Plan of Reorganization, it issued a note to Rare Medium in
the principal amount of $19.0 million in satisfaction of certain claims against
the Company. The note was issued by a new subsidiary of Motient Corporation that
owns 100% of Motient Ventures Holding Inc., which owns all of the Company's
interests in MSV. The new note had a term of three years and carried interest at
9%. The note allowed the Company to elect to accrue interest and add it to the
principal, instead of paying interest in cash. In July 2004, the Company repaid
all accrued principal and interest on this note, in the amount of $22.6 million.
CSFB Note
Under the Company's Plan of Reorganization, the Company issued a note to CSFB,
in satisfaction of certain claims by CSFB against Motient, in the principal
amount of $750,000. The new note was issued by a new subsidiary of Motient
Corporation that owns 100% of Motient Ventures Holding Inc., which owns all of
the Company's interests in MSV. The new note had a term of three years and
carried interest at 9%. The note allowed the Company to elect to accrue interest
and add it to the principal, instead of paying interest in cash. In July 2004,
the Company repaid all accrued principal and interest on this note, in the
amount of $0.9 million.
Motorola Vendor Financing
In June 1998, Motorola entered into an agreement with the Company to provide up
to $15 million of vendor financing, to finance up to 75% of the purchase price
of network base stations. Loans under this facility bore interest at a rate
equal to LIBOR plus 7.0% and were guaranteed by the Company and each subsidiary
of Motient Holdings. Advances made during a quarter constitute a loan, which was
then amortized on a quarterly basis over three years. As of December 31, 2003,
$4.8 million was outstanding, including accrued interest, under this facility at
an interest rate of 5.4%. In June 2004, the Company negotiated a settlement of
these obligations, paying a $2.0 million in cash and issuing a warrant to
Motorola to purchase 200,000 shares of the Company's common stock at a price of
$8.68, in full satisfaction of the outstanding balances.
F-20
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Hewlett-Packard Capital Lease
The Company had a capital lease for network equipment with Hewlett-Packard. The
lease has an effective interest rate of 12.2%. This capital lease was in default
for non-payment at December 31, 2002, however, in January 2003, this agreement
was restructured to provide for a modified payment schedule. In June 2004, the
Company negotiated a settlement of the entire amounts under this lease, making a
cash payment of $1.9 million, and took title to all of the leased equipment and
software. Additionally, Hewlett-Packard released to the Company a $1.1 million
letter of credit that the Company had provided for the benefit of
Hewlett-Packard in 2003 to secure certain obligations under its lease.
11. Other Long-Term Liabilities
Other long-term liabilities consist of the following:
December 31,
------------
2004 2003
---- ----
(in thousands)
Deferred revenue, Aether, RIM, MSV and other $ 606 $ 622
Deferred equipment revenue 69 725
------ ------
$ 675 $1,347
12. Stockholders' (Deficit) Equity
As of December 31, 2004 and 2003, the Company has authorized 5,000,000 shares of
preferred stock and 100,000,000 shares of common stock. For each share of common
stock held, common stockholders are entitled to one vote on matters submitted to
the stockholders.
The Preferred Stock may be issued in one or more series at the discretion of the
Board of Directors (the "Board"), without stockholder approval. The Board is
authorized to determine the number of shares in each series and all
designations, rights, preferences, and limitations on the shares in each series,
including, but not limited to, determining whether dividends will be cumulative
or non-cumulative.
On April 7, 2004, Motient sold 4,215,910 shares of its common stock at a per
share price of $5.50 for an aggregate purchase price of $23.2 million to several
different investors in a private placement. In connection with this sale,
Motient signed a registration rights agreement with the holders of these shares.
Motient also issued warrants to purchase an aggregate of 1,053,978 shares of its
common stock to the investors listed above, at an exercise price of $5.50 per
share. Because Motient met certain deadlines related to the registration of the
shares, the warrants will never vest.
In connection with this sale, Motient issued to Tejas Securities Group, Inc.,
its placement agent for the private placement, and certain CTA affiliates,
warrants to purchase 600,000 and 400,000 shares, respectively, of its common
stock. The exercise price of these warrants is $5.50 per share. The warrants are
F-21
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
immediately exercisable upon issuance and have a term of five years. Motient
also paid Tejas Securities Group, Inc. a placement fee of $350,000 at closing.
The fair value of the warrants was estimated at $6.2 million using a
Black-Scholes model. The shares were offered and sold pursuant to the exemption
from registration afforded by Rule 506 under the Securities Act and/or Section
4(2) of the Securities Act.
On July 1, 2004, Motient sold 3,500,000 shares of its common stock at a per
share price of $8.57 for an aggregate purchase price of $30.0 million to
multiple investors. The sale of these shares was not registered under the
Securities Act and the shares may not be sold in the United States absent
registration or an applicable exemption from registration requirements. The
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act. Motient also issued warrants to purchase an aggregate of 525,000
shares of its common stock to the investors listed above, at an exercise price
of $8.57 per share. Because Motient met certain deadlines related to the
registration of the shares, the warrants will never vest.
In connection with this sale, Motient issued to certain affiliates of CTA and
Tejas Securities Group, Inc., its placement agent for the private placement,
warrants to purchase 340,000 and 510,000 shares, respectively, of its common
stock. The exercise price of these warrants is $8.57 per share. The warrants are
immediately exercisable upon issuance and have a term of five years. Motient
also paid Tejas Securities Group, Inc. a placement fee of $850,000 at closing.
The fair value of the warrants was estimated at $11.6 million using a
Black-Scholes model.
On November 12, 2004, Motient sold 15,353,609 shares of its common stock at a
per share price of $8.57. Motient received aggregate proceeds of $126,397,809,
net of $5,182,620 in commissions paid to its placement agent, Tejas Securities
Group, Inc. The approximately 60 purchasers included substantially all of the
purchasers from the April and July 2004 private placements, as well multiple new
investors. In connection with this sale, Motient signed a registration rights
agreement with the holders of these shares. Among other things, this
registration rights agreement required us to file and cause to make effective a
registration statement permitting the resale of the shares by the holders
thereof. Motient also issued warrants to purchase an aggregate of approximately
3,838,401 shares of its common stock to the investors listed above, at an
exercise price of $8.57 per share. These warrants will vest if and only if
Motient does not meet certain deadlines between January and March 2005 with
respect to certain requirements under the registration rights agreement, one of
which has already been met and one of which has not been met. Accordingly, 25%
of these warrants have vested and 25% of these warrants will never vest. If the
remaining warrants vest, they may be exercised by the holders thereof at any
time through November 11, 2009.
Rights Offering
On November 22, 2004, Motient announced that it will issue to each of its
stockholders of record one right for each share of Motient common stock held as
of the close of business on December 17, 2004. Each right will entitle any
holder that did not participate in the April, July or November 2004 private
placements to purchase 0.103 shares of its common stock at a price of $8.57 per
share, with fractions rounded up to the next whole share. A maximum of 2.5
million shares may be sold in the Rights Offering, generating maximum aggregate
proceeds of approximately $21.4 million.
The rights will be non-transferable and will expire if not exercised within the
exercise period. The rights will not be exercisable until the registration
statement covering the rights and the shares of underlying common stock is
declared effective by the SEC, and the exercise period will expire 30 days after
the rights become exercisable. Motient has not filed a registration statement
relating to the rights offering, but intends to do so as soon as reasonably
practicable. Motient expects to consummate this rights offering in mid 2005.
The holders of the rights will not have over-subscription rights, and there will
be no backstop to purchase unsubscribed shares. Motient reserves the right to
abandon this rights offering at any time prior to the effectiveness of the
registration statement relating to the rights offering, and upon any such
abandonment, any and all of the rights previously issued will be cancelled, will
no longer be exercisable and will be of no further force or effect.
As of December 31, 2004, the Company had reserved common stock for future
issuance as detailed below.
Shares issuable upon exercise of warrants 8,895,286
2002 Stock Option Plan 1,741,200
Defined Contribution Plan 69,184
2004 Restricted Stock Plan 984,600
----------
Total 11,690,270
==========
Please see Note 21 ("Subsequent Events") for a discussion of recent developments
related to the issuance of common stock.
F-22
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
13. Stock Options And Restricted Stock
In May 2002, the Company's Board approved the 2002 Stock Option Plan with
2,993,024 authorized shares of common stock, of which options to purchase
605,727 shares of the Company's common stock were outstanding at December 31,
2004. The plan was approved by the Company's stockholders on July 11, 2002. The
options granted initially in 2002 are subject to vesting in two parts - 50% of
the shares vest in three equal parts on the first, second and third anniversary
of the date of grant, and the other 50% vest in three equal parts, or are
rescinded, based on a comparison of the Company's performance in 2002, 2003 and
2004 to certain objectives established by the compensation and stock option
committee of the Board following the availability of the annual results. In May
2004, the compensation committee of the Company's Board made a determination to
vest a portion of the 2003 performance options. The 2002 and 2004 performance
objectives were met in ordinary course, and those options were vested. The
performance based options are accounted for in accordance with variable plan
accounting, which requires that the value of these options are measured at their
intrinsic value and any change in that value be charged to the income statement
upon the determination that the fulfillment of the performance criteria is
probable. The other options were previously accounted for as a fixed plan and in
accordance with intrinsic value accounting, which require that the excess of the
market price of stock over the exercise price of the options, if any, at the
time that both the exercise price and the number of options are known be
recorded as deferred compensation and amortized over the option vesting period.
In March 2003, the Company's board of directors approved the reduction in the
exercise price of all of the outstanding stock options from $5.00 per share to
$3.00 per share. The re-pricing requires that all options be accounted for in
accordance with variable plan accounting, which requires that the value of these
options are measured at their intrinsic value and any change in that value be
charged to the income statement each quarter based on the difference (if any)
between the intrinsic value and the then-current market value of the common
stock. For the three and twelve months ended December 31, 2004, the Company
recorded a mark-to-market adjustment of $3.5 million and $7.4 million
respectively relating to these re-priced options. Options to purchase 1,631,025
shares, 1,757,513 shares, and 605,727 shares of the Company's common stock were
outstanding at December 31, 2002, 2003 and 2004, respectively, under the
Company's 2002 Stock Option Plan. Options to purchase 2,683,626 shares of the
Predecessor Company's stock were outstanding at April 30, 2002. These options
were cancelled as part of the Company's reorganization.
In July and September 2003, the compensation and stock option committee of the
Company's Board, acting pursuant to the Company's 2002 stock option plan,
granted 26 employees and officers options to purchase an aggregate of 470,000
shares of the Company's common stock at a price of $5.15 per share and 25,000
shares of the Company's common stock at a price of $5.65 per share. One-half of
each option grant vests with the passage of time and the continued employment of
the recipient, in three equal increments, on the first, second and third
anniversary of the date of grant. The other half of each grant vested based on
the performance of the Company in 2004. In August 2004, one employee received a
grant for 100,000 shares of the Company's common stock at a price of $5.15 per
share. These options were immediately exercisable. If vested and not exercised,
the options will expire on the 10th anniversary of the date of grant. In
December 2004, the directors, one employee and one consultant received options
to purchase an aggregate of 205,000 shares of the Company's common stock at a
price of $8.57 per share. These options were immediately exercisable upon
issuance, but later amended to vest on February 28, 2005 and expire on March 1,
2005. Also on February 28, 2005, the board granted an aggregate of 205,000
options with a strike price of $28.70 per share to the same persons . This
strike price was set at the closing price of the Company's common stock on
February 28, 2005.
2004 Restricted Stock Plan
In August 2004, the Company adopted a restricted stock plan, and subsequently
registered the shares to be issued under such plan on a registration statement
on Form S-8. Pursuant to this plan, the Company may issue up to 1,000,000 shares
of restricted common stock to employees or directors. In September 2004, the
Company issued an aggregate of 15,400 shares of restricted stock to its
directors as partial compensation for their service on the board of directors.
Such shares vested in February 2005. Also in February 2005, the Company issued
an aggregate of 95,286 shares of restricted stock to certain consultants and
advisors, which vested on February 18, 2005.
F-23
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Information regarding the Company's stock option plan is summarized below:
<TABLE>
<CAPTION>
Restricted
Stock and Weighted
Options Options Granted Average
Available and Option Price
For Grant Outstanding Per Share
--------- ----------- ---------
<S> <C> <C> <C>
Predecessor Company
-------------------
Balance, December 31, 2001 2,588,633 393,353 9.65
MTNT Restricted stock and options available for
grant cancelled (2,588,633) (393,353)
---------- --------
Balance, April 30, 2002 (Predecessor Company) -- -- --
=====================================================================================================
Successor Company
-----------------
Reorganized MNCP shares authorized for grant 2,993,024 -- 5.00(1)
MNCP options granted (2,244,250) 2,244,250 --
Exercised -- -- 5.00
Forfeited 613,225 (613,225) 5.00
---------- ----------
Balance, December 31, 2002 1,361,999 1,631,025
Options granted (495,000) 495,000 5.18
Exercised 15,412 (15,412) 3.00
Forfeited 353,100 (353,100) 3.02
---------- ----------
Balance, December 31, 2003 1,235,511 1,757,513
Options granted (340,432) 340,432 6.99
Exercised 630,685 (630,685) 3.23
Forfeited 861,533 (861,533) 3.66
---------- ----------
Balance, December 31, 2004 2,387,297 605,727
</TABLE>
(1) In March 2003, our board of directors approved the reduction in the exercise
price of all of the outstanding stock options from $5.00 per share to $3.00 per
share.
Options exercisable at December 31:
Average
Options Exercise Price
------- --------------
2004 343,140 $7.08
2003 437,266 $3.00
2002 0 N/A
Exercise prices for options outstanding as of December 31, 2004, were as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
as of Contractual Average as of Average
Range of December 31, Life Exercise December 31, Exercise
Exercise Prices 2004 Remaining Price 2004 Price
--------------- ---- --------- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$5.00(1) 143,230 9 years $3.00 19,804 $3.00
$5.15 232,497 10 years $5.15 114,168 $5.15
$5.65 25,000 10 years $5.65 4,168 $5.65
$8.57(2) 205,000 10 years $8.57 205,000 $8.57
</TABLE>
(1) In March 2003, our board of directors approved the reduction in the exercise
price of all of the outstanding stock options from $5.00 per share to $3.00 per
share.
(2) Later amended to vest on February 28, 2005 and expire on March 1, 2005.
Please see Note 21 "Subsequent Events," for information regarding grants of
stock options and restricted stock in 2005.
14. Income Taxes
The following is a summary of the Company's net deferred tax assets.
December 31,
2004 2003
---- ----
(in thousands)
Net Operating Loss Carryforwards $ 188,107 $ 165,933
Deferred Taxes Related to Temporary Differences:
Tangible asset bases, lives and depreciation methods (11,067) (11,000)
Other (2,967) (8,515)
--------- ---------
Total deferred tax asset, net 174,073 146,418
Less valuation allowance (174,073) (146,418)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
F-24
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
In connection with the fresh-start accounting adopted in 2002, our assets and
liabilities were recorded at their respective fair values. Deferred tax assets
and liabilities were then recognized for the tax effects of the differences
between fair values and tax bases. In addition, deferred tax assets were
recognized for future tax benefits of net operating loss ("NOL"), capital loss
and tax credit carryforwards, and a valuation allowance was recorded for the
overall net increase in deferred tax assets recognized in connection with
fresh-start accounting.
To the extent management believes the pre-emergence net deferred tax assets will
more likely than not be realized, a reduction in the valuation allowance
established in fresh-start accounting will be recorded. The reduction in this
valuation allowance will first reduce any remaining intangible assets recorded
in fresh-start accounting, with any excess being treated as an increase to
capital in excess of par value.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependant upon the generation of future taxable income during the periods in
which those temporary differences become deducible. No benefit for federal
income taxes has been recorded for the periods ended December 31, 2004 and 2003,
as the net deferred tax asset generated, primarily from temporary differences
related to the net operating loss, was offset by a full valuation allowance
because it is not considered more likely than not that these benefits will be
realized due to the Company's losses since inception. The change in the
valuation allowance for 2004 is based on the tax effect of the availability and
utilization of the Company's NOL's.
As of December 31, 2004 and 2003, the Company had estimated net operating loss
carryforwards ("NOLs") of $468 million and $412 million, respectively. In April
2002, due to the debt restructuring and reorganization, the Company has
triggered a change of control, which has limited the availability and
utilization of the NOLs. The Company's NOL's expire between 2005 and 2024.
The provisions for income taxes for the periods below differs from the amount
computed by applying the federal statutory rate due to the following:
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------- -------------------
Year Ended December 31 Eight Months Ended Four Months Ended
2004 2003 December 31, 2002 April 30, 2002
---- ---- ----------------- --------------
<S> <C> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% 34.0% 34.0%
State and local taxes, net of Federal tax 5.89% 6.14% 6.19% 6.19%
benefit
Permanent Differences (1.66)% (0.32)% (0.03)% (0.03)%
Valuation Allowance (38.23)% (39.82)% (40.16)% (40.16)%
Effective income tax rate -- -- -- --
</TABLE>
15. Related Parties
In 2004, Motient paid Communications Technology Advisors LLC $1,111,000 and
$25,000 to Gerald Stevens-Kittner, Esq. for consulting services.
At December 31, 2004 Motient was due approximately $5,400 from MSV for certain
customer payments that were received by MSV in 2004 and remitted to Motient in
2005.
The lenders of our term credit facility included Gary Singer, directly or
through one or more entities. Gary Singer is the brother of Steven G. Singer,
one of Motient's directors. Please see footnote 10 Debt & Capital Leases for
additional information regarding our Term Credit Facility.
F-25
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Communication Technology Advisors LLC
In May 2002, the Company entered into a consulting agreement with Communication
Technology Advisors LLC ("CTA") under which CTA provided consulting services to
the Company. CTA's chairman, Jared E. Abbruzzese, was a director of the Company
until June 20, 2003. Peter Aquino, a director from June 20, 2003 to February,
2004, was a senior managing director of CTA. Gerry S. Kittner, also a Motient
director, is an advisor and consultant for CTA.
CTA is a consulting and private advisory firm specializing in the technology and
telecommunications sectors. The Company's agreement with CTA had an initial term
of three months ending August 15, 2002, and was extended by mutual agreement for
several additional terms of two or three months each. For the first three months
of the agreement, CTA was paid a flat fee of $60,000 per month, and for the
period August 2002 to May 2003, the monthly fee was $55,000. Beginning in May
2003, the monthly fee was reduced to $39,000. The Company also agreed to
reimburse CTA for CTA's out-of-pocket expenses incurred in connection with
rendering services during the term of the agreement. This agreement was modified
on January 30, 2004.
CTA had previously acted as the spectrum and technology advisor to the official
committee of unsecured creditors in connection with the Company's Chapter 11
case. CTA received a total of $475,000 in fees for such advice and was
reimbursed a total of $4,896 for expenses in connection with the rendering of
such advice.
Except for the warrants offered to CTA described below and the warrants granted
to certain members of CTA in connection with the private placement of the
Company's common stock on April 7, 2004, neither CTA, nor any of its principals
or affiliates is a stockholder of Motient, nor does it hold any debt of Motient
(other than indebtedness as a result of consulting fees and expense
reimbursement owed to CTA in the ordinary course under the Company's existing
agreement with CTA). CTA has informed the Company that in connection with the
conduct of its business in the ordinary course, (i) it routinely advises clients
in and appears in restructuring cases involving telecommunications companies
throughout the country, and (ii) certain of the Company's stockholders and
bondholders and/or certain of their respective affiliates or principals, may be
considered to be (a) current clients of CTA in matters unrelated to Motient; (b)
former clients of CTA in matters unrelated to Motient; and (c) separate
affiliates of clients who are (or were) represented by CTA in matters unrelated
to Motient.
In July 2002, the Company's Board approved the offer and sale to CTA (or
affiliates thereof) of a warrant (or warrants) for 500,000 shares of the
Company's common stock, for an aggregate purchase price of $25,000. The warrant
has an exercise price of $3.00 per share and a term of five years. These
warrants were valued at $1.5 million and were recorded as a consultant
compensation expense in December of 2002. Certain affiliates of CTA purchased
the warrants in December 2002. Christopher W. Downie received a warrant for
100,000 of the 500,000 shares.
In November 2003, CTA was engaged to provide valuation of Motient's equity
interest in MSV as of December 31, 2002. CTA was paid $150,000 for this
valuation.
On January 30, 2004, the Company engaged CTA to act as chief restructuring
entity. As consideration for this work, Motient agreed to pay to CTA a monthly
fee of $60,000, one-half of which will be paid monthly in cash and one-half of
which will deferred. The new agreement amends the consulting arrangement
discussed above. In April 2004, Motient paid CTA $440,000 for all past deferred
fees.
In April 2004 and July 2004, certain members of CTA were granted warrants to
purchase 400,000 shares and 340,000 shares, respectively, of common stock in
conjunction with the private placements of the Company's common stock on April
7, 2004 and July 1, 2004. The warrants have an exercise price of $5.50 and $8.57
per share, respectively, and a term of five years. In December 2004, certain
affiliates of CTA were granted options to purchase 125,000 shares of the
Company's common stock at a price of $8.57 per share. The options were initially
immediately vested, but were later amended to vest on February 28, 2005 and
expire on March 1, 2005. For further information on fees paid to CTA, please see
Note 21, "Subsequent Events." Mr. Abbruzzese, Mr. Kittner and Mr. Aquino all of
whom did not participate in the deliberations or vote of the Board with respect
to the foregoing matters while serving as a member of the Board.
16. Commitments And Contingencies
As of December 31, 2004, the Company had no contractual inventory commitments.
F-26
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
UPS, the Company's largest customer as of December 31, 2002, has substantially
completed its migration to next generation network technology, and its monthly
airtime usage of the Company's network has declined significantly. UPS was
Motient's second largest customer for the twelve months ended December 31, 2003
and Motient's tenth largest customer for the twelve months ended December 31,
2004. There are no minimum purchase requirements under the Company's contract
with UPS and the contract may be terminated by UPS on 30 days' notice at which
point any prepaid network time would be required to be repaid. While the Company
expects that UPS will remain a customer for the foreseeable future, the bulk of
UPS' units have migrated to another network. As of December 31, 2004, UPS had
approximately 4,700 active units on Motient's network.
Until June 2003, UPS had voluntarily maintained its historical level of payments
to mitigate the near-term revenue and cash flow impact of its recent and
anticipated continued reduced network usage. However, beginning in July 2003,
the revenues and cash flow from UPS declined significantly. Also, due to a
separate arrangement entered into in 2002 under which UPS prepaid for network
airtime to be used by it in 2004 and beyond, the Company does not expect that
UPS will be required to make any cash payments to the Company in through 2006
for service to be provided through 2006. Pursuant to such agreement, and,
through December 31, 2004, UPS has not been required to make any cash payments
to the Company in, and the value of the Company's remaining airtime service
obligations to UPS in respect of the prepayment was approximately $4.0 million.
If UPS terminates the contract, we will be required to refund any unused portion
of the prepayment to UPS. For additional information, please see Note 21,
Subsequent Events." (Unaudited)
Operating Leases
The Company leases substantially all of its base station sites through operating
leases. The majority of these leases provide for renewal options for various
periods at their fair rental value at the time of renewal. In the normal course
of business, the operating leases are generally renewed or replaced by other
leases. Additionally, the Company leases certain facilities and equipment under
arrangements accounted for as operating leases. Certain of these arrangements
have renewal terms. Total rent expense, under all operating leases, approximated
$13.9 million for the year ended December 31, 2004, $15.2 million for the year
ended December 31, 2003, $10.5 million for the eight months ended December 31,
2002, and $5.6 million for the four months ended April 30, 2002.
At December 31, 2004, minimum future lease payments under noncancelable
operating leases are as follows:
Operating
---------
(in thousands)
2005 $ 5,173
2006 3,085
2007 2,273
2008 1,850
2009 and thereafter 2,831
-------
Total $15,212
=======
Change Of Control Agreements
Pursuant to the Plan of Reorganization, Motient entered into a change of control
agreement, effective May 1, 2002, with each of Mr. Matheson, Ms. Peterson, and
eight other vice presidents of Motient. Under the agreements, each officer is
eligible to receive one year of their annual base salary (excluding cash bonus)
in the event that both (x) a "change in control" or an anticipated "change in
control" as defined in the change of control agreement, has occurred and (y) the
employee is terminated or his or her compensation or responsibilities are
reduced. The events constituting a "change of control" generally involved the
acquisition of greater than 50% of the voting securities of Motient, as well as
certain transactions or events with a similar effect. Other than Mr. Matheson
and Ms. Peterson, the Company currently has no employees with such a change of
control agreement.
17. Employee Benefits
Prior to the Company's reorganization, the Company had several active stock
plans. All of these plans and the respective authorized and issued stock options
were cancelled as part of the Company's reorganization on May 1, 2002.
F-27
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Defined Contribution Plan
The Company sponsored a 401(k) defined contribution plan ("401(k) Savings Plan")
in which all employees of Motient could participate. The 401(k) Savings Plan
provided for (i) a Company match of employee contributions, in the form of
common stock, at a rate of $1 for every $1 of an employee's contribution not to
exceed 4% of an employee's eligible compensation, (ii) a discretionary annual
employer non-elective contribution, (iii) the option to have plan benefits
distributed in the form of installment payments, and (iv) the reallocation of
forfeitures, if any, to active participants. In 2001, effective January 2002,
the Company amended its 401(k) Savings Plan to make the matching contributions
discretionary, as well as to allow the match to be made in either cash or shares
of common stock, at the Company's sole discretion. The Company's matching
expense was $0.2 million for 2004, $0.4 million for 2003 and $0 for 2002. During
2002, the Company authorized 200,000 shares for the 401(K) Savings Plan.
2002 Stock Option Plan And 2004 Restricted Stock Plan
See Note 13 "Stock Options and Restricted Stock."
18. Legal Matters
On April 15, 2004, Motient filed a claim under the rules of the American
Arbitration Association in Fairfax County, VA against Wireless Matrix
Corporation, a reseller of Motient's services, for the non-payment of certain
amounts due and owing under the "take or pay" agreement between Motient and
Wireless Matrix. Under this agreement, Wireless Matrix agreed to purchase
certain minimum amounts of air-time on the Motient network. In February 2004,
Wireless Matrix informed Motient that it was terminating its agreement with
Motient. Motient did not believe that Wireless Matrix had any valid basis to do
so, and consequently filed the above mentioned claim seeking over $2.6 million
in damages, which amounts represents Wireless Matrix's total prospective
commitment under the agreement. On May 10, 2004, Motient received notice of a
counter-claim by Wireless Matrix of approximately $1 million, representing such
amounts as Wireless Matrix claimed to have paid in excess of services rendered
under the agreement. In June 2004, Motient reached a favorable out of court
settlement, in which Wireless Matrix paid Motient $1.1 million.
>From time to time, Motient is involved in legal proceedings in the ordinary
course of its business operations. Although, there can be no assurance as to the
outcome or effect of any legal proceedings to which Motient is a party, Motient
does not believe, based on currently available information, that the ultimate
liabilities, if any arising from any such legal proceedings not otherwise
disclosed would have a material adverse impact on its business, financial
condition, results of operations or cash flows.
19. Supplemental Cash Flow Information
F-28
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
----------------- -------
Eight Months Four Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, April 30,
2004 2003 2002 2002
----- ---- ---- ----
<S> <C> <C> <C> <C>
Cash payments for interest $ 3,144 $ 572 $ 396 $ 427
Cash payment for income taxes -- -- -- --
Non-cash investing and financing activities:
Additional deferred compensation on non-cash
compensation -- -- -- 97
Issuance and re-pricing of common stock
purchase warrants 26,672 10,024 1,464 --
Financing fees added to term credit facility 320 -- -- --
Exercise and Expiration of common stock
warrants (13,575) -- -- --
Vendor financing under maintenance agreement
-- -- 2,631 --
Issuance of Common Stock under the Defined
Contribution Plan -- 280 -- (203)
SAB 51 pick-up $ 7,993 $ -- $ -- $ --
</TABLE>
Cash (used) provided by reorganization items were as follows:
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
----------------- -------
Eight Months Four Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, April 30,
2004 2003 2002 2002
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Professional Fees $-- $-- $(3,434) $(5,892)
Interest Income -- -- -- 145
--- --- ------- -------
$-- $-- $(3,434) $(5,747)
=== === ======= =======
</TABLE>
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.
F-29
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
20. Reorganization And Fresh Start Accounting
Reorganization
On April 26, 2002, the United States Bankruptcy Court for the Eastern District
of Virginia (the "Bankruptcy Court") confirmed our Plan of Reorganization that
was filed with the Bankruptcy Court on February 28, 2002. On April 30, 2002, we
emerged from proceedings under Chapter 11 of Title 11 of the United States code
(the "Bankruptcy Code") pursuant to the terms of our Plan of Reorganization.
We operated our business as a debtor-in-possession subject to the jurisdiction
of the Bankruptcy Court from January 10, 2002, (the "Filing Date") until April
30, 2002. Accordingly, our consolidated financial statements prior to May 1,
2002 have been prepared in accordance with the American Institute of Certified
Public Accountants Statement of Position 90-7, Financial Reporting By Entities
In Reorganization Under The Bankruptcy Code ("SOP 90-7") and generally accepted
accounting principles applicable to a going concern, which assume that assets
will be realized and liabilities will be discharged in the normal course of
business.
The Company's emergence from Chapter 11 proceedings resulted in a new reporting
entity with the adoption of fresh-start accounting in accordance with the SOP
90-7. Pursuant to SOP 90-7, the accounting for the effects of the reorganization
occurred as of the confirmation date because there were no remaining conditions
precedent to the effectiveness of the plan as of the April 26, 2002 confirmation
date. For accounting purposes, the Company applied fresh-start accounting as of
May 1, 2002, because the results of operations for the 5 days through April 30,
2002 did not have a material impact on the reorganized company's financial
position, results of operations and cash flows. In connection with the
preparation of the Predecessor Company's Disclosure Statement, an independent
financial advisor determined our reorganization value, or fair value, to be
$234.0 million before considering certain preference. This reorganization value
was based upon our projected cash flows, selected comparable market multiples of
publicly traded companies and other applicable ratios and valuation techniques.
The estimated total equity value of the Reorganized Company aggregating $221.0
million was determined after taking into account the preference rights on
liquidation available to certain equity holders of MSV in connection with the
Plan of Reorganization.
Fresh Start Accounting
In accordance with SOP No. 90-7, the reorganized value of the Company was
allocated to the Company's assets based on procedures specified by SFAS No. 141,
"Business Combinations". Each liability existing at the plan confirmation date,
other than deferred taxes, was stated at the present value of the amounts to be
paid at appropriate market rates. It was determined that the Company's
reorganization value computed immediately before the Effective Date was $234
million. Subsequent to the determination of this value, the Company determined
that the reorganization value ascribed to MSV did not reflect certain preference
rights on liquidation available to certain equity holders in MSV. Therefore, the
reorganization value of MSV was reduced by $13 million and the Company's
reorganization value was reduced to $221 million. The Company adopted
"fresh-start" accounting because holders of existing voting shares immediately
before filing and confirmation of the plan received less than 50% of the voting
shares of the emerging entity and its reorganization value is less than its
postpetition liabilities and allowed claims, as shown below:
Postpetition current liabilities $ 49.9 million
Liabilities deferred pursuant to Chapter 11 Proceedings 401.1 million
---------------
Total postpetition liabilities and allowed claims 451.0 million
Reorganization value (221.0 million)
---------------
Excess of liabilities over reorganization value $(230.0 million)
===============
After consideration of the Company's debt capacity, and after extensive
negotiations among parties in interest, it was agreed that Motient's
reorganization capital structure should be as follows:
Notes payable to Rare Medium and CSFB $ 19.8 million
Shareholders' Equity 201.2 million
--------------
$221.0 million
==============
F-30
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
The Company allocated the $221.0 million reorganization value among its net
assets based upon its current estimates of the fair value of its assets. In the
case of current assets, with the exception of inventory, the Company concluded
that their carrying values approximated fair values. The values of the Company's
frequencies and its investment in and note receivable from MSV were based on
independent analyses presented to the bankruptcy court and subsequently adjusted
as discussed above. The value of the Company's fixed assets was based upon a
valuation of the Company's software and estimates of replacement cost for
network and other equipment, for which the Company believes that its recent
purchases represent a valid data point. The value of the Company's other
intangible assets was based on third party valuations as of May 1, 2002.
In February 2003, the Company engaged a financial advisory firm to prepare a
valuation of software and customer intangibles. Software and customer
intangibles were not taken into consideration when the original fresh-start
balance sheet was determined at May 1, 2002. The changes for the software and
customer contracts are reflected below and in the financial statements and notes
herein.
The effect of the plan of reorganization and application of "fresh-start"
accounting on the Predecessor Company's balance sheet as of April 30, 2002, is
as follows:
<TABLE>
<CAPTION>
Debt
Discharge
Preconfirmation and
Predecessor Exchange Fresh Start Reorganized
Company(j) of Stock Adjustments Successor Company
---------- -------- ----------- -----------------
<S> <C> <C> <C> <C>
(in thousands)
Assets:
Current assets
Cash $ 17,463 $ 17,463
Receivables 10,121 10,121
Inventory 8,194 $(4,352) 3,842
Deferred equipment costs 11,766 (11,766) (e) --
Other current assets 11,443 11,443
---------- ------- --------
Total current assets 58,987 (16,118) 42,869
Property and equipment 58,031 (1,553) (i) 56,478
FCC Licenses and other intangibles 45,610 56,866 (f)(i) 102,476
Goodwill 4,981 (4,981) (i) --
Investment in and notes receivable from MSV 27,262 26,593 (f) 53,855
Other long-term assets
2,864 (1,141) (e) 1,723
---------- ------- --------
Total Assets $ 197,735 $59,666 $257,401
========== ======= ========
Liabilities & Stockholders' (Deficit) Equity
Liabilities Not Subject to Compromise:
Current liabilities:
Current maturities of capital leases $ 4,096 $ 4,096
Accounts payable - trade 1,625 1,625
Vendor financing 655 655
Accrued expenses 15,727 15,727
Deferred revenue 23,284 (18,913) (g)(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 19,750
---------- --------- ------- --------
Total liabilities 475,046 (383,738) (35,049) 56,259
Stockholders' (deficit) equity:
Common stock - old 584 (584) (h) --
Common stock - new 251 (d) 251
Additional paid-in capital 988,531 (988,531) 197,814
197,814 (d)(h)
Common stock purchase
warrants - old 93,730 (93,730) (h)
Common stock purchase
warrants - new 3,077 (d) 3,077
Deferred stock compensation (336) 336 (h) --
Retained (deficit) earnings (1,359,820) 1,359,820 94,715 --
---------- --------- ------- --------
(183,725)
(94,715) (d)(h)
183,725 (h)
-------
Stockholders' Equity (Deficit) (277,311) 383,738 94,715 201,142
---------- ------- --------
Total Liabilities & Stockholders' Equity
(Deficit) $ 197,735 $ -- $59,666 $257,401
========== ========= ======= ========
</TABLE>
F-31
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(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 thereon, 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-32
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(f) To reflect the step-up in assets in accordance with the reorganization
value and valuations performed.
(g) Represents the write off of the deferred gain associated with the
Company's sale of its satellite assets to MSV in November 2001 and the
write-off of the unamortized balance of the $15,000 perpetual license
sold to Aether in November 2000, both of which total approximately
$22,142, since there is no obligation to provide future service
post-"fresh start".
(h) To record the cancellation of the Company's pre-reorganization equity
and to reverse the gain on extinguishment of debt of $183,725 and the
gain on fair market adjustment of $94,715.
(i) To record the valuation and resulting increase of customer intangibles
of approximately $11,501 and frequencies of $45,365. The reduction of
$4,981 is due to a write-off of goodwill. The reduction of property and
equipment relates to a subsequent reduction in the carrying value of
certain software from $4,942 to $3,389, reduction to inventory from
$8,194 to $3,842 to its net realizable value.
(j) The balances do not match the balances in the Company's Plan of
Reorganization due to subsequent re-audit adjustments.
Under the Plan of Reorganization, all then-outstanding shares of the Company's
pre-reorganization common stock and all unexercised options and warrants to
purchase the Company's pre-reorganization common stock were cancelled. The
holders of $335 million in senior notes exchanged their notes for 25,000,000
shares of the Company's new common stock. Certain of the Company's other
creditors received an aggregate of 97,256 shares of the Company's new common
stock in settlement for amounts owed to them. These shares were issued following
completion of the bankruptcy claims process; however, the value of these shares
has been recorded in the financial statements as if they had been issued on the
effective date of the reorganization. Holders of the Company's
pre-reorganization common stock received warrants to purchase an aggregate of
approximately 1,496,512 shares of common stock. The warrants expired May 1,
2004, or two years after the Effective Date. The warrants were exerciseable to
purchase shares of Motient common stock at a price of $.01 per share only if and
when the average closing price of Motient's common stock over a period of ninety
consecutive trading days was equal to or greater than $15.44 per share.
Motient's common stock did not trade at this level from May 1, 2002 to May 1,
2004. All warrants issued to the holders of the Company's pre-reorganization
common stock, including those shares held by the Company's 401(k) savings plan,
have been recorded in the financial statements as if they had been issued on the
effective date of the reorganization. Also, in July 2002, Motient issued to
Evercore, financial advisor to the creditors' committee in Motient's
reorganization, a warrant to purchase up to 343,450 shares of common stock, at
an exercise price of $3.95 per share. The warrant was dated May 1, 2002, and has
a term of five years. If the average closing price of Motient's common stock for
thirty consecutive trading days is equal to or greater than $20.00, Motient may
require Evercore to exercise the warrant, provided the common stock is then
trading in an established public market. The value of this warrant has been
recorded in the financial statements as if it had been issued on May 1, 2002.
21. Subsequent Events
Management And Board Changes
On May 2, 2005, the board of directors elected C. Gerald Goldsmith to serve as a
member of the board. (unaudited).
On March 4, 2005, the board of directors elected Barry A. Williamson to serve as
a member of the board.
On February 28, 2005, Peter Aquino resigned from Motient's board of directors.
MSV Related Matters
F-33
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
On February 9, 2005, Motient entered into a merger agreement with Telcom
Satellite Ventures Inc. and Telcom Satellite Ventures II Inc. and simultaneously
consummated the transactions contemplated thereby, pursuant to which Telcom
merged with and into MVH Holdings Inc., a direct and wholly-owned subsidiary of
Motient, in a tax free reorganization in which MVH is the surviving company. In
exchange for 2,296,835 MSV limited partnership units, Motient issued to Telcom's
stockholders 8,187,804 shares of its common stock owned by the Telcom entities.
Concurrently with this merger, Motient (through MVH) also purchased 373.7 shares
of common stock of Spectrum Space Equity Investors IV, Inc. and two other
related entities, representing approximately 66.3% of the outstanding common
stock of each of such entities, and 221.2 shares of common stock of Columbia
Space Partners, Inc. and two other related entities, representing approximately
27.8% of the outstanding common stock of such entities. In total, Motient issued
to the Spectrum entities and Columbia entities a total of 4,516,978 shares of
Motient common stock in a private placement in exchange for indirect ownership
of 1,267,098 MSV units.
Telcom, Columbia and Spectrum also received warrants exercisable for an
aggregate of approximately 952,858 shares of Motient common stock. The warrants
have a term of five years and an exercise price equal to $22.50. Each warrant
shall become exercisable only as follows: (i) with respect to 35% of the warrant
shares, on the date that is 30 days following the closing of the merger, if a
registration statement covering the resale of the shares shall not have been
filed with the SEC by such date, (ii) with respect to an additional 35% of the
warrant shares, on the 60th day after the closing of the merger, if a
registration statement covering the resale of the shares shall not have been
filed with the SEC by such date, and (iii) with respect to 30% of the warrant
shares, on the 180th day after the closing of the Mergers, if a registration
statement covering the resale of the shares shall not have been declared
effective. As Motient has filed a registration statement covering these shares,
70% of the 952,858 warrants will never vest.
On February 25, 2005, the FCC issued a revised set of rules following a detailed
multi-year process for the use of ATC. The rules expanded the technical and
operational flexibility of ATC Services allowing for greater capacity in both
the uplink and downlink directions. These rules are subject to challenge at the
FCC or before a federal court.
CTA Fees
On February 28, 2005, the board granted these CTA affiliates 125,000 options
with a strike price of $28.70 per share. This strike price was set at the
closing price of the Company's common stock on February 28, 2005. In February
2005, CTA and certain of its affiliates were paid a consulting fee of $3,709,796
in cash and stock in relation to the closing of Motient's acquisition of certain
interests in MSV. Such fee is equal to 1% of the aggregate consideration paid by
Motient for such MSV interests. This fee was comprised of 95,286 shares of stock
and a cash payment of $927,449. 40% of this fee was paid to The Singer
Children's Management Trust, which is a trust established for the benefit of the
children of Gary Singer, a former lender under the 2003 Term Credit Agreement
and the brother of Steven Singer, Motient's chairman of the board. This amount
was paid at the direction of CTA as compensation for the assistance Gary Singer
provided to CTA in the transaction.
In March 2005, Motient paid CTA an additional $25,000 to provide certain
valuation allocations for Motient's interest in MSV as a result of Motient's
November 12, 2004 additional investment in MSV.
Legal Matters
In March 2005, Research in Motion, Ltd. (RIM) settled an outstanding patent
infringement lawsuit related to RIM's BlackBerry handheld device and software,
which Motient supports on its Data Tac wireless network. As a result of this
settlement, RIM and its customers, including Motient, may use the BlackBerry
device and software without any further interference from NTP.
Board Actions
In March 2005, the board voted to propose to the shareholders that Motient's
authorized shared be increased from 100 million to 200 million at Motient's next
annual meeting. The stockholders approved this amendment at Motient's June 15,
2005 annual meeting and the certificate of incorporation was amended on June 23,
2005 to reflect this change (unaudited).
Sale Of Preferred Stock (Unaudited)
On April 15, 2005, Motient sold 408,500 shares of non-voting Series A Cumulative
Convertible Preferred Stock, $0.01 par value in a private placement exempt from
the registration requirements of the Securities Act of 1933. Motient received
cash proceeds, net of $17.2 million in placement agent commissions (before
escrowing a portion of the proceeds as required under the terms of the preferred
stock, described below) of approximately $391 million. The purchasers under the
Securities Purchase Agreement included most of the purchasers from Motient's
November 2004 private placement, as well as several new investors.
F-34
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
In connection with the sale of preferred stock, Motient also entered into a
registration rights agreement with the purchasers. Under this agreement, Motient
is obligated to use its reasonable best efforts to cause a registration
statement on Form S-1 (or if available S-3) relating to the resale by the
purchasers of the Motient shares of common stock issuable upon conversion of the
preferred stock or the warrants issued in connection therewith, to be filed with
the SEC on or prior to June 24, 2005, and will use its best efforts to cause the
registration statement to become effective as soon as possible, but in no event
later than (i) August 8, 2005 if the registration statement is not reviewed by
the Securities and Exchange Commission (the "SEC") or (ii) September 7, 2005 if
the Registration Statement is reviewed by the SEC.
In connection with the sale of the preferred stock, Motient granted warrants
exercisable for an aggregate of 154,109 shares of Motient common stock to the
purchasers. The warrants have a term of five years and an exercise price equal
to $26.51 per share. Each warrant shall become exercisable if the registration
statement is not filed or declared effective in accordance with the time limits
described above, or if the registration statement is filed and declared
effective but shall thereafter cease to be effective for a period of time that
exceeds 30 days in the aggregate in any twelve-month period. Each warrant will
vest as to 1/365th of the shares of common stock underlying the warrant for (i)
each day after June 24, 2005 on which the registration statement has not yet
been filed, (ii) each day after August 8, 2005 or September 7, 2005, as
applicable, that the registration statement has not been declared effective or
(iii) each day after the registration statement first becomes effective that
Motient is unable to keep it effective in accordance with the time periods and
terms described above.
The sale of these shares of preferred stock was not registered under the
Securities Act and the shares may not be sold in the United States absent
registration or an applicable exemption from registration requirements. The
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act as a sale not involving any public offering, under which offers
and sales were made to Qualified Institutional Buyers as such term is defined
under the rules and regulations under the Securities Act. In connection with
such sale of preferred stock, Motient also issued, for no separate
consideration, warrants to purchase up to 154,109 shares of Motient common
stock.
The rights, preferences and privileges of the Series A Preferred are contained
in Certificates of Designations of the Series A Cumulative Convertible Preferred
Stock. The following is a summary of these rights, preferences and privileges:
o The Series A Preferred Stock has voting rights limited to those listed
below, or except as required by applicable law. Upon (a) the
accumulation of accrued and unpaid dividends on the outstanding shares
of Series A Preferred for two or more six month periods, whether or
not consecutive; (b) the failure of the Corporation to properly redeem
the Series A Preferred Stock, or (c) the failure of the Corporation to
comply with any of the other covenants or agreements set forth in the
Certificate of Designations for the Series A Preferred Stock, and the
continuance of such failure for 30 consecutive days or more after
receipt of notice of such failure from the holders of at least 25% of
the Series A Preferred then outstanding then the holders of at least a
majority of the then-outstanding shares of Series A Preferred, with
the holders of shares of any parity securities issued after April 15,
2005 upon which like voting rights have been conferred and are
exercisable, voting as a single class, will be entitled to elect two
directors to Motient's Board of Directors for successive one-year
terms until such defect listed above has been cured. In addition,
Motient must obtain the approval of the holders of a majority of the
then outstanding shares of Series A Preferred to modify the rights,
preferences or privileges of the Series A Preferred in a manner
adverse to the holders of Series A Preferred.
o From April 15, 2005 to April 15, 2007, Motient is required to pay
dividends in cash at a rate of 5.25% per annum (the "Cash Rate") on
the shares of Series A Preferred. Motient was required to place the
aggregate amount of these cash dividends, $42,892,500, in an escrow
account. These cash dividends will be paid to the holders of Series A
Preferred from this escrow account in four semi-annual payments,
unless earlier paid pursuant to the terms described below.
o From April 15, 2007 to April 15, 2010, Motient is required to pay
dividends on each share of Series A Preferred either in cash at the
Cash Rate or in shares of Motient common stock at a rate of 6.25% per
annum.
o If any shares of Series A Preferred remain outstanding on April 15,
2010, Motient is required to redeem such shares for an amount equal to
the purchase price paid per share plus any accrued but unpaid
dividends on such shares.
F-35
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
o Each holder of shares of Series A Preferred shall be entitled to
convert their shares into shares of Motient common stock at any time.
Each share of Series A Preferred will initially be convertible into 30
shares of Motient common stock. Upon conversion, any accrued but
unpaid dividends on such shares will also be issued as shares of
common stock, in a number of shares determined by dividing the
aggregate value of such dividend by $33.33. In addition, if the
conversion takes place prior to April 15, 2007 (or if any amounts
remain in the escrow account on such date), the converting holder will
be entitled to the portion of the escrow account per share of Series A
Preferred Stock equal to $105.00 minus all dividends that have been
paid on such share from the escrow account (such amount, the "Escrow
Portion"). Upon conversion, all amounts paid to holders of Series A
Preferred will be paid in shares of Motient common stock.
o Upon a change in control of Motient, each holder of Series A Preferred
shall be entitled to require Motient to redeem such holder's shares of
Series A Preferred for an amount in cash equal to $1,080 per share
plus all accrued and unpaid dividends on such shares. In addition if
the change in control takes place prior to April 15, 2007 (or if any
amounts remain in the escrow account on such date), the holder
electing to have such shares redeemed will be entitled to the Escrow
Portion remaining as to such share.
o No dividends may be declared or paid, and no funds shall be set apart
for payment, on shares of Motient common stock, unless (i) written
notice of such dividend is given to each holder of shares of Series A
Preferred not less than 15 days prior to the record date for such
dividend and (ii) a registration statement registering the resale of
the Conversion Shares has been filed with the SEC and is effective on
the date Motient declares such dividend.
o Upon the liquidation, dissolution or winding up of Motient, the
holders of Series A Preferred are entitled to receive, prior and in
preference to any distributions to holders shares of Motient common
stock, an amount equal to $1,000 per share plus all accrued and unpaid
dividends on such shares. In addition if the liquidation, dissolution
or winding up takes place prior to April 15, 2007 (or if any amounts
remain in the escrow account on such date), the holder of each share
of Series A Preferred will be entitled the Escrow Portion remaining as
to such share.
Purchase Of Shares Of Common Stock Of TerreStar Networks, Inc. (Unaudited)
On May 11, 2005, Motient Ventures Holding Inc. ("MVH"), a wholly owned
subsidiary of Motient Corporation ("Motient"), purchased 8,190,008 shares of
newly issued common stock of TerreStar Networks Inc. ("TerreStar") from
TerreStar for $200 million pursuant to a Purchase Agreement by and between MVH
and TerreStar. As a result of this purchase and as of May 11, 2005, Motient owns
approximately 61% of the issued and outstanding common stock of TerreStar. The
funds used to purchase the shares of TerreStar common stock represent a portion
of the proceeds Motient raised from the private placement ofits Series A
Cumulative Convertible Preferred Stock on April 15, 2005.
TerreStar was a subsidiary of MSV established to, among other things, develop
business opportunities in the 2 GHz band. On May 11, 2005, TerreStar was
spun-off by MSV to its limited partners and, in connection with that spin-off,
Motient acquired ownership of approximately 49% of the issued and outstanding
shares of capital stock of TerreStar and the subsequent stock purchase increased
Motient's ownership to its current 61% level.
In connection with the purchase of shares of common stock of TerreStar, Motient
and/or MVH also entered into the following agreements, both dated May 11, 2005:
o A Conditional Waiver and Consent Agreement pursuant to which, subject
to the satisfaction of certain conditions, Motient has consented in
advance to the acquisition of all the MSV interests held by some or
all of the other limited partners of MSV, such that the ownership of
interests of MSV not held by Motient could be consolidated into a
single entity. The terms of such acquisition have yet to be negotiated
and may never occur. As the limited partners of MSV other than Motient
collectively own 51% of MSV, this transaction could result in a single
limited partner, other than Motient, controlling 51% of MSV, giving
such limited partner effective control of MSV. In such event, Motient
would be entitled to the benefit of a number of minority protection
provisions with respect to MSV.
o A Stockholders' Agreement by and among the stockholders of TerreStar,
pursuant to which MVH has the right to designate four of the seven
members of the Board of Directors of TerreStar (one of whom must be
independent of TerreStar) and contains certain minority protection
provisions for the other TerreStar stockholders, including tag-along
and preemptive rights, as well as a drag-along provision.
F-36
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
o An Intellectual Property License Agreement giving TerreStar a
perpetual, royalty-free license to the patent portfolio of MSV.
Share Repurchases (Unaudited)
On May 13, 2005, Motient, entered into an agreement to repurchase 500,000 shares
of Motient Corporation common stock, from George Haywood, at a price of $19.90
per share. The repurchase was completed on May 18, 2005. Mr. Haywood owned
approximately 9% of Motient's outstanding common stock prior to the repurchase.
On May 17, 2005, Motient, repurchased an aggregate of 2.4 million shares of
Common Stock from several different entities (the "Sellers"), at a price of
$19.50 per share. The Sellers (Columbia Capital Equity Partners III (QP), L.P.,
Columbia Capital Equity Partners III (Cayman), L.P., Columbia Capital Equity
Partners III (AI), L.P., Columbia Capital Investors III, LLC, Columbia Capital
Employee Investors III, LLC, Spectrum Equity Investors Parallel IV, L.P.,
Spectrum IV Investment Managers' Fund, L.P. and Spectrum Equity Investors IV,
L.P.), had previously purchased the common stock in connection with Motient's
February 9, 2005, acquisition of the Seller's indirect interests in Mobile
Satellite Ventures, LP. A covenant in the repurchase agreement prohibits the
Sellers from selling all but 200,000 of their remaining shares of common stock
purchased in the February 9, 2005 transaction until July 7, 2005, at which time
they may sell an additional approximately 575,000 shares of common stock. The
remainder of the common stock purchased in the February 9, 2005 transaction
(approximately 1.35 million shares) may not be sold until after November 15,
2005.
UPS Prepayment Agreement (Unaudited)
In December 2002, Motient entered into an agreement with UPS pursuant to which
UPS prepaid an aggregate of $5 million in respect of network airtime service to
be provided beginning January 1, 2004. In April 2005, this agreement was
amended, and then in September 2005, the agreement was amended again. Motient
made a payment of $2.0 to UPS, and in exchange, all but $0.6 million of the
outstanding prepayment of $3.7 million was terminated. The remaining $0.6
million prepayment must be used by UPS prior to March 31, 2006. If not used, UPS
will forfeit this prepayment, and it will not be repaid.
Related Party Payments (Unaudited)
The Company made cash payments of $1.5 million to related parties for
service-related obligations for the six-months ended June 30, 2005, as compared
to $0.8 million for the six-month period ended June 30, 2004. These payments
were primarily made to CTA, a consulting and private advisory firm specializing
in the technology and telecommunications sectors. CTA has been engaged to act as
chief restructuring entity of Motient. As consideration for this work, Motient
has agreed to pay to CTA a monthly fee of $60,000.
2002 Stock Option Plan (Unaudited)
On June 23, 2005, pursuant to stockholder approval given at Motient's June 15,
2005 annual meeting, Motient amended its 2002 Stock Option Plan to increase the
number of shares authorized for issuance thereunder by 2.5 million.
Acquisition of MSV and TerreStar (Unaudited)
On September 22, 2005, Motient announced that it had entered into a non-binding
letter of intent with SkyTerra Communications, Inc. and TMI Communications &
Company, among others, relating to a transaction to consolidate the ownership of
MSV and TerreStar within Motient. The parties anticipate that these
transactions, if consummated, will simplify the ownership and governance of both
MSV and TerreStar, better enabling both of them to pursue more effectively
deployment of their separate hybrid satellite and terrestrial based
communications networks. The networks will allow each of them to provide
ubiquitous wireless coverage in North America in the L-band and S-band,
respectively.
The letter of intent sets forth the basic terms of the proposed transaction,
which include, among other things, the following:
o In connection with all the transactions contemplated by the letter of
intent, Motient would issue or commit to issue approximately 77
million shares of common stock in exchange for the outstanding MSV
interests not already owned by Motient, and approximately 16 million
shares for the outstanding TerreStar shares not already owned by
Motient.
F-37
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
o All of the outstanding MSV and TerreStar interests not already owned
by Motient, other than those held by TMI, would be transferred to
Motient at closing.
o TMI would receive the right to exchange its interests in MSV and
TerreStar at any time at the same exchange ratios that are being
offered to the other shareholders and would subscribe for shares of a
new class of Motient preferred stock with nominal economic value but
having voting rights in Motient equivalent to those TMI would receive
upon exchange of its MSV and TerreStar interests for Motient common
stock.
o SkyTerra would dividend to its securityholders shares of a newly
formed company that would hold all of its assets other than its
interests in MSV and TerreStar, and then SkyTerra, which would then
consist only of its stakes in MSV and TerreStar, would merge in a
tax-free transaction with and into a subsidiary of Motient. As a
result, in addition to the dividend, SkyTerra's stockholders would
receive Motient common stock at an exchange ratio reflecting
equivalent economic value for MSV/TerreStar as received by the other
MSV/TerreStar stockholders. In total, SkyTerra common and preferred
stockholders would receive approximately 26 million shares of Motient
common stock. SkyTerra's preferred stock would be retired in exchange
for Motient common stock with a value equal to its liquidation
preference and SkyTerra's common stockholders would receive the
balance of the Motient shares.
o The parties anticipate that, after the closing of the transaction,
TerreStar would likely be spun-off to the stockholders of Motient
(including those receiving shares in connection with these
transactions). However, this spin-off would be evaluated following the
closing of the other transactions, and would only be executed if it is
judged by Motient's Board of Directors to be in the best interests of
its stockholders at that time. In the event of a spin off of
TerreStar, the exchange ratios applicable to TMI's exchange right
would be modified accordingly.
o The boards of Motient, MSV and TerreStar would be reconstituted with
nine members mutually acceptable to the parties and in compliance with
the independence rules and regulations of NASDAQ. TerraStar would have
a similarly structured board after the completion of the transaction,
separate of Motient and MSV.
o The parties anticipate that Alex Good, CEO of MSV, would become
Motient's new CEO after the transaction. The parties also anticipate
that Robert Brumley, CEO of TerreStar, would continue in that role
after the transaction with TerraStar maintaining its own management
team.
The consummation of the transactions will require successful completion of due
diligence, negotiation and execution of definitive documentation, Motient and
SkyTerra board and stockholder approval, and various regulatory approvals.
Because the letter of intent is non-binding, the parties have no obligation to
negotiate such documentation or otherwise consummate the transactions.
Therefore, the parties can provide no assurances that the transactions will be
consummated on the currently proposed terms or will ever be consummated, or that
the required corporate or regulatory approvals will be obtained.
TerreStar Regulatory Proceedings (Unaudited)
Currently, spectrum in the 2 GHz MSS band is assigned pro rata among the
existing licensees. TMI's current spectrum assignments from the FCC reflect the
cancellation of licenses of three of the eight entities that were authorized to
provide 2 GHz MSS in 2001: Mobile Communications Holding Inc. (MCHI),
Constellation Communications Holdings, Inc. (Constellation), and Globalstar LP.
Globalstar LLC, the successor-in-interest to Globalstar LP, along with another
interested entity, Globalstar Satellite LP, has collectively challenged
cancellation of its license on reconsideration to the FCC. MCHI and
Constellation have jointly challenged cancellation of their licenses on appeal
to the U.S. Court of Appeals for the D.C. Circuit. If any or all of those
licenses were reinstated, TMI would likely have access to less spectrum than it
would otherwise. The FCC has not yet redistributed spectrum surrendered in March
2005 by three of the then remaining five 2 GHz MSS licensees to the current
remaining two 2 GHz MSS licensees. Although the FCC has announced its intent to
redistribute the spectrum from the fourth and fifth license surrenders, there is
no guarantee that the FCC will do so. Also, the FCC recently issued a public
notice regarding the redistribution of spectrum surrendered by Celsat, the third
surrendering licensee, soliciting input as to whether such spectrum should be
redistributed to the remaining S-band licensees, given to a new, third, entrant,
or allocated to terrestrial wireless carriers. TMI has argued that such spectrum
should be distributed to the remaining S-band licensees, and many other parties,
have submitted arguments to the FCC supporting or opposing the various
alternatives.
F-38
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Legal Proceedings (Unaudited)
On August 16, 2005, Highland Legacy Limited, a stockholder of Motient, filed
suit in the Court of Chancery of the State of Delaware in and for New Castle
County against: Motient; Steven Singer, Gerald Kittner, Barry Williamson,
Raymond Steele and Gerald Goldsmith, directors of Motient; Peter D. Aquino, a
former director of Motient; Christopher Downie, Chief Operating Officer of
Motient; Gary Singer; Tejas Inc.; Tejas Securities, Inc.; Communications
Technology Advisors LLC; Capital & Technology Advisors, Inc.; and Jared
Abbruzzese. Highland Legacy Limited is an affiliate of James Dondero, a director
of Motient. The lawsuit alleges breaches of duties allegedly owed to Motient by
the defendants and seeks the recovery of fees from certain of these parties
relating to prior transactions with Motient. Most of these fees were approved by
Mr. Dondero in his capacity as a director of Motient. The defendants in this
lawsuit filed a motion to dismiss these claims on October 14, 2005. Motient's
independent audit committee, along with independent special counsel, has
conducted an investigation of Mr. Dondero's allegations and has found no basis
to his allegations.
On August 16, 2005, Highland Equity Focus Fund, L.P., Highland Crusader Offshore
Partners, L.P., Highland Capital Management Services, Inc., and Highland Capital
Management, L.P. filed a lawsuit in Dallas County, Texas against Motient
challenging the validity of the Series A Preferred on the basis of the confusion
regarding the voting rights of the Series A Preferred and seeking rescission of
their purchase of the shares of Series A Preferred that they purchased from
Motient in the private placement in April 2005. These entities acquired 90,000
shares of Series A Preferred for a purchase price of $90 million in that private
placement. Although Motient currently has sufficient cash to refund this
purchase price and rescind the purchase of Series A Preferred by these
investors, Motient believes that this claim is without merit and intends to
vigorously defend this lawsuit.
On October 7, 2005, Highland Equity Focus Fund, L.P., Highland Crusader Offshore
Partners, L.P., Highland Capital Management Services, Inc., Highland Capital
Management, L.P on behalf of themselves and all those similarly situated, filed
a class action lawsuit in the Court of Chancery of the State of Delaware against
Motient and each of its directors, other than Mr. Dondero, alleging that Motient
has provided inadequate information to the holders of Series A Preferred
relating to the Exchange Offer for the Series A Preferred, and that the Exchange
Offer is coercive. These parties have also requested that the court enjoin the
Exchange Offer. The Exchange Offer closed on October 26, 2005, and accordingly,
Motient has requested that this suit be dismissed as moot.
On October 19, 2005, Motient Corporation filed two lawsuits against James D.
Dondero, one in the United States District Court for the Northern Division of
Texas, and one in the District Court of Dallas County, Texas. The complaint
filed in state court alleges that Mr. Dondero has seriously and repeatedly
breached his fiduciary duties as a director of Motient in order to advance his
own personal interests. The complaint filed in Federal court alleges selective
disclosure of material inside information and other improper actions undertaken
by Mr. Dondero, the net result of which have been to drive down the price of
Motient's stock. It also alleges that Mr. Dondero has solicited, and is still
soliciting, the replacement of Motient's current board and management in
violation of federal law.
Issuance of Series A Preferred (Unaudited)
Motient issued the Series A Preferred in a private placement on April 15, 2005.
As originally proposed, the Series A Preferred would have voted along with
Motient's common stock on all matters on an as-converted basis. During
negotiations with respect to the Series A Preferred, investors affiliated with
Jim Dondero, a director of Motient, requested that the voting rights of the
Series A Preferred be limited so that these investors would not be required to
file applications under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended ("HSR"). Motient agreed to limit the voting rights of the
Series A Preferred to the extent appropriate so that these investors would not
be required to file HSR applications. However, due to a mistake, the voting
rights were incorrectly stated in the Certificate of Designations for the Series
A Preferred as originally filed with the Secretary of State of Delaware. Upon
discovering this mistake, Motient promptly filed a Certificate of Corrections
with the Secretary of State of Delaware to correctly state the voting rights of
the Series A Preferred. Motient's Certificate of Incorporation contains a
provision that prohibits the issuance by Motient of "non-voting stock." As
described below, the investors affiliated with Jim Dondero who requested that
the voting rights of the Series A Preferred be limited have now filed lawsuits
against Motient claiming, among other things, that the Series A Preferred is
void because the limited voting rights set forth in the Certificate of
Incorporation make the Series A Preferred "non-voting stock" and that the
Certificate of Corrections is not effective to remedy this. Motient believes
that the Certificate of Corrections was effective to remedy any problems caused
by the mistake, and that the limited voting rights granted in the Certificate of
Designations were sufficient to make the Series A Preferred not be "non-voting
stock." Subsequent to our sale of Series A Preferred, entities affiliated with
Mr. Dondero filed an HSR application based on their purchases of Motient's
securities in February 2005, two months prior to our issuance of the Series A
Preferred.
F-39
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Exchange Offer (Unaudited)
On October 26, 2005, Motient completed an exchange offer in which it allowed
each Holder of Series A Preferred the opportunity to exchange their shares of
Series A Preferred and a release of any claims relating to the issuance of the
Series A Preferred for shares of Series B Preferred, which will have rights,
preferences and privileges substantially identical to the Series A Preferred,
except that upon (a) the accumulation of accrued and unpaid dividends on the
outstanding shares of Series B Preferred for two or more six month periods,
whether or not consecutive; (b) the failure of Motient to properly redeem the
Series B Preferred Stock, or (c) the failure of Motient to comply with any of
the other covenants or agreements set forth in the Certificate of Designations
for the Series B Preferred Stock, and the continuance of such failure for 30
consecutive days or more after receipt of notice of such failure from the
holders of at least 25% of the Series B Preferred then outstanding, then the
holders of at least a majority of the then-outstanding shares of Series B
Preferred, with the holders of shares of any parity securities upon which like
voting rights have been conferred and are exercisable, voting as a single class,
will be entitled to elect a majority of the members of Motient's Board of
Directors for successive one-year terms until such defect listed above has been
cured. All of the holders of the Series A Preferred except for those affiliated
with Highland Capital Management exchange their shares in this offer.
Accordingly, approximately $318.5 million in face amount of Series A Preferred
shares were exchanged for Series B Preferred shares of the same face amount, and
only $90 million in face amount of Series A Preferred shares remain outstanding.
F-40
MOTIENT CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
QUARTERLY FINANCIAL DATA
(dollars in thousands, except for per share data)
(unaudited)
<TABLE>
<CAPTION>
Successor Company
-----------------
2004-2005 Quarters
------------------
3/31/04 6/30/04 9/30/04 12/31/04 3/31/05 6/30/05
------- ------- ------- -------- ------- -------
(Unaudited) (Unaudited)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 11,500 $ 11,439 $ 8,353 $ 5,588 $ 5,013 $ 3,545
Operating expenses (1) 21,674 23,471 14,583 23,739 26,465 21,399
----------------------------------------------------------------------------
Loss from operations (10,174) (12,032) (6,230) (18,151) (21,452) (17,854)
Net Income (loss) $(13,517) $(23,112) $ (9,849) $(25,851) $(28,540) $(22,868)
Basic and Diluted Loss Per
Share of common stock (2) $ (0.54) $ (0.79) $ (0.29) $ (0.62) $ (0.48) $ (0.36)
Weighted-average common shares
outstanding during the
period 25,232 29,338 33,418 41,944 59,580 63,762
Market price per share
High $ 7.45 $ 14.01 $ 13.75 $ 23.95 $ 31.45 $ 29.00
Low $ 4.05 $ 6.15 $ 8.40 $ 8.95 $ 21.25 $ 17.75
</TABLE>
<TABLE>
<CAPTION>
Successor Company
-----------------
2003-Quarters
-------------
3/31/03 6/30/03 9/30/03 12/31/03
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues $ 14,370 $ 14,992 $ 12,051 $ 13,072
Operating expenses (1) 24,424 25,358 29,795 23,647
-------- -------- -------- --------
Loss from operations (2) (10,054) (10,366) (17,744) (10,575)
Net Income (loss) $(12,394) $(13,010) $(22,345) $(14,373)
Basic and Diluted Loss Per Share of common stock $ (0.49) $ (0.52) $ (0.89) $ (0.57)
Weighted-average common shares outstanding during the period 25,097 25,137 25,170 25,145
Market price per share (3)
High $ 4.00 $ 2.00 $ 5.00 $ 5.45
Low $ 2.75 $ 5.75 $ 6.35 $ 3.95
</TABLE>
(1) In 2003, operating expenses include restructuring charges of
approximately $0.2 million in the second quarter. All $0.2 million was
paid in 2003. In 2004, $1.1 and $5.2 million in restructuring expenses
were charged to costs and expenses in the first and second quarters,
respectively. Of the $6.3 million restructuring expense in 2004, $5.0
million was paid in 2004.
(2) Loss per share calculations for each of the quarters are based on the
weighted average number of shares outstanding for each of the periods,
and the sum of the quarters is not equal to the full year loss per share
amount due to rounding.
(3) Until January 14, 2002, the Company's common stock was listed under the
symbol MTNT on the Nasdaq Stock Market. The Company voluntarily delisted
from the Nasdaq Stock Market on January 14, 2002 as a result of its
Chapter 11 bankruptcy filing. The Company's common stock is currently
traded under the symbol MNCP on the Pink Sheets. The quarterly high and
low sales price represents the intra-day prices in the Nasdaq Stock
Market for the Company's pre-reorganization common stock for the periods
indicated for 2002 and the high and low bid prices for Motient pre- and
post-reorganization common stock for the periods indicated. The
quotations represent inter-dealer quotations, without retail markups,
markdowns or commissions, and may not necessarily represent actual
transactions. As of December 31, 2004, there were 97 stockholders of
record of the Company's common stock.
F-41
SCHEDULE II
Valuation And Qualifying Accounts
Four Months Ended April 30, 2002,
Eight Months Ended December 31, 2002, And
Years Ended December 31, 2003 And 2004
<TABLE>
<CAPTION>
Charged
Balance at to Costs
Beginning and Balance at End of
Description of Period Expenses Deductions Period
----------- --------- -------- ---------- ------
<S> <C> <C> <C> <C>
Predecessor Company
-------------------
Four Months Ended April 30, 2002
Allowance for doubtful accounts $ 964 $ (52) $ (139) $ 773
==========================================================================================================
Successor Company
-----------------
Eight Months Ended December 31, 2002
Allowance for doubtful accounts $ 773 $ 994 $ (764) $1,003
Year Ended December 31, 2003
Allowance for doubtful accounts $1,003 $ 194 $ (438) $ 759
Year Ended December 31, 2004
Allowance for doubtful accounts $ 759 $ (269) $ (234) $ 256
<CAPTION>
Charged
Balance at to Costs
Beginning and Balance at End of
Description of Period Expenses Deductions Period
----------- --------- -------- ---------- ------
<S> <C> <C> <C> <C>
Predecessor Company
-------------------
Four Months Ended April 30, 2002
Allowance for Obsolescence $ 7,073 $ 4,687 $ (797) $10,963
=========================================================================================================
Successor Company
Eight Months Ended December 31, 2002
Allowance for Obsolescence $10,963 $ 287 $(1,699) $ 9,551
Year Ended December 31, 2003
Allowance for Obsolescence $ 9,551 $ 199 $(2,000) $ 7,750
Year Ended December 31, 2004
Allowance for Obsolescence $ 7,750 $ (132) $(7,618) $ --
</TABLE>
F-42
INDEX TO FINANCIAL STATEMENTS
TerreStar Networks Inc.
(A Development Stage Company)
<TABLE>
<S> <C>
Report of Independent Registered Public Accounting Firm........................................................ T-1
Statements of Operations for the years ended December 31, 2004 and 2003, for the
period February 20, 2002 (inception) through December 31, 2002, from February
20, 2002 (inception) through December 31, 2004, for the three months ended March
31, 2003 (unaudited) and 2004 (unaudited) and from February 20, 2002 (inception)
through March 31, 2005 (unaudited)............................................................................. T-2
Balance Sheets as of December 31, 2004, 2003 and March 31, 2005 (unaudited).................................... T-3
Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2004
and 2003, for the period February 20, 2002 (inception) through December 31, 2002 and from
February 20, 2002 (inception) through December 31, 2004, for the three months ended
March 31, 2005 (unaudited) and from February 20, 2002 (inception) through March 31, 2005 (unaudited).......... T-4
Statements of Cash Flows for the years ended December 31, 2004 and 2003, for the
period February 20, 2002 (inception) through December 31, 2002 and from February
20, 2002 (inception) through December 31, 2004, for the three months ended March
31, 2003 (unaudited) and 2004 (unaudited) and from February 20, 2002 (inception) through
March 31, 2005 (unaudited)..................................................................................... T-5
Notes to Financial Statements.................................................................................. T-6
</TABLE>
T-0
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
TerreStar Networks Inc.
We have audited the accompanying balance sheets of TerreStar Networks Inc. (a
development stage company) as of December 31, 2004 and 2003 and the related
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the years ended December 31, 2004 and 2003, for the period February
20, 2002 (inception) through December 31, 2002, and from February 20, 2002
(inception) through December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TerreStar Networks Inc. as of
December 31, 2004 and 2003 and the results of their operations and their cash
flows for the years ended December 31, 2004 and 2003, for the period February
20, 2002 (inception) through December 31, 2002 and from February 20, 2002
(inception) through December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
/s/ Friedman LLP
East Hanover, New Jersey
June 2, 2005
T-1
TerreStar Networks Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
For the Cumulative
Period Cumulative Since
February 20, Since For the For the Three February 20
2002 February 20, Months Ended 2002
For the Years Ended (Inception) 2002 of ------------------------ Inception of
------------------------- through Inception of March 31, March 31, Development
December 31, December 31, December 31, Development 2005 2004 Stage
2004 2003 2002 Stage (Unaudited) (Unaudited) (Unaudited)
----------- ------------ ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ -- $ -- $ -- $ --
----------- ------------ ----------- ----------- ----------- ------------ ------------
Costs And Expenses
General and administrative 6,305 6,305 1,619 14,229 1,575 1,575 15,804
Operations 1,914,317 2,306,954 1,658,306 5,879,577 1,015,576 428,301 6,895,153
Amortization 15,958 14,724 7,661 38,343 3,990 3,990 42,333
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total Costs and Expenses 1,936,580 2,327,983 1,667,586 5,932,149 1,021,141 433,866 6,953,290
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net Operating loss (1,936,580) (2,327,983) (1,667,586) (5,932,149) (1,021,141) (433,866) (6,953,290)
Interest income (expense) (3,016) -- -- (3,016) (128,684) -- (131,700)
Write-off of investment in
joint venture -- (2,000,000) -- (2,000,000) -- -- (2,000,000)
Other 280 -- -- 280 -- 280 280
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net loss $(1,939,316) $(4,327,983) $(1,667,586) $(7,934,885) $(1,149,825) $ (433,586) $(9,084,710)
=========== =========== =========== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
T-2
TerreStar Networks Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
March 31,
December 31, December 31, 2005
2004 2003 (Unaudited)
------------- ------------- ---------------
ASSETS
Current Assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 953,218 $ 216,320 $ 381,493
Restricted cash 5,001,151 -- 4,534,931
Other current assets 525 3,807 525
------------- ------------ -------------
Total current assets 5,954,894 220,127 4,916,949
Long-Term Assets
Intangible assets, net of amortization of 39,252, $23,294
and 42,333 (unaudited), respectively 200,122 216,080 196,132
Satellite under construction 1,337,932 850,000 1,837,932
------------- ------------ -------------
Total assets $ 7,492,948 $ 1,286,207 $ 6,951,013
============= ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 109,413 $ 78,668 $ 407,963
Accrued expenses 338,431 783,820 292,486
Due to Mobile Satellite Ventures LP, net -- 3,179,913 --
------------- ------------ -------------
Total current liabilities 447,844 4,042,401 700,449
------------- ------------ -------------
Long-Term Liabilities:
Notes Payable, including accrued interest thereon 5,004,167 -- 5,166,631
------------- ------------ -------------
Total long-term liabilities 5,004,167 -- 5,166,631
------------- ------------ -------------
Total liabilities 5,452,011 4,042,401 5,867,080
------------- ------------ -------------
Commitments And Contingencies -- -- --
Stockholders' Equity (Deficit):
Common Stock; voting, par value $0.001; authorized 50 million shares;
23,271,515, 23,265,428 and 23,938,487 shares issued and outstanding
at December 31, 2004 and 2003 and March 31,
2005 (unaudited), respectively 23,271 23,265 23,938
Additional paid-in capital 9,952,551 3,216,110 10,144,705
Deficit accumulated during the development stage (7,934,885) (5,995,569) (9,084,710)
------------- ------------- -------------
Stockholders' Equity (Deficit) 2,040,937 (2,756,194) 1,083,933
------------- ------------- -------------
Total liabilities and stockholders' equity $ 7,492,948 $ 1,286,207 $ 6,951,013
============= ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
T-3
TerreStar Networks Inc.
(A Development Stage Company)
Statements of Changes In Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional Through
-------------------------------- Paid-In Develpment
Shares Par Value Capital Stage Total
-------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Investment By MSV LP 1,000 $ 1 $ 2,999,999 $ -- $ 3,000,000
Contribution of 2GHz license
right by MSV LP 23,264,428 23,264 216,111 -- 239,375
Net loss -- -- -- (1,667,586) (1,667,586)
-------------- -------------- ------------- ------------- -------------
Balance, December 31, 2002 23,265,428 23,265 3,216,110 (1,667,586) 1,571,789
Net loss -- -- -- (4,327,983) (4,327,983)
-------------- -------------- ------------- ------------- -------------
Balance, December 31, 2003 23,265,428 23,265 3,216,110 (5,995,569) (2,756,194)
Conversion of amounts due
to MSV LP -- -- 6,732,186 -- 6,732,186
Exercise of stock options 6,087 6 4,255 -- 4,261
Net loss -- -- -- (1,939,316) (1,939,316)
-------------- -------------- ------------- ------------- -------------
Balance, December 31, 2004 23,271,515 23,271 9,952,551 (7,934,885) 2,040,937
Exercise of warrants issued
to Telecom Venture 666,972 667 142,672 -- 143,339
Stock compensation -- -- 49,482 -- 49,482
Net loss -- -- -- (1,149,825) (1,149,825)
-------------- -------------- ------------- ------------- -------------
Balance, March 31, 2005 (Unaudited) 23,938,487 $ 23,938 $ 10,144,705 $ (9,084,710) $ 1,083,933
============== ============== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
T-4
TerreStar Networks Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Cumulative
Period Cumulative Since
February 20, Since For the three February 20,
2002 February 20, Months Ended 2002
For the Years Ended (Inception) 2002 ------------------------ Inception of
------------------------- through Inception of March 31, March 31, Development
December 31, December 31, December 31, Development 2005 2004 Stage
2004 2003 2002 Stage (Unaudited) (Unaudited) (Unaudited)
----------- ------------ ----------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities:
Net (loss) $(1,939,316) $(4,327,983) $(1,667,586) $(7,934,885)$(1,149,825) $ (433,586) $(9,084,710)
Adjustments to reconcile net
(loss) to net cash (used in)
operating activities:
Depreciation and amortization 15,958 14,724 7,661 38,343 3,990 3,990 42,333
Write-off of investment
in joint venture -- 2,000,000 -- 2,000,000 -- -- 2,000,000
Stock based compensation expense -- -- -- -- 49,482 -- 49,482
Changes in assets and liabilities,
net of acquisitions and
dispositions
Accounts receivable-trade -- 1 (1) -- -- (1) --
Other current assets 3,282 (3,282) (525) (525) -- 3,282 (525)
Accounts payable and accrued
expenses (414,644) 16,650 845,838 447,844 252,605 (83,998) 700,449
Note payable accrued interest 4,167 -- -- 4,167 162,464 -- 166,631
Other -- 217 693 910 -- -- 910
----------- ------------ ----------- ----------- ----------- ----------- ------------
Net cash (used in) operating
activities (2,330,553) (2,299,673) (813,920) (5,444,146) (681,284) (510,313) (6,125,430)
------------ ------------ ----------- ----------- ----------- ------------ ------------
Cash Flows From Investing Activities:
Restricted cash (5,001,151) -- -- (5,001,151) 466,220 -- (4,534,931)
Payments made in exercise of
joint venture option -- (500,000) (1,500,000) (2,000,000) -- -- (2,000,000)
Additions to satellite under
construction (400,000) (350,000) (500,000) (1,250,000) (500,000) -- (1,750,000)
------------ ------------ ----------- ----------- ----------- ----------- ------------
Net cash (used in) investing
activities (5,401,151) (850,000) (2,000,000) (8,251,151) (33,780) -- (8,284,931)
------------ ------------ ----------- ----------- ----------- ----------- ------------
Cash Flows From Financing Activities:
Proceeds from loan and security
agreement 5,000,000 -- -- 5,000,000 -- -- 5,000,000
Proceeds from due to MSV, LP 3,464,341 -- 3,000,000 6,464,341 -- 293,993 6,464,341
Proceeds from exercise of
stock option 4,261 -- -- 4,261 -- -- 4,261
Proceeds from exercise of warrants -- -- -- -- 143,339 -- 143,339
Due to Mobile Satellite
Ventures LP, net -- 3,165,872 14,041 3,179,913 -- -- 3,179,913
----------- ------------ ----------- ----------- ----------- ----------- ------------
Net cash provided by financing
activities 8,468,602 3,165,872 3,014,041 14,648,515 143,339 293,993 14,791,854
----------- ------------ ----------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash
and cash equivalents 736,898 16,199 200,121 953,218 (571,725) (216,320) 381,493
Cash and cash equivalents, beginning
of the period 216,320 200,121 -- -- 953,218 216,320 --
----------- ------------ ----------- ----------- ----------- ----------- ------------
Cash and cash equivalents,
end of period $ 953,218 $ 216,320 $ 200,121 $ 953,218 $ 381,493 $ -- $ 381,493
=========== ============ =========== =========== =========== =========== ============
Supplemental Information
Cash paid for interest $ -- $ -- $ -- $ -- $ -- $ -- $ --
=========== ============ =========== =========== =========== =========== ============
Non-Cash Investing and Financing Activities
During 2004 the Company:
Converted $6,732,186 of amounts due to MSV, LP to equity, which
included capitalized interest of $87,932 on amounts advanced by MSV,
LP to fund the satellite under construction project.
During 2002 the Company:
Issued 23,264,428 shares of common stock to MSV, LP in exchange for
contribution of the 2GHz license right valued at $239,374 recorded as
an intangible asset.
</TABLE>
The accompanying notes are an integral part of these financial statements.
T-5
Notes to Financial Statements
TerreStar Networks Inc.
(A Development Stage Company)
Notes To Financial Statements
Note 1: Development Stage And Business
On February 20, 2002, Mobile Satellite Venture LP ("MSV") established
TerreStar Networks Inc. ("the Company", "TerreStar", "we" or "our") as a
wholly owned subsidiary. The Company is in the development stage and is in
the early stages of building the necessary communication infrastructure,
including its own satellite, necessary to offer communications services to
individual and corporate customers in the United States and Canada. Our
ability to realize the carrying value of our assets is dependent on being
able to successfully develop business opportunities related to our right
to receive (subject to the satisfaction of certain regulatory conditions)
certain licenses in the 2 GHz band. The Company's operations are subject
to significant risks and uncertainties including technological,
competitive, financial, operational, and regulatory risks associated with
the mobile satellite system and associated terrestrial segment.
On May 11, 2005, Motient Ventures Holding Inc. ("MVH"), a wholly owned
subsidiary of Motient Corporation ("Motient"), purchased 8,190,008 shares
of the Company's common stock from the Company for $200 million pursuant
to a Purchase Agreement by and between MVH and the Company. As a result of
this purchase and as of May 11, 2005, Motient owns approximately 61% of
the Company's issued and outstanding common stock. See Note 10,
"Subsequent Events" in the Notes to Financial Statements for further
discussion.
The Company's future capital requirements will depend on, but not be
limited to, the successful and timely completion of its satellite system
construction contract, and the development of certain ground
infrastructure, for use in the 2 GHz band.
Note 2: Significant Accounting Policies
Basis Of Presentation
The Company was incorporated under the laws of the State of Delaware on
February 20, 2002 to serve as a vehicle to develop business opportunities
related to the proposed receipt of certain licenses in the 2 GHz band.
Since February 20, 2002, the Company has been in the development stage,
and has not commenced planned principal operations. The financial
statements include the accounts of the Company and are prepared in
accordance with accounting principles generally accepted in the United
States.
Use Of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Cash And Cash Equivalents
Cash and cash equivalents include investments such as money market
accounts with an original maturity of three months or less.
Restricted Cash
In September 2004, the Company entered into an escrow agreement to provide
for payments under its satellite construction contract (see Note 9). As of
December 31, 2004, the amount in escrow was $5.0 million. If TerreStar
terminates the satellite construction contract, the escrow funds may be
returned to TerreStar, subject to the termination liability under the
contract. The cash in escrow as of December 31, 2004 is reflected as
restricted cash on the accompanying balance sheet.
T-6
Notes to Financial Statements
Satellite Under Construction
Satellites are stated at cost. These costs consist primarily of the cost
of satellite construction and launch, including premiums for launch
insurance and insurance during the period of in-orbit testing, the net
present value of performance incentives expected to be payable to the
satellite manufacturers, costs directly associated with the monitoring and
support of satellite construction and interest costs incurred during the
period of satellite construction. Satellite construction and launch
services are generally procured under long-term contracts that provide for
payments by us over the contract periods. Satellite construction and
launch services costs are capitalized to reflect progress toward
completion, which typically coincides with contract milestone payment
schedules. Insurance premiums related to satellite launches and subsequent
in-orbit testing are capitalized and amortized over the lives of the
related satellites. Insurance premiums associated with in-orbit operations
are expensed as incurred. Performance incentives payable in future periods
are dependent on the continued satisfactory performance of the satellites
in service. Satellites are depreciated and amortized on a straight-line
basis over their estimated useful lives. The depreciable lives of similar
type satellites range from 11 years to 15 years. We will make estimates of
the useful lives of our satellites for depreciation and amortization
purposes based upon an analysis of each satellite's performance, including
its orbital design life and its estimated orbital maneuver life. The
orbital design life of a satellite is the length of time that the
manufacturer has contractually committed that the satellite's hardware
will remain operational under normal operating conditions. In contrast, a
satellite's orbital maneuver life is the length of time the satellite is
expected to remain operational as determined by remaining fuel levels and
consumption rates. An in-orbit satellite generally has an orbital design
life ranging from 10 years to 13 years and orbital maneuver life as high
as 20 years. The useful lives of satellites generally exceed the orbital
design life and less than the orbital maneuver life. Although the orbital
maneuver life of a satellite has historically extended beyond their
depreciable lives, this trend may not continue. We will periodically
review the remaining estimated useful lives of our satellites to determine
if any revisions to our estimates are necessary based on the health of the
individual satellites. Changes in our estimate of the useful lives of our
satellites could have a material effect on our financial position or
results of operations.
In the event any satellite is lost as a result of a launch or in-orbit
failure upon the occurrence of the loss we would take a charge to
operations for the carrying value of the satellite. In the event of a
partial failure, we would record an impairment charge to operations upon
the occurrence of the loss if the undiscounted future cash flows were less
than the carrying value of the satellite. We would measure the impairment
charge as the excess of the carrying value of the satellite over its
estimated fair value as determined by the present value of estimated
expected future cash flows using a discount rate commensurate with the
risks involved. We would reduce the charge to operations resulting from
either a complete or a partial failure by the amount of any insurance
proceeds that were either due and payable to or received by us. We would
record any insurance proceeds received in excess of the carrying value of
the satellite as a gain and no impairment loss would be recognized. In the
event the insurance proceeds equal the carrying value of the satellite,
neither a gain nor an impairment loss would be recognized.
Impairment Of Long-Lived And Amortizable Intangible Assets
We review our long-lived and amortizable intangible assets to assess
whether an impairment has occurred using the guidance established under
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, whenever events or changes in circumstances indicate, in our
judgment, that the carrying amount of an asset may not be recoverable. The
recoverability of an asset to be held and used is measured by a comparison
of the carrying amount of the asset to the estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount
of the asset exceeds its estimated future cash flows, an impairment charge
is recognized in the amount by which the carrying amount of the asset
exceeds its fair value.
T-7
Notes to Financial Statements
As of December 31, 2004, there had been no events or changes in
circumstances leading us to believe that a possible impairment to any of
our long-lived and amortizable intangible assets existed as of that date.
In addition, no impairment charges were recorded in the year ended
December 31, 2003 or the period from February 20, 2002 (inception) through
December 31, 2002. The Company's estimates of anticipated cash flows and
the remaining estimated useful lives of long-lived assets could be reduced
significantly in the future. As a result, the carrying amount of
long-lived assets may be reduced in the future.
Deferred Satellite Orbital Performance Incentives
We are contractually obligated to make deferred satellite orbital
performance incentive payments over the life of the satellite, provided
the satellite continues to operate in accordance with contractual
specifications. Historically, the satellite manufacturers have earned
substantially all of these payments. Therefore, we will account for these
payments as deferred financing. Consequently, we will capitalize the
present value of these payments as part of the cost of the satellites and
record a corresponding liability to the satellite manufacturers. These
costs will be amortized over the useful lives of the satellites and the
liability is reduced as the payments are made.
Concentrations Of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents. The Company maintained cash balances at financial
institutions that exceeded federally insured limits as of December 31,
2004. The Company maintains its cash and cash equivalents at
high-credit-quality institutions, and as a result, management believes
that credit risk related to its cash is not significant.
Capitalized Interest
The Company's policy is to capitalize interest on expenditures for
satellite under construction projects while such activities are in
progress to bring the satellites to their intended use. Capitalized
interest included in Satellite Under Construction was $87,932 and $0 at
December 31, 2004 and 2003, respectively.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation plans using the fair value method. The Company has
chosen to account for employee stock-based compensation using the
intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations.
The following illustrates the effect on net loss if the Company had
applied the fair value method of SFAS No. 123:
T-8
Notes to Financial Statements
<TABLE>
<CAPTION>
For the Period
February 20,
2002 For the Three Months Ended
For the Year Ended (Inception) --------------------------------
December 31, through March 31, March 31,
---------------------- December 31, 2005 2004
2004 2003 2002 (unaudited) (unaudited)
-------------- -------------- ------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Net loss, as reported $ 1,939,316 $ 4,327,983 $ 1,667,586 $ 1,149,825 $ 433,586
Subtract stock-based employee
compensation included in
reported net loss -- -- -- (49,482) --
Additional stock-based employee
compensation expense determined
under fair value method 63,626 60,531 18,311 50,578 15,906
-------------- -------------- ------------- ------------ -------------
Pro forma net loss $ 2,002,942 $ 4,388,514 $ 1,685,897 $ 1,150,921 $ 449,492
============== ============== ============= ============ =============
</TABLE>
In accordance with SFAS No. 123, the fair value of the options granted was
estimated at the grant date using an option-pricing model with the
following weighted-average assumptions: risk-free interest rates ranging
from 2.7% to 4.6%, no dividends, expected life of the options of five
years, and no volatility.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities
are computed based on the difference between the financial statement and
income tax basis of assets and liabilities using the enacted tax rate.
SFAS No. 109 requires that the net deferred tax asset be reduced by a
valuation allowance if, based on the weight of available evidence, it is
more likely than not that some portion or all of the net deferred tax
asset will not be realized.
Revenue Recognition
We will recognize revenue primarily from satellite utilization charges
and, to a lesser extent, from providing managed services to our customers.
We will recognize revenue over the period during which services are
provided, as long as collection of the related receivable is reasonably
assured. We will make estimates regarding the likelihood of collection
based upon an evaluation of the customer's creditworthiness, the
customer's payment history and other conditions or circumstances that may
affect the likelihood of payment, such as political and economic
conditions in the country in which the customer is located. When we have
determined that the collection of payments for satellite utilization or
managed services is not reasonably assured at the time the service is
provided, we will defer recognition of the revenue until such time that
collection is believed to be reasonably assured or the payment is
received. We will also maintain an allowance for doubtful accounts for
customers' receivables where the collection of these receivables is
uncertain. If our estimate of the likelihood of collection is not
accurate, we may experience lower revenue or an increase in our bad debt
expense. Upon receipt of payments from customers in advance of our
providing services and amounts that might be received from customers
pursuant to satellite capacity prepayment options will be recorded in the
financial statements as deferred revenue. These deferred amounts will be
recognized as revenue on a straight-line basis over the agreement terms.
Our revenue recognition policy as described above complies with the
criteria set forth in Staff Accounting Bulletin No. 101, Revenue
Recognition, as amended by Staff Accounting Bulletin No. 104.
T-9
Notes to Financial Statements
Comprehensive Income (Loss)
The Company has no components of other comprehensive income. Accordingly,
net income equals comprehensive income for all periods.
Recent Pronouncements
In January 2003, the FASB issued Financial Interpretation No. 46 (FIN),
Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51, which requires the consolidation of
an entity in which an enterprise absorbs a majority of the entity's
expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership or contractual or other
financial interests in the entity. Generally, an entity is generally
consolidated by an enterprise when the enterprise has a controlling
financial interest in the entity through ownership of a majority voting
interest in the entity. The Company is currently evaluating the impact of
adoption of FIN 46. Adoption of this standard will be required for the
first annual period beginning after December 15, 2004.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,
which is a revision of SFAS No. 123, supersedes APB Opinion No. 25, and
amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in
SFAS No. 123(R) is similar to the approach described in SFAS No. 123.
However, SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. The new standard will be effective for the Company for the
year ending December 31, 2006. The impact of the adoption of SFAS No.
123(R) cannot be predicted at this time because it will depend on levels
of share-based payments granted in the future. However, had we adopted
SFAS No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of
pro forma net loss.
Note 3: Intangible Assets
The Company's identifiable intangible assets consist of the Company's
right to receive the 2GHz FCC and Industry Canada spectrum authorizations
of TMI Communications and Company, which is obligated to transfer these
authorizations to any entity that the Company may designate, subject to
the receipt of regulatory (FCC and Industry Canada) approvals, which may
never be obtained.
December 31,
2004 2003
------------- -------------
2 GHz License rights $ 239,374 $ 239,374
Accumulated amortization 39,252 23,294
------------- -------------
Intangible assets, net $ 200,122 $ 216,080
============= =============
Note 4: Long-Term Debt
On December 27, 2004 the Company and MSV consummated a Loan and Security
Agreement. Under the terms of the Loan Agreement, which matures on
December 27, 2008, the Company can borrow up to $15,000,000, and use the
proceeds of such loans to make milestone payments under the Company's
satellite construction contract and for certain other purposes, as defined
in the Loan Agreement. Each loan accrues and bears interest from the
closing date, as defined in the Loan Agreement, until paid in full at a
rate of 10% per annum. Commencing on December 27, 2008, the Company is to
pay the principal of, and all accrued interest on, each loan that is
outstanding in 36 monthly installments. As of December 31, 2004, the
Company had borrowed $5,000,000 and had $10,000,000 available to it under
the Loan Agreement. The Loan Agreement provides for, among other things,
the Company's requirement to meet certain affirmative and negative
T-10
Notes to Financial Statements
covenants. See Note 10 "Subsequent Events", in the Notes to Financial
Statements for information regarding cancellation of the Loan Agreement.
Note 5: Statement Of Operations Details
General and administrative expenses consisted of the following:
Rent expense of $6,305, $6,305, and $1,619 for the 2004, 2003, and 2002
operating years, respectively. TerreStar has incurred cumulative rent
expense of $14,229 since inception on February 20, 2002 through December
31, 2004.
Operations expense consisted of the following:
<TABLE>
<CAPTION>
For the period Cumulative
Februrary 20, since
2002 February 20,
(inception) 2002
through (inception) of
For the Years Ended December 31, Development
2004 2003 2002 Stage
-------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Salaries & Wages $ 397,321 $ 418,039 $ 360,046 $ 1,175,406
Bonuses 173,590 195,000 250,000 618,590
Consultants 650,983 670,499 480,431 1,801,913
Legal Expenses 654,912 950,542 509,358 2,114,812
Regulatory Expenses -- 52,018 7,386 59,404
Other 37,511 20,856 51,085 109,452
------------- ------------ --------------- ---------------
$ 1,914,317 $ 2,306,954 $ 1,658,306 $ 5,879,577
============= ============ =============== ===============
</TABLE>
Note 6: 2002 TERRESTAR STOCK INCENTIVE PLAN
Terrestar Option Plan
In July 2002, the Board of Directors of TerreStar approved the 2002
TerreStar Stock Incentive Plan. Options to acquire shares generally vest
over a 3-year period, and the options to acquire shares have a 10-year
life. At December 31, 2003 and 2004, and March 31, 2005 (unaudited),
568,304, 1,157,664, and 1,338,044 (unaudited) options, respectively, were
exercisable. At December 31, 2003 and 2004 and March 31, 2005 (unaudited),
the weighted-average remaining contractual life for outstanding options
was 8.6, 8.0, and 8.52 (unaudited) years, respectively. The
weighted-average fair value of options granted during the periods ended
December 31, 2002, 2003, and 2004 was $.10, $.10, and $0.00 per unit,
respectively. The weighted-average value of shares granted during the
three-month periods ended March 31, 2004 and 2005 (unaudited), was $0.00
and $1.42, respectively (unaudited). During 2004, the Company promised to
grant 208,277 options with an exercise price of $.70 during 2005 to
certain executives of the Company, of which 146,200 were granted in March
2005 (unaudited).
T-11
Notes to Financial Statements
As part of the TerreStar Rights transaction (see Note 9), the Board of
Directors of TerreStar authorized a grant of additional options to
employee option holders of record at December 20, 2004, of approximately
50% of the options outstanding on that date, which were granted in
February 2005. The Company recognized the cash received of $4,261 during
2004 for the options exercised as minority interest. During the
three-month period ended March 31, 2005, the Company granted options with
exercise prices at less than the estimated fair market value of the
related TerreStar stock on the options' grant date resulting in stock
based compensation of $1,971,412 which will be amortized over the options'
vesting period of 36 months. For the three-month period ended March 31,
2005 (unaudited), the Company recognized compensation expense of $49,481
in the accompanying statement of operations.
The following summarizes activity in the TerreStar Option Plan:
<TABLE>
<CAPTION>
Weighted-Average
Options to Exercise
Acquire Price
Shares Per Share
------------- -----------
<S> <C> <C>
Options outstanding at December 31, 2001 -- $ --
Granted 1,762,567 0.70
------------- -------------
Options outstanding at December 31, 2002 1,762,567 0.70
Granted 138,773 0.70
Canceled (39,803) 0.70
-------------- -------------
Options outstanding at December 31, 2003 1,861,537 0.70
Granted 535,278 0.66
Canceled (18,990) 0.70
Exercised (6,086) 0.70
-------------- -------------
Options outstanding at December 31, 2004 2,371,739 $ 0.69
Granted (unaudited) 1,398,264 0.27
Canceled (unaudited) (8,277) 0.70
-------------- -------------
Options outstanding at March 31, 2005 (unaudited) 3,761,726 $ 0.54
============= =============
</TABLE>
Note 7: Related Party Transactions
During the years ended December 31, 2003, and 2004 the Company received
$3,165,873 and $3,552,274, respectively, of cash and services provided by
its parent company, Mobile Satellite Ventures, LP. The amounts received by
the Company were converted into equity in December 2004. Please also see
Note 4, "Long Term Debt", for information regarding the Company's Loan and
Security Agreement with MSV.
Note 8: Income Taxes
There was no income tax benefit reported for the years ended December 31,
2004 and 2003, for the period February 20, 2002 (inception) through
December 31, 2002 and for the period February 20, 2002 (inception) through
December 31, 2004. Due to the Company's history of net operating losses
("NOLs") since inception, and the uncertainties that affect the ultimate
resolution of the $3,173,954 and $2,398,228 deferred tax asset arising
from such NOLs for the year ended December 31, 2004 and 2003 respectively,
the Company recorded a 100% valuation allowance applicable to such
Deferred Tax Asset. The Company will periodically review the realizability
of the deferred tax asset and adjust the related valuation allowance as
needed.
T-12
Notes to Financial Statements
Note 9: Commitments And Contingencies
Leases
As of December 31, 2004, the Company has no non-cancelable operating
leases. Rental expense, net of sublease income, for the years ended
December 31, 2004 and 2003, for the period February 20, 2002 (inception)
through December 31, 2002 and for the period February 20, 2002 (inception)
through December 31, 2004 was $6,305, $6,305, $1,619 and $14,229,
respectively.
Litigation And Claims
The Company is periodically a party to lawsuits and claims in the normal
course of business. While the outcome of the lawsuits and claims against
the Company cannot be predicted with certainty, management believes that
the ultimate resolution of the matters will not have a material adverse
effect on the financial position or results of operations of the Company.
Contingencies
From time to time, the Company may have certain contingent liabilities
that arise in the ordinary course of its business activities. The Company
recognizes a liability for these contingencies when it is probable that
future expenditures will be made and such expenditures can be reasonably
estimated.
Joint Venture Option
During 2002, TerreStar acquired an option to establish a joint venture
with a third party to develop certain opportunities in the 2 GHz band. The
FCC licensed the third party to construct, launch, and operate a
communications system consisting of two geostationary satellites in the 2
GHz band, a communications network, and user terminals. Consideration for
the option consisted of nonrefundable payments made by TerreStar of $1.0
million during 2002 and $500,000 during 2003. In January 2003, TerreStar
exercised its option to form the joint venture. Under the terms of the
memorandum of agreement, TerreStar contributed an additional $500,000 to
the joint venture upon signing of the joint venture agreements. However,
as a result of the February 2003 FCC order canceling TMI's 2 GHz license
described above, in July 2003 TerreStar and the third party mutually
agreed to terminate the option agreement and the joint venture and any
remaining obligations or liabilities related to these agreements. As a
result, TerreStar wrote off its $2.0 million investment in the joint
venture during the year ended December 31, 2003.
Satellite Construction Contract
During 2002 and in connection with its contractual obligations to TMI,
TerreStar entered into a contract to purchase a satellite system,
including certain ground infrastructure for use with the 2 GHz band.
TerreStar continues to make payments according to a milestone payment
plan. TerreStar made payments of $500,000 and $350,000 during the years
ended December 31, 2002 and 2003, respectively.
Following the reinstatement of the TMI license in July 2004, the contract
was amended resulting in a reduced milestone payment plan. TerreStar made
payments of $400,000 during the year ended December 31, 2004 related to
this contract. Such payments have been capitalized as satellite under
construction in property and equipment in the accompanying balance sheets.
The satellite manufacturer may also be entitled to certain incentive
payments based upon the performance of the satellite once in operation. If
TerreStar terminates the contract, the manufacturer shall be entitled to
payment of a termination liability as prescribed in the contract.
Beginning in 2005, the termination liability will be equal to amounts that
would have otherwise been due on milestones scheduled within 30 days
following notice of termination by TerreStar. The satellite represents one
component of a communications system that would include ground-switching
infrastructure, launch costs, and insurance. Total cost of this system
could exceed $500 million. In order to finance future payments, TerreStar
will be required to obtain additional debt or equity financing, or may
enter into various joint ventures to share the cost of development. There
can be no assurance that such financing or joint venture opportunities
will be available to TerreStar or available on terms acceptable to
TerreStar.
T-13
Notes to Financial Statements
TerreStar Rights Transaction
On December 20, 2004, MSV issued rights (the Rights) to receive an
aggregate of 23,265,428 shares of common stock of the Company representing
all of the shares of TerreStar common stock (the TerreStar Stock), owned
by MSV, to the limited partners of MSV, pro rata in accordance with each
limited partner's percentage ownership in MSV. The Rights will be
exchanged into shares of TerreStar Stock automatically in May 2005. In
addition, in connection with this transaction, TerreStar issued warrants
to purchase an aggregate of 666,972 shares of TerreStar Stock to one of
MSV's limited partners. The Warrants have an exercise price of $0.21491
per share and may be exercised until the second anniversary of the date of
their issuance. Please See Note 10, "Subsequent Events", for additional
information.
Concurrent with these transactions, the Company's Board of Directors
authorized a grant of additional options to employee option holders of
record at December 20, 2004 of approximately 50% of the options
outstanding on that date, which were granted in February 2005.
Note 10: Subsequent Events
On May 11, 2005, Motient Ventures Holding Inc. ("MVH"), a wholly owned
subsidiary of Motient Corporation ("Motient"), purchased 8,190,008 shares
of the Company's common stock from the Company for $200 million pursuant
to a Purchase Agreement by and between MVH and the Company. $8.7 million
of this investment was used to repay amounts outstanding under the Loan
Agreement between MSV and TerreStar. The Loan Agreement was terminated at
the closing of this transaction. As a result of this purchase and as of
May 11, 2005, Motient owns approximately 61% of the Company's issued and
outstanding common stock.
On May 11, 2005, TerreStar was spun-off by MSV to its limited partners
and, in connection with that spin-off, Motient acquired ownership of
approximately 49% of the issued and outstanding shares of capital stock of
TerreStar. The subsequent stock purchase increased Motient's ownership to
its current 61% level.
Following this acquisition, Christopher Downie, Motient's Executive Vice
President and Chief Operating Officer, and Jared E. Abbruzzese and Shawn
O'Donnell of CTA, Motient's Chief Restructuring Entity, will be among the
seven members of the Board of Directors of TerreStar.
In February and March 2005, TerreStar, pursuant to the 2002 TerreStar
Stock Incentive Plan (the "Plan"), granted options to purchase
approximately 1.4 million shares of its common stock at a price of $0.21
per share to employees of TerreStar and MSV. These option grants were
initially authorized by the TerreStar board of directors in conjunction
with the December 20, 2004 TerreStar rights issuance. These options
generally provide for vesting over three years, and expire ten years from
the date of grant.
The May 11, 2005 spin-off of TerreStar by MSV resulted in a change of
control under the terms of options issued pursuant to the Plan.
Accordingly, such options vested on that date, pursuant to their terms.
However, holders of approximately 85% of the 1.4 million options granted
in February and March 2005 agreed to waive the immediate vesting of their
options, and therefore those options will generally vest according to the
three year vesting schedule provided for in the option grant.
In February 2005, the warrants to purchase 666,972 shares of TerreStar
common stock, issued in connection with the December 2004 rights issuance,
were exercised by their holder.
T-14
MOBILE SATELLITE VENTURES LP AND SUBSIDIARIES
Consolidated Financial Statements
Years ended December 31, 2003 and 2004 with Report of Independent Auditors
and the three-month and six-month periods ended June 30, 2004 and 2005
(unaudited)
MOBILE SATELLITE VENTURES LP AND SUBSIDIARIES
Consolidated Financial Statements
Years ended December 31, 2003 and 2004 with Report of
Independent Auditors and the three-month and six-month periods
ended June 30, 2004 and 2005 (unaudited)
Contents
<TABLE>
<S> <C>
Report of Independent Auditors.............................................................................. M-1
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2003 and 2004 and June 30, 2005 (unaudited).................. M-2
Consolidated Statements of Operations for the years ended December 31, 2002, 2003, and 2004 and
the three-month and six-month periods ended June 30, 2004 and 2005 (unaudited)........................... M-3
Consolidated Statements of Partners' Equity (Deficit) for the years ended December 31, 2002, 2003,
and 2004 and the six-month period ended June 30, 2005 (unaudited)........................................ M-4
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003, and 2004
and for the three-month and six-month periods ended June 30, 2004 and 2005 (unaudited)................... M-5
Notes to Consolidated Financial Statements.................................................................. M-6
</TABLE>
Report of Independent Auditors
General Partner and Unit Holders
Mobile Satellite Ventures LP
We have audited the accompanying consolidated balance sheets of Mobile Satellite
Ventures LP (a Delaware limited partnership) and subsidiaries (collectively, the
Company) as of December 31, 2003 and 2004, and the related consolidated
statements of operations, partners' equity (deficit), and cash flows for each of
the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mobile Satellite
Ventures LP and subsidiaries at December 31, 2003 and 2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
McLean, Virginia
February 18, 2005, except for the matter
described in the last two paragraphs of
Note 10, as to which the date is May 11, 2005
M-1
Mobile Satellite Ventures LP and Subsidiaries - Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31 June 30
2003 2004 2005
------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,765,305 $ 129,124,291 $ 115,235,120
Restricted cash 74,246 74,823 1,606,061
Accounts receivable, net of allowance of $71,687, $69,908, and
$54,048 (unaudited) as of December 31, 2003 and 2004, and
June 30, 2005, respectively 4,156,416 3,343,769 5,360,318
Inventory 1,406,604 698,279 481,722
Prepaid expenses and other current assets 1,055,135 782,236 594,238
TerreStar assets, discontinued 220,127 5,954,894 --
------------------------------------------------
Total current assets 10,677,833 139,978,292 123,277,459
Restricted cash -- -- 4,600,000
Property and equipment, net 22,748,573 15,120,484 13,256,399
Intangible assets, net 80,457,125 71,506,197 66,721,497
Goodwill 15,784,572 16,495,324 16,237,296
Other assets 84,779 1,584,779 294,662
TerreStar assets, discontinued 1,066,080 1,538,054 --
------------------------------------------------
Total assets $ 130,818,962 $ 246,223,130 $ 224,387,313
================================================
Liabilities, minority interest, and partners' equity (deficit)
Current liabilities:
Accounts payable and accrued expenses $ 3,384,055 $ 6,171,221 $ 5,185,949
Vendor note payable, current portion 127,211 205,846 210,569
Deferred revenue, current portion 5,887,381 4,882,189 4,084,575
Other current liabilities 110,767 64,978 71,935
TerreStar liabilities, discontinued 862,488 447,844 --
------------------------------------------------
Total current liabilities 10,371,902 11,772,078 9,553,028
Deferred revenue, net of current portion 20,865,511 20,690,599 21,172,588
Accrued interest, net of current portion 16,725,057 -- --
Vendor note payable, net of current portion 915,785 695,714 590,403
Notes payable to investors 82,924,667 -- --
------------------------------------------------
Total liabilities 131,802,922 33,158,391 31,316,019
Commitments and contingencies
Minority interest -- 100,723 --
Partners' equity (deficit):
MSV general partner -- -- --
MSV limited partners (1,041,013) 217,643,300 198,597,770
Deferred compensation -- (4,185,223) (4,640,079)
Accumulated other comprehensive income (loss) 57,053 (494,061) (886,397)
------------------------------------------------
Total partners' equity (deficit) (983,960) 212,964,016 193,071,294
------------------------------------------------
Total liabilities, minority interest, and partners' equity (deficit) $ 130,818,962 $ 246,223,130 $ 224,387,313
================================================
See accompanying notes.
</TABLE>
M-2
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three-month period ended
Year ended December 31 June 30
2002 2003 2004 2004 2005
-----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Services and related revenues $ 24,389,482 $ 25,536,096 $ 26,664,328 $ 6,428,178 $ 6,587,106
Equipment sales and other
revenues 464,833 1,588,294 2,342,592 690,645 872,962
-----------------------------------------------------------------------------
Total revenues 24,854,315 27,124,390 29,006,920 7,118,823 7,460,068
Operating expenses:
Satellite operations and cost of
services 11,477,095 10,781,525 10,848,766 2,781,905 3,653,449
Satellite capacity purchased
from MSV Canada 4,647,224 4,858,305 5,768,970 1,238,083 --
Next-generation research and
development expenditures 3,532,487 4,267,991 8,593,001 1,925,146 2,818,334
Sales and marketing 2,416,050 1,973,381 4,762,461 568,219 561,562
General and administrative 3,713,718 4,318,913 7,350,119 1,475,848 4,069,343
Depreciation and amortization 18,227,369 17,927,948 18,438,732 4,630,381 3,745,021
-----------------------------------------------------------------------------
Total operating expenses 44,013,943 44,128,063 55,762,049 12,619,582 14,847,709
-----------------------------------------------------------------------------
Loss from continuing operations before
other income (expense) (19,159,628) (17,003,673) (26,755,129) (5,500,759) (7,387,641)
Other income (expense):
Management fee from MSV Canada 3,100,847 3,199,974 3,568,013 882,622 --
Equity in losses of MSV Canada (373,738) (1,030,119) (275,000) (234,028) --
Interest income 55,538 40,355 441,791 27,143 766,052
Interest expense (8,577,407) (9,616,235) (8,550,971) (2,453,394) (28,786)
Management fee from Terrestar -- -- -- -- 600,064
Minority interest in
consolidated subsidiary -- -- -- -- 24,784
Other income, net 2,424,490 737,211 55,716 (7,770) (4,953)
-----------------------------------------------------------------------------
Loss from continuing operations
before cumulative effect of change
in accounting principle (22,529,898) (23,672,487) (31,515,580) (7,286,186) (6,030,480)
Loss from operations of
discontinued TerreStar (3,637,586) (4,327,983) (1,939,316) (288,981) (692,139)
-----------------------------------------------------------------------------
Net loss before cumulative
effect of change in accounting
principle (26,167,484) (28,000,470) (33,454,896) (7,575,167) (6,722,619)
Cumulative effect of change in
accounting principle -- -- -- -- --
-----------------------------------------------------------------------------
Net loss $(26,167,484) $(28,000,470) $(33,454,896) $ (7,575,167) $ (6,722,619)
=============================================================================
See accompanying notes.
</TABLE>
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Operations (continued)
<TABLE>
<CAPTION>
Six-month period ended
June 30
2004 2005
-------------------------------
(Unaudited)
<S> <C> <C>
Revenues:
Services and related revenues $ 13,094,269 $ 13,293,154
Equipment sales and other
revenues 1,135,837 1,356,709
-------------------------------
Total revenues 14,230,106 14,649,863
Operating expenses:
Satellite operations and cost of
services 5,375,069 7,326,998
Satellite capacity purchased
from MSV Canada 2,479,351 --
Next-generation research and
development expenditures 3,505,216 8,592,369
Sales and marketing 1,068,033 1,280,485
General and administrative 2,619,856 8,950,319
Depreciation and amortization 9,227,579 8,321,673
-------------------------------
Total operating expenses 24,275,104 34,471,844
-------------------------------
Loss from continuing operations before
other income (expense) (10,004,998) (19,821,981)
Other income (expense):
Management fee from MSV Canada 1,727,853 --
Equity in losses of MSV Canada (370,331) --
Interest income 37,119 1,397,176
Interest expense (4,946,134) (58,502)
Management fee from Terrestar -- 600,064
Minority interest in net loss of
consolidated subsidiary -- 31,289
Other income, net 11,417 8,972
-------------------------------
Loss from continuing operations
before cumulative effect of change
in accounting principle (13,585,074) (17,842,982)
Loss from operations of
discontinued TerreStar (722,567) (9,584,101)
-------------------------------
Net loss before cumulative
effect of change in accounting
principle (14,307,641) (27,427,083)
Cumulative effect of change in
accounting principle -- 723,579
-------------------------------
Net loss $(14,307,641) $(26,703,504)
===============================
See accompanying notes.
</TABLE>
M-3
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Partners' Equity (Deficit)
<TABLE>
<CAPTION>
General Partner Limited Partners
-----------------------------------------------
Number of Number of
Units Amount Units Amount
------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 2001 -- $ -- 16,642,732 $ 49,426,941
Net loss -- -- -- (26,167,484)
Translation adjustment -- -- -- --
------------------------------------------------
Balance, December 31, 2002 -- -- 16,642,732 23,259,457
Total, year ended December 31, 2002
Issuance of MSV Class A Preferred Units -- -- 573,951 3,700,000
Net loss -- -- -- (28,000,470)
Change in market value of derivative
instruments -- -- -- --
Translation adjustment -- -- -- --
------------------------------------------------
Balance, December 31, 2003 -- -- 17,216,683 (1,041,013)
Total, year ended December 31, 2003
Issuance of MSV Class A Preferred Units -- -- 2,735,317 17,633,333
Conversion of Notes -- -- 9,911,234 84,922,011
Issuance of MSV Common Units -- -- 4,923,599 145,000,000
Issuance of stock options -- -- -- 4,680,376
Amortization of deferred compensation -- -- -- --
Distribution of warrant in subsidiary -- -- -- (96,511)
Net loss -- -- -- (33,454,896)
Change in market value of derivative
instruments -- -- -- --
Translation adjustment -- -- -- --
------------------------------------------------
Balance, year ended December 31, 2004 -- -- 34,786,833 217,643,300
Total, year ended December 31, 2004
Issuance of stock options (unaudited) -- -- -- 6,788,807
Amortization of deferred compensation
(unaudited) -- -- -- --
Distribution to shareholders for
TerreStar spin-off (unaudited) -- -- -- 869,167
Net loss (unaudited) -- -- -- (26,703,504)
Change in market value of derivative
instruments (unaudited) -- -- -- --
Translation adjustment (unaudited) -- -- -- --
------------------------------------------------
Balance, June 30, 2005 (unaudited) -- $ -- 34,786,833 $ 198,597,770
================================================
Total, six-month period ended June 30,
2005 (unaudited)
</TABLE>
See accompanying notes.
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Partners' Equity (Deficit) (continued)
<TABLE>
<CAPTION>
Accumulated
Other Total Partners'
Deferred Comprehensive Equity Comprehensive
Compensation Income (Deficit) Loss
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 2001 $ -- $ -- $ 49,426,941
Net loss -- -- (26,167,484) $(26,167,484)
Translation adjustment -- 6,867 6,867 6,867
--------------------------------------------------------------
Balance, December 31, 2002 -- 6,867 23,266,324
Total, year ended December 31, 2002 $(26,160,617)
=============
Issuance of MSV Class A Preferred Units -- -- 3,700,000
Net loss -- -- (28,000,470) $(28,000,470)
Change in market value of derivative
instruments -- 81,712 81,712 81,712
Translation adjustment -- (31,526) (31,526) (31,526)
--------------------------------------------------------------
Balance, December 31, 2003 -- 57,053 (983,960)
Total, year ended December 31, 2003 $(27,950,284)
=============
Issuance of MSV Class A Preferred Units -- -- 17,633,333
Conversion of Notes -- -- 84,922,011
Issuance of MSV Common Units -- -- 145,000,000
Issuance of stock options (4,680,376) -- --
Amortization of deferred compensation 495,153 -- 495,153
Distribution of warrant in subsidiary -- -- (96,511)
Net loss -- -- (33,454,896) $(33,454,896)
Change in market value of derivative
instruments -- (45,407) (45,407) (45,407)
Translation adjustment -- (505,707) (505,707) (505,707)
--------------------------------------------------------------
Balance, year ended December 31, 2004 (4,185,223) (494,061) 212,964,016
Total, year ended December 31, 2004 $(34,006,010)
=============
Issuance of stock options (unaudited) (6,788,807) -- --
Amortization of deferred compensation
(unaudited) 6,333,951 -- 6,333,951
Distribution to shareholders for
TerreStar spin-off (unaudited) -- -- 869,167
Net loss (unaudited) -- -- (26,703,504) (26,703,504)
Change in market value of derivative
instruments (unaudited) -- (36,188) (36,188) (36,188)
Translation adjustment (unaudited) -- (356,148) (356,148) (356,148)
--------------------------------------------------------------
Balance, June 30, 2005 (unaudited) $ (4,640,079) $ (886,397) $ 193,071,294
==============================================
Total, six-month period ended June 30,
2005 (unaudited) $(27,095,840)
=============
See accompanying notes.
</TABLE>
M-4
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six-month period ended
Year ended December 31 June 30
2002 2003 2004 2004 2005
---------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss $(26,167,484) $(28,000,470) $ (33,454,896) $(14,307,641) $ (26,703,504)
Less: net loss from operations of discontinued
TerreStar (3,637,586) (4,327,983) (1,939,316) (722,567) (9,584,101)
---------------------------------------------------------------------------
Net loss from continuing operations (22,529,898) (23,672,487) (31,515,580) (13,585,074) (17,119,403)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Cumulative effect of change in accounting principle -- -- -- -- (723,579)
Depreciation and amortization 18,227,369 17,927,948 18,438,732 9,227,579 8,321,673
Equity in losses of MSV Canada 373,738 1,030,119 275,000 370,331 --
Amortization of deferred compensation -- -- 495,153 -- 6,220,384
Minority interest in net loss of consolidated
subsidiary -- -- 100,723 -- (31,290)
Changes in operating assets and liabilities:
Accounts receivable 471,009 (1,061,933) 916,694 7,998 (1,746,605)
Inventory 811,197 711,979 708,325 479,936 216,557
Prepaid expenses and other assets (353,283) (938,231) 332,883 (128,536) (123,881)
Accounts payable and accrued expenses 230,743 307,320 2,765,258 311,413 60,515
Other current liabilities (4,138,827) (751,514) (119,672) 50,621 89,413
Accrued interest 8,571,854 7,384,721 (12,589,396) 2,252,931 --
Deferred revenue 723,136 1,274,075 (2,677,326) (1,850,847) (2,473,405)
---------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,387,038 2,211,997 (22,869,206) (2,863,648) (7,309,621)
Investing activities
Purchase of Motient Satellite business, net of cash
acquired (2,200,000) (2,200,000) -- -- --
Purchase of property and equipment (340,328) (966,512) (343,963) (25,541) (131,147)
Purchase of intangible assets and other assets -- -- (500,000) -- --
Restricted cash 3,355,184 578,614 (577) (215) (6,076,601)
Net cash received from repayment of TerreStar advance -- -- -- -- 8,624,115
---------------------------------------------------------------------------
Net cash used in investing activities 814,856 (2,587,898) (844,540) (25,756) 2,416,367
Financing activities
Proceeds from issuance of Class A Preferred Units -- 3,700,000 17,633,333 17,633,333 --
Proceeds from issuance of Common Units -- -- 145,000,000 -- --
Principal payment on notes payable -- (1,575,333) (2,370,583) (2,402,340) (100,588)
Proceeds from issuance of notes payable to investors 3,000,000 -- -- -- --
Proceeds from exercise of warrant in subsidiary -- -- -- -- --
Proceeds from exercise of stock option in subsidiary -- -- 4,261 -- --
---------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,000,000 2,124,667 160,267,011 15,230,993 (100,588)
Effect of exchange rates on cash and cash equivalents 235,076 134,374 (66,248) (228,592) (172,689)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net cash used in discontinued operations (4,484,796) (3,699,324) (11,128,031) (610,628) (8,722,640)
---------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,952,174 (1,816,184) 125,358,986 11,502,369 (13,889,171)
Cash and cash equivalents, beginning of period 3,629,315 5,581,489 3,765,305 3,765,305 129,124,291
---------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 5,581,489 $ 3,765,305 $ 129,124,291 $ 15,267,674 $ 115,235,120
===========================================================================
Supplemental information
Cash paid for interest $ 5,553 $ 2,124,667 $ 21,394,806 $ 2,676,202 $ 39,181
===========================================================================
Non-cash financing information
Equipment obtained through issuance of notes to vendor $ -- $ 1,028,771 $ -- $ -- $ --
===========================================================================
Conversion of Notes $ -- $ -- $ 84,922,011 $ -- $ --
===========================================================================
See accompanying notes
</TABLE>
M-5
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
1. Organization and Business
Mobile Satellite Venture LP's predecessor company, Motient Satellite Ventures
LLC, was organized as a limited liability company pursuant to the Delaware
Limited Liability Company Act on June 16, 2000, by Motient Corporation
(Motient). On December 19, 2000, Motient Satellite Ventures LLC changed its name
to Mobile Satellite Ventures LLC (MSV LLC). On November 26, 2001, MSV LLC was
converted into a limited partnership, Mobile Satellite Ventures LP (MSV or the
Company), subject to the laws of the state of Delaware. Concurrent with such
conversion, the Company acquired certain assets and liabilities of the Motient
and TMI Communications LP (TMI) satellite businesses. In connection with its
purchase of TMI's satellite business, the Company acquired a 20% equity interest
in Mobile Satellite Ventures (Canada) Inc. (MSV Canada) and a 33 1/3% equity
interest in Mobile Satellite Ventures Holdings (Canada) Inc. (MSV Holdings). In
February 2002, the Company established TerreStar Networks Inc. (TerreStar), as a
majority-owned subsidiary, to develop business opportunities related to the
planned receipt of certain licenses in the 2 GHz band (see Note 10). On May 11,
2005, holders of the Company's Limited Partnership units exercised previously
distributed rights to acquire all of the shares of TerreStar owned by the
Company. As a result of this transaction, TerreStar is no longer a subsidiary of
the Company (see Note 10).
The Company provides mobile satellite and communications services to individual
and corporate customers in the United States and Canada via its own satellite
and leased satellite capacity. The Company's operations are subject to
significant risks and uncertainties including technological, competitive,
financial, operational, and regulatory risks associated with the wireless
communications business. Uncertainties also exist regarding the Company's
ability to raise additional debt and equity financing and the ultimate
profitability of the Company's proposed next-generation wireless system. The
Company will require substantial additional capital resources to construct its
next-generation wireless system.
The Company's current operating assumptions and projections, which reflect
management's best estimate of future revenue and operating expenses, indicate
that anticipated operating expenditures through 2005 can be met by cash flows
from operations and available working capital; however, the Company's ability to
meet its projections is subject to uncertainties, and there can be no assurance
that the Company's current projections will be accurate. If the Company's cash
requirements are more than projected, the Company may require additional
financing.
M-6
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
1. Organization and Business (continued)
The type, timing, and terms of financing, if required, selected by the Company
will be dependent upon the Company's cash needs, the availability of financing
sources, and the prevailing conditions in the financial markets. There can be no
assurance that such financing will be available to the Company at any given time
or available on favorable terms.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements as of December 31, 2003 and 2004, for each
of the three years in the period ended December 31, 2004, and the three-month
and six-month periods ended June 30, 2004 include the accounts of the Company
and its majority owned subsidiaries prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The consolidated
financial statements as of June 30, 2005, and for the three-month and six-month
periods then ended include the accounts of the Company and its majority-owned
subsidiaries and all variable interest entities for which the Company is the
primary beneficiary, in accordance with GAAP. All significant intercompany
accounts are eliminated upon consolidation.
Unaudited Interim Consolidated Financial Statements Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the
Company have been prepared in accordance with GAAP for interim financial
information. Certain information and note disclosures normally included in the
annual financial statements, prepared in accordance with GAAP, have been
condensed or omitted pursuant to GAAP for interim information, although the
Company believes that the disclosures made are adequate to make the information
presented not misleading. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation of financial position and results of operations for the three-month
and six-month periods ended June 30, 2004 and 2005, have been recorded.
Operating results for the six-month period ended June 30, 2005, are not
necessarily indicative of the results that may be expected for the entire fiscal
year or for any future period.
M-7
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
2. Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates affecting the
consolidated financial statements include management's judgments regarding the
allowance for doubtful accounts, reserves for inventory, future cash flows
expected from long-lived assets, and accrued expenses for probable losses.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include investments such as money market accounts with
an original maturity of three months or less.
Restricted Cash
In connection with the purchase of the Motient satellite business in 2001, the
Company retained a portion of the purchase price, which was restricted to pay
Motient's rent obligation to the Company for the lease of office space in the
Company's headquarters and to ensure the provision of certain services to the
Company by Motient under a transition services agreement. During the year ended
December 31, 2002, the agreement was amended, $1,104,708 was released to
Motient, and $336,060 was released to MSV. During 2003, $530,742 was used to
satisfy Motient's obligations under its sublease with the Company, and $50,708
was remitted to Motient for services provided to MSV. As of December 31, 2003,
and 2004, the restricted cash balance for this purpose was $74,246 and $74,352
respectively. During March, 2005, all obligations under this transition services
agreement were satisfied and all remaining funds were released to Motient and
MSV, accordingly.
In September 2004, the Company entered into an escrow agreement to provide for
payments under TerreStar's satellite construction contract (see Note 10). If
TerreStar terminates the satellite construction contract, the escrow funds may
be returned to TerreStar, subject to the termination liability under the
contract. As of December 31, 2004, the amount in escrow was $5.0 million, which
is reflected in TerreStar assets, discontinued on the accompanying consolidated
balance sheet. As a result of the spin-off of TerreStar on May 11, 2005 (see
Note 10) MSV no longer has any rights or obligations relating to this escrow
account.
M-8
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
2. Significant Accounting Policies (continued)
Restricted Cash (continued)
On January 10, 2005, and on May 23, 2005 the Federal Communication Commission's
(FCC) International Bureau authorized MSV to launch and operate new L-Band
mobile satellite services (MSS) systems that will occupy orbital locations that
are in addition to the company's existing orbital slots, and satellites. The
International Bureau requires all grants for new systems to be supported by a
performance bond. In accordance with this requirement, the Company secured a
five-year, $3.0 million bond for each slot. The bonds were fully collateralized
by a $3.0 million letter of credit for each bond, secured by cash on deposit,
which is reflected as restricted cash in the accompanying consolidated balance
sheet as of June 30, 2005.
Inventory
Inventories consist of finished goods that are communication devices and are
stated at the lower of cost or market, average cost method. The Company
periodically assesses the market value of its inventory, based on sales trends
and forecasts and technological changes, and records a charge to current-period
income when such factors indicate that a reduction in net realizable value is
appropriate.
Property and Equipment
Property and equipment acquired in business combinations are recorded at their
estimated fair value on the date of acquisition. Purchases of property and
equipment are recorded at cost. Depreciation is computed using the straight-line
method over estimated useful lives, ranging from three to ten years. During
2004, MSV initiated inclined orbit of the MSAT-2 satellite, effectively
extending its fuel life. In March 2005, the Company completed a formal
evaluation of the impact of this action and concluded that the satellite's
useful life had been extended by approximately five years. The depreciation life
of this satellite was extended by five years on a prospective basis. This change
in estimate decreased the net loss for the six months ended June 30, 2005, by
approximately $1.7 million. Leasehold improvements are amortized over the
shorter of the estimated useful life of the asset or the remaining lease term.
M-9
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
2. Significant Accounting Policies (continued)
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Company
reviews its long-lived assets, including property and equipment and intangible
assets other than goodwill, whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable. To
determine the recoverability of its long-lived assets, the Company evaluates the
probability that future estimated undiscounted net cash flows will be less than
the carrying amount of the assets. If such estimated cash flows are less than
the carrying amount of the long-lived assets, then such assets are written down
to their fair value. No impairment charges were recorded in the years ended
December 31, 2002, 2003, or 2004. During March 2005, the Company expensed
approximately $8.1 million related to the termination of certain agreements to
acquire spectrum access and rights (see Note 3). The Company's estimates of
anticipated cash flows and the remaining estimated useful lives of long-lived
assets could be reduced significantly in the future. As a result, the carrying
amount of long-lived assets may be reduced in the future.
Goodwill
SFAS No. 142, Goodwill and Other Intangible Assets, requires the use of a
non-amortization approach to account for purchased goodwill. Under a
non-amortization approach, goodwill is not amortized into results of operations,
but instead is reviewed for impairment and written down and charged to results
of operations only in the periods in which the recorded value of goodwill is
determined to be more than its estimated fair value. The Company performs its
annual impairment test on December 31 or when certain triggering events occur.
No impairment charges were recorded in the years ended December 31, 2002, 2003,
or 2004.
M-10
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
2. Significant Accounting Policies (continued)
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintained cash balances at financial institutions that
exceeded federally insured limits as of December 31, 2004. The Company maintains
its cash and cash equivalents at high-credit-quality institutions, and as a
result, management believes that credit risk related to its cash is not
significant.
The Company generally grants credit to customers on an unsecured basis. The
Company performs ongoing evaluations of probability of collection of amounts
owed to the Company. The Company records an allowance for doubtful accounts
equal to the amount estimated to be potentially uncollectible.
The Company's significant customers, as measured by percentage of total
revenues, were as follows:
<TABLE>
<CAPTION>
For the six-month period ended
For the year ended December 31 June 30
2002 2003 2004 2004 2005
-----------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Customer A 13% 12% * * *
Customer B 13% * * * *
Customer C * 11% * * *
Customer D * 13% 14% 14% 13%
</TABLE>
The Company's significant customers, as measured by percentage of total accounts
receivable, were as follows:
December 31 June 30
2003 2004 2005
----------------------------------------------------
(unaudited)
Customer A * * 15%
Customer C * 12% 14%
Customer D * 12% *
Customer E 14% * *
Customer F 12% 11% *
* Customer did not represent more than 10% for the period presented.
M-11
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
2. Significant Accounting Policies (continued)
Fair Value of Financial Instruments
SFAS No. 107, Disclosure about Fair Value of Financial Instruments, requires
disclosures regarding the fair value of certain financial instruments. The
carrying amount of the Company's cash and cash equivalents, restricted cash,
accounts receivables, and accounts payable, accrued expenses approximates their
fair value because of the short-term maturity of these instruments. The Company
estimated the fair value of its notes payable using estimated market prices
based upon the current interest rate environment and the remaining term to
maturity. The Company believes the fair value of these liabilities approximates
their carrying value.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans using the fair value method. The Company has chosen to
account for employee stock-based compensation using the intrinsic value method
as prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and its related interpretations.
The following illustrates the effect on net loss if the Company had applied the
fair value method of SFAS No. 123:
<TABLE>
<CAPTION>
Six-month period ended
December 31 June 30
2002 2003 2004 2004 2005
------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss, as reported $ (26,167,484) $ (28,000,470) $ (33,454,896) $ (14,307,641) $ (26,703,504)
Add stock-based
compensation included in
reported net loss -- -- 495,153 -- 6,333,951
Additional stock-based
compensation expense
determined under fair
value method (621,148) (1,080,385) (1,952,382) (141,483) (5,999,348)
------------------------------------------------------------------------------------------------
Pro forma net loss $ (26,788,632) $ (29,080,855) $ (34,912,125) $ (14,449,124) $ (26,368,901)
================================================================================================
</TABLE>
M-12
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
2. Significant Accounting Policies (continued)
Stock-Based Compensation (continued)
In accordance with SFAS No. 123, the fair value of the options granted was
estimated at the grant date using an option-pricing model with the following
weighted-average assumptions: risk-free interest rates ranging from 2.7% to
4.6%, no dividends, expected life of the options of five years, and no
volatility.
Income Taxes
As a limited partnership, the Company is not subject to income tax directly.
Rather, each unit holder is subject to income taxation based on the unit
holder's portion of the Company's income or loss as defined in the limited
partnership agreement.
Revenue Recognition
The Company generates revenue primarily through the sale of wireless airtime
service and equipment. The Company recognizes revenue when the services are
performed or delivery has occurred, evidence of an arrangement exists, the fee
is fixed and determinable, and collectibility is probable. The Company receives
activation fees related to initial registration for retail customers. Revenue
from activation fees is deferred and recognized ratably over the customer's
contractual service period, generally one year. The Company records equipment
sales upon transfer of title and accordingly recognizes revenue upon shipment to
the customer.
Derivatives
The Company accounts for derivatives in accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended, which requires
the recognition of all derivatives as either assets or liabilities measured at
fair value with changes in fair value of derivatives other than hedges reflected
as current-period income (loss) unless the derivatives qualify as hedges of
future cash flows. For derivatives qualifying as hedges of future cash flows,
the effective portion of changes in fair value is recorded temporarily in equity
and then recognized in earnings along with the related effects of the hedged
items. Any ineffective portion of hedges is reported in earnings as it occurs.
M-13
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
2. Significant Accounting Policies (continued)
Derivatives (continued)
In the normal course of business, the Company is exposed to the impact of
fluctuations in the exchange rate with the Canadian dollar. The Company limits
this risk by following an established foreign currency financial management
policy. This policy provides for the use of forward and option contracts, which
limit the effects of exchange rate fluctuations of the Canadian dollar on
financial results. The Company does not use derivatives for trading or
speculative purposes.
As of December 31, 2003, 2004, and June 30, 2005, the Company hedged portions of
its forecasted expenses, payable in Canadian dollars, totaling $2.8 million,
$2.2 million and $1.8 million, respectively, by entering into forward contracts
and option contracts, respectively. In general, these contracts have varying
maturities up to, but not exceeding, one year with cash settlements made at
maturity based upon rates agreed to at contract inception. All derivatives held
by the Company satisfy the hedge criteria of SFAS No. 133, and therefore, the
Company recorded unrealized gains (losses) on these contracts of $81,712,
$36,305, $(15,761), and $117 for the years ended December 31, 2003 and 2004, and
for the six-month periods ended June 30, 2004 and 2005, respectively, which are
reflected as a component of accumulated other comprehensive income and an asset
within prepaid expenses and other current assets in the accompanying
consolidated balance sheets.
Foreign Currency and International Operations
The functional currency of two of the Company's subsidiaries is the Canadian
dollar. The financial statements of these subsidiaries are translated to U.S.
dollars using period-end rates for assets and liabilities, which is included as
a component of accumulated other comprehensive income in the accompanying
consolidated balance sheets. In addition, the Company realized foreign exchange
transaction (losses) gains, which are a component of other income in the
accompanying consolidated statements of operations. For the years ended December
31, 2002, 2003, and 2004, foreign exchange transaction (losses) gains were
$(266,507), $444,753, and $40,858, respectively. For the six-month periods ended
June 30, 2004 and 2005, the realized foreign exchange transaction gains were
$11,343 and $9,604, respectively.
M-14
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
2. Significant Accounting Policies (continued)
Investments in MSV Canada and MSV Holdings
For the years ended December 31, 2002, 2003, and 2004, the Company accounted for
its equity investments in MSV Canada and MSV Holdings pursuant to the equity
method of accounting. The carrying value of these investments was $0 at each
balance sheet date presented. Because the Company is obligated to provide
working capital financial support to MSV Canada through a management agreement,
the Company recorded losses related to such funding as equity in losses of MSV
Canada in the accompanying consolidated statements of operations.
In January 2003, the FASB issued Financial Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities--an Interpretation of Accounting
Research Bulletin No. 51. FIN 46 provides a new framework for identifying
variable interest entities (VIEs) and determining when a company should include
the assets, liabilities, noncontrolling interests and results of activities of a
VIE in its consolidated financial statements.
In general, a VIE is a corporation, partnership, limited-liability corporation,
trust, or any other legal structure used to conduct activities or hold assets
that either (1) has an insufficient amount of equity to carry out its principal
activities without additional subordinated financial support, (2) has a group of
equity owners that are unable to make significant decisions about its
activities, or (3) has a group of equity owners that do not have the obligation
to absorb losses or the right to receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a variable interest holder)
is obligated to absorb a majority of the risk of loss from the VIE's activities,
is entitled to receive a majority of the VIE's residual returns (if no party
absorbs a majority of the VIE's losses), or both. A variable interest holder
that consolidates the VIE is called the primary beneficiary. Upon consolidation,
the primary beneficiary generally must initially record all of the VIE's assets,
liabilities, and noncontrolling interests at fair value and subsequently account
for the VIE as if it were consolidated based on majority voting interest. FIN 46
also requires disclosures about VIEs that the variable interest holder is not
required to consolidate but in which it has a significant variable interest.
M-15
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
2. Significant Accounting Policies (continued)
Investments in MSV Canada and MSV Holdings (continued)
FIN 46 was effective immediately for VIEs created after January 31, 2003, and
was effective January 1, 2005, for VIEs created before February 1, 2003. The
provisions of FIN 46, as revised, were adopted as of January 1, 2005, for the
Company's interest in MSV Canada, which was created prior to February 1, 2003.
In accordance with the transition provisions of FIN 46, the assets, liabilities,
and noncontrolling interests of newly consolidated VIEs such as MSV Canada were
initially recorded at the amounts at which they would have been carried in the
consolidated financial statements if FIN 46 had been effective when the Company
first met the conditions to be the primary beneficiary of the VIE. The
difference between the net amount added to the Company's consolidated balance
sheet related to MSV Canada and the Company's previously recognized interest in
MSV Canada represented a gain of $723,579 and was recognized as a cumulative
effect of change in accounting principle during the three-month period ended
March 31, 2005. Excluding the cumulative effect of change in accounting
principle, the consolidation of MSV Canada resulted in an additional income of
$365,953 during the three-month period ended March 31, 2005 and an additional
loss of $695,034 and $329,081 during the three-month and the six-month periods
ended June 30, 2005, respectively. The adoption of FIN 46 on January 1, 2005
also increased total assets by approximately $3.3 million and total liabilities
by approximately $2.6 million. Prior periods were not restated. Had FIN 46 been
applied retroactively, the impact on prior periods would not have been marked.
Neither the assets nor liabilities of MSV Canada have been reported in any of
the Company's financial statements prior to January 1, 2005.
MSV Canada Holdings Inc.'s financial results are entirely the result of its
ownership interest in MSV Canada. The Company considers its investment in MSV
Holdings Inc. as part of its overall ownership interest in MSV Canada in
recording the consolidation of MSV Canada. The assets, as consolidated by MSV,
of MSV Canada consist primarily of its satellite, which has a carrying value of
$2.0 million at June 30, 2005 and is included in property, plant, and equipment
in the Company's consolidated balance sheet. The consolidated liabilities of MSV
Canada consist primarily of its deferred revenue, which has a carrying value of
$1.9 million at June 30, 2005 and is included in deferred revenue in the
Company's consolidated balance sheet. The Company has an obligation, by
contract, to fund MSV Canada.
M-16
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
2. Significant Accounting Policies (continued)
Recent Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which is
a revision of SFAS No. 123, supersedes APB Opinion No. 25, and amends SFAS No.
95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is
similar to the approach described in SFAS No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. Pro forma disclosure is no longer an alternative. The new standard will
be effective for the Company for the year beginning January 1, 2006. The impact
of the adoption of SFAS No. 123(R) cannot be predicted at this time because it
will depend on levels of share-based payments granted in the future.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
3. Intangible Assets and Goodwill
The Company's intangible assets and goodwill arose primarily as a result of the
Company's 2001 acquisitions of the Motient and TMI satellite businesses. These
transactions were accounted for using the purchase method of accounting. At the
time of the acquisition, the Company allocated the purchase price to the assets
acquired and liabilities assumed on a preliminary basis based on their
respective estimated fair values. During 2002, the Company revised its purchase
price allocation based upon changes in estimates related primarily to certain
liabilities assumed in the acquisition. In addition, under the terms of the
agreement, the Company paid a total of $6.6 million through December 31, 2003,
of which $2.2 million was paid in each of the years ended December 31, 2002 and
2003, in contingent consideration to Motient for the provision of services to a
customer under a contract assumed by the Company. These payments were accounted
for as contingent consideration and were included in the determination of the
purchase price when paid to Motient. As of December 31, 2003, there were no
contingent purchase payments remaining.
M-17
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
3. Intangible Assets and Goodwill (continued)
In July 2004, MSV purchased certain intangible assets including intellectual
property, or rights to acquire spectrum access and rights, or rights to acquire
related assets from a third party. During the year ended December 31, 2004, MSV
paid $2.0 million in cash for these intangible assets, of which $1.5 million was
included in other assets and $500,000 was included in intangible assets as of
December 31, 2004 in the accompanying consolidated balance sheet. In connection
with these transactions, MSV also acquired rights related to a system
development contract in exchange for MSV's assumption of certain payments
through January 2005. The Company paid $1.1 million during 2004, and accrued
$67,000 in capitalized interest costs, which were capitalized as system under
construction in property and equipment in the accompanying consolidated balance
sheet.
During the three-month period ended March 31, 2005, the Company paid an
additional $4.0 million related to the acquisition of rights, or rights to
acquire spectrum access and rights, or rights to acquire related assets from
various third parties. The Company also agreed to pay one of the parties an
additional $1 million due in January 2006, which is recorded in accounts payable
and accrued expenses as of June 30, 2005, in the accompanying consolidated
balance sheet.
During the three-month period ended March 31, 2005, the Company terminated
certain of the 2004 and 2005 agreements described above. Accordingly, the
Company recognized a charge of $8.1 million associated with this action, which
is reflected as a component of loss from operations from discontinued TerreStar
in the accompanying consolidated statement of operations. The Company has
retained the rights to use the intangible assets representing $500,000 of the
amounts capitalized during 2004.
The Company's identifiable intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31 June 30
2003 2004 2005
------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Customer contracts $ 18,092,565 $ 18,177,727 $ 18,153,846
Next-generation intellectual property 82,100,000 82,600,000 82,600,000
------------------------------------------------------
100,192,565 100,777,727 100,753,846
Accumulated amortization (19,735,440) (29,271,530) (34,032,349)
------------------------------------------------------
Intangible assets, net $ 80,457,125 $ 71,506,197 $ 66,721,497
======================================================
</TABLE>
M-18
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
3. Intangible Assets and Goodwill (continued)
Customer contracts are amortized over a period ranging from 4.5 to 5 years.
Next-generation intellectual property is amortized over periods ranging from 4.5
to 15 years. During the years ended December 31, 2002, 2003, and 2004, the
Company recorded approximately $9.4 million, $9.4 million, and $9.5 million,
respectively, of amortization expense related to these intangible assets. The
Company's next-generation intellectual property consists of a combination of
licenses and contractual rights to various authorizations, various applications,
certain technology, and certain other rights. The increase in goodwill from
December 31, 2003 to December 31, 2004, and the decrease from December 31, 2004,
to June 30, 2005, are primarily the result of the fluctuation of the exchange
rate between the U.S. dollar and Canadian dollar. Future amortization of
intangible assets is as follows as of December 31, 2004:
2005 $ 9,571,931
2006 7,520,535
2007 5,601,111
2008 5,601,111
2009 5,490,000
Thereafter 37,921,631
------------
$71,706,319
============
4. Balance Sheet Details
Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31 June 30
2003 2004 2005
----------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Space and ground segments $ 39,771,813 $ 40,577,825 $ 43,171,505
System under construction -- 1,067,329 --
Office equipment and furniture 836,961 927,112 928,427
Leasehold improvements 300,000 434,832 452,195
----------------------------------------------------
40,908,774 43,007,098 44,552,127
Accumulated depreciation (18,160,201) (27,886,614) (31,295,728)
----------------------------------------------------
Property and equipment, net $ 22,748,573 $ 15,120,484 $ 13,256,399
====================================================
</TABLE>
M-19
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
4. Balance Sheet Details (continued)
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
December 31 June 30
2003 2004 2005
--------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Accounts payable $ 927,668 $ 2,447,819 $ 1,739,620
Accrued expenses 715,254 1,368,593 1,660,505
Accrued compensation and benefits 1,457,384 2,011,696 1,429,907
Accrued interest 283,749 343,113 355,917
--------------------------------------------------
Total accounts payable and accrued expenses $ 3,384,055 $ 6,171,221 $5,185,949
==================================================
</TABLE>
5. Long-Term Debt
Notes Payable
In November 2001, the Company issued $55.0 million of Convertible Notes and
$26.5 million of Non-Convertible Notes (collectively, the Notes) to finance the
acquisitions of the Motient and TMI satellite businesses. In August 2002, the
Company issued an additional $3.0 million of Convertible Notes. The Notes were
scheduled to mature on November 26, 2006, and bore interest at 10% per annum,
compounded semiannually and payable at maturity.
The Convertible Notes were convertible, at any time, into a number of the
Company's Class A Preferred Units (Preferred Units) determined by dividing the
principal being converted by $6.45. The terms of the Convertible Notes were
amended during 2003 to automatically convert into Preferred Units upon the
Company's payment in full of the principal and accrued interest on the
Non-Convertible Notes and the accrued interest on the Convertible Notes.
In August 2003, the Company repaid approximately $1.6 million of the principal,
and all of the accrued interest of approximately $2.1 million, on one of the
Non-Convertible Notes.
M-20
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
5. Long-Term Debt (continued)
Notes Payable (continued)
Long-term debt at December 31, 2003, consisted of the following:
Convertible Notes $ 58,000,000
Non-Convertible Notes 24,924,667
---------------
Notes payable $ 82,924,667
===============
In April 2004, the Company made payments totaling approximately $2.4 million for
principal and $2.6 million for accrued interest, on the Non-Convertible Notes.
In November 2004, $25.9 million of Non-Convertible Notes and accrued interest
were exchanged for 878,115 Common Units of MSV. The principal balance of $22.6
million and accrued interest of $3.3 million were exchanged for 765,843 and
112,272 Common Units, respectively, and approximately $56,000 of accrued
interest were paid in cash. At the same time, $58.0 million of Convertible Notes
was converted into 8,997,073 Class A Preferred Units in accordance with their
terms. At the date of the transaction, accrued interest on the Convertible Notes
was approximately $19.2 million, of which $18.2 million was paid in cash and
$1.0 million was exchanged for 36,045 Common Units (see Note 6). At the
completion of this transaction, all outstanding principal and interest
obligations on the Notes were extinguished.
Vendor Notes Payable
In February 2003, the Company entered into an agreement with a satellite
communications provider that is a related party (the Vendor) for the
construction and procurement of a ground station. The Vendor provided financing
for this project totaling approximately $1.0 million at an interest rate of
9.5%. Future payments on the Vendor note payable as of December 31, 2004, are as
follows:
2005 $ 279,523
2006 279,523
2007 279,523
2008 232,936
------------
Total future payments 1,071,505
Less: interest (169,945)
------------
Principal portion 901,560
Less: current portion (205,846)
------------
Long-term portion of vendor note payable $ 695,714
============
M-21
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
6. Partners' Equity
Effective November 26, 2001, pursuant to the Limited Partnership Agreement of
the Company, the partners' interests in the Company consisted of MSV Common
Units and MSV Class A Preferred Units. The Company's general partner, Mobile
Satellite Ventures GP Inc., a Delaware corporation, has no economic interest in
the Company and is owned by the Company's limited partners in proportion to
their fully diluted interests in the Company.
The Class A Preferred Units and Common Units had many of the same rights and
privileges, except the Class A Preferred Units had preference over the Common
Units in receiving proceeds resulting from a distribution of assets in certain
circumstances. The general partner did not hold any units as of December 31,
2002, 2003, and 2004. As of December 31, 2002, 2003, and 2004, there were
14,642,732, 14,642,732, and 34,786,823 Common Units, respectively, held by
limited partners. As of December 31, 2002 and 2003, there were 2,000,000 and
2,573,951 Class A Preferred Units, respectively, held by limited partners. In
November 2004, the Company's limited partnership agreement was amended to
eliminate the distinction between Class A Preferred and Common Units, and all
Class A Preferred Units were converted to Common Units. As of June 30, 2005,
there were 34,786,833 Common Units held by limited partners and no units held by
the general partner.
Effective November 26, 2001, profits and losses are allocated to the partners in
proportion to their economic interests. Losses allocated to any partner for any
fiscal year will not exceed the maximum amount of losses that may be allocated
to such partner without causing such partner to have an adjusted capital account
deficit at the end of such fiscal year. Any losses in excess of this limitation
shall be specially allocated solely to the other partners. Thereafter,
subsequent profits shall be allocated to reverse any such losses specially
allocated pursuant to the preceding sentence. Except for certain capital
proceeds and upon liquidation, the Company shall make distributions as
determined by the Board of Directors to the partners in proportion to their
respective percentage interests. Upon dissolution of the Company, a liquidating
trustee shall be appointed by the Board, or under certain circumstances, the
required investor majority, as defined, who shall immediately commence to wind
up the Company's affairs. The proceeds of liquidation shall be distributed in
the following order:
o First, to creditors of the Company, including partners, in the order
provided by law
o Thereafter, to the partners in the same order as other distributions
M-22
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
6. Partners' Equity (continued)
Issuance of Class A Preferred Units
In August 2003, the Company received $3.7 million in exchange for the issuance
of 573,951 Class A Preferred Units at $6.45 per unit. The Company used these
funds to repay approximately $1.6 million of the principal and approximately
$2.1 million of accrued interest on one of the Non-Convertible Notes (see Note
5). In March 2004, the Company received $17.6 million in exchange for the
issuance in April 2004 of 2,735,317 Class A Preferred Units. The Company used a
portion of the proceeds to repay approximately $2.4 million of the principal
balance and approximately $2.6 million of accrued interest on Non-Convertible
Notes (see Note 5). In November 2004, the Company's limited partnership
agreement was amended to eliminate the distinction between Preferred and Common
Units, and all Preferred Units were converted to Common Units.
Issuance of Common Units
In November 2004, the Company received $145.0 million in proceeds from its
existing investors in exchange for the issuance of 4,923,599 Common Units.
Concurrently, $25.9 million of Non-Convertible Notes and accrued interest was
exchanged for 878,115 Common Units. The principal balance of $22.6 million and
accrued interest of $3.3 million were exchanged for 765,843 and 112,272 Common
Units, respectively, and approximately $56,000 of accrued interest was paid in
cash. Additionally, $58.0 million of Convertible Notes were converted into
8,997,073 Class A Preferred Units in accordance with their terms. At the date of
the transaction, accrued interest on the Convertible Notes was approximately
$19.2 million, of which $18.2 million was paid in cash and $1.0 million was
exchanged for 36,045 Common Units.
7. Unit and Stock Option Plans
MSV Option Plan
In December 2001, the Company adopted a unit option incentive plan (Unit Option
Incentive Plan). Under the Unit Option Incentive Plan, the Company reserved for
issuance and may grant up to five million options to acquire units to employees
and directors upon approval by the Board of Directors. Options to acquire units
generally vest over a three-year period and have a 10-year life. In July 2005,
the total options available for grant were increased by 500,000.
M-23
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
7. Unit and Stock Option Plans (continued)
MSV Option Plan (continued)
Beginning in July 2004, the Company granted options with exercise prices at less
than the estimated fair market value of the related units on the option's grant
date. As a result, the Company recorded approximately $4.7 million in deferred
compensation during the year ended December 31, 2004. The Company recorded
approximately $6.2 million in deferred compensation during the six-month period
ended June 30, 2005. The deferred compensation is being amortized over the
options' vesting period. For the year ended December 31, 2004 and the six-month
period ended June 30, 2005, the Company recognized compensation expense of
approximately $495,000 and $6.2 million, of which $4.0 million related to the
change in control described below, $1.5 million related to modifications of
certain options granted to Directors, and $700,000 related to the amortization
of deferred compensation for options that vested as services were provided by
employees during the six-month period ended June 30, 2005.
Change of Control
Subsequent to the issuance of its March 31, 2005 financial statements, the
Company's Compensation Committee of the Board of Directors determined that a
"Change of Control" of the Company, as defined in the Unit Option Incentive
Plan, had occurred during the three-month period ended March 31, 2005. This
interpretation was related to Motient's acquisition, in February 2005, of MSV
interests previously held by other MSV limited partners. This Change of Control
in turn triggered the acceleration of the vesting of all of the Company's then
outstanding options and recognition of all deferred compensation expense
associated with these options. Accordingly, the Company recorded additional
amortization of deferred compensation of $3.8 million in the three-month period
ended March 31, 2005, which decreased the previously reported partners' equity
at March 31, 2005, and increased the net loss for the three-month period ended
March 31, 2005 by $3.8 million. These adjustments had no impact on total
partners' equity for the three-month period ended March 31, 2005. The Company
has restated its unaudited interim financial statements for the three-month
period ended March 31, 2005 to reflect the impact of this accelerated vesting.
M-24
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
7. Unit and Stock Option Plans (continued)
MSV Option Plan (continued)
At December 31, 2003 and 2004, and June 30, 2005, there were 885,333, 1,807,167,
and 3,657,847 options, respectively that were exercisable. At December 31, 2003
and 2004, and June 30, 2005, the weighted-average remaining contractual life for
outstanding options was 7.9 years, 8.1 years, and 7.7 years, respectively. The
weighted-average fair value of unit options granted during the years ended
December 31, 2002, 2003, and 2004 was $0.80, $0.91, and $4.61 per unit,
respectively. The weighted-average fair value of unit options granted during the
six-month periods ended June 30, 2004 and 2005, was $1.09 and $9.91,
respectively. At December 31, 2004 and June 30, 2005, the outstanding options
had exercise prices ranging from $6.45 to $29.45.
The following summarizes activity in the Unit Incentive Option Plan:
<TABLE>
<CAPTION>
Options to Weighted-Average
Acquire Units Exercise Price
---------------------------------------
<S> <C> <C>
Options outstanding at December 31, 2001 1,297,500 $ 6.45
Granted 91,000 6.45
---------------------------------------
Options outstanding at December 31, 2002 1,388,500 6.45
Granted 1,621,500 6.45
Canceled (115,833) 6.45
---------------------------------------
Options outstanding at December 31, 2003 2,894,167 6.45
Granted 1,497,750 6.81
Canceled (78,334) 6.45
---------------------------------------
Options outstanding at December 31, 2004 4,313,583 6.58
Granted (unaudited) 445,000 19.55
Canceled (unaudited) (41,936) 11.93
---------------------------------------
Options outstanding at June 30, 2005 (unaudited) 4,716,647 $ 7.85
=======================================
</TABLE>
M-25
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
7. Unit and Stock Option Plans (continued)
TerreStar Stock Option Plan
In July 2002, the Board of Directors of TerreStar approved the 2002 TerreStar
Stock Incentive Plan. The plan terms are similar to the Unit Option Incentive
Plan. Options to acquire shares generally vest over a 3-year period, and the
options to acquire shares have a 10-year life. At December 31, 2003 and 2004,
and May 11, 2005, 568,304, 1,157,664, and 1,342,295 options, respectively, were
exercisable. At December 31, 2003 and 2004 and May 11, 2005, the
weighted-average remaining contractual life for outstanding options was 8.6
years, 8.0 years, and 8.4 years, respectively. The weighted-average fair value
of options granted during the years ended December 31, 2002, 2003, and 2004 was
$0.10, $0.10, and $0.00 per unit, respectively. The weighted-average fair value
of shares granted during the six-month periods ended June 30, 2004 and 2005 was
$0.00 and $0.04, respectively. During 2004, the Company promised to grant
208,277 options with an exercise price of $0.70 during 2005 to certain
executives of the Company, of which 146,200 were granted in March 2005.
As part of the TerreStar Rights transaction (see Note 10), the Board of
Directors of TerreStar authorized a grant of additional options to employee
option holders of record at December 20, 2004, of approximately 50% of the
options outstanding on that date, which were granted in February 2005. The
Company recognized the cash received of $4,261 during 2004 for the options
exercised as minority interest. During the period from January 1, 2005 through
May 11, 2005, the Company granted options with exercise prices at less than the
estimated fair market value of the related TerreStar stock on the grant date. As
a result, the Company recorded approximately $2.0 million and $600,000 in
deferred compensation during the three-month period ended March 31, 2005 and
from April 1, 2005 through May 11, 2005, respectively. The deferred compensation
is being recognized over the options' vesting period. For the three-month period
ended March 31, 2005 and from April 1, 2005 through May 11, 2005, the Company
recognized compensation expense of approximately $49,000 and $64,000,
respectively in the accompanying consolidated statement of operations.
M-26
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
7. Unit and Stock Option Plans (continued)
TerreStar Stock Option Plan (continued)
The following summarizes activity in the TerreStar Option Plan as of May 11,
2005:
<TABLE>
<CAPTION>
Weighted-Average
Options to Exercise Price per
Acquire Shares Share
---------------------------------------
<S> <C> <C>
Options outstanding at December 31, 2001 -- $ --
Granted 1,762,567 0.70
---------------------------------------
Options outstanding at December 31, 2002 1,762,567 0.70
Granted 138,773 0.70
Canceled (39,803) 0.70
---------------------------------------
Options outstanding at December 31, 2003 1,861,537 0.70
Granted 535,278 0.66
Canceled (18,990) 0.70
Exercised (6,086) 0.70
---------------------------------------
Options outstanding at December 31, 2004 2,371,739 0.69
Granted (unaudited) 1,445,751 0.57
Canceled (unaudited) (20,086) 0.62
---------------------------------------
Options outstanding at May 11, 2005 (unaudited) 3,797,404 $ 0.65
=======================================
</TABLE>
8. Related Party Transactions
During the years ended December 31, 2002, 2003, and 2004, the Company incurred
$1,441,673, $150,966, and $1,180 of administrative expenses related primarily to
services provided by Motient. In addition, the Company provided
facilities-related services to Motient of $133,729 during the year ended
December 31, 2003.
The Company has an arrangement with MSV Canada, under which the Company provides
management services to MSV Canada and purchases satellite capacity from MSV
Canada. MSV Canada owns the satellite formerly owned by TMI. The Company earned
fees under the management agreement by providing certain services to MSV Canada
such as allowing access to its intellectual property; providing voice- and
data-switching capabilities; providing backup, restoral, and emergency spectrum
and satellite capacity and providing accounting, customer service, and billing
M-27
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
8. Related Party Transactions (continued)
services. Prior to January 1, 2005 (see Note 2), the Company recognized the
related management fee income in the month in which the services are provided.
The Company leases satellite capacity from MSV Canada pursuant to a lease
agreement. The term of the lease extends for 25 years and may be terminated by
the Company with one year's notice or by either party in certain circumstances.
The amount of the lease payments is determined by the parties periodically based
upon the amount of capacity usage by the Company and market rates. Prior to
January 1, 2005 (see Note 2) the Company recognized capacity fee expense in the
month in which the service was provided.
During the years ended December 31, 2002, 2003, and 2004, the Company incurred
$117,000, $36,025, and $188,682, respectively, of consulting expenses for
services provided by a company controlled by one of the Company's investors,
which is included in legal, regulatory, and consulting expenses in the
accompanying consolidated statements of operations. During the six-month periods
ended June 30, 2004 and 2005, the Company incurred $36,916 and $107,408,
respectively, of consulting expenses for these services.
The Company leases office space from an affiliate of TMI (see Note 9). The
Company has also entered into an agreement with this company to obtain
telemetry, tracking, and control services. The agreement ends April 30, 2006,
with automatic extension for three successive additional renewal periods of one
year each. The agreement may be terminated at any time, provided that the
Company makes a payment equal to the lesser of 12 months of service or the
remaining service fee. Under its services agreement, the Company paid $378,462,
$360,819, and $428,867, during the years ended December 31, 2002, 2003, and
2004, respectively. Under its services agreement, the Company paid $240,413 and
$243,918, during the six-month periods ended June 30, 2004 and 2005,
respectively.
During the year ended December 31, 2004, the Company incurred approximately
$2,728,000 of expenses for services provided by companies controlled by one of
the Company's investors. During the six-month periods ended June 30, 2004 and
2005, the Company incurred approximately $112,100 and $10,850 respectively, of
expenses for these services.
M-28
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
9. Commitments and Contingencies
Leases
As of December 31, 2004, the Company has noncancelable operating leases,
expiring through August 2008. Rental expense, net of sublease income, for the
years ended December 31, 2002, 2003, and 2004, was approximately $1.8 million,
$1.1 million, and $1.2 million, respectively. Rental expense, net of sublease
income was $630,000 and $634,000, respectively, during the six-month periods
ended June 30, 2004 and 2005.
Future minimum lease payments under noncancelable operating leases with initial
terms of one year or more are as follows for the years ended December 31:
2005 $ 1,289,236
2006 1,282,417
2007 1,282,417
2008 936,757
-------------
$ 4,790,827
=============
Office facility leases may provide for periodic escalations of rent, rent
abatements during specified periods of the lease, and payment of pro rata
portions of building operating expenses, as defined. The Company records rent
expense for operating leases using the straight-line method over the term of the
lease agreement.
Executive Employment Agreements
Certain executives have employment agreements that provide for severance and
other benefits, as well as acceleration of option vesting in certain
circumstances following a change in control as defined in those agreements.
Litigation and Claims
The Company is periodically a party to lawsuits and claims in the normal course
of business. While the outcome of the lawsuits and claims against the Company
cannot be predicted with certainty, management believes that the ultimate
resolution of the matters will not have a material adverse effect on the
financial position or results of operations of the Company.
M-29
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
9. Commitments and Contingencies (continued)
Contingencies
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company recognizes
a liability for these contingencies when it is probable that future expenditures
will be made and such expenditures can be reasonably estimated.
Regulatory Matters
During 2001, Motient applied to the FCC to transfer licenses and authorizations
related to its L-Band mobile satellite service (MSS) system to MSV. This
transfer was approved in November 2001. In connection with this application,
Motient sought FCC authority to launch and operate a next-generation MSS system
that will include the deployment of satellites and terrestrial base stations
operating in the same frequencies as an integrated network. In February 2003,
the FCC adopted general rules based on the Company's proposal to develop an
integrated satellite-terrestrial system, subject to the requirement that the
Company file an additional application for a specific terrestrial component
consistent with the broader guidelines issued in the February 2003 order. These
broad guidelines govern issues such as aggregate system interference to other
MSS operators, the level of integration between satellite and terrestrial
service offerings, and specific requirements of the satellite component that the
Company currently meets by virtue of its existing satellite system. While the
Company's current satellite assets satisfy these requirements, the Company
anticipates the future need to construct and deploy more powerful satellites.
The Company believes that the ruling allows for significant commercial
opportunity related to the Company's next-generation system. Both proponents and
opponents of the Ancillary Terrestrial Component (ATC), including the Company,
asked the FCC to reconsider the rules adopted in the February 2003 order.
Opponents of the ruling advocated changes that could adversely impact the
Company's business plans. The Company also sought certain corrections and
relaxations of technical standards that would further enhance the commercial
viability of the next-generation system. The FCC issued an order on
reconsideration of the February 2003 order in February 2005. The FCC granted
some of the corrections and relaxations of technical standards the Company has
advocated and has rejected the requests for changes advocated by opponents of
the FCC's February 2003 order. Only Inmarsat Ventures Ltd. has filed a petition
for reconsideration of the February 2005 order, which is currently pending. One
terrestrial wireless carrier filed an appeal of the FCC's February 2003 order
with the United States Court of Appeals. This appeal has been withdrawn.
M-30
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
9. Commitments and Contingencies (continued)
Regulatory Matters (continued)
In November 2003, the Company applied for authority to operate ATC in
conjunction with the current and next-generation satellites of MSV and MSV
Canada. The FCC's International Bureau granted this authorization, in part, in
November 2004 and deferred certain issues to the FCC's rulemaking proceeding,
which was resolved in February 2005. One opponent of the Company's application
has asked the FCC to review the Company's ATC authorization. This challenge is
pending. The Company has also received authorization to construct, launch and
operate three satellites; two by the FCC and one by Industry Canada. MSV must
meet certain milestone dates for each of these satellites.
There can be no assurance that, following the conclusion of the rulemaking and
the other legal challenges, the Company will have authority to operate a
commercially viable next-generation network.
10. TerreStar Networks
In February 2002, the Company established TerreStar, a majority-owned
subsidiary, to develop business opportunities related to the proposed receipt of
certain licenses in the 2 GHz band.
Regulatory Matters
TMI holds the approval issued by Industry Canada for a 2 GHz space station
authorization and related spectrum licenses for the provision of MSS in the 2
GHz band as well as an authorization from the FCC for the provision of MSS in
the 2 GHz band (MSS authorization). These authorizations are subject to FCC and
Industry Canada milestones relating to construction, launch, and operational
date of the system. TMI plans to transfer the Canadian authorization to an
entity that is eligible to hold the Canadian authorization and in which
TerreStar and/or TMI will have an interest, subject to obtaining the necessary
Canadian regulatory approvals. To satisfy the milestone requirements included
within the authorizations, TerreStar and TMI entered into an agreement in which
TerreStar agreed to enter into a non-contingent satellite procurement contract
for the construction and delivery to TMI of a satellite that is consistent with
the Canadian and FCC authorizations. Further, TMI agreed that at TerreStar's
election, TMI will transfer the 2 GHz authorizations to the entities described
above, subject to any necessary Canadian and U.S. regulatory approvals. In
December 2002, TMI and TerreStar jointly applied to the FCC for authority to
transfer TMI's MSS authorization to TerreStar.
M-31
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
10. TerreStar Networks (continued)
Regulatory Matters (continued)
In August 2002, Industry Canada advised TMI that the contractual arrangement
with TerreStar met the requirement that TMI demonstrate that it is bound to a
contractual agreement for the construction of the proposed satellite. However,
certain wireless carriers had urged the FCC to cancel TMI's MSS authorization. A
similar group also filed a petition in January 2003 asking the FCC to dismiss
the application to transfer TMI's MSS authorization to TerreStar. In February
2003, the FCC's International Bureau adopted an order canceling TMI's MSS
authorization due to an alleged failure to enter into a non-contingent satellite
construction contract before the specified first milestone date and dismissing
the application for TMI to transfer its MSS authorization to TerreStar. Also in
February 2003, the FCC adopted an order allowing MSS carriers, including those
in the 2 GHz band, to provide ATC. A number of parties, principally wireless
carriers, challenged the validity of that order. The FCC issued an order on
reconsideration of the February 2003 order in February 2005 (see Note 9).
In June 2004, upon review of the International Bureau's decision, the FCC agreed
to waive aspects of the first milestone requirement applicable to TMI's MSS
authorization and, therefore, also reinstated that authorization, along with the
application to transfer TMI's MSS authorization to TerreStar. The FCC also
modified the milestone schedule applicable to TMI's MSS authorization. In
November 2004, TMI certified to the FCC its compliance with the second milestone
under its MSS authorization. In April 2005, TMI certified compliance with the
third milestone under its MSS authorization. The FCC is currently reviewing both
certifications for compliance with the requirements of TMI's MSS authorization.
The application to transfer TMI's MSS authorization to TerreStar is still
pending before the FCC.
In September 2004, the FCC issued an order allowing PCS operation in the
1995-2000 MHz band, which may be adjacent to the 2 GHz frequencies ultimately
assigned to TMI. TerreStar has commented in the proceedings to establish service
rules for the 1995-2000 MHz band. There can be no assurance that the FCC will
not adopt service rules that will create interference to MSS operators in the 2
GHz band, including TerreStar.
As of December 31, 2004, spectrum in the 2 GHz MSS band is assigned pro rata
among the existing licensees. TMI's current spectrum assignments from the FCC
and Industry Canada reflect the cancellation of licenses of three of the eight
entities that were authorized to provide 2 GHz MSS in 2001: Mobile
Communications Holding Inc. (MCHI), Constellation Communications Holdings, Inc.
(Constellation), and Globalstar LP. Globalstar LLC, the successor-in-interest to
M-32
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
10. TerreStar Networks (continued)
Regulatory Matters (continued)
Globalstar LP, along with another interested entity, Globalstar Satellite LP,
has collectively challenged cancellation of its license on reconsideration to
the FCC. MCHI and Constellation have jointly challenged cancellation of their
licenses on appeal to the U.S. Court of Appeals for the D.C. Circuit. If any or
all of those licenses were reinstated, TMI would likely have access to less
spectrum than it would otherwise. The FCC has not yet redistributed spectrum
surrendered in March 2005 by three of the then remaining five 2 GHz MSS
licensees to the current remaining two 2 GHz MSS licensees. Although the FCC's
rules presume that such redistribution shall be made in the case of the fourth
and fifth license surrenders, there is no guarantee that the FCC will follow
that presumption, or that Industry Canada would make consequential amendments to
the spectrum assignment contained in TMI's Industry Canada authorization. Also,
TMI and TerreStar recently filed a letter at the FCC arguing for redistribution
of spectrum surrendered by Celsat, the third surrendering licensee. The letter
asks that the FCC find merit in the rebuttal of the presumption of the FCC's
rules that the Celsat spectrum would not be redistributed to the remaining two 2
GHz MSS licensees. The FCC has not yet issued a Public Notice concerning that
request. The Cellular Telecommunications Industry Association has filed an
objection to the TMI and TerreStar letter. There can be no assurance that more
oppositions will not be filed to TMI's and TerreStar's letter, nor can there be
any assurance that the FCC will accept TMI's and TerreStar's positions in such
letter or grant TMI's and TerreStar's request.
The 2 GHz MSS band and certain adjacent bands are currently occupied by
broadcast auxiliary service licensees, cable television relay service licensees,
local television transmission service licensees, fixed service licensees, and
certain other licensees. Most if not all of those licensees, and especially
those in the 2 GHz MSS uplink at 2000-2020 MHz, will need to relocate their
operations to a new band to accommodate 2 GHz MSS and other new entrants. As a 2
GHz MSS entrant, TMI and/or TerreStar may be obligated to compensate those
incumbent licensees for their relocation costs and for the costs of providing
"comparable facilities" to them. Under a separate FCC Order, Nextel
Communications Inc. (Nextel) must relocate incumbent licensees in the 1990-2025
MHz band by September 6, 2007. TMI and TerreStar have filed a Petition for
Reconsideration asking that the FCC clarify the reimbursement obligations of 2
GHz MSS licensees to Nextel, but the FCC has not yet acted on that Petition. It
is thus unclear what the potential reimbursement liability of TerreStar will be
with regard to Nextel's costs in that relocation process. Even if Nextel bears
all costs of relocating incumbent licensees in the 1990-2025 MHz band, TMI
and/or TerreStar will still likely be responsible for relocating certain
incumbent licensees in the 2165-2200 MHz band, although it may have the right to
recoup certain costs from wireless entrants in the 2165-2180 MHz band.
M-33
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
10. TerreStar Networks (continued)
Joint Venture Option
During 2002, TerreStar acquired an option to establish a joint venture with a
third party to develop certain opportunities in the 2 GHz band. The FCC licensed
the third party to construct, launch, and operate a communications system
consisting of two geostationary satellites in the 2 GHz band, a communications
network, and user terminals. Consideration for the option consisted of
nonrefundable payments made by TerreStar of $1.0 million during 2002 and
$500,000 during 2003. In January 2003, TerreStar exercised its option to form
the joint venture. Under the terms of the memorandum of agreement, TerreStar
contributed an additional $500,000 to the joint venture upon signing of the
joint venture agreements. However, as a result of the February 2003 FCC order
canceling TMI's 2 GHz license described above, in July 2003 TerreStar and the
third party mutually agreed to terminate the option agreement and the joint
venture and any remaining obligations or liabilities related to these
agreements. As a result, TerreStar wrote off its $2.0 million investment in the
joint venture during the year ended December 31, 2003.
Satellite Construction Contract
During 2002 and in connection with its contractual obligations to TMI, TerreStar
entered into a contract to purchase a satellite system, including certain ground
infrastructure for use with the 2 GHz band. TerreStar made payments of $500,000
and $350,000 during the years ended December 31, 2002 and 2003, respectively.
Following the reinstatement of the TMI license in July 2004, the contract was
amended resulting in a reduced milestone payment plan. TerreStar made payments
of $400,000 during the year ended December 31, 2004, and $0 and $2 million
during the six-month periods ended June 30, 2004 and 2005, respectively, related
to this contract. Such payments were capitalized as system under construction in
property and equipment in the accompanying consolidated balance sheets. As a
result of the spin-off of TerreStar as of May 11, 2005 (see below) MSV no longer
has any rights or obligations relating to this contract.
On December 20, 2004, the Company issued rights (the Rights) to receive an
aggregate of 23,265,428 shares of common stock of TerreStar representing all of
the shares of TerreStar common stock (the TerreStar Stock), owned by the
Company, to the limited partners of the Company, pro rata in accordance with
each limited partner's percentage ownership in the Company. In addition, in
connection with this transaction, TerreStar issued warrants (the Warrants) to
purchase an aggregate of 666,972 shares of TerreStar Stock to one of the
Company's limited partners.
M-34
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(information as of June 30, 2005, and the three-month and six-month periods
ended June 30, 2004 and 2005, is unaudited)
10. TerreStar Networks (continued)
Satellite Construction Contract (continued)
The Warrants have an exercise price of $0.21491 per share. The Company
recognized the fair value of the warrants of $95,611 as minority interest using
an option pricing model with the following assumptions: risk free interest rate
of 2.5%, expected life of the warrant of two years, and volatility of 141%. The
limited partner exercised the warrant in March 2005. The Company recorded the
cash received of $143,340 as minority interest.
On May 11, 2005, the limited partners of MSV exercised the Rights to acquire
shares of common stock of TerreStar. As a result of this transaction, Motient
Ventures Holdings, Inc. gained a majority interest in TerreStar and MSV divested
its ownership interest in TerreStar, thereby effecting a spin-off, which was
recorded as a distribution to the limited partners at book value in the
accompanying consolidated statement of partners' equity (deficit) for the six
months ended June 30, 2005. In May 2005, MSV and TerreStar entered into a
management services agreement whereby MSV agreed to provide certain services, to
include technical and program management efforts associated with ATC network
development as well as administrative support required to accomplish these
tasks.
Subsequent to the spin-off, as MSV no longer has an ownership interest in
TerreStar and is not the primary beneficiary of TerreStar, the accompanying
consolidated financial statements do not include the assets or liabilities of
TerreStar as of June 30, 2005, which were approximately $9.7 million and $10.4
million, respectively, on May 11, 2005. The accompanying consolidated financial
statements include the results of TerreStar since its inception through May 11,
2005, and are presented as discontinued operations in the accompanying
consolidated statements of operations and as TerreStar assets and liabilities,
discontinued, in the accompanying consolidated balance sheet.
11. Subsequent Events (unaudited)
On September 22, 2005 certain of the Company's limited partners announced the
key terms of a non-binding letter of intent for transactions that would result
in the consolidation of the ownership of MSV within Motient. Consummation of the
transactions will require successful completion of due diligence, negotiation
and execution of definitive documentation, Motient and SkyTerra Communications,
Inc. board and shareholder approval, and various regulatory approvals. Because
the letter of intent is non-binding, the parties have no obligation to negotiate
such documentation or otherwise consummate the transactions. Therefore, there
are no assurances that the transactions will be consummated on the currently
proposed terms or will ever be consummated, or that the required corporate or
regulatory approvals will be obtained.
M-35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table shows the costs and expenses, other than underwriting
discounts and commissions, payable in connection with the sale and distribution
of the securities being registered. All of these expenses will be paid by
Motient. All amounts except the SEC registration fee are estimated.
SEC Registration Fee.................................... $ 42,524
Accounting Fees and Expenses............................ 25,000
Legal Fees and Expenses................................. 200,000
Miscellaneous........................................... 148,000
--------------
Total................................................... $ 415,524
==============
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses, including attorneys' fees, as well as judgments, fines and settlements
in non-derivative lawsuits, actually and reasonably incurred in connection with
the defense of any action, suit or proceeding in which they or any of them were
or are made parties or are threatened to be made parties by reason of their
serving or having served in such capacity. The DGCL provides, however, that such
person must have acted in good faith and in a manner such person reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
in the case of a criminal action, such person must have had no reasonable cause
to believe his or her conduct was unlawful. In addition, the DGCL does not
permit indemnification in an action or suit by or in the right of the
corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for costs the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
Our Restated Certificate of Incorporation provides that no director of Motient
shall be personally liable for breach of fiduciary duty as a director. Any
repeal or modification of such provision shall not adversely affect any right or
protection, or any limitation of the liability of, a director of Motient
existing at, or arising out of facts or incidents occurring prior to, the
effective date of such repeal or modification. Both our Restated Certificate of
Incorporation and our Amended and Restated Bylaws contain provisions that
further provide for the indemnification of directors and officers in accordance
with and to the fullest extent permitted by the DGCL.
Additionally, Motient has entered into indemnification agreements with certain
of its directors and officers which may, in certain cases, be broader than the
specific indemnification provisions contained under current applicable law. The
indemnification agreements may require Motient, among other things, to indemnify
such officers, directors and key personnel against certain liabilities that may
arise by reason of their status or service as directors, officers or employees
of Motient and to advance the expenses incurred by such parties as a result of
any threatened claims or proceedings brought against them as to which they could
be indemnified.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On May 1, 2002, pursuant to Motient's plan of reorganization, 25,000,000 shares
of Motient's common stock, par value $0.01 per share, were issued. An additional
97,256 shares of our common stock were issued to certain of our creditors upon
completion of the bankruptcy claims process.
II-1
Additionally, pursuant to our plan of reorganization, holders of our
pre-reorganization common stock became entitled to receive warrants to purchase
an aggregate of approximately 1,496,512 shares of common stock at a price of
$0.01 per share. The holders were entitled to exercise such warrants to purchase
shares of our common stock prior May 1, 2004, if and only if the average closing
price of our common stock for ninety consecutive trading days was equal to or
greater than $15.44 per share. Since such condition was never satisfied, the no
warrants were ever exercised.
The shares of common stock and warrants to purchase shares of common stock
described above were not registered under the Securities Act of 1933. These
securities were issued in reliance upon the exemption contained in Section
1145(a) of the Bankruptcy Code, which exempts the offer and sale of securities
under a plan of reorganization from registration under the Securities Act.
In July 2002, our board of directors approved the offer and sale to CTA (or its
affiliates), a consultant to Motient, of warrants to purchase an aggregate of
500,000 shares of our common stock, for an aggregate purchase price of $25,000.
The warrants have an exercise price of $3.00 per share and a term of five years.
CTA purchased their warrants in December 2002. The warrants were valued at $1.5
million and recorded as a consultant compensation expense in December 2002. The
warrants were issued in reliance upon the exemption provided by Rule 506 under
the Securities Act of 1933, as amended, and/or in reliance on the exemption
afforded by Section 4(2) of the Securities Act.
On January 27, 2003, in connection with the execution of the credit agreement,
we issued warrants at closing to the lenders to purchase, in the aggregate,
3,125,000 shares of our common stock. The exercise price for these warrants is
$1.06 per share. The warrants were immediately exercisable upon issuance and
have a term of five years. The warrants were issued in reliance upon the
exemption afforded by Section 4(2) of the Securities Act.
On July 29, 2003, in connection with the execution of the letter agreement with
Further Lane, we issued Further Lane a warrant to purchase 200,000 shares of our
common stock. The exercise price of the warrant is $5.10 per share. The warrant
was immediately exercisable upon issuance and has a term of five years. The
warrant was issued in reliance upon the exemption afforded by Section 4(2) of
the Securities Act.
On March 16, 2004, in connection with the execution of the amendment to our
credit agreement, we issued warrants to the lenders to purchase, in the
aggregate, 2,000,000 shares of our common stock. The number of warrants will be
reduced to an aggregate of 1,000,000 shares of common stock because we obtained
at least $7.5 million of additional debt or equity financing within 60 days
after March 16, 2004. The exercise price of the warrants is $4.88 per share. The
warrants were immediately exercisable upon issuance and have a term of five
years. The warrants were issued in reliance upon the exemption afforded by
Section 4(2) of the Securities Act. The warrants are also subject to a
registration rights agreement. Under such agreement, we agreed to register the
shares underlying the warrants upon the request of a majority of the warrant
holders, or in conjunction with the registration of other common stock of the
company. We will bear all the expenses of such registration.
On April 7, 2004, we sold 4,215,910 shares of our common stock at a per share
price of $5.50 for an aggregate purchase price of $23.2 million to The Raptor
Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund
L.P., Tudor Proprietary Trading, L.L.C., Highland Crusader Offshore Partners,
L.P., York Distressed Opportunities Fund, L.P., York Select, L.P., York Select
Unit Trust, M&E Advisors L.L.C., Catalyst Credit Opportunity Fund, Catalyst
Credit Opportunity Fund Offshore, DCM, Ltd., Greywolf Capital II LP and Greywolf
Capital Overseas Fund and LC Capital Master Fund. The sale of these shares was
not registered under the Securities Act of 1933, as amended and the shares may
not be sold in the United States absent registration or an applicable exemption
from registration requirements. The shares were offered and sold pursuant to the
exemption from registration afforded by Rule 506 under the Securities Act and/or
Section 4(2) of the Securities Act. In connection with this sale, we signed a
registration rights agreement with the holders of these shares. We also issued
warrants to purchase an aggregate of 1,053,978 shares of our common stock to the
investors listed above, at an exercise price of $5.50 per share. However,
because we met certain conditions following the issuance of these warrants, they
will never vest.
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In connection with this sale, we issued to Tejas Securities Group, Inc., our
placement agent for the private placement, and certain CTA affiliates, warrants
to purchase 600,000 and 400,000 shares, respectively, of our common stock. The
exercise price of these warrants is $5.50 per share. The warrants are
immediately exercisable upon issuance and have a term of five years. The fair
value of the warrants was estimated at $6.2 million using a Black-Scholes model.
The shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act.
In April 2004, Michael Fabbri, Daniel Croft and Walter V. Purnell, Jr., received
275,000 shares of common stock upon the exercise of certain of their outstanding
options under Motient's 2002 employee stock option plan. Additionally, in June
2004, Walter V. Purnell, Jr. received an approximately 16,600 additional shares
of common stock upon the exercise of additional outstanding options. All of the
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act.
In June 2004, in connection with the settlement of outstanding obligations due
to Motorola, Motient agreed to issue Motorola warrants to purchase 200,000 of
its common stock. The exercise price of these warrants is $8.68 per share. The
warrants are immediately exercisable upon issuance and have a term of five
years. The warrants were issued in reliance upon the exemption afforded by
Section 4(2) of the Securities Act.
On July 1, 2004, we sold 3,500,000 shares of our common stock at a per share
price of $8.57 for an aggregate purchase price of $30.0 million to The Raptor
Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund
L.P., Tudor Proprietary Trading, L.L.C., York Distressed Opportunities Fund,
L.P., York Select, L.P., York Select Unit Trust, York Global Value Partner,
L.P., Catalyst Credit Opportunity Fund, Catalyst Credit Opportunity Fund
Offshore, DCM, Ltd., Rockbay Capital Fund, LLC, Rockbay Capital Investment Fund,
LLC, Rockbay Capital Offshore Fund, Ltd., Glenview Capital Partner, L.P.,
Glenview Institutional Partners, L.P., Glenview Capital Master Fund, Ltd., GCM
Little Arbor Master Fund, Ltd., OZ Master Fund, Ltd., OZ Mac 13 Ltd., Fleet
Maritime, Inc., John Waterfall, Edwin Morgens, Greywolf Capital II, L.P.,
Greywolf Capital Overseas Fund, Highland Equity Focus Fund, L.P., Singer
Children's Management Trust, Highland Equity Fund, L.P., and Strome Hedgecap
Limited. The sale of these shares was not registered under the Securities Act
and the shares may not be sold in the United States absent registration or an
applicable exemption from registration requirements. The shares were offered and
sold pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. In connection with
this sale, we signed a registration rights agreement with the holders of these
shares. We also issued warrants to purchase an aggregate of 525,000 shares of
our common stock to the investors listed above, at an exercise price of $8.57
per share. However, because we met certain conditions following the issuance of
these warrants, they will never vest.
In connection with this sale, we issued to certain affiliates of CTA and Tejas
Securities Group, Inc., our placement agent for the private placement, warrants
to purchase 340,000 and 510,000 shares, respectively, of our common stock. The
exercise price of these warrants is $8.57 per share. The warrants are
immediately exercisable upon issuance and have a term of five years. The shares
were offered and sold pursuant to the exemption from registration afforded by
Rule 506 under the Securities Act and/or Section 4(2) of the Securities Act.
On November 12, 2004, Motient sold 15,353,609 shares of its common stock at a
per share price of $8.57. Motient received aggregate proceeds of $126,397,809,
net of $5,182,620 in commissions paid to Motient's placement agent, Tejas
Securities Group, Inc. The approximately 60 purchasers included substantially
II-3
all of the purchasers from the April and July 2004 private placements, as well
multiple new investors. The sale of these shares was not registered under the
Securities Act and the shares may not be sold in the United States absent
registration or an applicable exemption from registration requirements. The
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act. In connection with this sale, Motient signed a registration
rights agreement with the holders of these shares. Among other things, this
registration rights agreement requires Motient to file and cause to make
effective a registration statement permitting the resale of the shares by the
holders thereof. Motient also issued warrants to purchase an aggregate of
approximately 3,838,401 shares of its common stock to the investors listed
above, at an exercise price of $8.57 per share. These warrants will vest if and
only if Motient does not meet certain deadlines between January and March 2005
with respect to certain requirements under the registration rights agreement. If
the warrants vest, they may be exercised by the holders thereof at any time
through November 11, 2009.
On February 9, 2005, Motient entered into a merger agreement with Telcom
Satellite Ventures Inc. and Telcom Satellite Ventures II Inc. and simultaneously
consummated the transactions contemplated thereby, pursuant to which Telcom
merged with and into MVH Holdings Inc., a direct and wholly-owned subsidiary of
Motient, in a tax free reorganization in which MVH is the surviving company. In
exchange for 2,296,835 MSV limited partnership units owned by the Telcom
entities, Motient issued to Telcom's stockholders 8,187,804 shares of its common
stock. As the purchasers are all accredited investors, and no general
solicitation has occurred, or will occur, as part of the offering and sale of
these securities, Motient has relied upon the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act.
Concurrently with this merger, Motient (through MVH) also purchased 373.7 shares
of common stock of Spectrum Space Equity Investors IV, Inc. and two other
related entities, representing approximately 66.3% of the outstanding common
stock of each of such entities, and 221.2 shares of common stock of Columbia
Space Partners, Inc. and two other related entities, representing approximately
27.8% of the outstanding common stock of such entities. In total, Motient issued
to the Spectrum entities and Columbia entities a total of 4,516,978 shares of
Motient common stock in a private placement in exchange for indirect ownership
of 1,267,098 MSV units. As the purchasers are all accredited investors, and no
general solicitation has occurred, or will occur, as part of the offering and
sale of these securities, Motient has relied upon the exemption from
registration afforded by Rule 506 under the Securities Act and/or Section 4(2)
of the Securities Act.
Telcom, Columbia and Spectrum also received warrants exercisable for an
aggregate of approximately 952,858 shares of Motient common stock. The warrants
have a term of five years and an exercise price equal to $22.50. Each warrant
shall become exercisable only as follows: (i) with respect to 35% of the warrant
shares, on the date that is 30 days following the closing of the merger, if a
registration statement covering the resale of the shares shall not have been
filed with the SEC by such date, (ii) with respect to an additional 35% of the
warrant shares, on the 60th day after the closing of the merger, if a
registration statement covering the resale of the shares shall not have been
filed with the SEC by such date, and (iii) with respect to 30% of the warrant
shares, on the 180th day after the closing of the Mergers, if a registration
statement covering the resale of the shares shall not have been declared
effective. As Motient has filed a registration statement covering these shares
on February 14, 2005, 70% of the 952,858 warrants will never vest.
On April 15, 2005, Motient sold 408,500 shares of non-voting Series A Cumulative
Convertible Preferred Stock, $0.01 par value, at a per share price of $1,000,
for total aggregate proceeds of approximately $391,000,000, net of $17,500,000
in combined commissions paid to Tejas Securities Group, Inc. and Deutsche Bank
Securities Inc. The approximately 40 purchasers included substantially all of
II-4
the purchasers from the November 2004 private placements, as well multiple new
investors. Each share of preferred stock has a term of five years and is
convertible into 30 shares of common stock. Dividends may be paid in cash or
common stock at Motient's option. Dividends paid in cash bear interest at a rate
of 5.25% and dividends paid in common stock bear interest at a rate of 6.25%.
Motient was required to place into escrow a sufficient amount to pay 24 months
of cash dividends, and accordingly will pay dividends only in cash through April
15, 2007.
After 24 months, Motient can require holders of preferred stock to convert it
into common stock if the trading price of Motient common stock exceeds $43.33
for at least 15 trading days within a 20 consecutive trading day period, so long
as the common stock underlying the convertible preferred stock is then
registered. If Motient is acquired prior to maturity of the preferred stock, or
if Motient issues more than $250 million of senior or pari passu securities,
then Motient must offer to redeem the preferred stock at a price of $1,080 per
share, plus any interest then remaining in the escrow account.
The sale of these shares was not registered under the Securities Act and the
shares may not be sold in the United States absent registration or an applicable
exemption from registration requirements. The shares were offered and sold
pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. In connection with
this sale, Motient signed a registration rights agreement with the holders of
these shares. Among other things, this registration rights agreement requires
Motient to file and cause to make effective a registration statement permitting
the resale of the common stock underlying the preferred stock. If Motient does
not meet certain registration deadlines with respect to the registration of
these shares, it will be required to issue warrants to the preferred holders in
the amount of 1/12 of 1% per month that the registration statement is not
effective after mid-September 2005.
On October 26, 2005, Motient completed an exchange offer whereby purchasers of
Series A Preferred could exchange their shares for Series B Preferred with
economic terms substantially identical to the Series A Preferred. Motient
accepted for exchange 318,500 shares of Series A Preferred Stock, representing
approximately 78% percent of the outstanding Series A Preferred Stock. With the
exception of 90,000 shares of Series A Preferred Stock held by funds affiliated
with Highland Capital Management (which remain outstanding), all Series A
Preferred Stockholders tendered their Series A Preferred Stock in the offer. The
Company will issue an equal number of shares of Series B Preferred Stock to the
holders who elected to exchange their shares of Series A Preferred Stock in the
exchange offer. The exchange was made pursuant to an exemption from registration
afforded by Section 3(a)(9) of the Securities Act.
No underwriters were involved in any of the foregoing distributions of
securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
The Exhibit Index filed herewith is incorporated herein by
reference.
(b) Financial Statement Schedules
Financial Statement Schedules not included below have been
omitted because they are not required or not applicable, or because the
required information is shown in the financial statements or notes
thereto.
Schedule II - Valuation and Qualifying Accounts......... Page F-42
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ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement; provided, however, that paragraphs
(a)(1)(i) and (a)(1)(ii) do not apply if the information
required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
2. That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
4. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the General Corporation Law of the State of Delaware, the
Restated Certificate of Incorporation, as amended, or the Amended and Restated
Bylaws of registrant, indemnification agreements entered into between registrant
and its officers and directors, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Lincolnshire,
Commonwealth of Illinois, on November 2, 2005.
MOTIENT CORPORATION
By: /s/ Christopher Downie
-------------------------------------------
Christopher Downie Executive Vice President,
Chief Operating Officer and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated
on November 2, 2005.
Name Title
---- -----
/s/ Christopher Downie Executive Vice President, Chief Operating Officer
---------------------- and Treasurer (Principal Executive Officer)
Christopher Downie
/s/ Myrna J. Newman Controller and Chief Accounting Officer
--------------------- (Principal Financial Officer)
Myrna J. Newman
---------------------- Director
Barry A. Williamson
* Director
---------------------
Gerry S. Kittner
* Chairman, Director
---------------------
Steven G. Singer
* Director
---------------------
Jonelle St. John
---------------------- Director
James D. Dondero
* Director
---------------------
Raymond L. Steele
---------------------- Director
C. Gerald Goldsmith
* Signed by Christopher W. Downie pursuant to a power of attorney.
II-7
EXHIBIT INDEX
2.1 - Debtors' Amended Joint Plan of Reorganization Under Chapter 11 of
the Bankruptcy Code, dated February 27, 2002 (incorporated by
reference to Exhibit 99.2 to the Registrant's Current Report on
Form 8-K dated March 4, 2002 (File No. 0-23044)).
3.1 - Restated Certificate of Incorporation of the Company (as restated
effective May 1, 2002) (incorporated by reference to Exhibit 3.1
of the Company's Amendment No. 2 to Registration Statement on
Form 8-A, filed May 1, 2002).
3.2 - Amended and Restated Bylaws of the Company (as amended and
restated effective May 1, 2002) (incorporated by reference to
Exhibit 3.1 of the Company's Amendment No. 2 to Registration
Statement on Form 8-A, filed May 1, 2002).
3.3 - Certificate of Designations of the Series A Cumulative
Convertible Preferred Stock (incorporated by reference to Exhibit
3.1 to the Registrant's Current Report on Form 8-K dated April
15, 2005)
3.4 - Amendment to Restated Certificate of Incorporation (incorporated
by reference to Motient's Registration Statement on Form S-1
filed on June 24, 2005).
3.5 - Certificate of Designations of the Series B Cumulative
Convertible Preferred Stock (incorporated by reference to Exhibit
3.1 to the Registrant's Current Report on Form 8-K dated October
31, 2005)
4.1 - Specimen of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of the Company's Amendment No. 2 to Registration
Statement on Form 8-A, filed May 1, 2002).
5.1 - Opinion of Andrews Kurth LLP, regarding the legality of the
common stock registered hereby.
10.2 - Credit Agreement by and between Motorola Inc. and ARDIS Company
dated June 17, 1998 (incorporated by reference to Exhibit 10.61
to the Company's Current Report on Form 10-Q dated June 30, 1998
(File No. 0-23044)).
10.2a - Amendment No. 2, dated September 1, 2000, to the Credit
Agreement, dated as of June 17, 1998, by and between Motorola,
Inc. and Motient Communications Company (formerly known as ARDIS
Company) (incorporated by reference to Exhibit 10.22a to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 0-23044)).
10.2b - Assumption, Release, Amendment and Waiver Agreement by and among
Motorola, Inc., Motient Communications Inc. and Motient
Communications Company, dated as of December 29, 2000
(incorporated by reference to Exhibit 10.22b to the Company's
Annual Report on Form 10-K for the year ended December 31, 2001
(File No. 0-23044)).
10.3 - Investment Agreement dated as of June 22, 2000, by and among the
Company, Motient Satellite Ventures LLC, and certain other
investors (incorporated by reference to Exhibit 10.41 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000 (File No. 0-23044)).
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10.4 - Asset Sale Agreement between Motient Satellite Ventures LLC and
Motient Services Inc. dated as of June 29, 2000 (incorporated by
reference to Exhibit 10.42 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000 (File No.
0-23044)).
10.4a - Amendment No. 1, dated as of November 29, 2000, to Asset Sale
Agreement, dated as of June 29, 2000, between Motient Satellite
Ventures LLC and Motient Services Inc. (incorporated by reference
to Exhibit 10.42a to the Company's annual report on Form 10-K for
the year ended December 31, 2000 (File No. 0-23044)).
10.4b - Amended and Restated Asset Sale Agreement, dated as of January 8,
2001, between Mobile Satellite Ventures LLC and Motient Services
Inc. (incorporated by reference to Exhibit 10.42b to the
Company's annual report on Form 10-K for the year ended December
31, 2000 (File No. 0-23044)).
10.4c - Amendment, dated as of October 12, 2001, to the Amended and
Restated Asset Sale Agreement, dated as of January 8, 2001, by
and between Motient Services Inc. and Mobile Satellite Ventures
LLC (incorporated by reference to Exhibit 10.42c to the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
2001 (File No. 0-23044)).
10.5 - Asset Sale Agreement, dated November 29, 2000, by and among the
Company, Motient Services Inc. and Aether Systems, Inc.
(incorporated by reference to Exhibit 10.46 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000
(File No. 0-23044)).
10.6 - January 2001 Investment Agreement, dated as of January 8, 2001,
by and among the Company, Mobile Satellite Ventures LLC, TMI
Communications and Company, Limited Partnership, and the other
investors named therein (incorporated by reference to Exhibit
10.48 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 (File No. 0-23044)).
10.7 - Document Standstill and Termination Agreement, dated as of
January 8, 2001, by and among the Company, Mobile Satellite
Ventures LLC, Motient Services Inc., and certain investors named
therein (incorporated by reference to Exhibit 10.50 to the
Company's annual report on Form 10-K for the year ended December
31, 2000 (File No. 0-23044)).
10.7a - Amended and Restated Document Standstill and Termination
Agreement, dated as of October 12, 2001 (incorporated by
reference to Exhibit 10.50a to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001 (File No.
0-23044)).
10.8 - Amended and Restated Investment Agreement, dated October 12,
2001, by and among Motient Corporation, Mobile Satellite Ventures
LLC, TMI Communications and Company, Limited Partnership, and the
other investors named therein (incorporated by reference to
Exhibit 10.55 to the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 2001 (File No. 0-23044)).
10.9 - Form of Stockholders' Agreement of Mobile Satellite Ventures GP
Inc. (incorporated by reference to Exhibit 10.56 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
2001 (File No. 0-23044)).
10.9a - Stockholders' Agreement, dated as of November 26, 2001, of
Mobile Satellite Ventures GP Inc. (incorporated by reference to
Exhibit 10.56a of the Company's Current Report on Form 8-K dated
November 19, 2001 (File No. 0-23044)).
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10.10 - Form of Limited Partnership Agreement of Mobile Satellite
Ventures LP (incorporated by reference to Exhibit 10.57 to the
Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 0-23044)).
10.11 - Form of Convertible Note of Mobile Satellite Ventures LP, in the
amount of $50.0 million issued to MSV Investors LLC (incorporated
by reference to Exhibit 10.58 to the Company's quarterly report
on Form 10-Q for the quarter ended September 30, 2001 (File No.
0-23044)).
10.12 - Form of Promissory Note of Mobile Satellite Ventures LP, in the
amount of $15.0 million issued to Motient Services Inc.
(incorporated by reference to Exhibit 10.59 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
2001 (File No. 0-23044)).
10.13 - Registration Rights Agreement between the Company and Highland
Capital Management, L.P., and Morgan Stanley Investment
Management, dated May 1, 2002 (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002) (File No. 0-23044)).
10.14* - Form of Change of Control Agreement for Officers of the Company
(incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2002 (File No. 0-23044)).
10.15 - Senior Indebtedness Note of MVH Holdings Inc., in the amount of
$19.0 million issued to Rare Medium Group, Inc., dated May 1,
2002 (incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2002 (File No. 0-23044)).
10.16 - Senior Indebtedness Note of MVH Holdings Inc., in the amount of
$750,000 issued to Credit Suisse First Boston, dated May 1, 2002
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2002 (File No. 0-23044)).
10.17 - Settlement Agreement by and among the Registrant and Rare Medium
Group, Inc., dated March 28, 2002 (incorporated by reference to
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 (File No. 0-23044)).
10.18 - Form of Warrant to purchase 343,450 shares of the Company's
common stock at an exercise price of $3.95 per share issued to
Evercore Partners, L.P. (incorporated by reference to Exhibit
10.28 to Amendment No. 1 to the Company's Registration Statement
on Form S-1 (File No. 333-87844)).
10.19 - Debtors' Amended Joint Plan of Reorganization Under Chapter 11 of
the Bankruptcy Code, dated February 27, 2002 (incorporated by
reference to Exhibit 99.2 to the Registrant's Current Report on
Form 8-K dated March 4, 2002 (File No. 0-23044)).
10.20* - Motient Corporation 2002 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Company's registration statement
on Form S-8 (File No. 333-92326)).
10.21* - Form of Stock Option Agreement (incorporated by reference to
Exhibit 99.2 to the Company's registration statement on Form S-8
(File No. 333-92326)).
10.22 - Form of Warrant to purchase up to 500,000 shares of the Company's
common stock at an exercise price of $3.00 per share issued to
certain affiliates of Communication Technology Advisors LLC
(incorporated by reference to Exhibit 10.22 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
II-10
10.23* - Executive Retention Agreement, dated as of July 16, 2002, by and
between Walter V. Purnell, Jr. and the Company (incorporated by
reference to Exhibit 10.23 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002).
10.24 - Amended and Restated Term Credit Agreement, dated January 27,
2003, by and among the Company, Motient Communications Inc.,
Motient Holdings Inc., the Lenders named therein, and M&E
Advisors, L.L.C., as Administrative Agent and Collateral Agent
(incorporated by reference to Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2002).
10.25 - Security Agreement, dated as of January 27, 2003, between Motient
Communications Inc. and M&E Advisors L.L.C. as Collateral Agent
(incorporated by reference to Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2002).
10.26 - First Amendment to Security Agreement, dated as of January 30,
2003, between Motient Communications Inc. and M&E Advisors L.L.C.
as Collateral Agent (incorporated by reference to Exhibit 10.26
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.27 - Motient Corporation Share Pledge Agreement, dated as of January
27, 2003, between Motient Corporation and M&E Advisors L.L.C., as
Collateral Agent (incorporated by reference to Exhibit 10.27 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.28 - Motient Holdings Share Pledge Agreement, dated as of January 27,
2003, between Motient Holdings Inc. and M&E Advisors L.L.C., as
Collateral Agent (incorporated by reference to Exhibit 10.28 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.29 - Form of Warrant to purchase shares of common stock of Motient
Corporation issued to lenders under the Amended and Restated Term
Credit Agreement dated as of January 27, 2003 (incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K for the year ended December 31, 2002).
10.30* - Letter amendment to Executive Retention Agreement, dated as of
February 10, 2004, by and between Walter V. Purnell, Jr. and the
Company (incorporated by reference to Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the year ended December
31, 2002).
10.31 - Amendment No. 1 to Amended and Restated Term Credit Agreement,
dated March 16, 2004, by and among Motient Communications Inc.,
Motient License Inc., the Required Lenders party thereto, and M&E
Advisors, L.L.C., as Administrative Agent and Collateral Agent
(incorporated by reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2002).
10.32 - Omnibus Amendment to SLA Note and Credit Facility, dated as of
March 16, 2004, by and among Motient Communications Inc., Motient
Corporation, Motient Holdings Inc., Motient Services Inc., and
Motorola, Inc. (incorporated by reference to Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the year ended December
31, 2002).
10.33 - Share Pledge Agreement, dated as of March 16, 2004, by and
between Motient Communications Inc. and M&E Advisors, L.L.C.
(incorporated by reference to Exhibit 10.33 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2002).
10.34 - Warrant to purchase shares of common stock of Motient
Corporation, issued to lenders under Amendment No. 1 to Amended
and Restated Term Credit Agreement, dated March 16, 2004
(incorporated by reference to Exhibit 10.34 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2002).
II-11
10.35 - Registration Rights Agreement, dated March 16, 2004, by and
between Motient Corporation and M&E Advisors, L.L.C. in its
capacity as Administrative and Collateral Agent under Amendment
No. 1 to Amended and Restated Term Credit Agreement (incorporated
by reference to Exhibit 10.35 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2002).
10.36 - Collateral Agency, Subordination and Intercreditor Agreement,
dated as of March 16, 2004, by and among Motient Communications
Inc., Motient License Inc., M&E Advisors L.L.C., and Motorola,
Inc. (incorporated by reference to Exhibit 10.36 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2002).
10.37 - Subordinate Motient Communications Share Pledge Agreement, dated
as of March 16, 2004, by and between Motient Communications Inc.
and Motorola, Inc. (incorporated by reference to Exhibit 10.37 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.38 - Common Stock Purchase Agreement, dated as of April 7, 2004, by
and among Motient Corporation and the Raptor Global Portfolio,
Ltd., et al (incorporated by reference to Exhibit 10.38 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003).
10.39 - Registration Rights Agreement, dated as of April 7, 2004, by and
among Motient Corporation and the Raptor Global Portfolio, Ltd.,
et al (incorporated by reference to Exhibit 10.39 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003).
10.40 - Form of Common Stock Purchase Warrant, dated as of April 7, 2004
(incorporated by reference to Exhibit 10.40 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003).
10.41 - Form of Common Stock Purchase Warrant, dated as of April 7, 2004
(incorporated by reference to Exhibit 10.41 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004).
10.42 - Securities Purchase Agreement, dated as of June 30, 2004, by and
among Motient Corporation and the Raptor Global Portfolio, Ltd.,
et al (incorporated by reference to Exhibit 10.42 to the
Company's Registration Statement on Form S-1 filed on July 6,
2004)
10.43 - Registration Rights Agreement, dated as of June 30, 2004, by and
among Motient Corporation and the Raptor Global Portfolio, Ltd.,
et al (incorporated by reference to Exhibit 10.42 to the
Company's Registration Statement on Form S-1 filed on July 6,
2004)
10.44 - Form of Common Stock Purchase Warrant, dated as of June 30, 2004
(incorporated by reference to Exhibit 10.42 to the Company's
Registration Statement on Form S-1 filed on July 6, 2004)
10.45 - Form of Common Stock Purchase Warrant, dated as of June 30, 2004
(incorporated by reference to Exhibit 10.42 to the Company's
Registration Statement on Form S-1 filed on July 6, 2004)
10.46 - Warrant Issued to Motorola, Inc. (incorporated by reference to
Exhibit 10.42 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004)
10.47 - Common Stock Purchase Agreement, dated as of November 12, 2004,
by and among Motient Corporation and the investors listed therein
(incorporated by reference to Exhibit 10.43 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2004)
II-12
10.48 - Registration Rights Agreement, dated as of November 12, 2004, by
and among Motient Corporation and the investors listed therein
(incorporated by reference to Exhibit 10.44 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2004)
10.49 - Form of Common Stock Purchase Warrant, dated as of November 12,
2004 (incorporated by reference to Exhibit 10.45 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2004)
10.50 - Purchase Agreement, dated as of November 12, 2004, by and among
Motient Ventures Holding Inc., Mobile Satellite Ventures LP, et
al (incorporated by reference to Exhibit 10.46 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2004)
10.51 - Note Exchange Agreement, dated as of November 12, 2004, by and
among Motient Ventures Holding Inc., Mobile Satellite Ventures
LP, et al (incorporated by reference to Exhibit 10.47 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004)
10.52 - Amended and Restated Limited Partnership Agreement, dated as of
November 12, 2004, by and among Motient Ventures Holding Inc.,
Mobile Satellite Ventures LP, et al (incorporated by reference to
Exhibit 10.48 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004)
10.53 - Amended and Restated Stockholders Agreement, dated as of November
12, 2004, by and among Motient Ventures Holding Inc., Mobile
Satellite Ventures GP Inc., et. al. (incorporated by reference to
Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004)
10.54 - Second Amended and Restated Parent Transfer/Drag Along Agreement,
dated as of November 12, 2004, by and among Motient Corporation,
et. al. (incorporated by reference to Exhibit 10.50 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004)
+10.55 - Voting Agreement, dated as of November 12, 2004, by and among
Columbia Space (QP), Inc., et al (incorporated by reference to
Exhibit 10.55 of this Company's Registration Statement on Form
S-1/A, file number 333-121862)
+10.56 - Consent Agreement, dated January 27, 2005, by and among Columbia
Space (QP), Inc., et al (incorporated by reference to Exhibit
10.56 of this Company's Registration Statement on Form S-1/A,
file number 333-121862)
+10.57 - Merger Agreement, dated as of February 9, 2005, by and among
Motient Corporation, Telcom Satellite Ventures Inc., et al
(incorporated by reference to Exhibit 10.57 of this Company's
Registration Statement on Form S-1/A, file number 333-121862)
+10.58 - Form of Stock Purchase Agreement, dated February 9, 2005
(incorporated by reference to Exhibit 10.58 of this Company's
Registration Statement on Form S-1/A, file number 333-121862)
+10.59 - Registration Rights Agreement, dated February 9, 2005 by and
among Motient Corporation, Telcom Satellite Ventures Inc., et al
(incorporated by reference to Exhibit 10.59 of this Company's
Registration Statement on Form S-1/A, file number 333-121862)
+10.60 - Form of Warrant to purchase Motient common stock, dated February
9, 2005 (incorporated by reference to Exhibit 10.60 of this
Company's Registration Statement on Form S-1/A, file number
333-121862)
+10.61 - Form of Stockholder's Agreement, dated February 9, 2005
(incorporated by reference to Exhibit 10.61 of this Company's
Registration Statement on Form S-1/A, file number 333-121862)
10.62 - Securities Purchase Agreement dated April 15, 2005 by and among
the Registrant and the Purchasers listed on Schedule 1 thereto
(incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated April 15, 2005)
10.63 - Amended and Restated Registration Rights Agreement dated October
26, 2005 by and among the Registrant and the Purchasers listed on
Schedule 1 thereto (incorporated by reference to Exhibit 10.1 to
the Registrant's Current Report on Form 8-K dated October 31,
2005)
II-13
10.64 - Form of Common Stock Purchase Warrant (incorporated by reference
to Exhibit 10.3 to the Registrant's Current Report on Form 8-K
dated April 15, 2005)
10.65 - Purchase Agreement dated May 11, 2005 by and between Motient
Ventures Holding Inc. and TerreStar Networks Inc. (incorporated
by reference to Exhibit 10.1 to the Registrant's Current Report
on Form 8-K dated May 11, 2005)
10.66 - Conditional Waiver and Consent Agreement dated May 11, 2005 by
and among the Registrant and each other party listed on the
signature page thereto (incorporated by reference to Exhibit 10.2
to the Registrant's Current Report on Form 8-K dated May 11,
2005)
10.67 - Stockholders Agreement dated May 11, 2005 by and among Motient
Ventures Holding Inc. and the other parties thereto (incorporated
by reference to Exhibit 10.3 to the Registrant's Current Report
on Form 8-K dated May 11, 2005)
10.68 - Purchase Agreement dated May 13, 2005 by and between Motient
Corporation and George Haywood (incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated
May 19, 2005)
10.69 - Form of Purchase Agreement dated May 17, 2005 by and between
Motient Corporation and Columbia Capital Investors III, LLC, et
al (incorporated by reference to Exhibit 10.2 to the Registrant's
Current Report on Form 8-K dated May 19, 2005
10.70* - Amendment to Motient Corporation 2002 Stock Option Plan
(incorporated by reference to Motient's Registration Statement on
Form S-1 filed June 24, 2005)
10.71 - Amended and Restated Registration Escrow Agreement dated October
26, 2005 by and among the Registrant and Computershare
(incorporated by reference to Exhibit 10.2 to the Registrant's
Current Report on Form 8-K dated October 31, 2005)
16.1 - Letter from PricewaterhouseCoopers LLP to the Securities and
Exchange Commission dated April 22, 2003 (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on Form
8-K filed on April 23, 2003).
16.2 - Letter from PricewaterhouseCoopers LLP to the Securities and
Exchange Commission dated March 9, 2004 (incorporated by
reference to Exhibit 16.1 to the Company's Current Report on Form
8-K filed on March 9, 2004).
16.3 - Letter from Friedman LLP to the Securities and Exchange
Commission dated June 7, 2004 (incorporated by reference to
Exhibit 16.1 to the Company's Current Report on Form 10-Q for the
quarter ended September 30, 2003, filed on June 7, 2004).
21.1 - Subsidiaries of the Company. (filed herewith)
23.1 - Consent of Andrews Kurth LLP (included in
Exhibit 5.1)
23.2 - Consent of Friedman LLP, Independent Registered Public Accounting
Firm (filed herewith).
23.3 - Consent of Friedman LLP, Independent Registered Public Accounting
Firm (filed herewith).
23.4 - Consent of Ernst & Young LLP, Independent Auditors (filed
herewith).
+24.1 - Power of Attorney pursuant to which amendments to this
registration statement may be filed (included on the signature
page in Part II of this registration statement).
------------
* Management contract or compensatory plan or arrangement.
+ Previously filed.
II-14
EXHIBIT 5.1
[ANDREWS KURTH LLP LETTERHEAD]
November 2, 2005
Motient Corporation
300 Knightsbridge Parkway
Lincolnshire, Illinois 60069
RE: Motient Corporation Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Motient Corporation, a Delaware corporation
(the "Company"), in connection with the preparation and filing of its
Registration Statement on Form S-1 (the "Registration Statement"), filed with
the Securities and Exchange Commission (the "Commission") pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), in connection with
the resale of up to 11,235,465 shares (the "Shares") of the Company's common
stock, par value $0.001 per share ("Common Stock"), proposed to be offered by
the selling stockholders named therein, 9,509,019 of which may be issued upon
conversion of the Company's Series B Cumulative Convertible Preferred Stock (the
"Series B Stock") held by the selling stockholders named therein, 120,158 of
which may be issued upon exercise of certain Common Stock Purchase Warrants (the
"Warrants") held by the selling stockholders named therein, and 1,606,288 of
which may be issued as dividends on shares of the Series B Preferred held by the
selling stockholders named therein, each as described below.
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Restated
Certificate of Incorporation of the Company on file with the Secretary of State
of the State of Delaware (the "Certificate of Incorporation"), (ii) the Bylaws
of the Company as in effect on the date hereof and at the time of the adoption
of the resolutions by the Board of Directors approving the issuance of the
Shares, as certified to us by a Company officer, (iii) the Certificate of
Designations of Series B Cumulative Convertible Preferred Stock on file with
the Secretary of State of the State of Delaware (the "Certificate of
Designations") (iii) certain resolutions of the Board of Directors of the
Company, as certified to us by a Company officer, (iv) a specimen certificate
representing the Common Stock, and (v) such other documents and records as we
have deemed necessary and relevant for purposes hereof. We have relied upon
certificates of public officials and officers of the Company as to certain
matters of fact relating to this opinion and have made such investigations of
law as we have deemed necessary and relevant as a basis hereof. As to all
matters of fact material to such opinion, we have relied upon representations of
officers of the Company.
In our examination, we have assumed and have not independently
established or verified (i) the genuineness of all signatures, (ii) the legal
capacity of all natural persons, (iii) the authenticity of all documents
submitted to us as originals, and (iv) the conformity to the authentic originals
of all documents supplied to us as certified, conformed, photostatic or faxed
copies. In rendering the opinion set forth below, we have assumed that the
certificate or certificates evidencing the Shares will be manually signed by one
of the authorized officers of the transfer agent and registrar for the Shares
and registered by such transfer agent and will conform to the specimen stock
certificate examined by us evidencing the Common Stock.
Our opinion below assumes that the Shares to be issued upon conversion
of or as dividends on the shares of Series B Preferred will be issued in
accordance with the terms of the Certificate of Designations and that the
securities to be issued pursuant to the Common Stock Purchase Warrants dated as
of April 15, 2005 issued by the Company and the selling stockholders named in
the Registration Statement (the "Warrants") will be issued in accordance with
Motient Corporation
November 2, 2005
Page 2
the terms of the Warrants, and with respect to all Shares that all requisite
steps will be taken to comply with applicable requirements of state laws
regulating the offer and sale of securities.
Based upon the foregoing, and subject to the limitations and
assumptions set forth herein, and having due regard for such legal
considerations as we deem relevant, we are of the opinion that the Shares have
been duly authorized and will be, upon issuance, upon conversion of the Series B
Stock, upon exercise of the Warrants or as dividends on the Series B Stock, as
the case may be, validly issued, fully paid and non-assessable.
The foregoing opinion is based on and is limited to the General
Corporation Law of the State of Delaware, and we render no opinion with respect
to the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the reference to our firm under the
caption "Legal Matters" in the Registration Statement and the prospectus which
forms a part thereof. In giving these consents, we do not thereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act or the rules and regulations issued thereunder.
This opinion is expressed as of the date hereof, and we disclaim any
undertaking to advise you of any subsequent changes in the facts stated or
assumed herein, or of any subsequent changes in applicable law. This opinion is
intended solely for your use as an exhibit to the Registration Statement for the
purpose of the above-referenced registered re-sale of Shares and is not intended
to be relied upon by any other person or for any other purpose.
Very truly yours,
/s/ Andrews Kurth LLP
ANDREWS KURTH LLP
EXHIBIT 21.1
SUBSIDIARIES
All subsidiaries listed below are Delaware corporations doing business under the
name given.
Motient Communications Inc.
Motient Holdings Inc.
Motient Services Inc.
Motient License Inc
MVH Holding Inc.
Motient Ventures Holding Inc.
TerreStar Networks Inc.
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
We consent to the inclusion in this Registration Statement of Motient
Corporation and Subsidiaries on Form S-1 (No. 333-[ ]) and the related
prospectus, of our report dated March 30, 2005 relating to the consolidated
financial statements and financial statement schedule, which appears in such
Prospectus. We also consent to the reference to us under the headings "Experts"
and "Summary Financial Data" in such Prospectus. However, it should be noted
that Friedman LLP has not prepared or certified such "Summary Financial Data."
/s/ FRIEDMAN LLP
----------------
East Hanover, New Jersey
November 2, 2005
EXHIBIT 23.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the inclusion in this Registration Statement on Form S-1 (No.
333-[ ]) and the related prospectus, of our report dated June 2, 2005, relating
to the financial statements of TerreStar Networks Inc. We also consent to the
reference to us under the headings "Experts" and "Summary Financial Data" in
such Prospectus. However, it should be noted that Friedman LLP has not prepared
or certified such "Summary Financial Data."
/s/ FRIEDMAN LLP
----------------
East Hanover, New Jersey
November 2, 2005
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and the use
of our report dated February 18, 2005, except for the matter described in the
last two paragraphs of Note 10, as to which the date is May 11, 2005, with
respect to the consolidated financial statements of Mobile Satellite Ventures LP
and Subsidiaries in the Registration Statement (Form S-1 No. 333-00000) and
related Prospectus of Motient Corporation for the registration of 11,235,465
shares of its common stock.
/s/ ERNST & YOUNG LLP
---------------------
McLean, Virginia
November 1, 2005