Item 1. Business. - -----------------
Overview
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.
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(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 our proprietary applications and services that reduce airtime usage, improve performance and reduce costs. As of February 1, 2005, we have not generated any revenues from iMotient Solutions, however, we have recently signed customer agreements and anticipate generating revenue in the near term.
As of March 15, 2005, Motient's terrestrial wireless two-way data network covers a geographic area populated by more than 195 million people and is comprised of over 1,200 base stations that provide service to 412 of the nation's largest cities and towns, including all primary metropolitan statistical areas, commonly known as "MSAs". Subscriber units, 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 its 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 will begin 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(TM) platform, or to other networks using our agreements with RACO Wireless, Inc. and eAccess Solutions, Inc. Our 800 MHz FCC licenses for these discontinued markets may be lost as a result of these actions. 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. 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.
As of December 31, 2003 and 2004, there were approximately 204,000 user devices and 132,000 user devices registered, respectively, and 115,000 user devices and
77,000 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.
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.
Our website is www.motient.com.
Management and Board Changes Since January 1, 2004
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 the board of directors.
On June 15, 2004, the board of directors designated Raymond L. Steele and Jonelle St. John as the board's financial experts.
On May 24, 2004, the board of directors designated Myrna J. Newman, the Company's controller and chief accounting officer, as the principal financial officer of the Company.
Also on May 24, 2004, the board of directors elected Christopher W. Downie to the position of executive vice president, chief operating officer and treasurer. Mr. Downie remains the principal executive officer.
On May 6, 2004, the board of directors elected Raymond L. Steele to serve as a member of the board. They also elected him to the Company's Audit Committee.
On May 6, 2004 the board of directors elected Robert L. Macklin to the position of general counsel and secretary.
On March 18, 2004 the board of directors elected Christopher W. Downie to the position of executive vice president, chief financial officer and treasurer, and designated Mr. Downie as the Company's principal executive officer.
On February 18, 2004, Daniel Croft, senior vice president, marketing and business development, and Michael Fabbri, senior vice president, sales, were relieved of their duties as part of a reduction in force.
On February 10, 2004, our board of directors and Walter V. Purnell, Jr. mutually agreed to end his employment as president and chief executive officer of Motient and all of its wholly owned subsidiaries. Concurrently, Mr. Purnell resigned as a director of such entities and of Mobile Satellite Ventures L.P., or MSV, and all of its subsidiaries.
History
Motient was formed in 1988 under the name "American Mobile Satellite Corporation" to construct, launch and operate a mobile satellite services system to provide a full range of mobile voice and data services via satellite to land, air and sea-based customers subject to local regulation. During 1995, we successfully launched our first satellite and initiated commercial voice service. In late 1996, we expanded our mobile data business through the acquisition of Rockwell International Corporation's dual mode mobile messaging and global positioning and monitoring service for commercial trucking fleets.
In March 1998, we acquired Motient Communications, formerly ARDIS Company, from Motorola and combined the ARDIS terrestrial-based business with our satellite-based business to offer a broad range of integrated end-to-end wireless solutions through two network configurations, either a "satellite-only" service network or a "multi-mode" terrestrial and satellite service network.
Following operation of a joint network for three years, we decided to base our business primarily on the terrestrial network and make the satellite available to a joint venture. Motient's satellite and related assets and business were sold on November 26, 2001 to MSV.
Mobile Satellite Ventures
Business
MSV is 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 "ancillary terrestrial component" technology. MSV 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. 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. As of March 1, 2005, we have a 49% direct and indirect interest in MSV.
History
On June 29, 2000, we formed a joint venture subsidiary, MSV, with certain other parties, in which we owned 80% of the membership interests. The remaining 20% interests in MSV were owned by three investors unrelated to Motient. However, the minority investors had the right to participate in certain business decisions that were made in the normal course of MSV's business. Therefore, in accordance with Emerging Issues Task Force Issue No 96-16, "Investor's Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights", our investment in MSV has been recorded for all periods presented in the consolidated financial statements included in this annual report pursuant to the equity method of accounting.
Through November 2001, MSV used our satellite network to conduct research and development activities. On November 26, 2001, we sold the assets comprising our satellite communications business to MSV. In consideration for our satellite business assets, we received the following:
o a $24.0 million cash payment in June 2000;
o a $41.0 million cash payment paid at closing on November 26, 2001, net of $4.0 million retained by MSV related to our sublease of real estate from MSV; and
o a five-year, $15.0 million note.
In this transaction, TMI Communications and Company, Limited Partnership, or TMI, a Canadian satellite services provider, also contributed its satellite communications business assets to MSV. In addition, Motient purchased a $2.5 million convertible note issued by MSV as part of this transaction, and certain other investors, including a subsidiary of Rare Medium, purchased a total of $52.5 million of MSV convertible notes. On August 12, 2002, we purchased an additional $957,000 of MSV convertible notes. At December 31, 2002, on a fully diluted basis, Motient owned approximately 25.5% of the equity of MSV, assuming certain other investors fully exercised their option to make additional investments in MSV as a result of the FCC's ATC approval process described more fully below.
On August 21, 2003, two investors in MSV (excluding Motient) invested an additional $3.7 million in MSV in exchange for Class A preferred units of limited partnership interests in MSV. MSV used the proceeds from this investment
to repay other indebtedness that was senior in its right of repayment to Motient's promissory note. Under the terms of the amended and restated investment agreement, these investors also had the option of investing an additional $17.6 million in MSV.
On April 2, 2004, an additional $17.6 million investment in MSV was consummated. Of the proceeds, $5.0 million was used to repay certain outstanding indebtedness of MSV, including $2.0 million of accrued interest under the $15.0 million promissory note issued to Motient by MSV. The remainder of the proceeds from this investment was used for general corporate purposes by MSV. Motient was required to use 25% of the $2 million it received in this transaction, or $500,000, to make prepayments under its existing notes owed to Rare Medium Group, Inc. and Credit Suisse First Boston. As of the closing, Motient's percentage ownership of MSV was approximately 29.5% (assuming conversion of all outstanding convertible notes).
On November 12, 2004, we 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 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. Such investments and conversions increased Motient's ownership of MSV from 29.5% (assuming conversion of all outstanding convertible notes) to 38.6%.
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 held by the Telcom entities, Motient issued to Telcom's stockholders 8,187,804 shares of its common stock.
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 through the Spectrum and Columbia entities of 1,267,098 MSV units.
At the consummation of these transactions, Motient's direct and indirect ownership of MSV was approximately 49%. Motient does not control MSV and accounts for its investment under the equity method.
MSV's Next-Generation Communications System: 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. ATC technology allows a wireless provider to use satellite communications technology in conjunction with more traditional land-based wireless communications technologies, 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 at least some of the frequencies that are allocated to the satellite systems. An appeal of this decision has been filed before a federal court. We cannot predict the outcome of this pending appeal.
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.
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. These rules are subject to challenge at the FCC or before a federal court.
MSV's Spectrum Assets
MSV, together with Mobile Satellite Ventures (Canada) Inc., licensed by Industry Canada, has access to more than 25 MHz of L-band spectrum that is authorized for use in every market in North America. The L-band spectrum is positioned within the range of frequencies used by terrestrial wireless providers in North America. In addition to its L-band spectrum, MSV has certain rights to receive
nationwide spectrum in the S-band (2 GHz range) from its affiliate, TMI Communications and Company, Limited Partnership, or TMI, as a result of authorizations from the FCC and Canada's regulatory authority. The S-band authorizations contain certain conditions and require the satisfaction of certain satellite construction and other milestones. Additionally, the amount of the S-band spectrum that can be utilized by any one operator is contingent upon the number of remaining authorized operators in the band as determined by their respective ability to meet construction and other milestones. There can be no assurance that such conditions and milestones will be satisfied. Also, the transfer of the S-band authorizations to MSV is subject to approval by the FCC and Canadian regulatory authority.
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.
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 100 million shares of common stock and up to 5 million shares of preferred stock.
On the effective date of our Plan of Reorganization, a new board of directors of Motient consisting of seven members was established. Effective May 1, 2002, we adopted "fresh-start" accounting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". We determined that the selection of May 1, 2002 versus April 26, 2002 for the "fresh-start" date was more convenient for financial statement reporting purposes and that the results for the period from April 26, 2002 to May 1, 2002 were immaterial to our consolidated financial statements. Under "fresh-start" accounting, a new entity has been deemed created for financial reporting purposes.
Further details regarding the Plan of Reorganization are contained in our disclosure statement with respect to the Plan of Reorganization, which was filed as Exhibit 99.2 to our current report on Form 8-K dated March 4, 2002.
Motient's Business Strategy
Motient's objective is to 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:
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 data 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.
Focus Growth Efforts for the DataTac Network on Network Efficient Applications. Certain applications have key attributes that make them an efficient use of the Motient DataTac network. Applications such as wireless point-of-sale and transportation and dispatching applications (found in industries such as transportation, trucking and credit card processing) typically have small bandwidth requirements and can be designed to utilize the network on a 24 hours per day, 7 days per week basis, thus smoothing loading requirements and optimally using our existing capacity. We believe that these kinds of applications are poised for significant growth and that this growth can be accommodated efficiently on the existing Motient DataTac network, and we have signed agreements with several resellers that specialize in these kinds of applications. This focus could also allow for some excess capacity to be removed from our DataTac network in the future, which would reduce our operating costs.
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 core terrestrial network, such as customer support and business services.
Develop New Wireless Applications to Increase Demand and Revenue Per Subscriber. Motient intends to exploit the market potential of its wireless network by
working with other companies to develop additional innovative wireless applications. As market acceptance and demand for wireless email grows, Motient believes users will demand an increasing variety of Internet-based content and services. Motient currently offers content-based services for use with its eLink service provided by GoAmerica and Notify Inc.
Leverage Distribution Resources of Strategic Resellers. To penetrate target markets without significant direct sales and marketing expenses, Motient has signed a number of strategic alliances with various industry leaders. Motient intends to leverage the relationships, marketing and distribution resources and large existing customer bases of these resellers to reach significantly more potential customers than Motient would be able to address on its own. Motient has a roster of resellers and resale contracts with third parties, including SkyTel Communications, Inc., Metrocall Wireless, Inc., Geologic Solutions (formerly Aether Systems, which purchased our transportation assets in November 2000), Research In Motion, Ltd. and Earthlink, Inc., among others. Motient has also entered into agreements with a number of device manufacturers, resellers and software vendors to develop and offer a variety of specialized applications, including heating, ventilation and air conditioning, commonly known as HVAC, system monitoring, energy meter reading, office and vending machine automation and wireless point-of-sale applications such as credit card processing. Motient plans to continue to seek new strategic distribution channels that will enable it to more fully penetrate its existing markets and access potential new markets. In addition, Motient intends to exploit cross-selling opportunities using some of its existing large corporate customers in the future.
Effectively Manage the Anticipated Migration of our Mobile Internet Segment Customers. Due to the emergence of high-bandwidth competitive data networks, and with additional voice service capabilities, as well as limitations on the number of available mobile internet user devices, primarily as a result of Research In Motion's decision in 2003 to discontinue the RIM 857 product line on our DataTac network, we are implementing initiatives to manage the migration of these customers to next-generation network solutions. These initiatives include supporting customer migration efforts by referring these customer relationships to T-Mobile through our sub-dealer agreements with RACO Wireless or otherwise through eAccess Solutions, Inc. This allows us to continue to support our customers' needs, while also generating revenue from these customers. This migration of customers could also allow for some excess capacity to be removed from our network, which would reduce our operating costs.
Work With Vendors to Develop Less Expensive and More Functional User Devices to Address Competition and Increase Demand for its Services. Motient plans to continue to work with vendors to develop new generations of user devices and applications that combine improved functionality and convenience at a lower price. Motient also plans to continue to incorporate inexpensive, off the shelf software or free software in its services. Motient believes that lower price points will help accelerate the acceptance and adoption of its services in its traditional markets and will also enable Motient to better penetrate its targeted new wireless markets. By working with suppliers and by making strategic software and hardware investments, Motient has lowered the total cost of ownership of its products. At the same time, Motient has improved the functionality of its devices and made them smaller and more convenient.
Take Advantage of Motient's Professional Service and Back-Office Capabilities to 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 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.
Rationalize Cost Structure & Improve Network Utilization. Motient plans to rationalize its network infrastructure by focusing on market segments that are most appropriate for its technology. We intend to focus on the markets identified above because we believe that this will enable us to grow our revenues while also reducing the operating cost of our network, because these markets are less demanding on our network.
Motient's Wireless Service Offerings
General
Motient 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 8 types of devices from 8 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, Motient believes we will be able to enhance our sales performance by offering enterprise customers a full array of technology solutions that meet their needs, independent of the network.
iMotient Solutions
In December 2004, we announced 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 will 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 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(TM) 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, long-standing customers, such as IBM, 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.
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 and office machine automation and security/alarm monitoring. We believe that our expansive wireless network and telemetry experience will allow us to provide cost-effective and comprehensive solutions for these communication requirements.
The iMotient Solutions 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 December 31, 2004, there were approximately 132,000 user devices registered on Motient's network, with 107,000 in a billable status and 77,000 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 39% Field service 7 Telemetry and point of sale 21 Wireless internet or email 33 ---- Total 100% ====
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%. The loss of one or more of these customers, or any event, occurrence or development, which adversely affects Motient's relationship with one or more of these customers, could harm Motient's business. The contracts with these customers are generally multi-year contracts, and the services provided pursuant to such contracts are generally customized applications developed to work solely on Motient's network.
UPS, Motient's second largest customer for the year ended December 31, 2003 and 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 30 days' notice. As of December 31, 2004, UPS had approximately 4,700 user devices actively passing traffic units on Motient's network.
In addition, due to a separate arrangement entered into in 2002 under which UPS prepaid for network airtime to be used by it in 2004 and beyond, we do not expect that UPS will be required to make any cash payments to us through 2006 for service to be provided through 2006. As of December 31, 2004 the value of our remaining airtime service obligations to UPS in respect of the prepayment was approximately $4.0 million. If UPS terminates its contract with Motient, any remaining prepayment would be required to be repaid.
Marketing and Distribution
Motient markets its wireless services through strategic distribution resellers and its direct sales force.
Strategic Alliances and Resellers
To penetrate new wireless data markets, which Motient believes have significant growth potential, we have signed contracts for a variety of strategic alliances, including with industry leaders. Motient intends to use the marketing and distribution resources and large existing customer bases of these resellers to address significantly more potential customers than Motient would be able to address on its own.
Motient 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 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 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.
Equipment and Supplier Relationships
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.
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 certified on Sprint's network.
AT&T Corp. provides network telecommunications services, including a nationwide wireline data network, and leased sites which house regional switching equipment for Motient's terrestrial network. Motient also has a relationship with AT&T as Motient's vendor for switched inbound and outbound public switched telephone network services, 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 March 15, 2005, Motient had 95 and 94 employees, respectively. None of Motient's employees are represented by a labor union. Motient considers its relations with its employees to be good.
Regulation
The terrestrial two-way wireless data network used in Motient's wireless business is regulated to varying degrees at the federal, state and local levels. Various legislative and regulatory proposals under consideration from time to time by Congress and the FCC have in the past materially affected and may in the future materially affect the telecommunications industry in general, and Motient's wireless business in particular. The following is a summary of significant laws, regulations and policies affecting the operation of Motient's wireless business. In addition, many aspects of regulation at the federal, state and local level currently are subject to judicial review or are the subject of administrative or legislative proposals to modify, repeal, or adopt new laws and administrative regulations and policies. Neither the outcome of these proceedings nor their impact on Motient's operations can be predicted at this time.
The ownership and operation of Motient's terrestrial network is subject to the rules and regulations of the FCC, which acts under authority established by the Communications Act of 1934, as amended, and related federal laws. Among other things, the FCC allocates portions of the radio frequency spectrum to certain services and grants licenses to and regulates individual entities using that spectrum. Motient operates pursuant to various licenses granted by the FCC.
Motient is a commercial mobile radio service provider and therefore is regulated as a common carrier. Motient must offer service at just and reasonable rates on a first-come, first-served basis, without any unjust or unreasonable discrimination, and Motient is subject to the FCC's complaint processes. The FCC has decided not to apply or to withhold its right, at this time, to apply numerous common carrier provisions of the Communications Act to commercial mobile radio service providers. In particular, Motient is not subject to traditional public utility rate-of-return regulation, and is not required to file tariffs with the FCC.
The FCC's universal service fund supports the provision of affordable telecommunications to high-cost areas and the provision of advanced telecommunications services to schools, libraries, and rural health care providers. Under the FCC's current rules, end-user revenues derived from the sale of information and other non-telecommunication services and certain wholesale revenues derived from the sale of telecommunications services are not subject to universal service fund obligations. Generally, Motient is not required to contribute to the universal service fund. Current rules also do not require that Motient impute to its contribution base retail revenues derived when it uses its own transmission facilities to provide a service that includes both information service and telecommunications components. There can be no assurances that the FCC will retain the exclusions described herein or its current policy regarding the scope of a carrier's contribution base. Motient may also be required to contribute to state universal service programs. The requirement to make these state universal service payments, the amount of which in some cases may be subject to change and is not yet determined, may have a material adverse impact on the conduct of Motient's business.
Motient is subject to the Communications Assistance for Law Enforcement Act, or CALEA. Under CALEA, Motient must ensure that law enforcement agencies can intercept certain communications transmitted over its network. Motient must also ensure that law enforcement agencies are able to access certain call-identifying information relating to communications over Motient's network. The deadline for complying with the CALEA requirements and any rules subsequently promulgated was June 30, 2002. Based on discussions with Federal law enforcement agencies regarding the applicability of CALEA's provisions to Motient, we do not believe that our network, which uses packet data technology, is subject to the requirements of CALEA. At the suggestion of Federal law enforcement agencies, we have developed an alternative methodology for intercepting certain communications over our network for the purposes of law enforcement surveillance. We believe this alternative methodology has substantially the same functionality as the standards provided in CALEA. It is possible that our
alternative methodology may ultimately be found not to comply with CALEA's requirements, or that our interpretation that CALEA does not apply to our network may ultimately be found to be incorrect.
In addition, CALEA establishes a federal fund to compensate telecommunications carriers for all reasonable costs directly associated with modifications performed by carriers in connection with equipment, facilities and services installed or deployed on or before January 1, 1995. For equipment, facilities and services deployed after January 1, 1995, the CALEA fund is intended to compensate carriers for any reasonable costs associated with modifications required to make compliance "reasonably achievable." It is possible that all necessary modifications will not qualify for this compensation and that the available funds will not be sufficient to reimburse Motient. Therefore, the requirement to comply with CALEA could have a material adverse effect on the conduct of Motient's business.
Motient's FCC licenses are renewable, site-based, 800 MHz licenses, granted for a term of 10 years. Renewal is granted in the ordinary course for licenses like those which Motient holds.
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.
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 April 8, 2004, Motient filed a request with the FCC asking that the FCC relocate its 800MHz band frequencies into the "Guard Band", which is that portion of the 800 MHz frequency band immediately adjacent to the upper-800 as part of the 800 MHz reconfiguration plan. On August
6, 2004, the FCC released the text of its July 8, 2004 order. The text of the order did not grant Motient's request, but neither did it explicitly deny it. On December 2, 2004, Motient filed comments with the FCC seeking to clarify and implement Motient's original request of April 8, 2004. On December 22, 2004, the FCC clarified that Motient would generally be allowed, subject to certain conditions, to move its 800 MHz frequencies to the upper-800 MHz band. Motient cannot assure you that its operations will be not affected by the adoption or implementation of this order or any subsequent addenda.
As a result of our ongoing network rationalization efforts, our 800 MHz FCC licenses may be lost in markets to which we are discontinuing service. We believe that the value of our FCC licenses in these smaller markets is very small compared to the value of our FCC licenses in the top 40 MSAs. While we 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.
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. The new entity, Friedman LLP has been retained by Motient and the Audit Committee of Motient's Board of Directors approved this decision on June 4, 2004.
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.
We have been forced to take material actions to reduce operating costs and preserve our remaining cash. For example, in February 2004 we effected a reduction in force that reduced our workforce from approximately 166 to 112 employees. 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. 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. As Motient begins decommissioning its DataTac network outside of the 40 largest MSA, it may be faced with the loss of certain FCC licenses in those areas. Motient anticipates that if it is not able to sell, lease or otherwise monetize these frequencies, 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 and may never be cash flow positive, and our prospects will depend on our ability to control our costs while maintaining and improving our service levels.
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. As a result, we have been involved in the process of reducing our expenditures in a variety of areas, including a reduction in the number of our employees, the closure of our Reston facility and the restructuring and reduction of our network. We also have renegotiated several of our key vendor and customer arrangements and continue to aggressively pursue further vendor cost reductions when opportunities arise. We continue to use more cash than we generate from operations. Our prospects will depend in part on our ability to reduce operating costs further and operate more efficiently, while maintaining and improving our service levels.
We will need additional liquidity to fund our operations.
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. We currently anticipate that our funding requirements through 2005 should be met through a combination of various sources, including:
o cash on hand
o cash from a rights offering announced in December 2004, expected to be completed by May or June 2005, 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. 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.
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 generate a large part of our revenues and cash flows from a small number of customers, 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 are 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 customers will continue in future periods. We may lose certain revenues from major customers due to churn and migration to alternative technologies. 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.
In addition, United Parcel Service, Inc., or UPS, our second largest customer for the year ended December 31, 2003 and our tenth largest customer for the year ended December 31, 2004, substantially completed its migration to next generation network technology by the end of the second quarter of 2003, and its monthly airtime usage of our network declined significantly. In December 2002 we entered into a separate agreement with UPS under which UPS made a significant prepayment for network airtime service to be provided beginning January 1, 2004. The prepayment was credited against airtime services provided to UPS beginning January 1, 2004, until the prepayment is fully credited. If UPS terminates our contract (which it may do on 30 days' notice), any remaining prepayment would be required to be repaid. Based on the current level of network airtime usage by UPS, we do not expect that UPS will be required to make any cash payments to us through 2006 for service provided through 2006.
Our growth has been curtailed by funding constraints.
We have significantly decreased the amount that we are spending on the maintenance and growth of our operations, network and subscriber base due to our liquidity constraints. We have taken a number of steps to continue to reduce our operating and capital expenditures in order to lower our cash burn rate. Our failure to generate or raise sufficient funds may require us to delay or abandon some of our expenditures, which could harm our business and competitive position.
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 will be 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.
We may not be able to realize value from our investment in MSV due to risks associated with MSV's next-generation business plan.
MSV's next-generation business plan involving the development of a next generation network that combines satellite services with ancillary terrestrial components, or ATC, is novel and without established precedent. Neither MSV nor any other company has developed an integrated hybrid network combining satellite services with ATC, and MSV's 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 S-band rights;
o MSV's ability to effectively make use of spectrum in the S-band and L-band;
o MSV's ability to structure partnerships to fund its next generation system consistent with various regulations governing ownership and operation of both satellite assets and ATC;
o 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 MSV's spectrum assets 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 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 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 MSV's next-generation satellites and the maintenance of MSV's existing geostationary satellites;
o MSV's ability to obtain funding for the construction of the satellite component of its next-generation service on favorable terms;
o MSV's dependence on one or more third party partners to construct the terrestrial base station component of its next-generation network;
o market acceptance and level of demand for MSV's next-generation network; and
o protection of MSV's proprietary information and intellectual property rights.
If MSV is unable to implement its next-generation business strategy, our investment in MSV could be materially and adversely affected. For additional information regarding MSV, please see the financial statements of MSV beginning on page M-1.
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 could lose market share and revenues as a result of increasing competition from companies in the wireless communications industry that have greater resources and name recognition.
We expect to face intense competition in all of our markets, which could result in a loss 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.
Our wireless internet service competes with a variety of services that offer two-way messaging and personal digital assistant, or PDA, functionality on small, portable devices. Most of these competing services are better established in the marketplace, and many competitors have substantially greater financial, technical, marketing, sales, distribution and other resources than we have. Our agreement with Research In Motion permits us to market the BlackBerry(TM) service in the United States on the Motient network. These and other firms may enter the markets where we focus our sales efforts, which may create downward pressure on the prices for our services and negatively impact our returns. Many of the existing and potential competitors have financial and other resources far greater than those of Motient. In addition, continuing consolidation in the communications industry may strengthen existing competitors or give rise to significant new competitors, which would threaten our business.
In addition, a variety of new technologies, devices and services will result in new types of competition for us in the near future. The emergence of new protocols such as the wireless access protocol, or WAP, and the Bluetooth protocol enable the use of the Internet as a platform to exchange information among people with different devices running on different networks. Also, several large wireless providers are deploying new, so-called "2.5G" and "3G" technologies, including new forms of CDMA, time division multiple access, or TDMA, and GSM technologies, which will increase the data capabilities of wireless voice and data services and will have a competitive impact on our business.
Failure to keep pace with rapidly changing markets for wireless communications would significantly harm our business.
The technology and markets for wireless communications services change rapidly. Our success depends, in part, on our ability to respond and adapt to change. For example, large wireless voice carriers are in the process of expanding their ability to offer wireless data services that may compete with our services, by deploying "2.5G" and "3G" technologies. These technologies, which include GPRS and 1XRTT, support both wireless voice and packet data services. While we will endeavor to enhance the efficiency and performance of our existing data-only network through a variety of measures, we also expect to consider, as appropriate, alliances or other contractual arrangements with larger wireless communications providers, so that we can continue to offer as complete an array of data services as possible. We cannot guarantee that we will be able to compete effectively under, or adjust our contemplated plan of development to meet, changing market conditions. We cannot guarantee that we will be able to implement our strategy or that our strategy will be successful in these rapidly evolving markets. The markets for wireless communications services are also marked by the continuous introduction of new products and services and increased capacity for services similar to those provided by Motient. Technological advances may also increase the efficiency of existing products or services. If a technology becomes available that is more cost-effective or creates a superior product, we may be unable to access this technology or finance the necessary substantial capital expenditures that may be required. Our technology may be rendered less profitable or less viable by existing, proposed or as yet undeveloped technologies. We cannot guarantee that we will have the financial and other resources available to compete effectively against companies possessing such technologies. We are unable to predict which of the many possible future products and services will meet evolving industry standards and consumer demands. We cannot guarantee that we can adapt to technological changes or offer products or services on a timely basis to establish or maintain a competitive position.
The success of our wireless communications business depends on our ability to enter into and maintain third party distribution relationships.
A key element of our strategy is to develop and capitalize on distribution relationships with leading companies who can provide access to significant numbers of potential customers in our target markets. For example, Motient has reseller agreements with SkyTel, Metrocall, Geologic Solutions and Earthlink, as well as Research In Motion. Because we are relying on these distribution
companies to enable us to acquire subscribers, our success in penetrating our targeted markets will depend, to a large extent, on the efforts of these distribution companies, as well as future distribution companies. The rollout of sales efforts by these distribution companies may be subject to delays, some of which may be outside of our control. Some of our resellers have experienced significant financial difficulties in recent periods. Our inability to fully capitalize on our third party distribution agreements, the termination of or failure to renew any of these agreements, or our inability to enter into similar distribution relationships with other leading companies could reduce our access and exposure to potential customers.
We expect to maintain a limited inventory of devices to be used in connection with our wireless internet service, and any interruption in the supply of such devices could significantly harm our business.
We depend on independent vendors to develop and manufacture wireless communications devices for our networks, which are significant elements of our business plan because most of our services require these devices. Numerous vendors manufacture devices that can be utilized on the Cingular and Sprint networks that can be offered to Motient's current and future customers through our iMotient Solutions(TM) platform.
We carry a limited inventory of these devices and generally have no guaranteed supply arrangements. Some of these suppliers and vendors are relatively small companies and have limited resources and production capacities. In addition, some of our sole-source suppliers themselves rely on sole- or limited-sources of supply for components included in their devices.
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 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.
If we are found to infringe or misappropriate a third party's proprietary rights, we could be required to pay damages to the third party, alter our products or services, obtain a license from the third party or cease activities utilizing these proprietary rights, including making or selling products or services utilizing the proprietary rights. Our inability to do any of the foregoing on commercially favorable terms could have a material adverse impact on our business, financial condition or results of operations.
We also rely on some technologies licensed from third parties. 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. A number of Motient's licenses are subject to renewal by the FCC. We cannot guarantee that all existing licenses will be renewed and that the requisite frequencies will be coordinated. Moreover, the recent changes to our wireless network specifically the future discontinuance of service to certain smaller markets, may result in the loss of our FCC licenses in such markets. 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, 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. Any additional issuance of equity by Motient would also be subject to certain pre-emptive rights held by the investors in Motient's April, July and November 2004 private placements. 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.
Rights Offering
On November 22, Motient announced that it will issue to each of its stockholders of record one right for each share of Motient common stock held as of the close of business on December 17, 2004. Each right will entitle any holder that did not participate in the April, July or November 2004 private placement to purchase 0.103 shares of its common stock at a price of $8.57 per share, with fractions rounded up to the next whole share. A maximum of 2.5 million shares may be sold in the Rights Offering, generating maximum aggregate proceeds of approximately $21.4 million.
The rights will be non-transferable and will expire if not exercised within the exercise period. The rights will not be exercisable until the registration statement covering the rights and the shares of underlying common stock is declared effective by the SEC, and the exercise period will expire 30 days after the rights become exercisable. Motient has not filed a registration statement relating to the rights offering, but intends to do so as soon as reasonably practicable. Motient expects to consummate this rights offering in mid 2005.
The holders of the rights will not have over-subscription rights, and there will be no backstop to purchase unsubscribed shares. Purchasers that purchased shares in the November 12, 2004 private placement of its common stock, which include all purchasers in its April and July 2004 private placements, have waived their right to participate in the rights offering. Motient reserves the right to abandon this rights offering at any time prior to the effectiveness of the registration statement relating to the rights offering, and upon any such abandonment, any and all of the rights previously issued will be cancelled, will no longer be exercisable and will be of no further force or effect.
Item 2.
Item 2. 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 1,200 base stations and antennae across the country for the terrestrial network under one to five-year lease contracts with varied renewal provisions.
Motient believes that its existing facilities are adequate to meet its needs for the foreseeable future.
Item 3.
Item 3. Legal Proceedings. - --------------------------
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 DataTac 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, Inc., the holder of the disputed patents.
On April 15, 2004, Motient filed a claim under the rules of the American Arbitration Association in Fairfax County, VA, against Wireless Matrix Corporation, a reseller of Motient's services, for the non-payment of certain amounts due and owing under the "take-or-pay" agreement between Motient and Wireless Matrix. Under this agreement, Wireless Matrix agreed to purchase certain minimum amounts of air-time on the Motient network. In February 2004, Wireless Matrix informed Motient that it was terminating its agreement with Motient. Motient did not believe that Wireless Matrix had any valid basis to do so, and consequently filed the above mentioned claim seeking over $2.6 million in damages, which amount represents Wireless Matrix's total prospective commitment under the agreement. On May 10, 2004, Motient received notice of a counter-claim by Wireless Matrix of approximately $1 million, representing such amounts as Wireless Matrix claimed to have paid in excess of services rendered under the agreement. In June 2004, Motient reached a favorable out of court settlement, in which Wireless Matrix 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.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. - ------------------------------------------------------------
No matters were submitted to a vote of our stockholders during the fourth quarter of fiscal 2004.
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.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. - --------------------------------------
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 2003, 2004 and 2005.
---------------------------------------------------------------------- 2005 High Low ---------------------------------------------------------------------- First Quarter (through March 15, 2005) $31.45 $21.25 ---------------------------------------------------------------------- 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 $8.95 ---------------------------------------------------------------------- 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 ----------------------------------------------------------------------
The high and low sales prices represent the intra-day prices on the Pink Sheets. The quotations represent inter-dealer quotations, without retail markups, markdowns or commissions, and may not necessarily represent actual transactions.
On March 15, 2005, the last reported bid price of our common stock was $25.40 per share on the Pink Sheets. As of March 15, 2005, there were approximately 106 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 capital 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. Under Delaware law, a corporation cannot declare or pay dividends on its capital stock unless it has an available surplus.
Recent Sales of Unregistered Securities
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. The sale of these shares was not registered under the Securities Act of 1933, as amended and the shares may not be sold in the United States absent registration or an applicable exemption from registration requirements. The shares were offered and sold pursuant to the exemption from registration afforded by Rule 506 under the Securities Act and/or Section 4(2) of the Securities Act. In connection with this sale, Motient signed a registration rights agreement with the holders of these shares. Motient also issued warrants to purchase an aggregate of 1,053,978 shares of its common stock to the investors listed above, at an exercise price of $5.50 per share. Because Motient met certain conditions following the issuance of the warrants, they will never vest.
In connection with this sale, Motient issued to Tejas Securities Group, Inc., its placement agent for the private placement, and certain CTA affiliates, warrants to purchase 600,000 and 400,000 shares, respectively, of its common stock. The exercise price of these warrants is $5.50 per share. The warrants are immediately exercisable upon issuance and have a term of five years. Motient also paid Tejas Securities Group, Inc. a placement fee of $350,000 at closing. The fair value of the warrants was estimated at $6.2 million using a Black-Scholes model. 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 conditions following the issuance of the warrants, they 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. The shares were offered and sold pursuant to the exemption from registration afforded by Rule 506 under the Securities Act and/or Section 4(2) of the Securities Act.
On November 12, 2004, Motient sold 15,353,609 shares of its common stock at a per share price of $8.57. Motient received aggregate proceeds of $126,397,809, net of $5,182,620 in commissions paid to its placement agent, Tejas Securities Group, Inc. The approximately 60 purchasers included substantially all of the purchasers from the April and July 2004 private placements, as well multiple new investors. The sale of these shares was not registered under the Securities Act and the shares may not be sold in the United States absent registration or an applicable exemption from registration requirements. The shares were offered and sold pursuant to the exemption from registration afforded by Rule 506 under the Securities Act and/or Section 4(2) of the Securities Act. In connection with this sale, Motient signed a registration rights agreement with the holders of these shares. Among other things, this registration rights agreement required us to file and cause to make effective a registration statement permitting the resale of the shares by the holders thereof. Motient also issued warrants to purchase an aggregate of approximately 3,838,401 shares of its common stock to the investors listed above, at an exercise price of $8.57 per share. These warrants will vest if and only if Motient does not meet certain deadlines between January and March 2005 with respect to certain requirements under the registration rights agreement, one of which has already been met, and one of which was not 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.
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.
No securities were repurchased during the fourth quarter of 2004.
Certain information concerning our equity compensation plans appearing under "Equity Compensation Plan Information" is included in "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" below.
Item 6.
Item 6. 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 are referred to as "Successor Company" results.
You should read our selected financial data in conjunction with the information contained in "Item 7
Item 7. 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.
Core Wireless Business
We are a nationwide provider of two-way, wireless mobile data services and wireless internet services. We own and operate a wireless radio data network that provides wireless mobile data service to customers across the United States, and we generate revenue primarily from the sale of airtime on this 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. 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 their users with wireless access to a broad range of email and information services to personal consumers and corporate customers;
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.
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 seamless 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 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 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. As of February 1, 2005, we have not generated any revenues from iMotient Solutions(TM), however, we have recently signed several customer agreements and anticipate generating revenue in the near term. 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 efforts on this area.
Of our revenues for the year ended December 31, 2004, approximately 50% were generated in connection with our own eLink(SM) wireless email service and our BlackBerry(TM) by Motient 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. The RIM 850 device is no longer manufactured and on June 26, 2003 Research In Motion provided us with a written End of Life Notification for the RIM 857 wireless handheld device.
Aside from our ability to obtain this hardware, the End of Life Notification by Research In Motion may be considered indicative of the desire of Research In Motion in particular and consumers in general to move to new technologies that cannot be supported on Motient's network, such as wireless handheld 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 our reseller agreements with RACO Wireless, Inc. and eAcess Solutions, Inc. which allows us to receive a one-time commission for signing up customers to use alternative network providers wireless internet service. We are also exploring alternatives ways to provide comparable wireless internet services, using either our DataTac network or our iMotient Solutions(TM) 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.
In addition to focusing on iMotient Solutions, we plan to focus our growth efforts on applications that make efficient use of our existing DataTac network. Certain applications have certain key attributes that make efficient use of the Motient DataTac network. For example, applications to conduct wireless point-of-sale transactions, and transportation and dispatching applications, typically have small bandwidth requirements and can be designed to utilize our network on a 24 hours per day, 7 days per week basis, thus smoothing loading requirements and optimally using our existing DataTac network capacity. We believe that these kinds of applications are poised for significant growth and that this growth can be accommodated efficiently on our existing DataTac network, and we have signed agreements with several resellers that specialize in these kinds of applications.
We also intend to take advantage of this loss of wireless internet customers by undertaking to reduce our overall network cost structure. Additionally, this reduction in overall cost structure may be considered necessary given a variety of factors that have hindered our growth since our emergence from bankruptcy in May 2002, including the weak economy generally and the weak telecommunications and wireless sector specifically, the financial difficulty of several of our key resellers, on whom we rely for a majority of our new revenue growth, and our continued limited liquidity. We believe that these cost reduction efforts will assist in lowering our cash burn rate.
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 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 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 will begin 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(TM) platform, or to other networks using our agreements with RACO Wireless, Inc. and eAccess Solutions, Inc. 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 loose 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.
Despite these efforts, we continue to be cash flow negative, and there can be no assurances that we will ever be cash flow positive.
Mobile Satellite Ventures LP
As of March 15, 2005, we also own a 49% direct and indirect interest in Mobile Satellite Ventures LP (commonly known as MSV), a provider of mobile satellite-based communications services. Although Motient has certain rights to appoint directors to the sole general partner of MSV, as a limited partner, it does not have any direct or indirect operating control over MSV. 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 "ancillary terrestrial component", or "ATC", technology. After the deployment of its next-generation system, MSV anticipates that it 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.
MSV was formed on June 29, 2000, when we formed a joint venture subsidiary in which we owned 80% of the membership interests. The remaining 20% interests in MSV were owned by three investors unrelated to Motient; however, the minority investors had certain participating rights which provided for their participation in certain business decisions that were made in the normal course of business; therefore, in accordance with Emerging Issues Task Force Issue No 96-16, "Investor's Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights", our investment in MSV has been recorded for all periods presented in the consolidated financial statements included in this annual report pursuant to the equity method of accounting.
Since its formation, we and other parties have undertaken on multiple occasions to invest capital into MSV. Our current ownership of MSV reflects the result of such investment.
Motient's investment in MSV is governed by several agreements, including but not limited to the limited partnership agreement of MSV and the stockholder's agreement of MSV GP. The acquisition or disposition by MSV of its assets, the acquisition or disposition of any limited partner's interest in MSV, subsequent investment into MSV by any person, and any merger or other business combination of MSV, would be subject to the control restrictions contained in such documents. Such control restrictions include, but are not limited to, rights of first refusal, tag along rights and drag along rights. Many of these actions, among others, cannot occur without the consent of the majority of the ownership interests of MSV, and the limited partners of MSV entered into a voting agreement, which may restrict any signatories ability to give such consent absent the agreement of the majority of the signatories to such voting agreement.
Results of Operations
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 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 efforts on this area.
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 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. All billable and active units are registered on our network.
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:
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.
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.
(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 directors 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:
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).
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 changes 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 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 will begin 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.
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
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 the lenders 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 and 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.
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.
(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:
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:
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.
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.
(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,
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.
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.
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.
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 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 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. The increase of $13.3 million 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. As of February 28, 2005, we had approximately $12 million of cash on hand and short-term investments.
Summary of Cash Flow for the years ended December 31, 2004 and December 31, 2003
Operating Activities: Net cash used in operating activities during the year ended December 31, 2004 was approximately $18.3 million as compared to $7.1 million for the year ended December 31, 2003. 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 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.
Our $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 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, the 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: 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.
Our $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: 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 consist of $192.0 million in proceeds from the issuance of stock, $2.0 million in proceeds from the issuance 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 available funds, together proceeds from planned rights offering and the exercise of warrants and options, will be adequate to satisfy our current and planned operations for at least the next twelve months.
Debt and Capital Lease Obligations
As of December 31, 2004, Motient has no outstanding debt or capital lease obligations.
Credit Facility Repayment: On April 13, 2004, Motient repaid the all principal amounts then owing under its term credit facility, including accrued interest thereon, in an amount of $6.8 million. The facility terminated on December 31, 2004, and the Company does not plan to attempt to extend the borrowing availability again. 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, we entered into an agreement with UPS pursuant to which UPS prepaid to us an aggregate of $5 million for network airtime service to be provided beginning January 1, 2004. The $5 million prepayment was credited against airtime services provided to UPS beginning January 1, 2004. Based on UPS' current level of network airtime usage, we do not expect that UPS will be required to make any cash payments to us in 2005 and 2006 for service provided during 2005 and 2006. UPS may terminate the contract on 30 days' notice. If UPS terminates the contract, we will be required to
refund any unused portion of the prepayment to UPS. While we expect that UPS will remain a customer for the foreseeable future, there are no minimum purchase requirements under the contract and the bulk of UPS' units have migrated to another network, leaving 4,721 active units on our network as of December 31, 2004. The value of our remaining airtime service obligations to UPS at December 31, 2004 in respect of the prepayment was approximately $4.0 million.
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.
Restructuring Costs
In June 2004, the Company recorded a restructuring charge of $5.1 million related to certain network rationalization initiatives, consisting of base station deconstruct costs of $0.5 million, the loss on the retirement of certain base station equipment of $2.8 million and termination liabilities of $1.8 million for site leases no longer required for removed base stations. Of these amounts, as of December 31, 2004, the Company had incurred base station deconstruction costs of $0.5 million, the loss on the retirement of certain base station equipment of $2.8 million and termination liabilities of $0.9 million for site leases no longer required for removed base stations.
The following table displays the activity and balances of the restructuring reserve account from January 1, 2004 to December 31, 2004:
Commitments
There are no remaining payments related to our debt and capital lease obligations since they were all retired.
As of December 31, 2004, we had the following outstanding cash contractual operating commitments:
(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.
In addition, we have certain liabilities, further described above, related to the $5 million prepayment made to us by UPS in 2002.
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.
Critical Accounting Policies and Significant Estimates
Below are our accounting policies that are both important to our financial condition and operating results, and require management's most difficult, subjective and complex judgments in determining the underlying estimates and assumptions. The estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates as they require assumptions that are inherently uncertain.
"Fresh-Start" Accounting
In accordance with SOP No. 90-7, effective May 1, 2002, we adopted "fresh-start" accounting and allocated the reorganization value of $221.0 million to our net assets in accordance with procedures specified by SFAS No. 141, "Business Combinations".
We allocated the $221.0 million reorganization value among our net assets based upon our estimates of the fair value of our assets and liabilities. In the case of current assets, we concluded that their carrying values approximated fair values. The values of our frequencies and its investment in and notes receivable from MSV were based on independent analyses presented to the bankruptcy court and subsequently modified as part of our valuation process in November 2003. Please see Note 2, "Significant Accounting Policies - Restatement of Financial Statements," and Note 16, "Subsequent Events," of notes to the consolidated financial statements for further information concerning MSV. The value of our fixed assets was based upon a valuation of our software and estimates of replacement cost for network and other equipment, for which we believe that our recent purchases represent a valid data point. The value of our other intangible assets was based on third party valuations as of May 1, 2002.
For a complete description of the application of "fresh-start" accounting, please refer to Note 2, "Significant Accounting Policies", of notes to the consolidated financial statements.
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 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 our business has been transacted with telecommunications, field services, natural resources, professional service and transportation companies located throughout the United States. We grant credit based on an evaluation of the customer's financial condition, generally without requiring collateral or deposits. We establish a valuation allowance for doubtful accounts receivable for bad debt and other credit adjustments. Valuation allowances for revenue credits are established through a charge to revenue, while valuation allowances for bad debts are established through a charge to general and administrative expenses. We assess the adequacy of these reserves quarterly, evaluating factors such as the length of time individual receivables are past due, historical collection experience, the economic environment and changes in credit worthiness of our customers. As of December 31, 2004 and December 31, 2003, we had a valuation allowance of approximately 11.8% and 16.6% of our accounts receivable, respectively. We believe that our established valuation allowance was adequate as of December 31, 2004 and 2003. If circumstances related to specific customers change or economic conditions worsen such that our past collection experience and assessments of the economic environment are no longer relevant, our estimate of the recoverability of our trade receivables could be further reduced.
Equipment and service sales: We sell equipment to resellers who market our terrestrial product and airtime service to the public. We also sell our product directly to end-users. Revenue from the sale of the equipment as well as the cost of the equipment, are initially deferred and are recognized over a period corresponding to our estimate of customer life of two years. Equipment costs are deferred only to the extent of deferred revenue.
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.
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.
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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. - ---------------------------------------------------------------------
As of December 31, 2004 and March 1, 2005, we are not exposed to the impact of interest rate changes. We do not use derivative financial instruments to manage our interest rate risk. We invest our cash in short-term commercial paper, investment-grade corporate and government obligations and money market funds.
As of December 31, 2004 and March 1, 2005, Motient has no remaining debt obligations.
Item 8.
Item 8. Financial Statements and Supplementary Data. - -----------------------------------------------------
The financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Form 10-K and are presented beginning on page with respect to Motient and beginning on page M-1 with respect to MSV.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. - ---------------------
None.
Item 9A.
Item 9A. Controls and Procedures. - ----------------------------------
We have performed an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of December 31, 2004.
Internal Control Over Financial Reporting
Pursuant to Item 308(a) of Regulation S-K and subsequent SEC Releases and guidance, we will be required to furnish an annual management report on our internal control of our financial reporting by April 30, 2005. In order to issue our report, which will be included pursuant to an amendment to this Form 10-K, our management must document both the design of our internal controls and the testing processes that support management's evaluation and conclusion. Our management has begun the necessary processes and procedures for issuing its report on internal controls.
The attestation report of our independent registered public accounting firm, Friedman LLP, required by Item 308(b) of Regulation S-K is not contained in this Annual Report on Form 10-K. This attestation report will be included pursuant to an amendment to this Form 10-K.
Although we have not been able to include this report herein, we have been able to outline certain items that will effect the contents of that report, discussed below.
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in the Securities Exchange Act of 1934 Rule 13a - 15(f), and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2004. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 based upon criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on our assessment, management determined that our internal control over financial reporting have certain "significant deficiencies" as defined under the standards established by the Public Company Accounting Oversight Board that do not, individually or in aggregate, rise to the level of a "material weakness". These significant deficiencies involve matters relating to the design or operation of internal control that, in the judgment of management, could adversely affect the organization's ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. These significant deficiencies relate to:
o an insufficient segregation of duties involved in the initiation of wire transfers; o our reliance on certain insufficiently controlled spreadsheets used for certain aspects of our financial reporting; and o the lack of sufficient oversight and review of the processes involved in the preparation of certain aspects of our financial reporting, in particular as it relates to several complex and sophisticated transactions. As part of our 2004 audit, our auditors suggested certain adjustments (which we agree with) to our accounting as a result of certain transactions. While these adjustments were not material, we deemed the necessity for these adjustments as potential evidence of a lack of appropriate resources in our finance department.
Management has concluded that adequate compensatory controls, including executive oversight, were in place as of December 31, 2004 and therefore does not believe that these significant deficiencies had a material effect on the results of our financial reporting, either singularly or in aggregate, nor does management believe that any of these significant deficiencies, singularly or in aggregate, rise to the level of a "material weakness."
In order to address these issues, management has taken the following steps to eliminate these conditions in 2005:
o we have changed our wire transfer rights and procedures to insure all wires are properly initiated and approved according to Company policy; o we have started to, and will continue to, install passwords, "locked" cells, and other proper controls within spreadsheets used for financial reporting, and will attempt to eliminate their use wherever possible by the end of the second quarter 2005; and, o we have retained consultants with accounting expertise to assist our internal staff in the recording of certain complex accounting matters. We also plan to add additional internal resources in the next 60 to 90 days to ensure adequate oversight and review of future transactions.
We have discussed our corrective actions and future plans with our Audit Committee and Freidman LLP and, as of the date of this Annual Report on Form 10-K, we believe the actions outlined above should correct the deficiencies in internal controls outlined above.
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The changes outlined above began in 2005.
Item 9B.
Item 9B. Other Information - ---------------------------
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of Motient. - ------------------------------------------------------
The following table sets forth certain information about our executive officers, directors and key employees.
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. From 1991 to 1993, Mr. Downie served as a financial analyst at Bear, Stearns & Co. 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.
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 March 2005. 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 serves on the Board of Directors of Tejas Incorporated, a publicly traded brokerage and investment banking company, and SPACEHAB, Incorporation, a publicly traded commercial and government space services 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.
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 Audio Visual Services Corp., Genesis Health Ventures, Inc. and American Banknote Corporation, all of which are 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).
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. Kittner and Mr. Steele) and the compensation and stock option committee (currently Mr. Singer, Mr. Kittner and Mr. Dondero) are entitled to receive an additional $500 and $250 per month, respectively. 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the securities laws of the United States, our directors, executive officers and any persons holding more than ten percent of our common stock are required to report their ownership of the common stock and any changes in that ownership to the SEC. Specific due dates for these reports have been established by the SEC, and we are required to report in this annual report any failure to file by these dates. Based on our review of these reports filed during and in connection with the year ended December 31, 2004, and on certain written representations, we do not believe that any of our directors, officers or beneficial owners of more than ten percent of our common stock failed to file a form or report a transaction on a timely basis other than: a Form 4 filed by JGD Management Corp., a Form 3 filed by Raymond Steele, a Form 4 filed by Peter Aquino, a Form 3 filed by Robert Macklin, a Form 4 filed by James Dondero, a Form 4 filed by John Waterfall, and a Form 4 filed by Christopher Downie, each of which were not filed on a timely basis, but have since been filed.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer. This code of ethics has been approved by our board of directors, and has been designed to deter wrongdoing among directors, officers and employees and promote honest and ethical conduct, full, fair, accurate and timely disclosure, compliance with applicable laws, rules and regulations, prompt internal reporting of code violations, and accountability for adherence to our code. Our code of ethics is posted in the investor relations section of our website, www.motient.com.
Item 11.
Item 11. 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.
Summary Compensation 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
(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.
The following table sets forth, for each of the named executive officers, the value of unexercised options at fiscal year-end.
(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.
Compensation of Directors
Information about compensation of directors appears in Item 10 of this annual report on Form 10-K and is incorporated herein by reference.
2002 Stock Option Plan
Our 2002 stock option plan was adopted by the board of directors on May 31, 2002 and received stockholder approval on July 11, 2002. A total of 2,993,024 shares of common stock have been reserved for issuance under the 2002 stock option plan. Under the 2002 stock option plan, we are authorized to grant options to purchase shares of common stock intended to qualify as incentive stock options, as defined under section 422 of the Internal Revenue Code of 1986, as amended, and non-qualified stock options to any employees, outside directors, consultants, advisors and individual service providers whose participation in the 2002 stock option plan is determined by our compensation and stock option committee to be in our best interests. The term of each stock option is fixed by the board of directors or the compensation committee, and each stock option is exercisable within ten years of the original grant date. Generally, an option is not transferable by the recipient except by will or the laws of descent and distribution. Some change of control transactions, such as a sale of Motient, may cause awards granted under the 2002 stock option plan to vest. As of December 31, 2004, options to purchase 605,727 shares of our common stock were outstanding.
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.
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. All of these contracts and transactions were approved by Motient's board of directors, and Motient believes that the contracts and transactions were made on terms substantially as favorable to Motient as could have been obtained from unaffiliated third parties. The following is a description of such contracts and transactions. In addition, this section describes the relationship between Steven Singer and one of the lenders under our credit facility. For additional information concerning these relationships, see "Certain Relationships and Related Transactions."
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, CTA and certain of its affiliates were paid an investment banking 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. 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.
Item 12.
Item 12. Security Ownership Of Certain Beneficial Owners and Management and Related Shareholder Matters. - ----------------------------
Stock Ownership Of Certain Beneficial Owners and Management and Related Stockholder Matters. - --------------------
The following table and the accompanying notes set forth certain information, as of March 15, 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.
Directors and Executive Officers Dennis W. Matheson 40,000 * Christopher W. Downie (8) 101,160 * Deborah L. Peterson 11,733 * Richard V. Crawford 0 * Robert L. Macklin (7) 14,208 * Myrna J. Newman (7) 2,500 * Barry A. Williamson 0 * Gerald S. Kittner (7) 18,814 * Steven G. Singer (7) 32,517 * Jonelle St. John (7) 21,114 * Raymond L. Steele (7) 11,800 * James D. Dondero (2) 6,042,702 9.3% --------- ---
All directors and named executive officers as a group (13 persons) 6,384,748 9.9% ========= ===
* 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.
(2) Indirect ownership consists of shares of Common Stock held by a filing group consisting of Highland Capital Management, L.P. ("Highland Capital"); Strand Advisors, Inc. ("Strand"); Highland Crusader Offshore Partners, L.P. ("Crusader"); Prospect Street High Income Portfolio, Inc. ("PHY"); Prospect Shares Income Shares, Inc. ("CNN"); Highland Legacy Limited ("Legacy"); PAMCO Cayman, Limited ("PAMCO"); Highland Equity Focus Fund, L.P. ("Equity Focus"); Highland Equity Fund, L.P. ("Equity Fund") and James D. Dondero. Highland Capital is the general partner of Crusader, Equity Fund and Equity Focus, and the investment advisor for PHY, CNN, Legacy and PAMCO. Strand is the general partner of Highland Capital. Mr. Dondero is the President of Highland Capital and the President and a director of Strand. The amount also includes warrants for the purchase of 825,000 additional shares, which may never vest. Highland Capital, Strand and Mr. Dondero expressly disclaim beneficial ownership of the securities reported herein except to the extent of their pecuniary interest therein.
(3) The shares of Common Stock reported herein as beneficially owned are owned directly by Tudor Proprietary Trading, L.L.C., The Altar Rock Fund, L.P., The Raptor Global Portfolio, Ltd. and The Tudor BVI Global Portfolio Ltd. . Because Tudor Investment Corporation is the sole general partner of Altar Rock and provides investment advisory services to Raptor Portfolio and BVI Portfolio, Tudor Investment Corporation may be deemed beneficially to own the shares of Common Stock owned by each. Tudor Investment Corporation expressly disclaims such beneficial ownership. In addition, because Mr. Jones is the controlling shareholder of Tudor Investment Corporation and the indirect controlling equity holder of Tudor Proprietary Trading, Mr. Jones may be deemed beneficially to own the shares of Common Stock deemed beneficially owned by Tudor Investment Corporation and Tudor Proprietary Trading. Mr. Jones expressly disclaims such beneficial ownership.
(4) Does not include 130,000 shares owned by Mr. Haywood's spouse and children.
(5) James G. Dinan beneficially owns the 2,276,445 shares of our common stock, which includes shares owned by various funds and accounts over which Mr. Dinan has discretionary investment authority. Mr. Dinan is the senior managing member and holder of a controlling interest in Dinan Management, L.L.C., York Select Domestic Holdings, LLC, York Select Offshore Holdings, LLC, York Offshore Holdings L.L.C. and York Distressed Domestic Holdings, LLC. Mr. Dinan is also a director and holder of a controlling interest in York Offshore Holdings, Limited. York Offshore Holdings is the investment manager of York Investment. Dinan Management is the general partner of York Capital Management. York Select Domestic Holdings is the general partner of York Select. York Select Offshore Holdings is the investment manager of York Select Unit Trust. York Distressed Domestic Holdings is the investment manager of York Distressed Opportunities Fund. York Offshore Holdings is the investment manager of York Offshore Investors. Mr. Dinan is the president and sole stockholder of JGD Management Corp., which manages the other funds and accounts that hold our common stock over which Mr. Dinan has discretionary investment authority.
(6) 307,042 of the shares listed are shares underlying warrants to purchase common stock which may never vest. Includes 2,046,951 shares and 153,521 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 307, 042 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.
(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.
Securities Issued Under Equity Compensation Plans
The following table provides information regarding equity compensation plans under which our equity securities were authorized for issuance as of December 31, 2004.
Equity Compensation Plan Information
(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) 2004 Restricted Stock Plan. See above description for further details.
Item 13.
Item 13. Certain Relationships and Related Transactions. - ---------------------------------------------------------
This section describes arrangements with CTA, an entity in which (i) Jared E. Abbruzzese, a director until June 20, 2003, is the chairman, (ii) Gerald S. Kittner, a Motient director, is an advisor and consultant, (iii) Christopher W. Downie, Motient's executive vice president, chief operating officer and treasurer, was formerly affiliated with CTA as an independent consultant and (iv) Peter Aquino, a 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.
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 an investment banking 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, Bay Harbour Partners, York Capital, and Lampe Conway & Co. York Capital is affiliated with James G. Dinan and JGD Management Corp. Bay Harbour Management, JGD Management Corp. and James G. Dinan each hold 5% or more of our common stock. The lenders also include Gary Singer, directly or through one or more entities. Gary Singer is the brother of Steven G. Singer, one of our directors. The facility terminated on December 31, 2004, and all amounts due and owing pursuant to the facility have been repaid. We do not anticipate that it borrowing availability will be extended again.
Private Placements of Common Stock
Certain of our directors and holders of more than 5% of our common stock participated in the April 7, July 1, and November 12, 2004 private placements of our common stock. PDA Group, LLC, a wholly-owned entity of Peter D. Aquino, one of our directors, was assigned by Tejas Securities, our placement agent, warrants to purchase 56,250 shares of our common stock at a price of $5.50 per share. James D. Dondero, a director and beneficial owner of more than 5% of our common stock, purchased an aggregate of 2,420,688 shares of our common stock in such private placements. In addition, he also received warrants to purchase 350,058 shares of our common stock at a price of $8.57 per share all of which will vest if and only if we do not meet certain deadlines with respect to the registration of the common stock sold in the private placement.
Item 14.
Item 14. Principal Accountant Fees and Services. - -------------------------------------------------
Auditor Fees - ------------
The following table outlines our fees from our auditors for 2004 and 2003.
Twelve Months Twelve Months Ended December 31, Ended December 31, 2004 2003 ----- ---- Audit fees $716,230 $695,193 Audit related fees 20,750 64,425 Tax fees 4,540 25,325 Other 0 20,338 ------- ------ Total $741,520 $805,281
Audit Committee Policies - ------------------------
The audit committee of Motient's board of directors is solely responsible for the approval in advance of all audit and permitted non-audit services to be provided by the independent auditors (including the fees and other terms thereof), subject to the de minimus exceptions for non-audit services provided by Section 10A(i)(1)(B) of the Exchange Act, which services are subsequently approved by the audit committee prior to the completion of the audit. None of the fees listed above are for services rendered pursuant to such de minimus exceptions.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules - ---------------------------------------------------------------------------
(1)(a) The following documents are filed as part of this Form 10-K:
1) The following consolidated financial statements of Motient Corporation are included as follows:
(2) 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
(3) Exhibits
3.1 - Restated Certificate of Incorporation of the Company (as restated effective May 1, 2002) (incorporated by reference to Exhibit 3.1 of the Company's Amendment No. 2 to Registration Statement on Form 8-A, filed May 1, 2002).
3.2 - Amended and Restated Bylaws of the Company (as amended and restated effective May 1, 2002) (incorporated by reference to Exhibit 3.1 of the Company's Amendment No. 2 to Registration Statement on Form 8-A, filed May 1, 2002).
4.1 - Specimen of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Company's Amendment No. 2 to Registration Statement on Form 8-A, filed May 1, 2002).
4.2 - Warrant Agreement between the Registrant and Equiserve Trust Company, N.A., as warrant agent, dated May 1, 2002 (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form 8-A, filed May 1, 2002).
4.2a - Specimen of Warrant Certificate of the Company (incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form 8-A, filed May 1, 2002).
10.2 - Credit Agreement by and between Motorola Inc. and ARDIS Company dated June 17, 1998 (incorporated by reference to Exhibit 10.61 to the Company's Current Report on Form 10-Q dated June 30, 1998 (File No. 0-23044)).
10.2a - Amendment No. 2, dated September 1, 2000, to the Credit Agreement, dated as of June 17, 1998, by and between Motorola, Inc. and Motient Communications Company (formerly known as ARDIS Company) (incorporated by reference to Exhibit 10.22a to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 0-23044)).
10.2b - Assumption, Release, Amendment and Waiver Agreement by and among Motorola, Inc., Motient Communications Inc. and Motient Communications Company, dated as of December 29, 2000 (incorporated by reference to Exhibit 10.22b to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 0-23044)).
10.3 - Investment Agreement dated as of June 22, 2000, by and among the Company, Motient Satellite Ventures LLC, and certain other investors (incorporated by reference to Exhibit 10.41 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 0-23044)).
10.4 - Asset Sale Agreement between Motient Satellite Ventures LLC and Motient Services Inc. dated as of June 29, 2000 (incorporated by reference to Exhibit 10.42 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 0-23044)).
10.4a - Amendment No. 1, dated as of November 29, 2000, to Asset Sale Agreement, dated as of June 29, 2000, between Motient Satellite Ventures LLC and Motient Services Inc. (incorporated by reference to Exhibit 10.42a to the Company's annual report on Form 10-K for the year ended December 31, 2000 (File No. 0-23044)).
10.4b - Amended and Restated Asset Sale Agreement, dated as of January 8, 2001, between Mobile Satellite Ventures LLC and Motient Services Inc. (incorporated by reference to Exhibit 10.42b to the Company's annual report on Form 10-K for the year ended December 31, 2000 (File No. 0-23044)).
10.4c - Amendment, dated as of October 12, 2001, to the Amended and Restated Asset Sale Agreement, dated as of January 8, 2001, by and between Motient Services Inc. and Mobile Satellite Ventures LLC (incorporated by reference to Exhibit 10.42c to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2001 (File No. 0-23044)).
10.5 - Asset Sale Agreement, dated November 29, 2000, by and among the Company, Motient Services Inc. and Aether Systems, Inc. (incorporated by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 0-23044)).
10.6 - January 2001 Investment Agreement, dated as of January 8, 2001, by and among the Company, Mobile Satellite Ventures LLC, TMI Communications and Company, Limited Partnership, and the other investors named therein (incorporated by reference to Exhibit 10.48 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 0-23044)).
10.7 - Document Standstill and Termination Agreement, dated as of January 8, 2001, by and among the Company, Mobile Satellite Ventures LLC, Motient Services Inc., and certain investors named therein (incorporated by reference to Exhibit 10.50 to the Company's annual report on Form 10-K for the year ended December 31, 2000 (File No. 0-23044)).
10.7a - Amended and Restated Document Standstill and Termination Agreement, dated as of October 12, 2001 (incorporated by reference to Exhibit 10.50a to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 0-23044)).
10.8 - Amended and Restated Investment Agreement, dated October 12, 2001, by and among Motient Corporation, Mobile Satellite Ventures LLC, TMI Communications and Company, Limited Partnership, and the other investors named therein (incorporated by reference to Exhibit 10.55 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2001 (File No. 0-23044)).
10.9 - Form of Stockholders' Agreement of Mobile Satellite Ventures GP Inc. (incorporated by reference to Exhibit 10.56 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2001 (File No. 0-23044)).
10.9a - Stockholders' Agreement, dated as of November 26, 2001, of Mobile Satellite Ventures GP Inc. (incorporated by reference to Exhibit 10.56a of the Company's Current Report on Form 8-K dated November 19, 2001 (File No. 0-23044)).
10.10 - Form of Limited Partnership Agreement of Mobile Satellite Ventures LP (incorporated by reference to Exhibit 10.57 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2001 (File No. 0-23044)).
10.11 - Form of Convertible Note of Mobile Satellite Ventures LP, in the amount of $50.0 million issued to MSV Investors LLC (incorporated by reference to Exhibit 10.58 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2001 (File No. 0-23044)).
10.12 - Form of Promissory Note of Mobile Satellite Ventures LP, in the amount of $15.0 million issued to Motient Services Inc. (incorporated by reference to Exhibit 10.59 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2001 (File No. 0-23044)).
10.13 - Registration Rights Agreement between the Company and Highland Capital Management, L.P., and Morgan Stanley Investment Management, dated May 1, 2002 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002) (File No. 0-23044)).
10.14* - Form of Change of Control Agreement for Officers of the Company (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File No. 0-23044)).
10.15 - Senior Indebtedness Note of MVH Holdings Inc., in the amount of $19.0 million issued to Rare Medium Group, Inc., dated May 1, 2002 (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File No. 0-23044)).
10.16 - Senior Indebtedness Note of MVH Holdings Inc., in the amount of $750,000 issued to Credit Suisse First Boston, dated May 1, 2002 (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File No. 0-23044)).
10.17 - Settlement Agreement by and among the Registrant and Rare Medium Group, Inc., dated March 28, 2002 (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File No. 0-23044)).
10.18 - Form of Warrant to purchase 343,450 shares of the Company's common stock at an exercise price of $3.95 per share issued to Evercore Partners, L.P. (incorporated by reference to Exhibit 10.28 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (File No. 333-87844)).
10.19 - Debtors' Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated February 27, 2002 (incorporated by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated March 4, 2002 (File No. 0-23044)).
10.20* - Motient Corporation 2002 Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Company's registration statement on Form S-8 (File No. 333-92326)).
10.21* - Form of Stock Option Agreement (incorporated by reference to Exhibit 99.2 to the Company's registration statement on Form S-8 (File No. 333-92326)).
10.22 - Form of Warrant to purchase up to 500,000 shares of the Company's common stock at an exercise price of $3.00 per share issued to certain affiliates of Communication Technology Advisors LLC (incorporated by reference to Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
10.23* - Executive Retention Agreement, dated as of July 16, 2002, by and between Walter V. Purnell, Jr. and the Company (incorporated by reference to Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
10.24 - Amended and Restated Term Credit Agreement, dated January 27, 2003, by and among the Company, Motient Communications Inc., Motient Holdings Inc., the Lenders named therein, and M&E Advisors, L.L.C., as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.25 - Security Agreement, dated as of January 27, 2003, between Motient Communications Inc. and M&E Advisors L.L.C. as Collateral Agent (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.26 - First Amendment to Security Agreement, dated as of January 30, 2003, between Motient Communications Inc. and M&E Advisors L.L.C. as Collateral Agent (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.27 - Motient Corporation Share Pledge Agreement, dated as of January 27, 2003, between Motient Corporation and M&E Advisors L.L.C., as Collateral Agent (incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.28 - Motient Holdings Share Pledge Agreement, dated as of January 27, 2003, between Motient Holdings Inc. and M&E Advisors L.L.C., as Collateral Agent (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.29 - Form of Warrant to purchase shares of common stock of Motient Corporation issued to lenders under the Amended and Restated Term Credit Agreement dated as of January 27, 2003 (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.30* - Letter amendment to Executive Retention Agreement, dated as of February 10, 2004, by and between Walter V. Purnell, Jr. and the Company (incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.31 - Amendment No. 1 to Amended and Restated Term Credit Agreement, dated March 16, 2004, by and among Motient Communications Inc., Motient License Inc., the Required Lenders party thereto, and M&E Advisors, L.L.C., as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.32 - Omnibus Amendment to SLA Note and Credit Facility, dated as of March 16, 2004, by and among Motient Communications Inc., Motient Corporation, Motient Holdings Inc., Motient Services Inc., and Motorola, Inc. (incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.33 - Share Pledge Agreement, dated as of March 16, 2004, by and between Motient Communications Inc. and M&E Advisors, L.L.C. (incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.34 - Warrant to purchase shares of common stock of Motient Corporation, issued to lenders under Amendment No. 1 to Amended and Restated Term Credit Agreement, dated March 16, 2004 (incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.35 - Registration Rights Agreement, dated March 16, 2004, by and between Motient Corporation and M&E Advisors, L.L.C. in its capacity as Administrative and Collateral Agent under Amendment No. 1 to Amended and Restated Term Credit Agreement (incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.36 - Collateral Agency, Subordination and Intercreditor Agreement, dated as of March 16, 2004, by and among Motient Communications Inc., Motient License Inc., M&E Advisors L.L.C., and Motorola, Inc. (incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.37 - Subordinate Motient Communications Share Pledge Agreement, dated as of March 16, 2004, by and between Motient Communications Inc. and Motorola, Inc. (incorporated by reference to Exhibit 10.37 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.38 - Common Stock Purchase Agreement, dated as of April 7, 2004, by and among Motient Corporation and the Raptor Global Portfolio, Ltd., et al (incorporated by reference to Exhibit 10.38 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003).
10.39 - Registration Rights Agreement, dated as of April 7, 2004, by and among Motient Corporation and the Raptor Global Portfolio, Ltd., et al (incorporated by reference to Exhibit 10.39 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003).
10.40 - Form of Common Stock Purchase Warrant, dated as of April 7, 2004 (incorporated by reference to Exhibit 10.40 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003).
10.41 - Form of Common Stock Purchase Warrant, dated as of April 7, 2004 (incorporated by reference to Exhibit 10.41 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
10.42 - Securities Purchase Agreement, dated as of June 30, 2004, by and among Motient Corporation and the Raptor Global Portfolio, Ltd., et al (incorporated by reference to Exhibit 10.42 to the Company's Registration Statement on Form S-1 filed on July 6, 2004)
10.43 - Registration Rights Agreement, dated as of June 30, 2004, by and among Motient Corporation and the Raptor Global Portfolio, Ltd., et al (incorporated by reference to Exhibit 10.42 to the Company's Registration Statement on Form S-1 filed on July 6, 2004)
10.44 - Form of Common Stock Purchase Warrant, dated as of June 30, 2004 (incorporated by reference to Exhibit 10.42 to the Company's Registration Statement on Form S-1 filed on July 6, 2004)
10.45 - Form of Common Stock Purchase Warrant, dated as of June 30, 2004 (incorporated by reference to Exhibit 10.42 to the Company's Registration Statement on Form S-1 filed on July 6, 2004)
10.46 - Warrant Issued to Motorola, Inc. (incorporated by reference to Exhibit 10.42 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004)
10.47 - Common Stock Purchase Agreement, dated as of November 12, 2004, by and among Motient Corporation and the investors listed therein (incorporated by reference to Exhibit 10.43 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.48 - Registration Rights Agreement, dated as of November 12, 2004, by and among Motient Corporation and the investors listed therein (incorporated by reference to Exhibit 10.44 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.49 - Form of Common Stock Purchase Warrant, dated as of November 12, 2004 (incorporated by reference to Exhibit 10.45 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.50 - Purchase Agreement, dated as of November 12, 2004, by and among Motient Ventures Holding Inc., Mobile Satellite Ventures LP, et al (incorporated by reference to Exhibit 10.46 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.51 - Note Exchange Agreement, dated as of November 12, 2004, by and among Motient Ventures Holding Inc., Mobile Satellite Ventures LP, et al (incorporated by reference to Exhibit 10.47 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.52 - Amended and Restated Limited Partnership Agreement, dated as of November 12, 2004, by and among Motient Ventures Holding Inc., Mobile Satellite Ventures LP, et al (incorporated by reference to Exhibit 10.48 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.53 - Amended and Restated Stockholders Agreement, dated as of November 12, 2004, by and among Motient Ventures Holding Inc., Mobile Satellite Ventures GP Inc., et. al. (incorporated by reference to Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.54 - Second Amended and Restated Parent Transfer/Drag Along Agreement, dated as of November 12, 2004, by and among Motient Corporation, et. al. (incorporated by reference to Exhibit 10.50 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
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 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005)
10.56 - Consent Agreement, dated January 27, 2005, by and among Columbia Space (QP), Inc., et al(incorporated by reference to Exhibit 10.56 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005)
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 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005)
10.58 - Form of Stock Purchase Agreement, dated February 9, 2005 (incorporated by reference to Exhibit 10.58 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005)
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 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005)
10.60 - Form of Warrant to purchase Motient common stock, dated February 9, 2005 (incorporated by reference to Exhibit 10.60 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005)
10.61 - Form of Stockholder's Agreement, dated February 9, 2005 (incorporated by reference to Exhibit 10.61 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005)
21.1 - Subsidiaries of the Company (filed herewith).
23.1 - Consent of Friedman LLP, Independent Registered Public Accounting Firm (filed herewith)
23.2 - Consent of Ernst & Young LLP, Independent Auditors (filed herewith)
31.1 - Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the Executive Vice President, Chief Operating Officer and Treasurer (principal executive officer).
31.2 - Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the Controller and Chief Accounting Officer (principal financial officer)
32 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Executive Vice President, Chief Operating Officer and Treasurer (principal executive officer) and Controller and Chief Accounting Officer (principal financial officer)
----------------------------------
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c) of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MOTIENT CORPORATION
By /s/ Christopher W. Downie ----------------------------------- Christopher W. Downie Executive Vice President Chief Operating Officer and Treasurer
Date: March 30, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
MOTIENT CORPORATION AND SUBSIDIARIES
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
Motient Corporation and Subsidiaries Consolidated Statements of Operations For 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)
Motient Corporation and Subsidiaries Consolidated Balance Sheets as of December 31, 2004 and 2003 (in thousands, except share and per share data)
Motient Corporation and Subsidiaries Consolidated Statements of Changes In Stockholders' Equity (Deficit) For the Years Ended December 31, 2004 and 2003, the Eight Months Ended December 31, 2002, and the Four Months Ended April 30, 2002
Motient Corporation and Subsidiaries Consolidated Statements of Cash Flows For 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)
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.
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 "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 values 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 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.
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 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.
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.
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 caring 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.
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.
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:
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.
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:
The Company does not measure ultimate income or loss or track its assets by these market categories.
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.
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 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.
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.
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:
December 31, ------------ 2004 2003 ---- ---- (in thousands) FCC Licenses $80,594 $80,594 Customer contracts 349 1,893 -------- ------- 80,943 82,487 Less accumulated amortization (13,294) (8,466) -------- ------- FCC licenses and other intangible assets, net $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.
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.
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
10. DEBT & CAPITAL LEASES
Debt and capital leases consists of the following:
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.
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.
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 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.
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.
Information regarding the Company's stock option plan is summarized below:
(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:
(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.
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 deductible. 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 provision for income taxes for the periods below differs from the amount computed by applying the federal statutory rate due to the following:
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 out Term Credit Facility.
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.
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.
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 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.
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.
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 Wirelesss 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
Cash (used) provided by reorganization items were as follows:
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.
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 ==============
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:
(a) Represents the cancellation of the following liabilities: i. Amounts due to Boeing $1,533 ii. Amounts due to CSFB 2,000 iii. Amounts due to JP Morgan Chase 1,550 iv. Amounts due to Evercore Partners LP ("Evercore") 1,948 v. Amounts due to the FCC 1,003 vi. Other amounts 751 ------ $8,785
Liabilities were cancelled in exchange for the following: a. 97,256 shares of new Motient common stock, b. a note to CSFB in the amount of $750 and c. a warrant to Evercore Partners to purchase 343,450 shares of new Motient common stock, and d. a note to Rare Medium in the amount of $19,000. (b) Represents the cancellation of the senior notes in the amount of $367,673, including interest threron, in exchange for 25,000,000 shares of new Motient common stock. Certain of the Company's other creditors received an aggregate of 97,256 shares of the Company's common stock in settlement for amounts owed to them. (c) Represents the cancellation of $27,030 of notes due to Rare Medium, including accrued interest thereon, in exchange for a new note in the amount of $19,000. The Company also issued CSFB a note in the principal amount of $750 for certain investment banking services. (d) Represents the issuance of the following: i. 25,097,256 shares of new Motient common stock. ii. warrants to the holders of pre-reorganization common stock to purchase an aggregate of approximately 1,496,512 shares of common stock, with such warrants being valued at approximately $1,100. iii. a warrant to purchase up to 343,450 share of common stock to Evercore, valued at approximately $1,900. The retained earnings adjustment includes the gain on the discharge of debt of $183,725. (e) Represents the write off of deferred equipment costs of $12,907 and deferred equipment revenue of $12,907 since there is no obligation to provide future service post-"fresh start". (f) To reflect the step-up in assets in accordance with the reorganization value and valuations performed. (g) Represents the write off of the deferred gain associated with the Company's sale of its satellite assets to MSV in November 2001 and the write-off of the unamortized balance of the $15,000 perpetual license sold to Aether in November 2000, both of which total approximately $22,142, since there is no obligation to provide future service post-"fresh start". (h) To record the cancellation of the Company's pre-reorganization equity and to reverse the gain on extinguishment of debt of $183,725 and the gain on fair market adjustment of $94,715. (i) To record the valuation and resulting increase of customer intangibles of approximately $11,501 and frequencies of $45,365. The reduction of $4,981 is due to a write-off of goodwill. The reduction of property and equipment relates to a subsequent reduction in the carrying value of certain software from $4,942 to $3,389, reduction to inventory from $8,194 to $3,842 to its net realizable value. (j) The balances do not match the balances in the Company's Plan of Reorganization due to subsequent re-audit adjustments.
Under the Plan of Reorganization, all then-outstanding shares of the Company's pre-reorganization common stock and all unexercised options and warrants to purchase the Company's pre-reorganization common stock were cancelled. The holders of $335 million in senior notes exchanged their notes for 25,000,000 shares of the Company's new common stock. Certain of the Company's other creditors received an aggregate of 97,256 shares of the Company's new common stock in settlement for amounts owed to them. These shares were issued following completion of the bankruptcy claims process; however, the value of these shares has been recorded in the financial statements as if they had been issued on the effective date of the reorganization. Holders of the Company's pre-reorganization common stock received warrants to purchase an aggregate of approximately 1,496,512 shares of common stock. The warrants expired May 1, 2004, or two years after the Effective Date. The warrants were exerciseable to 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 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
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 an investment banking 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.
QUARTERLY FINANCIAL DATA (dollars in thousands, except for per share data) (unaudited)
(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.
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
MOBILE SATELLITE VENTURES LP AND SUBSIDIARIES
Consolidated Financial Statements
Years ended December 31, 2003 and 2004 with Report of Independent Auditors
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2003 and 2004
Contents
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.
February 18, 2005 McLean, Virginia
M-1
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Balance Sheets
See accompanying notes.
M-2
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Operations
See accompanying notes.
M-3
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Partners' Equity (Deficit)
See accompanying notes.
M-4
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Partners' Equity (Deficit) (continued)
M-5
Mobile Satellite Ventures LP and Subsidiaries
Consolidated Statements of Cash Flows
See accompanying notes.
M-6
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2004
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 33-1/3% equity interest in Mobile Satellite Ventures Holdings (Canada) Inc. (MSV Holdings). In February 2002, the Company established TerreStar Networks, Inc. (TerreStar), a wholly owned subsidiary, to develop business opportunities related to the planned receipt of certain licenses in the 2 GHz band (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. In addition, a wholly owned subsidiary of the Company entered into a satellite construction contract (see Note 10) during 2002 and assumed certain obligations under another system development contract in 2004 (see Note 3) that may require the Company to obtain additional funding to finance the required payments unless one or both of the contracts are either amended or terminated by the Company prior to certain payment due dates. The Company is not planning to
M-7
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Organization and Business (continued)
terminate the contracts, and there can be no assurance that the Company will be able to enter into amendments that will defer payments in a manner consistent with the Company's next-generation business plans. The type, timing, and terms of financing, if required, selected by the Company will be dependent upon the Company's cash needs, the availability of financing sources, and the prevailing conditions in the financial markets. There can be no assurance that such financing will be available to the Company at any given time or available on favorable terms.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries prepared in accordance with accounting principles generally accepted in the United States. All significant intercompany accounts are eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates 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.
M-8
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Restricted Cash
In connection with the purchase of the Motient satellite business, 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 $74,823 respectively.
In September 2004, the Company entered into an escrow agreement to provide for payments under TerreStar's satellite construction contract (see Note 10). 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 the 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 consolidated balance sheet.
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 five years. 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)
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. 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.
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.
M-10
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Concentrations of Credit Risk (continued)
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:
For the year ended December 31 2002 2003 2004 ------------------------------------------------------
Customer A 13% 12% * Customer B 13% * * Customer C * 11% * Customer D * 13% 14%
The Company's significant customers, as measured by percentage of total accounts receivable, were as follows:
December 31 2003 2004 ------------------------------------------------------
Customer C * 12% 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)
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:
M-12
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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)
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 and 2004, the Company hedged aggregate exposures of $2.8 million and $2.2 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 on these contracts of $81,712 and $36,305 for the years ended December 31, 2003 and 2004, respectively, which are reflected as a component of accumulated other comprehensive income and an asset within prepaid expenses and other current assets on the accompanying consolidated balance sheets.
Equity Method Investments
The Company accounts for its equity investments in MSV Canada and MSV Holdings pursuant to the equity method of accounting. The carrying value of these investments was $0 at each balance sheet date presented. Because the Company is obligated to provide working capital financial support to MSV Canada through a management agreement, the Company records losses related to such funding as equity in losses of MSV Canada in the accompanying consolidated statements of operations.
Foreign Currency and International Operations
The functional currency of one of the Company's subsidiaries is the Canadian dollar. The financial statements of this subsidiary are translated to U.S. dollars using period-end rates for assets and liabilities, which is included as a component of accumulated other comprehensive income in the accompanying 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.
M-14
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with SFAS No. 130, Reporting Comprehensive Income, which establishes rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires foreign currency translation adjustments and the change in market value of effective derivative instruments to be included in other comprehensive income.
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, with respect to its investment and related obligations in MSV Canada. Adoption of this standard will be required for the first annual period beginning after December 15, 2004. MSV Canada's net (loss) income for the years ended December 31, 2003 and 2004 were approximately $(696,000) and $1.4 million (unaudited), respectively.
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.
M-15
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
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 acquisitions, 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.
In July 2004, MSV purchased certain intangible assets including intellectual property and rights, or rights to acquire spectrum access and rights, or rights to acquire related assets from third parties. At the time of these transactions, MSV paid $2.0 million in cash, of which $1.5 million is included in other assets and $500,000 is included in intangible assets as of December 31, 2004 in the accompanying consolidated balance sheet. Future payments under these agreements total $2.0 million payable in two equal annual installments in January 2005 and 2006. As the payments are due only upon the achievement of certain milestones, the future obligations have not been accrued as of December 31, 2004.
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. As of December 31, 2004, payments on this contract totaled $1.1 million with additional payments of $50,000 committed through January 2005. MSV may continue payments on this contract at its sole discretion following these initial payments. Payments made through December 31, 2004 have been capitalized as system under construction in property and equipment in the accompanying consolidated balance sheet.
M-16
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Intangible Assets and Goodwill (continued)
The Company's identifiable intangible assets consist of the following:
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 $9,401,000, $9,427,000, and $9,494,000, respectively, of amortization expense related to these intangible assets. The Company's next-generation intellectual property consists of a combination of licenses and contractual rights to various authorizations, various applications, certain technology, and certain other rights, which resulted primarily from the 2001 acquisitions.
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 =============
The increase in goodwill from December 31, 2003 to December 31, 2004 is primarily a result of the fluctuation of the exchange rate between the U.S. dollar and Canadian dollar.
M-17
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Balance Sheet Details
Property and equipment
Property and equipment consisted of the following:
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
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.
M-18
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
Notes Payable (continued)
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.
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 converted into 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 was converted to 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.
M-19
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
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 ===========
6. Partners' Equity
Effective November 26, 2001, pursuant to the Limited Partnership Agreement of the Company, the partners' interests in the Company were either MSV Common Units or MSV Class A Preferred Units. The Company's general partner, Mobile Satellite Ventures GP Inc., a Delaware corporation, has no economic interest in the Company and is owned by the Company's limited partners in proportion to their fully diluted interests in the Company.
The Class A Preferred Units and Common Units 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 Preferred and Common Units, and all Preferred Units were converted to Common Units.
M-20
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Partners' Equity (continued)
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
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 April 2004, the Company received $17.6 million in exchange for the issuance of 2,735,317 of 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).
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 converted into 765,843 and 112,272 Common Units, respectively and approximately $56,000 was paid in cash. Additionally, $58.0 million of Convertible Notes was converted to 8,997,073 Class A Preferred
M-21
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Partners' Equity (continued)
Issuance of Common Units (continued)
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 Option Plans
MSV Option Plan
In December 2001, the Company adopted a unit option incentive plan (Unit Option Incentive Plan). Under the Unit Option Incentive Plan, the Company reserved for issuance and may grant up to 5,000,000 options to acquire units to employees and directors upon approval by the Board of Directors. Options to acquire units generally vest over a 3-year period and have a 10-year life.
During 2004, the Company granted options at less than the estimated fair market value of the related units on the option's grant date. As a result, the Company recorded $4,680,375 in deferred compensation during the year ended December 31, 2004. The deferred compensation is being amortized over the options' vesting period. For the year ended December 31, 2004, the Company recognized compensation expense of $495,153.
The Company has promised to grant an additional 285,000 options during the year ended December 31, 2005 to certain executives of the Company, of which 200,000 will have an exercise price of the lower of $6.45 or the price at which the most recent financing transaction has occurred, and 85,000 will have an exercise price of $6.45.
At December 31, 2003 and 2004, 885,333 and 1,807,167 options, respectively, were exercisable. At December 31, 2003 and 2004, the weighted-average remaining contractual life for outstanding options was 7.9 years and 8.1 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. At December 31, 2004, the outstanding options had exercise prices ranging from $6.45 to $29.45.
M-22
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Unit Option Plans (continued)
MSV Option Plan (continued)
The following summarizes activity in the Unit Incentive Option Plan:
TerreStar Option Plan
In July 2002, the Board of Directors of TerreStar approved the 2002 TerreStar Stock Incentive Plan. The plan terms are similar to the Unit Option Incentive Plan. Options to acquire shares generally vest over a 3-year period, and the options to acquire units have a 10-year life. At December 31, 2003 and 2004, 568,304 and 1,157,664 options, respectively, were exercisable. At December 31, 2003 and 2004, the weighted-average remaining contractual life for outstanding options was 8.6 and 8.0 years, respectively. The weighted-average fair value of unit options granted during the years ended December 31, 2002, 2003, and 2004 was $0.10, $0.10, and $0.00 per unit, respectively.
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. These options are expected to be granted in 2005.
M-23
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Unit Option Plans (continued)
TerreStar Option Plan (continued)
The following summarizes activity in the TerreStar Option Plan:
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 earns revenues under the management agreement by providing certain services to MSV Canada such as allowing access to its intellectual property; providing voice- and data-switching capabilities; providing backup, restoral, and emergency spectrum and satellite capacity and providing accounting, customer service, and billing services. The Company recognizes the related management fee income in the month in which the services are provided.
M-24
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Related Party Transactions (continued)
The Company leases satellite capacity from MSV Canada pursuant to a lease agreement. The term of the lease extends for 25 years and may be terminated by the Company with one year's notice or by either party in certain circumstances. The amount of the lease payments is determined by the parties periodically based upon the amount of capacity usage by the Company and market rates. Payments due under the lease may be offset against amounts owed to the Company.
During the years ended December 31, 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.
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.
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 $1,800,000, $1,100,000, and $1,200,000, respectively.
Future minimum lease payments under noncancelable operating leases with initial terms of one year or more are as follows for the years ended December 31:
2005 1,289,236 2006 1,282,417 2007 1,282,417 2008 936,757 ------------ $ 4,790,827 ============
M-25
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
Leases (continued)
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.
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.
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. Such 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 ruling. These broad guidelines govern issues such as aggregate system interference to other MSS operators, the level of integration between satellite and terrestrial service offerings, and specific requirements of the satellite component that the Company currently meets by virtue of its existing satellite system. While the Company's current satellite assets satisfy these requirements, the Company anticipates the future need to construct and deploy more powerful satellites.
M-26
Mobile Satellite Ventures LP and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
Regulatory Matters (continued)
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. Moreover, one terrestrial wireless carrier has filed an appeal of the FCC's decision with the United States Court of Appeals, which has been held in abeyance until the FCC rules on the reconsideration requests.
In November 2003, the Company applied for 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, as noted above, is in its reconsideration phase. One opponent of the Company's application has asked the FCC to review the Company's ATC authorization.
The FCC adopted a decision on reconsideration in the rulemaking phase in February 2005, but the decision has not been released to the public. Based on public statements made by the FCC commissioners and staff, the Company believes that the FCC has 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 ruling. The appeal by a terrestrial wireless carrier of the February 2003 ruling is still pending before the U.S. Court of Appeals.
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 wholly owned subsidiary, to develop business opportunities related to the proposed receipt of certain licenses in the 2 GHz band.
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Notes to Consolidated Financial Statements (continued)
10. TerreStar Networks (continued)
Regulatory Matters
TMI holds the approval issued by Industry Canada for a 2 GHz space station authorization and related spectrum licenses for the provision of MSS in the 2 GHz band as well as an authorization from the FCC for the provision of MSS in the 2 GHz band (MSS authorization). These authorizations are subject to FCC and Industry Canada milestones relating to construction, launch, and operational date of the system. TMI plans to transfer the Canadian authorizations to an entity that is eligible to hold the Canadian authorizations and in which TerreStar and/or TMI will have an interest, subject to obtaining the necessary Canadian regulatory approvals. In order to satisfy the milestone requirements included within the authorizations, TerreStar and TMI entered into an agreement in which TerreStar agreed to enter into a non-contingent satellite procurement contract for the construction and delivery to TMI of a satellite that is consistent with the Canadian and FCC authorizations. Further, TMI agreed that at TerreStar's election, TMI will transfer the 2 GHz assets to the entities described above, subject to any necessary Canadian and U.S. regulatory approvals. In December 2002, TMI and TerreStar jointly applied to the FCC for authority to transfer TMI's MSS authorization to TerreStar.
In August 2002, Industry Canada advised the Company that this arrangement met the requirement that TMI demonstrate that it is bound to a contractual agreement for the construction of the proposed satellite. However, certain wireless carriers had urged the FCC to cancel TMI's MSS authorization. A similar group also filed a petition in January 2003 asking the FCC to dismiss the application to transfer TMI's MSS authorization to TerreStar. In February 2003, the FCC'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, have challenged the validity of that order (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. TMI recently certified to the FCC its compliance with the second milestone under its MSS authorization. In March 2005, TMI will be required to certify compliance with the third milestone under its MSS authorization. The FCC is currently
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Notes to Consolidated Financial Statements (continued)
10. TerreStar Networks (continued)
Regulatory Matters (continued)
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.
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.
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.
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Notes to Consolidated Financial Statements (continued)
10. TerreStar Networks (continued)
Satellite Construction Contract (continued)
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 system under construction in property and equipment in the accompanying consolidated 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.
TerreStar Rights Transaction
On December 20, 2004, the Company issued rights (the Rights) to receive an aggregate of 23,265,428 shares of common stock 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. The Rights will be exchanged into shares of TerreStar Stock automatically on May 20, 2005. The Rights will be accounted for as a distribution on the date of the exchange. In addition, in connection with this transaction, TerreStar issued warrants (the Warrants) to purchase an aggregate of 666,972 shares of TerreStar Stock to one of the Company's limited partners. The Warrants have an exercise price of $0.21491 per share and may be exercised until the second anniversary of the date of their issuance. The Company recognized as minority interest the fair value of the Warrants 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%.
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Notes to Consolidated Financial Statements (continued)
10. TerreStar Networks (continued)
TerreStar Rights Transaction (continued)
Concurrent with these transactions, 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 are expected to be granted in 2005.
11. Subsequent Events
In January 2005, the Company purchased certain intangible assets including intellectual property and rights, rights to acquire spectrum access and rights, or rights to acquire related assets from third parties for $3.0 million. The terms of the agreement allow the parties to renegotiate the form of payment to exchange up to $2.0 million of the cash consideration for equity interests in the Company.
On January 10, 2005 the FCC's International Bureau authorized MSV to launch and operate an L-Band MSS system. The International Bureau requires all new grants for systems to be supported by a performance bond. In accordance with this requirement, the Company secured a five-year, $3.0 million bond. The bond was fully collateralized by a $3.0 million letter of credit secured by cash on deposit.
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