10-Q 1 0001.txt QUARTERLY REPORT FOR PERIOD ENDING 6/30/00 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 Commission File No. 0-23044 --------------- MOTIENT CORPORATION (Exact name of registrant as specified in its charter) Delaware 93-0976127 (State or other jurisdiction of (I.R.S. Employee Identification Number) incorporation or organization) 10802 Parkridge Boulevard Reston, Virginia 20191-5416 (703) 758-6000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] Number of shares of Common Stock outstanding at July 31, 2000: 49,539,797 PART I- FINANCIAL INFORMATION Item 1. Financial Statements Motient Corporation and Subsidiaries Consolidated Condensed Statements of Operations (in thousands, except per share data) (Unaudited)
Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- REVENUES Services $ 18,221 $ 16,622 $35,373 $ 32,786 Sales of equipment 7,468 6,251 12,486 10,317 ----- ----- ------ ------ Total Revenues 25,689 22,873 47,859 43,103 COSTS AND EXPENSES Cost of services and operations 18,774 16,516 36,792 34,386 Cost of equipment sold 7,949 6,594 13,205 11,122 Sales and advertising 7,620 5,721 13,846 10,470 General and administrative 18,664 4,708 40,577 9,477 Depreciation and amortization 9,195 13,632 18,288 27,404 ----- ------ ------ ------ Operating Loss (36,513) (24,298) (74,849) (49,756) Interest and Other Income 9,951 1,893 15,153 3,632 Interest Expense (16,029) (16,891) (31,010) (32,821) Unrealized Loss on Note Receivable From XM Radio -- (9,919) -- (9,919) Gain on Conversion of Convertible Note Payable to Related Party -- -- 32,854 -- Unrealized Gain on Convertible Note Payable to Related Party -- 10,036 3,925 10,036 Minority Interest in Loss of XM Radio 3,341 -- 10,683 -- Equity in Loss of XM Radio -- (3,198) -- (6,692) -------- --------- ------- --------- Net Loss before Extraordinary Item and Preferred Dividend (39,250) (42,377) (43,244) (85,520) Extraordinary Loss on Extinguishment of Debt (417) -- (417) -- -------- --------- ------- --------- Net Loss before Preferred Dividend (39,667) (42,377) (43,661) (85,520) Preferred Stock Dividend Requirement of XM Radio (745) -- (1,251) -- Net Loss Attributable to Common Shareholders ($40,412) ($42,377) ($44,912) ($85,520) ========= ========= ======== ========= Basic and Diluted Loss Per Share of Common Stock ($0.82) ($1.31) ($0.91) ($2.65) Weighted-Average Common Shares Outstanding During the Period 49,502 32,416 49,298 32,321
See notes to consolidated condensed financial statements. Motient Corporation and Subsidiaries Consolidated Condensed Balance Sheets (in thousands)
June 30, 2000 December 31, 1999 ------------- ----------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents (includes $267,372 from XM Radio at June 30, 2000 and $50,698 at December 31, 1999) $271,980 $51,474 Short-term investments of XM Radio -- 69,472 Accounts receivable-trade, net 20,261 16,594 Inventory 31,992 28,616 Prepaid in-orbit insurance 937 3,381 Restricted short-term investments 41,038 41,038 Restricted short-term investments of XM Radio 93,415 -- Other current assets 30,847 9,719 ------ ----- Total current assets 490,470 220,294 PROPERTY AND EQUIPMENT, NET 138,596 116,516 XM RADIO SYSTEM UNDER CONSTRUCTION 574,901 357,278 GOODWILL AND OTHER INTANGIBLES, NET 60,751 62,211 RESTRICTED INVESTMENTS 14,777 31,109 RESTRICTED INVESTMENTS OF XM RADIO 81,208 -- DEFERRED CHARGES AND OTHER ASSETS, NET 31,157 22,540 ------ ------ Total Assets $1,391,860 $809,948 ========== ========
See notes to consolidated condensed financial statements. Motient Corporation and Subsidiaries Consolidated Condensed Balance Sheets (in thousands)
June 30, 2000 December 31, 1999 ------------- ----------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expenses $92,855 $67,885 Obligations under capital leases due within one year 3,408 6,154 Current portion of vendor financing commitment due to related party 3,228 1,977 Current portion of deferred trade payables 653 3,983 Other current liabilities 10,356 1,646 ------ ----- Total current liabilities 110,500 81,645 LONG-TERM LIABILITIES: Obligations under Senior notes, net of discount 328,025 327,576 Senior Secured Notes of XM Radio, net of discount 261,171 -- Obligations under Bank Financing 121,000 85,000 Capital lease obligations 798 247 Net assets acquired in excess of purchase price 985 1,333 Vendor financing commitment due to related party 3,991 2,535 Convertible note payable due to related party, at fair value -- 50,138 Other long-term liabilities 25,913 3,995 ------ ----- Total long-term liabilities 741,883 470,784 Total liabilities 852,383 552,429 ------- ------- MINORITY INTEREST IN XM RADIO 509,985 274,745 STOCKHOLDERS' EQUITY (DEFICIT): Preferred Stock -- -- Common Stock 495 485 Additional paid-in capital 917,593 844,181 Deferred compensation (4,253) (6,536) Common Stock purchase warrants and conversion rights 76,159 63,290 Unamortized guarantee warrants (16,579) (18,384) Cumulative loss (943,923) (900,262) --------- -------- STOCKHOLDERS' EQUITY (DEFICIT) 29,492 (17,226) ------ -------- Total Liabilities, Minority Interest, and Stockholders' Equity $1,391,860 $809,948 ========== ======== (Deficit)
See notes to consolidated condensed financial statements. Motient Corporation and Subsidiaries Consolidated Condensed Statements of Cash Flows (in thousands) (Unaudited)
Six months ended June 30, 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(43,661) $(85,520) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of Guarantee Warrants and debt related costs 5,741 9,196 Depreciation and amortization 18,288 27,404 Equity in loss of XM Radio -- 6,692 Unrealized loss on note receivable from XM Radio 9,919 Unrealized gain on convertible note payable to related party (3,925) (10,036) Extraordinary loss on extinguishment of debt 417 -- Non cash stock compensation of XM Radio 2,258 -- Gain on conversion of convertible note payable to related party (32,854) -- Minority Interest (10,683) -- Changes in assets and liabilities, net of acquisitions: Inventory (3,376) 168 Prepaid in-orbit insurance 2,444 2,898 Accounts receivable-trade (4,169) (4,685) Other current assets (21,774) (2,477) Accounts payable and accrued expenses 1,925 (851) Accrued interest Senior Note 15 (456) Deferred trade payables (3,330) (3,644) Deferred items, net 16,989 (466) ------ ----- Net cash used in operating activities (75,695) (51,858) CASH FLOWS FROM INVESTING ACTIVITIES: Payment of Senior Note interest from escrow 20,503 20,503 Purchase of XM Radio Note Receivable -- (21,419) Purchase of long-term restricted investments (4,172) (3,781) Net Purchase/Maturity of XM Radio's short-term investments 69,471 -- System under construction (191,319) -- Purchase of restricted investments by XM Radio (125,863) -- Other investing activities by XM Radio (54,250) -- Asset Sale Agreement to Motient Satellite Ventures 10,836 -- Additions to property and equipment (28,458) (5,631) -------- ------- Net cash used in investing activities (303,252) (10,328) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Common Stock 5,308 2,913 Proceeds from issuance of conversion option to the investors of Satellite 18,564 -- Ventures Proceeds from issuance of Common and Preferred Stock by XM Radio 229,225 -- Proceeds from Senior Secured Notes and Stock Purchases Warrants issued by 322,898 -- XM Radio Principal payments under capital leases (2,933) (2,781) Principal payments under Vendor Financing (1,233) (197) Proceeds from Bank Financing 56,000 40,000 Repayments of Bank Financing (20,000) -- Proceeds from note payable to related party -- 21,500 Debt issuance costs (8,376) (220) ------- ----- Net cash provided by financing activities 599,453 61,215 Net increase in cash and cash equivalents 220,506 (971) CASH AND CASH EQUIVALENTS, beginning of period 51,474 2,285 ------ ----- CASH AND CASH EQUIVALENTS, end of period $271,980 $1,314 ======== ======
See notes to consolidated condensed financial statements. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (continued) MOTIENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements June 30, 2000 (Unaudited) 1. ORGANIZATION AND BUSINESS Motient Corporation (formerly American Mobile Satellite Corporation) is a leading provider of two-way mobile communications services principally to business-to-business customers and enterprises. Motient Corporation (with its subsidiaries, "Motient" or the "Company") serves a variety of markets including mobile professionals, telemetry, transportation, field service, and nationwide voice dispatch, to customers in the United States. Motient provides its industry-leading eLink(sm) two-way wireless email service to customers accessing email through corporate servers, Internet Service Providers (ISP) and Mail Service Provider (MSP) accounts, and paging network suppliers. As of June 30, 2000, the Company had an equity interest in XM Satellite Radio Holdings Inc. ("XM Radio") of approximately 34.3% (or 25.0% on a fully diluted basis); however, the Company continues to control XM Radio through its Board of Director membership and common stock voting rights. The operations and financing of XM Radio are maintained separate and apart from the operations and financing of Motient. XM Radio completed its initial public offering in October 1999. Please refer to XM Radio's audited financial statements, included in its reports and filings with the Securities and Exchange Commission ("SEC"), for more detail about its business plan, risks, and financial results. Motient is devoting its efforts to expanding its business. This effort involves substantial risk. Specifically, future operating results will be subject to significant business, economic, regulatory, technical, and competitive uncertainties and contingencies. Depending on their extent and timing, these factors, individually or in the aggregate, could have an adverse effect on the Company's financial condition and future results of operations. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The unaudited consolidated condensed financial statements included herein have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. While the Company believes that the disclosures made are adequate to not make the information misleading, these consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's filings and the filings of XM Radio with the SEC. All filings of the Company before April 24, 2000 can be found under the Company's former name, American Mobile Satellite Corporation. The consolidated balance sheet as of June 30, 2000, the consolidated statements of operations for the three and six months ended June 30, 2000 and 1999, and cash flows for the six months ended June 30, 2000 and 1999, have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at June 30, 2000, and for all periods presented have been made. Consolidation The consolidated financial statements include the accounts of Motient, its wholly owned subsidiaries, and its equity interest in XM Radio. All significant inter-company transactions and accounts have been eliminated. In July 1999 the Company acquired all of the outstanding debt and equity interest in XM Radio from its other investor (the "XM Acquisition"). As a result, all of XM Radio's results for the period from July 7, 1999 have been included in the Company's consolidated condensed financial statements. The Company will continue to consolidate XM Radio until the Company no longer controls XM Radio. The Company must request and receive FCC approval to relinquish control of XM Radio. Prior to July 7, 1999, the Company's investment in XM Radio was accounted for pursuant to the equity method of accounting. On March 30, 2000, the FCC approved an application filed by XM Radio which would allow the Company to reduce its ownership of the voting stock of XM Radio to a minimum of 40%, provided that the Company retains its right to elect a majority of the directors of XM Radio's Board of Directors. The Company has not elected to reduce its voting shares in XM Radio and still maintains control of XM Radio. On July 14, 2000, XM Radio filed an application with the FCC to allow XM Radio to transfer its control from the Company to a diffuse group of owners, none of whom will have a controlling interest. This application is pending with the FCC. Under the terms outlined in this application, the Company will still retain its Board of Director membership but will no longer have the right to elect a majority of XM Radio's Board of Directors. At such time that the Company ceases to control XM Radio, the Company will account for its investment in XM Radio pursuant to the equity method. Additionally, Motient Satellite Ventures LLC ("Satellite Ventures") was formed June 29, 2000 (see Note 4 - Motient Satellite Ventures LLC). Although the Company has an 80% interest in Satellite Ventures, the minority investors have certain participative rights which provide for their participation in certain business decisions that may be made in the normal course of business; therefore, in accordance with Emerging Issues Task Force Issue No 96-16, the Company's investment in Satellite Ventures is recorded pursuant to the equity method. Loss Per Share Basic and diluted loss per common share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Options and warrants to purchase shares of common stock were not included in the computation of loss per share as the effect would be antidilutive. As a result, the basic and diluted earnings per share amounts are identical. As of June 30, 2000, there were approximately 4,984,857 options and warrants that were not included in this calculation, because the effect would be antidilutive. Net loss attributable to common shareholders for the quarter ended June 30, 2000 reflects the deduction from net loss of the Company's share of XM Radio's 8.25% Series B convertible redeemable preferred stock dividend accrued for the second quarter. The dividend will be paid on August 1, 2000. See Note 9-Subsequent events. For the first half of the year, the net loss attributable to common shareholders reflects the Company's share of the first and second quarter preferred stock dividends of XM Radio. On May 1, 2000, XM Radio paid its first quarter dividend on the preferred stock in 62,318 shares of Class A common stock to preferred stockholders of record on April 12, 2000. Comprehensive Income SFAS No. 130, "Reporting of Comprehensive Income" requires "comprehensive income" and the components of "other comprehensive income" to be reported in the financial statements and/or notes thereto. Since the Company does not have any components of "other comprehensive income," reported net income is the same as "comprehensive income" for the three and six months ended June 30, 2000 and June 30, 1999. Segment Disclosures In accordance with SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has two operating segments: wireless communications services and XM Radio's satellite-based digital audio radio service. The Company provides a wide range of two-way mobile and internet communications services principally to business-to-business customers and enterprises. The Company's service covers all of the 50 states, Puerto Rico, the U.S. Virgin Islands, and hundreds of miles of U.S. coastal waters. XM Radio is in the process of constructing its satellite system to provide digital radio programming transmitted from satellites to vehicles, homes, and portable radios. XM Radio is currently in the development stage and thus has no revenue generating operations. The following summarizes the Company's core wireless communications services and equipment revenue by major product lines:
Revenue for the Three Revenue for the Six Months Ended Months Ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- Data Services $ 13.5 $ 12.3 $ 26.0 $ 24.4 Voice Service 3.4 3.2 6.9 6.2 Capacity Resellers and Other 1.3 1.1 2.5 2.2 Equipment 7.5 6.3 12.5 10.3
New Accounting Pronouncements In June 1998, FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires the recognition of all derivatives as either assets or liabilities measured at fair value. This statement was originally effective for the year ended December 31, 2000. In June 1999, FASB issued Statement No. 137, which defers the effective date of Statement No. 133 until fiscal years beginning after June 15, 2000. In June 2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which amends FASB Statement No. 133. This Statement limits the scope to certain derivatives and hedging activities. The effective date of Statement No. 138 is for fiscal years beginning after June 15, 2000. The Company does not believe that the adoption of Statement No. 138 will have a material impact on its financial position, results of operations and cash flows. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. The Company is currently evaluating the impact of SAB 101 on its consolidated results of operations and financial condition. On June 26, 2000, the SEC delayed implementation of SAB 101 until the fourth quarter of fiscal years beginning after December 15, 1999. Any change in accounting principle required from adoption of SAB 101 will be reported as a cumulative effect of a change in accounting principle as of January 1, 2000. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation ("FIN 44"). FIN 44 further defines the accounting consequence of various modifications to the terms of a previously fixed stock option or award under APB Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44 becomes effective on July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. In July 1999, XM Radio repriced certain options. FIN 44 requires that these options be accounted for as variable awards from July 1, 2000 until the date the award is exercised, forfeited, or expires unexercised. For those options that have vested as of July 1, 2000, compensation cost is recognized only to the extent that the exercise price exceeds the stock price on July 1, 2000. For those options that have not vested as of July 1, 2000, the portion of the award's intrinsic value measured at July 1, 2000 is recognized over the remaining vesting period. Additional compensation cost is measured for the full amount of any increases in stock price after the effective date and is recognized over the remaining vesting period. Any adjustment to compensation cost for further changes in the stock price after the award vests is recognized immediately. The effects of implementing FIN 44 may require XM Radio to recognize additional non-cash compensation commencing in the third quarter of 2000. Concentrations of Credit Risk For the six months ended June 30, 2000, five customers accounted for approximately 27% of the Company's total revenue. Other The Company paid approximately $6.7 million and $3.7 million in the six-month period ended June 30, 2000 and June 30, 1999, respectively, to related parties for capital assets, service-related obligations, and payments under pre-existing financing agreements. There were no payments from related parties in the six-month period ended June 30, 2000 and June 30, 1999. Total indebtedness to related parties at June 30, 2000 was approximately $8.3 million. As described in Note 6-Commitments and Contingencies, XM Radio has contracted with Hughes Space and Communications, Inc., a related party to the Company, for the construction and launch of XM Radio's satellite. Obligations under this contract are approximately $541.3 million. 3. STOCKHOLDERS' EQUITY (DEFICIT) Significant activity in stockholders' equity from December 31, 1999 to June 30, 2000 consists of the following:
Additional Common Paid-in Deferred Common Stock Unamortized Stock Capital Compensation Purchase Warrants Guarantee Warrants ------ ---------- ------------ ----------------- ------------------ Balance December 31, 1999 $ 485 $844,181 ($6,536) $63,290 ($18,384) Warrant Exercises 5 7,776 -- (7,047) -- Reduction in deferred compensation on restricted stock -- (2,283) 2,283 -- -- Issuance of Motient Satellite Ventures LLC investors' option to convert into Motient common stock (See Note 4) -- -- -- 18,564 -- Amortization of Guarantee warrants -- -- -- -- 2,828 Reduction of Guarantee warrants related to extinguishment of debt -- -- -- -- 329 Guarantee Warrant revaluation -- -- -- 1,352 (1,352) Stock Option Exercises 4 4,382 -- -- -- Capital gain in connection with XM Radio equity transactions -- 62,864 -- -- -- Issuance of shares under 401(k) Savings Plan, Stock Purchase Plan, and award of bonus stock 1 673 -- -- -- ----- -------- -------- -------- --------- Ending Balance June 30, 2000 $495 $917,593 ($4,253) $76,159 ($16,579) ===== ======== ======== ======== ==========
4. MOTIENT SATELLITE VENTURES LLC On June 29, 2000, the Company entered into a series of transactions with a group of investors, relating to its satellite communications business. These transactions are described below. The Company formed a new joint venture subsidiary, Motient Satellite Ventures LLC ("Satellite Ventures"), in which the Company owns 80% of the membership interests. The remaining 20% interest in Satellite Ventures is owned by three investors controlled by Columbia Capital, Spectrum Equity Investors LP and Telcom Ventures, L.L.C. (collectively, the "Investors"). The Investors paid $50 million to Satellite Ventures (in the aggregate), of which $24 million was received on June 28, 2000, with the remainder received in early July 2000, in exchange for their 20% interest, pursuant to an Investment Agreement, dated June 29, 2000, by and among Motient, Satellite Ventures, and the Investors. Of the $50 million payment received by Satellite Ventures, $6.0 million is being retained by Satellite Ventures and will be used to fund certain research and development activities, with the remaining $44 million paid to Motient Services Inc. (which owns the Company's satellite and related assets), as described below. Motient is not required to provide additional financing to Satellite Ventures. Satellite Ventures will conduct research and development activities to explore the technical, strategic, and market potential of new wireless data communications services making use of the Company's existing satellite network. Satellite Ventures has signed a Research & Development, Marketing and Service Agreement, dated June 29, 2000 (the "R&D Agreement"), with Motient Services, under which Motient Services will provide technical, engineering, and similar assistance to Satellite Ventures. Motient Services will also provide Satellite Ventures with dedicated bandwidth on its satellite network, for the purpose of Satellite Ventures' testing and R&D activities. In exchange for these access rights and services, Satellite Ventures paid Motient Services a one-time, up-front fee of $20 million. The R&D Agreement has a three-year term, but would terminate upon any consummation of the Asset Sale Agreement described below. At any time during the next two years, the Investors have the right to elect to purchase up to an additional 40% stake in Satellite Ventures, for an extra payment of $120 million (which amount will increase by a specified daily amount, after one year) (such payment is referred to as the "Additional Payment"). Upon such exercise, Satellite Ventures will consummate the purchase of all of the assets owned by Motient Services that relate to the satellite business, pursuant to the terms of an Asset Sale Agreement, dated June 29, 2000, between Satellite Ventures and Motient Services. The purchase price for such assets will be equal to the sum of $24 million (paid as a down payment in connection with the signing of the Asset Sale Agreement in July of 2000), and the Additional Payment received by Satellite Ventures from the Investors (i.e., for a total price of $144 million, increasing after the first year). Also at any time during the next two years, if the Investors decide that they do not wish to acquire control of Satellite Ventures and acquire the satellite assets of Motient Services as described above, they may convert their existing minority position in Satellite Ventures into shares of the Company's common stock, at a conversion price which will be set at the time of exercise, between $12 and $20 per share, as specified in the Investment Agreement. The Investors may not exercise this right, however, until after December 29, 2000, except under certain limited circumstances. The $44 million received by Motient Services Inc. has been allocated, for accounting purposes, to the R&D Agreement, the Asset Sale Agreement, and the Investors' right to convert their minority interest in Satellite Ventures into shares of the Company's common stock, based on each component's relative fair value. The Company assigned, based on an independent valuation, approximately $18.6 million to the Investors' conversion right which is recorded as common stock warrants in the accompanying consolidated condensed balance sheet. The R&D agreement and Asset Sale Agreement were assigned relative fair values of approximately $14.6 million and $10.8 million, respectively, and are reflected in the accompany consolidated condensed balance sheet as deferred revenue and long- term deposits, respectively. The funds received pursuant to the R&D Agreement will be recognized as service revenue over two years. The Company received partial waivers from the banks and the Bank Facility Guarantors (as defined in Note 5 below) for the requirement in the Bank Facility that 50% of certain proceeds that the Company received be used to repay and permanently reduce the Revolving Credit Facility. In connection with these waivers, the Company agreed to reprice the remaining outstanding Bank Facility Guarantors' warrants. Under the terms of the bank facility waivers received, only $2.75 million of the initial $44 million payment received was used to repay outstanding amounts, and permanently reduce commitments, under the Company's Revolving Credit Facility, with the remainder of the initial $44 million payment retained by the Company. If the Investors elect to acquire control of Satellite Ventures and the Additional Payment is made as described above, then the Company will be required to use 50% of such proceeds to pay down outstanding balances and/or reduce commitments, under our Revolving Credit Facility and/or the Term Loan Facility. As a result of the $2.75 million permanent reduction of the Revolving Credit Facility, the Company recorded an extraordinary loss on extinguishment of debt of approximately $417,000 consisting of the write off, on a pro rata basis, of the deferred financing fees associated with the placement of the Bank Financing and warrants held by the Bank Facility Guarantors. 5. LIQUIDITY AND FINANCING Adequate liquidity and capital are critical for the Company to continue as a going concern and to fund subscriber acquisition programs necessary to achieve positive cash flow and profitable operations. The Company expects to continue to make significant capital outlays to fund interest expense, capital expenditures and working capital prior to the time it begins to generate positive cash flow from operations and for the foreseeable future. The Company's current operating assumptions and projections reflect management's best estimate of subscriber and revenue growth and operating expenses. The Company anticipates that capital expenditures, operating losses, working capital and debt service requirements through 2000, can be met by (i) cash on hand, (ii) the borrowings available under the bank financing and the vendor financing, (iii) proceeds realized through the sale of inventory relating to our new products-eLink and MobileMAX2(TM), and (iv) additional debt or equity financing transactions. The Company also believes that its investment in XM Radio may provide the Company, in the future, with flexibility for obtaining additional liquidity, should that be necessary. However, there are various restrictions on the Company's ability to realize liquidity on its investment in XM Radio. The Company's ability to meet its projections is subject to numerous uncertainties and there can be no assurance that the Company's current projections regarding the timing of its ability to achieve positive operating cash flow will be accurate. If the Company's cash requirements are more than projected, the Company may require additional financing in amounts which may be material. The type, timing and terms of financing that the Company selects will be dependent upon its cash needs, the availability of other financing sources and the prevailing conditions in the financial markets. The Company cannot guarantee that additional financing sources will be available at any given time or available on favorable terms. XM Radio is operated, managed, and funded separately from the Company. See consolidating financial statements in Footnote 8 for XM Radio's separate financial statements. While the Company does not have any obligation or commitments to provide additional funding to XM Radio, and does not expect to provide such funding, it may chose to provide additional financing in the future. XM Radio will require significant additional funding in the future. The failure of XM Radio to obtain the necessary financing could have a material adverse effect on the value of the Company's investment in XM Radio. On August 3, 1999, the Company raised $116 million, net of underwriting discounts and expenses, through the issuance of 7.0 million shares of common stock in a public offering. Of the net proceeds, $59 million was used to pay down a portion of the Term Loan Facility, and is not available for re-borrowing. The remainder of the net proceeds were used to pay down a portion of the Revolving Credit Facility, which are available for re-borrowing as needed for general working capital purposes. $335 Million Unit Offering On June 30, 1998, Motient Holdings Inc. (formerly AMSC Acquisition Company, Inc.) issued $335 million of Units (the "Units") consisting of 12 1/4% Senior Notes due 2008 (the "Senior Notes"), and one warrant to purchase 3.75749 shares of Common Stock of the Company for each $1,000 principal amount of Senior Notes (the "Warrants") at an exercise price of $12.51 per share. The Warrants were valued at $8.5 million and are reflected in the balance sheet as a debt discount. In connection with the Senior Notes, Motient Holdings Inc. purchased approximately $112.3 million of restricted investments that are restricted for the payment of the first six interest payments on the Senior Notes. Interest payments are due semi-annually, in arrears, beginning October 1, 1998. As a result of the automatic application of certain adjustment provisions following the issuance of 7.0 million shares in the 1999 public offering, the exercise price of the warrants associated with the Senior Notes was reduced to $12.28 per share, the number of shares per warrant was increased to 3.83 shares for each $1,000 principle amount of Senior Notes, and the aggregate number of shares issuable upon exercise of such warrants was increased by 24,294. The additional Senior Note warrants and re-pricing were valued at $440,000. This was recorded as additional debt discount in the third quarter of 1999. Bank Financing In March 1998, the Company entered into two bank facilities: (i) the Revolving Credit Facility, a $100 million unsecured five-year reducing revolving credit facility maturing June 30, 2003, and (ii) the Term Loan Facility, a $100 million five-year, term loan facility with up to three additional one-year extensions subject to the lenders' approval. The Term Loan Facility was reduced to $41.0 million using the proceeds from the stock offering in 1999 and is not available for re-borrowing, and the Revolving Credit Facility was permanently reduced to $97.3 million using the proceeds received in June 2000 from the Satellite Ventures transaction. The Bank Financing is severally guaranteed by Hughes Electronics Corporation, Singapore Telecommunications Ltd. and Baron Capital Partners, L.P. (collectively, the "Bank Facility Guarantors"). As of July 31, 2000, the Company had outstanding borrowings of $41.0 million under the Term Loan Facility at 7.875%, and $65.0 million under the Revolving Credit Facility at rates ranging from 7.6875% to 8.0%. The Guarantees In connection with the Bank Financing, the Bank Facility Guarantors extended separate guarantees of the obligations of Motient Holdings Inc. and the Company to the banks, which on a several basis aggregated to $200 million. In their agreement with Motient Holdings Inc. and the Company (the "Guarantee Issuance Agreement"), the Bank Facility Guarantors agreed to make their guarantees available for the Bank Financing. In exchange for the additional risks undertaken by the Bank Facility Guarantors in connection with the Bank Financing, the Company agreed to compensate the Bank Facility Guarantors, principally in the form of 1 million additional warrants and re-pricing of 5.5 million warrants previously issued in connection with the Company's previous bank facility (together, the "Guarantee Warrants"). The Guarantee Warrants were originally issued with an exercise price of $12.51, reduced to $7.50 in April 1999 in exchange for the elimination of certain covenants in the Guarantee Issuance Agreement, and further reduced to $7.3571 in connection with the automatic application of certain adjustment provisions following the stock offering in 1999. In exchange for the Bank Facility Guarantors' consents received in connection with the Satellite Ventures transaction described above, the exercise price of the Guarantee Warrants was further reduced to $6.25 per share. The value of the re-pricing was approximately $1.4 million. In connection with the Bank Financing, the Company entered into an interest rate swap agreement, with an implied annual rate of 6.51%. The swap agreement reduces the impact of interest rate increases on the Term Loan Facility. The Company paid a fee of approximately $17.9 million for the swap agreement. Under the swap agreement, an amount equal to LIBOR plus 50 basis points, is paid on a quarterly basis directly to the respective banks on behalf of the Company, on a notional amount of $100 million until the termination date of June 30, 2001. In connection with the pay down of a portion of the Term Loan Facility in 1999, the Company reduced the notional amount of its swap agreement from $100 million to $41 million. The Company is exposed to a credit loss in the event of non- performance by the counter party under the swap agreement. The Company does not believe there is a significant risk of non-performance as the counter party to the swap agreement is a major financial institution. Other Financing Motorola has entered into an agreement with the Company to provide up to $10 million of vendor financing, to finance up to 75% of the purchase price of additional network base stations. As of June 30, 2000, $7.2 million was outstanding under this facility at interest rates ranging from 13.00% to 13.29%, and no amounts were available for borrowing. The Company has also arranged the financing of certain trade payables, and as of June 30, 2000, $0.7 million of deferred trade payables were outstanding at rates ranging from 6.07% to 12.00%. Baron XM Radio Convertible Note In January 1999 the Company issued to Baron Asset Fund ("Baron"), a stockholder and guarantor of the Company's Bank Facility, a $21.5 million note convertible into shares of common stock of XM Radio (the "Convertible Note Payable to Related Party" or "Baron XM Radio Convertible Note".) The Baron XM Radio Convertible note was indexed to XM Radio stock. Due to a decrease in value of XM Radio stock, from December 31, 1999 to January 12, 2000, the Company recorded an unrealized gain of $3.9 million in the first quarter of 2000. On January 13, 2000, Baron notified the Company of its intention to exchange the Baron XM Radio Convertible Note for 1,314,914 shares of XM Radio Class B Stock, subsequently converted to Class A Stock on a one-for-one basis. The exchange of the convertible note resulted in a non-recurring gain of $32.9 million at March 31, 2000 computed as the difference in the carrying value of the Baron XM Radio Convertible Note and the Company's cost basis in XM Radio stock exchanged upon conversion of this note. XM Radio Financing In the first quarter of 2000, XM Radio completed a supplemental stock offering of 4.4 million shares of Class A Common Stock, at $32 per share, and 2.0 million shares of newly designated Series B convertible redeemable preferred stock, at $50 per share. The Series B convertible redeemable preferred stock provides for 8.25% cumulative dividends that may be paid in Class A common stock or cash. The Series B convertible redeemable preferred stock is convertible into Class A common stock at a conversion price of $40 per share and is redeemable in Class A common stock on February 3, 2003. Net proceeds raised from this stock offering were approximately $228.6 million. On July 7, 2000, XM Radio reached an agreement for a private offering of 235,000 shares for $1,000 per share of its 8.25% Series C convertible redeemable preferred stock, which closed on August 8, 2000 and yielded net proceeds of approximately $227.0 million. XM Radio expects to record a $123.0 million beneficial conversion charge that will reduce earnings available to common stockholders. The issuance of the Series C preferred stock caused the exercise price of the warrants sold in March 2000 to be adjusted to $47.94. See Note 9-Subsequent Events. In March 2000, XM Radio completed a high yield debt offering of 325,000 units, each unit consisting of $1,000 principal amount of 14% Senior Secured Notes due 2010 and one warrant to purchase 8.024815 shares of Class A common stock of XM Radio at an exercise price of $49.50 per share. XM Radio realized net proceeds of $191.3 million, excluding $123.0 million used to acquire securities which will be used to pay interest payments due under the notes for the first three years. In connection with the first quarter 2000 stock offering and in accordance with Staff Accounting Bulletin 51 (SAB 51), the Company recorded an increase to its investment in XM Radio in the first quarter of 2000 of approximately $62.8 million to reflect the increase in the net book value of XM Radio. SAB 51 addresses the accounting for sale of stock by a subsidiary. Since XM Radio is a development stage company, SAB 51 requires that the difference in the carrying amount of the Company's investment in XM Radio and the net book value of XM Radio after the equity transactions, be reflected as a capital transaction. Accordingly the $62.8 million increase to the Company's investment in XM Radio, is reflected as an addition to additional paid-in capital in the accompanying consolidated condensed balance sheet. 6. COMMITMENTS AND CONTINGENCIES At June 30, 2000, the Company had remaining contractual commitments to purchase subscriber equipment inventory, primarily related to eLink and MobileMAX2, in the amount of $34.3 million during 2000 and 2001. The Company has the right to terminate certain of these commitments by incurring a cancellation penalty representing a percentage of the unfulfilled portion of the contract. As of June 30, 2000 the cancellation penalty would have been approximately $5.2 million. The Company has also contracted for the purchase of $9.6 million of base stations to expand its coverage and complete certain necessary site build-outs and has certain other operating expense contract commitments that total approximately $1.9 million over the next year. The aggregate fixed and determinable portion of all inventory commitments and obligations for other fixed contracts is $45.8 million, of which $31.6 million is due in 2000 and $14.2 million is due in 2001. XM Radio is also subject to certain commitments and contingencies. XM Radio has a distribution agreement with General Motors that will require significant expenditures in the future. Under its satellite contract with Hughes Space and Communications, Inc., XM Radio will incur payment obligations of approximately $541.3 million of which $350.8 million had been paid as of June 30, 2000. XM Radio has signed a contract with LCC International, Inc. (a related party to XM Radio), for the engineering of its terrestrial repeater network with total contract payments expected to be approximately $115 million through 2001. As of June 30, 2000, XM Radio has paid $14.0 million under this contract. Effective October 1999, XM Radio signed a contract with Hughes Electronics Corporation for the design, development, and purchase of terrestrial repeater equipment. The total value of this contract is $128 million and XM Radio has paid $12.5 million under this contract as of June 30, 2000. On February 16, 2000, XM Radio and Sirius Satellite Radio, a competitor of XM Radio, signed an agreement to develop a unified standard for satellite radios to facilitate the ability of consumers to purchase one radio capable of receiving both XM Radio's and Sirius Satellite Radio's services. Refer to XM Radio's filings with the SEC for additional information regarding these contractual commitments. 7. LEGAL AND REGULATORY MATTERS Like other mobile service providers in the telecommunications industry, the Company is subject to substantial domestic, foreign and international regulation including the need for regulatory approvals to operate and expand the satellite network and operate and modify subscriber equipment. The ownership and operation of the mobile satellite services system and ground-based two-way wireless data system are subject to the rules and regulations of the FCC, which acts under authority granted by the Communications Act 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 the spectrum. Motient operates pursuant to various licenses granted by the FCC. The successful operation of the satellite network is dependent on a number of factors, including the amount of L-band spectrum made available to the Company pursuant to an international coordination process. The United States is currently engaged in an international process of coordinating the Company's access to the spectrum that the FCC has assigned to the Company. This international coordination process is not yet complete. In the absence of a coordination agreement, Motient must operate its system on a non- interference basis. The inability of the United States government to secure sufficient spectrum could have an adverse effect on the Company's financial position, results of operations and cash flows. The Company has the necessary regulatory approvals, some of which are pursuant to special temporary authority, to continue its operations as currently contemplated. The Company has filed applications with the FCC and expects to file applications in the future with respect to the continued operations, change in operation and expansion of the network and certain types of subscriber equipment. Certain of its applications pertaining to future service have been opposed. While the Company, for various reasons, believes that it will receive the necessary approvals on a timely basis, there can be no assurance that the requests will be granted, will be granted on a timely basis or will be granted on conditions favorable to the Company. Any significant changes to the applications resulting from the FCC's review process or any significant delay in their approval could adversely affect the Company's financial position, results of operations and cash flows. On November 30,1999, the FCC granted two applications to use TMI Communications and Company, Limited Partnership's (TMI) Canadian-licensed system to provide service in the United States to up to 125,000 mobile terminals. TMI's system operates in the MSS L-Band and has a satellite footprint that covers the United States. Motient appealed the FCC's grant of these applications to the United States Court of Appeals for the D.C. Circuit. The United States Court of Appeals affirmed the FCC's decision and the Company is seeking a rehearing. There is no assurance that this rehearing will be successful. TMI's entry into the domestic U.S. marketplace provides additional competition to Motient and may increase TMI's demand for spectrum in the international coordination process. The FCC is also currently considering applications to use the Inmarsat satellite system to provide mobile messaging service in the United States. The grant of any of these applications would provide additional competition and may further adversely impact Motient's ability to coordinate spectrum access. Motient is authorized to build, launch, and operate three geosynchronous satellites in accordance with a specific schedule. Motient is not in compliance with the schedule for commencement and construction of its second and third satellites and has petitioned the FCC for changes to the schedule. Certain of these extension requests have been opposed by third parties. The FCC has not acted on Motient's requests. The FCC has the authority to revoke the authorizations for the second and third satellites and in connection with such revocation could exercise its authority to rescind Motient's license. Motient believes that the exercise of such authority to rescind the license is unlikely. The term of the license for each of Motient's three authorized satellites is ten years, beginning when Motient certifies that the respective satellite is operating in compliance with Motient's license. The ten-year term of MSAT-2 began August 21, 1995. Although Motient anticipates that the authorization for MSAT-2 is likely to be extended in due course to correspond to the useful life of the satellite and a new license granted for any replacement satellites, there is no assurance of such extension or grants. XM Radio is also subject to the rules and regulations of the FCC. The FCC has established certain system development milestones that must be met in order for XM Radio to maintain its license to operate its satellite system. XM Radio believes it is in compliance with the FCC milestones. One of the bidders for the DARS licenses filed an Application for Review by the FCC of the Licensing Order which granted XM Radio its FCC license. The Application for Review alleges that a prior XM Radio shareholder had effectively taken control of XM Radio without the approval of the FCC. The FCC or the U.S. Court of Appeals has the authority to overturn the award of the FCC license to XM Radio. XM Radio believes that it should be able to maintain its FCC license since the party referenced is no longer a stockholder of XM Radio. XM Radio is unable to predict the outcome of this Application for Review. In January 1999, a competitor of XM Radio, Sirius Radio, filed an action against XM Radio for patent infringement. In February 2000, this suit was resolved in accordance with the terms of a joint development agreement between XM Radio and Sirius Radio in which both companies agreed to cross-license their respective property. If this agreement is terminated due to XM Radio failing to perform on a material covenant or obligation, the suit could be filed again. 8. FINANCIAL STATEMENTS OF SUBSIDIARIES In connection with the Company's acquisition of Motient Communications Company (formerly known as ARDIS Company) on June 30, 1998 (the "Motient Communications Acquisition"), and related financing discussed above, the Company formed a new wholly-owned subsidiary, Motient Holdings Inc. ("Motient Holdings"). The Company contributed all of its inter-company notes receivables and transferred its rights, title and interests in Motient Services Inc. and certain other subsidiaries that were subsequently dissolved (together with Motient Communications, the "Subsidiary Guarantors") to Motient Holdings, and Motient Holdings was the acquirer of Motient Communications and the issuer of the Senior Notes. Motient Corporation ("Motient Parent") is a guarantor of the Senior Notes. The Senior Notes contain covenants that, among other things, limit the ability of Motient Holdings and its Subsidiaries to incur additional indebtedness, pay dividends or make other distributions, repurchase any capital stock or subordinated indebtedness, make certain investments, create certain liens, enter into certain transactions with affiliates, sell assets, enter into certain mergers and consolidations, and enter into sale and leaseback transactions. The Senior Notes are jointly and severally guaranteed on full and unconditional basis by the Subsidiary Guarantors and Motient Parent. The following unaudited condensed consolidating information for these entities presents: o Condensed consolidating balance sheets as of June 30, 2000 and December 31, 1999, the condensed consolidating statements of operations for the three and six months ended June 30, 2000 and 1999, and the condensed consolidating statement of cash flows for the six months ended June 30, 2000 and 1999. o Elimination entries necessary to combine the entities comprising Motient. Condensed Consolidating Balance Sheet As of June 30, 2000 (Unaudited) (in thousands)
Consolidated Consolidated Subsidiary Motient Motient Motient Motient Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent ---------- -------- ------------ -------- ------ -------- ------------ ------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,608 $ -- $ -- $ 4,608 $ -- $ 267,372 $ -- $ 271,980 Inventory 31,992 -- -- 31,992 -- -- -- 31,992 Prepaid in-orbit insurance 937 -- -- 937 -- -- -- 937 Accounts receivable -- net 20,261 -- -- 20,261 -- -- -- 20,261 Restricted short-term investments -- 41,038 -- 41,038 -- 93,415 -- 134,453 Other current assets 27,576 -- -- 27,576 1,881 1,390 -- 30,847 ------ -- -- ------ ----- ----- -- ------ Total current assets 85,374 41,038 -- 126,412 1,881 362,177 -- 490,470 PROPERTY AND EQUIPMENT -- NET 125,709 -- (11,896) 113,813 -- 24,783 -- 138,596 SYSTEM UNDER CONSTRUCTION -- -- -- -- -- 579,981 (5,080) 574,901 GOODWILL AND INTANGIBLES -- NET 49,908 -- -- 49,908 -- 24,694 (13,851) 60,751 INVESTMENT IN XM RADIO -- -- -- -- 232,679 -- (232,679) -- INVESTMENT IN/DUE FROM SUBSIDIARY -- 188,192 (188,192) -- (217,039) -- 217,039 -- DEFERRED CHARGES AND OTHER ASSETS -- NET 3,431 24,011 -- 27,442 (10,047) 13,762 -- 31,157 RESTRICTED INVESTMENTS 2,500 (196) -- 2,304 12,473 81,208 -- 95,985 ----- ----- -- ----- ------ ------ -- ------ Total assets $266,922 $253,045 $(200,088) $319,879 $19,947 $1,086,605 $ (34,571) $1,391,860 ======== ======== ========== ======== ======== =========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expenses $ 26,800 $ 11,149 $ -- $37,949 $ 987 $ 53,919 $ -- $ 92,855 Obligations under capital Leases due within one year 3,259 -- -- 3,259 -- 149 -- 3,408 Current portion long-term debt 3,881 -- -- 3,881 -- -- -- 3,881 Other current liabilities 7,300 -- -- 7,300 -- 3,056 -- 10,356 ----- -- -- ----- -- ----- -- ------ Total current liabilities 41,240 11,149 -- 52,389 987 57,124 -- 110,500 DUE TO PARENT/AFFILIATE 811,660 -- (811,744) (84) (37,532) 84 37,532 -- LONG-TERM LIABILITIES Note payable to /from Issuer/Parent -- 14,000 -- 14,000 (14,000) -- -- -- Obligations under Bank Financing -- 80,000 -- 80,000 41,000 -- -- 121,000 Senior Notes, net of discount -- 328,025 -- 328,025 -- 261,171 -- 589,196 Other long-term debt 3,991 -- -- 3,991 -- -- -- 3,991 Capital lease obligations 630 -- -- 630 -- 168 -- 798 Net assets acquired in excess Of purchase price 985 -- -- 985 -- -- -- 985 Other long-term 20,072 -- -- 20,072 -- 5,841 -- 25,913 ------ -- -- ------ -- ------- -- ------ Total long-term liabilities 25,678 422,025 -- 447,703 27,000 267,180 -- 741,883 Total liabilities 878,578 433,174 (811,744) 500,008 (9,545) 324,388 37,532 852,383 ------- ------- --------- ------- ------- ------- ------ ------- MINORITY INTEREST -- -- -- -- -- -- 509,985 509,985 STOCKHOLDERS' EQUITY (DEFICIT) (611,656) (180,129) 611,656 (180,129) 29,492 762,217 (582,088) 29,492 --------- --------- ------- --------- ------ ------- --------- ------ Total Liabilities, Minority Interest, and Stockholders' Equity (Deficit) $266,922 $253,045 $(200,088) $319,879 $19,947 $1,086,605 $(34,571) $1,391,860 ======== ======== ========== ======== ======= ========== ========= ==========
Condensed Consolidating Balance Sheet As of December 31, 1999 (Unaudited) (in thousands)
Consolidated Consolidated Subsidiary Motient Motient Motient Motient Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent ---------- -------- ------------ -------- ------ -------- ------------ ------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 776 $ -- $ -- $ 776 $ -- $ 50,698 $ -- $ 51,474 Short-term investments -- -- -- -- -- 69,472 -- 69,472 Inventory 28,616 -- -- 28,616 -- -- -- 28,616 Prepaid in-orbit insurance 3,381 -- -- 3,381 -- -- -- 3,381 Accounts receivable-net 16,594 -- -- 16,594 -- -- -- 16,594 Restricted short-term investments -- 41,038 -- 41,038 -- -- -- 41,038 Other current assets 6,074 -- -- 6,074 2,568 1,077 -- 9,719 ----- -- -- ----- ----- ----- -- ----- Total current assets 55,441 41,038 -- 96,479 2,568 121,247 -- 220,294 PROPERTY AND EQUIPMENT-NET 126,914 -- (12,949) 113,965 -- 2,551 -- 116,516 SYSTEM UNDER CONSTRUCTION -- -- -- -- -- 362,358 (5,080) 357,278 GOODWILL AND INTANGIBLES--NET 51,158 -- -- 51,158 -- 25,380 (14,327) 62,211 INVESTMENT IN XM RADIO -- -- -- -- 190,757 -- (190,757) -- INVESTMENT IN/DUE FROM SUBSIDIARY -- 176,450 (176,450) -- (148,913) -- 148,913 -- DEFERRED CHARGES AND OTHER ASSETS--NET 2,977 26,507 -- 29,484 (10,597) 3,653 -- 22,540 RESTRICTED INVESTMENTS 320 18,360 -- 18,680 12,429 -- -- 31,109 --- ------ -- ------ ------ -- -- ------ Total assets $236,810 $262,355 $(189,399) $309,766 $46,244 $515,189 $(61,251) $809,948 ======== ======== ========== ======== ======= ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expense $ 31,073 $ 10,866 $ -- $ 41,939 $ 1,266 $ 24,680 $ -- $ 67,885 Obligations under capital lease due within one year 5,982 -- -- 5,982 -- 172 -- 6,154 Current portion long-term debt 5,960 -- -- 5,960 -- -- -- 5,960 Other current liabilities -- -- -- -- -- 1,646 -- 1,646 -- -- -- -- -- ----- -- ----- Total current liabilities 43,015 10,866 -- 53,881 1,266 26,498 -- 81,645 DUE TO PARENT/AFFILIATE 769,564 -- (769,626) (62) (14,934) 62 14,934 -- LONG-TERM LIABILITIES: Note payable to/from Issuer/Parent -- 14,000 -- 14,000 (14,000) -- -- -- Obligations under Bank Financing -- 44,000 -- 44,000 41,000 -- -- 85,000 Senior Notes, net of discount -- 327,576 -- 327,576 -- -- -- 327,576 Other long-term debt 2,535 -- -- 2,535 50,138 -- -- 52,673 Capital Lease obligations 35 -- -- 35 -- 212 -- 247 Net assets acquired in excess of purchase price 1,333 -- -- 1,333 -- -- -- 1,333 Other long-term liabilities 555 -- -- 555 -- 3,400 -- 3,955 --- -- -- --- -- ----- -- ----- Total long-term liabilities 4,458 385,576 -- 390,034 77,138 3,612 -- 470,784 Total liabilities 817,037 396,442 (769,626) 443,853 63,470 30,172 14,934 552,429 ------- ------- --------- ------- ------ ------ ------ ------- MINORITY INTEREST -- -- -- -- -- -- 274,745 274,745 STOCKHOLDERS' EQUITY (DEFICIT) (580,227) (134,087) 580,227 (134,087) (17,226) 485,017 (350,930) (17,226) --------- --------- ------- --------- -------- ------- --------- -------- Total liabilities, minority interest, and stockholders' equity (deficit) $236,810 $262,355 $(189,399) $309,766 $46,244 $515,189 $(61,251) $809,948 ======== ======== ========== ======== ======= ======== ========= ========
Condensed Consolidating Statement of Operations Three Months ended June 30, 2000 (Unaudited) (in thousands)
Consolidated Consolidated Subsidiary Motient Motient Motient Motient Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent ---------- -------- ------------ -------- ------ -------- ------------ ------ REVENUES Services $18,221 $-- $-- $18,221 $300 $-- $(300) $18,221 Sales of equipment 7,468 -- -- 7,468 -- -- -- 7,468 ----- -- -- ----- -- -- -- ----- Total Revenues 25,689 -- -- 25,689 300 -- (300) 25,689 COSTS AND EXPENSES Cost of service and operations 18,774 -- -- 18,774 -- -- -- 18,774 Cost of equipment sold 7,949 -- -- 7,949 -- -- -- 7,949 Sales and advertising 7,505 -- -- 7,505 115 -- -- 7,620 General and administrative 4,829 343 -- 5,172 366 13,426 (300) 18,664 Depreciation and amortization 8,921 -- -- 8,921 -- 511 (237) 9,195 ----- -- -- ----- ------- ------- ----- ----- Operating Loss (22,289) (343) -- (22,632) (181) (13,937) 237 (36,513) Interest and Other Income 105 4,559 (3,844) 820 541 8,849 (259) 9,951 Minority Interest in Loss of -- -- -- -- -- -- 3,341 3,341 Subsidiaries Equity in Loss of Subsidiaries -- (26,571) 26,571 -- (41,935) -- 41,935 -- Interest Expense (4,387) (14,075) 3,844 (14,618) (1,670) -- 259 (16,029) ------- -------- ----- -------- ------- ------- ------ -------- Net Loss Before Extraordinary Item and Preferred Dividend (26,571) (36,430) 26,571 (36,430) (43,245) (5,088) 45,513 (39,250) Extraordinary Loss on Extinguishment of Debt -- (417) -- (417) -- -- -- (417) Preferred Stock Dividend Requirement -- -- -- -- (745) (2,171) 2,171 (745) Net Loss Attributable Common Shareholders ($26,571) ($36,847) $26,571 ($36,847) ($43,990) ($7,259) $47,684 ($40,412) ========= ========= ======= ========= ========= ======== ======= =========
Condensed Consolidating Statement of Operations Three Months ended June 30, 1999 (Unaudited) (in thousands)
Consolidated Consolidated Subsidiary Motient Motient Motient Motient Guarantors Holdings Eliminations Holdings Parent Eliminations Parent ---------- -------- ------------ -------- ------ ------------ ------ REVENUES Services $16,622 $-- $ -- $16,622 $300 $(300) $16,622 Sales of equipment 6,251 -- -- 6,251 -- -- 6,251 ----- -- -- ----- -- -- ----- Total Revenues 22,873 -- -- 22,873 300 (300) 22,873 COSTS AND EXPENSES Cost of service and operations 16,516 -- -- 16,516 -- -- 16,516 Cost of equipment sold 6,594 -- -- 6,594 -- -- 6,594 Sales and advertising 5,620 -- -- 5,620 101 -- 5,721 General and administrative 4,496 355 -- 4,851 157 (300) 4,708 Depreciation and amortization 14,159 -- (527) 13,632 -- -- 13,632 ------ -- ----- ------ -- -- ------ Operating Loss (24,512) (355) 527 (24,340) 42 -- (24,298) Interest and Other Income 103 4,814 (3,759) 1,158 735 -- 1,893 Unrealized Loss on Note Receivable From XM Radio -- -- -- -- ($9,919) -- ($9,919) Unrealized Gain on Note Payable to Related Party -- -- -- -- $10,036 -- $10,036 Equity in Loss of Subsidiaries -- ($28,786) $28,786 -- ($40,110) $36,912 (3,198) Interest Expense (4,377) (13,112) 3,759 (13,730) (3,161) -- (16,891) ------- -------- ----- -------- ------- -- -------- Net Loss ($28,786) ($37,439) $29,313 ($36,912) ($42,377) $36,912 ($42,377) ========= ========= ======= ========= ========= ======= =========
Condensed Consolidating Statement of Operations Six Months ended June 30, 2000 (Unaudited) (in thousands)
Consolidated Consolidated Subsidiary Motient Motient Motient Motient Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent ---------- -------- ------------ -------- ------ -------- ------------ ------ REVENUES Services $35,373 $-- $-- $35,373 $600 $ -- $(600) $35,373 Sales of equipment 12,486 -- -- 12,486 -- -- -- 12,486 ------ -- -- ------ -- -- -- ------ Total Revenues 47,859 -- -- 47,859 600 -- (600) 47,859 COSTS AND EXPENSES Cost of service and operations 36,792 -- -- 36,792 -- -- -- 36,792 Cost of equipment sold 13,205 -- -- 13,205 -- -- -- 13,205 Sales and advertising 13,730 -- -- 13,730 116 -- -- 13,846 General and administrative 10,047 678 -- 10,725 640 29,812 (600) 40,577 Depreciation and amortization 17,749 -- -- 17,749 -- 1,014 (475) 18,288 ------ ------- -------- ------ ----- ----- ----- ------ Operating Loss (43,664) (678) -- (44,342) (156) (30,826) 475 (74,849) Interest and Other Income 195 9,635 (7,687) 2,143 519 13,001 (510) 15,153 Gain on Conversion of Convertible Note Payable to Related Party -- -- -- -- 32,854 -- -- 32,854 Unrealized Gain on Convertible Note Payable to Related Party -- -- -- 3,925 -- -- 3,925 Equity in Loss of Subsidiaries -- (52,255) 52,255 -- (81,695) -- 81,695 -- Minority Interest in Loss of -- -- -- -- -- -- 10,683 10,683 Subsidiaries Interest Expense (8,786) (27,494) 7,687 (28,593) (2,925) (2) 510 (31,010) ------- -------- ----- -------- ------- --- --- -------- Net Loss before Extraordinary Item and Preferred Dividend (52,255) (70,792) 52,255 (70,792) (47,478) (17,827) 92,853 (43,244) Extraordinary Loss on Extinguishment of Debt -- (417) -- (417) -- -- -- (417) Preferred Stock Dividend Requirement -- -- -- -- (1,251) (3,643) 3,643 (1,251) Net Loss Attributable to Common Shareholders ($52,255) ($71,209) $52,255 ($71,209) ($48,729) ($21,470) $96,496 ($44,912) ========= ========= ======= ========= ========= ========= ======= =========
Condensed Consolidating Statement of Operations Six Months ended June 30, 1999 (Unaudited) (in thousands)
Consolidated Consolidated Subsidiary Motient Motient Motient Motient Guarantors Holdings Eliminations Holdings Parent Eliminations Parent ---------- -------- ------------ -------- ------ ------------ ------ REVENUES Services $32,786 $-- $ -- $32,786 $600 $(600) $32,786 Sales of equipment 10,317 -- -- 10,317 -- -- 10,317 -------- ------- ------- ------ ------- ------- ------ Total Revenues 43,103 -- -- 43,103 600 (600) 43,103 COSTS AND EXPENSES Cost of service and operations 34,386 -- -- 34,386 -- -- 34,386 Cost of equipment sold 11,122 -- -- 11,122 -- -- 11,122 Sales and advertising 10,369 -- -- 10,369 101 -- 10,470 General and administrative 9,039 691 -- 9,730 347 (600) 9,477 Depreciation and amortization 28,457 -- (1,053) 27,404 -- -- 27,404 ------ ------- ------- ------ ------- ------- ------ Operating Loss (50,270) (691) 1,053 (49,908) 152 -- (49,756) Interest and Other Income 172 9,812 (7,645) 2,339 1,293 -- 3,632 UNREALIZED LOSS ON NOTE RECEIVABLE FROM XM RADIO -- -- -- -- (9,919) -- (9,919) UNREALIZED GAIN ON NOTE PAYABLE TO RELATED PARTY -- -- -- -- 10,036 -- 10,036 EQUITY IN LOSS OF SUBSIDIARIES -- (58,604) 58,604 -- (80,801) 74,109 (6,692) INTEREST EXPENSE (8,506) (25,679) 7,645 (26,540) (6,281) -- (32,821) ------- -------- ----- -------- ------- -- -------- NET LOSS ($58,604) ($75,162) $59,657 ($74,109) ($85,520) $74,109 ($85,520) ========= ========= ======= ========= ========= ======= =========
Condensed Consolidating Statement of Cash Flow Six Months Ended June 30, 2000 (Unaudited) (in thousands)
Consolidated Consolidated Subsidiary Motient Motient Motient Motient Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent ---------- -------- ------------ -------- ------ -------- ------------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($52,255) ($71,209) $52,255 ($71,209) ($47,478) ($17,827) $92,853 ($43,661) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Amortization of Guarantee Warrants and debt discount and issuance costs -- 4,520 -- 4,520 1,221 -- -- 5,741 Depreciation and amortization 17,749 -- -- 17,749 -- 1,014 (475) 18,288 Non cash stock compensation of XM Radio -- -- -- -- -- 2,258 -- 2,258 Extraordinary loss on extinguishment of debt -- 417 -- 417 -- -- -- 417 Minority Interest -- -- -- -- -- -- (10,683) (10,683) Gain on conversion on convertible note payable to related party -- -- -- -- (32,854) -- -- (32,854) Unrealized gain on marketable securities -- -- -- -- (3,925) -- -- (3,925) Changes in assets & liabilities Inventory (3,376) -- -- (3,376) -- -- -- (3,376) Prepaid in-orbit insurance 2,444 -- -- 2,444 -- -- -- 2,444 Trade accounts receivable (4,169) -- -- (4,169) -- -- -- (4,169) Other current assets (22,138) -- -- (22,138) 677 (313) -- (21,774) Accounts payable and accrued expenses (6,655) 283 -- (6,372) (278) 8,575 -- 1,925 Accrued interest on Senior Note -- 15 -- 15 -- -- -- 15 Deferred trade payables (3,330) -- -- (3,330) -- -- -- (3,330) Deferred Items--net 16,594 -- -- 16,594 395 -- -- 16,989 ------ -- -- ------ --- -- -- ------ Net cash (used in) provided by operating activities (55,136) (65,974) 52,255 (68,855) (82,242) (6,293) 81,695 (75,695) CASH FLOWS FROM INVESTING ACTIVITIES: Payment of Senior Note interest from escrow -- 20,503 -- 20,503 -- -- -- 20,503 Additions to property & equipment (9,644) -- -- (9,644) -- (18,814) -- (28,458) Asset Sale agreement to Motient Satellite Ventures 10,836 -- -- 10,836 -- -- -- 10,836 System under construction -- -- -- -- -- (191,319) -- (191,319) Net Purchase/Maturity of short-term investments -- -- -- -- -- 69,471 -- 69,471 Other investing activities by XM Radio -- -- -- -- -- (54,250) -- (54,250) Purchase of long-term, restricted investments (2,180) (1,948) -- (4,128) (44) (125,863) -- (130,035) ------- ------- -- ------- ---- --------- -- --------- Net cash (used in) provided by investing activities (988) 18,555 -- 17,567 (44) (320,775) -- (303,252) Consolidated Consolidated Subsidiary Motient Motient Motient Motient Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent ---------- -------- ------------ -------- ------ -------- ------------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Common and Preferred Stock -- -- -- -- 5,308 229,225 -- 234,533 Proceeds from issuance of conversion option to the investors of Satellite Ventures -- -- -- -- 18,564 -- -- 18,564 Funding from parent/subsidiary 64,122 11,419 (52,255) 23,286 58,409 -- (81,695) -- Principal payments under capital leases (2,933) -- -- (2,933) -- -- -- (2,933) Principal payments under vendor lease (1,233) -- -- (1,233) -- -- -- (1,233) Proceeds from Senior Secured Notes and Stock Purchase Warrants -- -- -- -- -- 322,898 -- 322,898 Proceeds from bank financing -- 36,000 -- 36,000 -- -- -- 36,000 Debt issuance costs -- -- -- -- 5 (8,381) -- (8,376) -- -- -- -- - ------- -- ------- Net cash provided by (used in) financing activities 59,956 47,419 (52,255) 55,120 82,286 543,742 (81,695) 599,453 Net increase in cash and cash equivalents 3,832 -- -- 3,832 -- 216,674 -- 220,506 CASH & CASH EQUIVALENTS, beginning of period 776 -- -- 776 -- 50,698 -- 51,474 --- -- -- --- ------ ------ CASH & CASH EQUIVALENTS, end of period $ 4,608 $ -- $ -- $ 4,608 $ -- $267,372 $ -- $271,980 ======= ==== ==== ======= ==== ======== ==== =========
Condensed Consolidating Statement of Cash Flow Six Months Ended June 30, 1999 (Unaudited) (in thousands)
Consolidated Consolidated Subsidiary Motient Motient Motient Motient Guarantors Holdings Eliminations Holdings Parent Eliminations Parent ---------- -------- ------------ -------- ------ ------------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($58,604) ($75,162) $59,657 ($74,109) ($85,520) $74,109 ($85,520) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Amortization of Guarantee Warrants and debt discount and issuance costs -- 3,616 -- 3,616 5,580 -- 9,196 Depreciation and amortization 27,404 -- -- 27,404 -- -- 27,404 Equity in loss in XM Radio -- -- -- -- 6,692 -- 6,692 Unrealized gain on note payable to related party -- -- -- -- (10,036) -- (10,036) Unrealized loss on note receivable from XM Radio -- -- -- -- 9,919 --- 9,919 Changes in assets & liabilities Inventory 168 -- -- 168 -- -- 168 Prepaid in-orbit insurance 2,898 -- -- 2,898 -- -- 2,898 Accounts receivable--trade (4,685) -- -- (4,685) -- -- (4,685) Other current assets (1,859) 20 -- (1,839) (638) -- (2,477) Accounts payable and accrued expenses (1,986) -- -- (1,986) 1,135 -- (851) Accrued interest on Senior Notes -- (456) -- (456) -- -- (456) Deferred trade payables (3,644) -- -- (3,644) -- -- (3,644) Deferred Items--net 20 -- -- 20 (486) -- (466) -- -- -- -- ----- -- ----- Net cash (used in) provided by operating (40,288) (71,982) 59,657 (52,613 (73,354) 74,109 (51,858) activities CASH FLOWS FROM INVESTING ACTIVITIES: Payment of Senior note interest from escrow -- 20,503 -- 20,503 -- -- 20,503 Additions to property & equipment (5,631) -- -- (5,631) -- -- (5,631) Purchase of XM Radio note receivable -- -- -- -- (21,419) -- (21,419) Purchase of long-term, restricted investments (1,008) (1,217) -- (2,225) (1,556) -- (3,781) ------- ------- -- ------- ------- -- ------- Net cash (used in) provided by investing (6,639) 19,286 -- 12,647 (22,975) -- (10,328) activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Common Stock -- -- -- -- 2,913 -- 2,913 Funding from parent 48,934 12,696 (59,657) 1,973 72,136 (74,109) -- Principal payments under capital leases (2,781) -- -- (2,781) -- -- (2,781) Principal payments under vendor Financing (197) -- -- (197) -- -- (197) Proceeds from bank financing -- 40,000 -- 40,000 -- -- 40,000 Debt issuance costs -- -- -- -- (220) -- (220) Proceeds from note payable to related party -- -- -- -- 21,500 -- 21,500 -- -- -- -- ------ -- ------ Net cash provided by (used in) financing 45,956 52,696 (59,657) 38,995 96,329 (74,109) 61,215 activities Net increase in cash and cash equivalents (971) -- -- (971) -- -- (971) CASH & CASH EQUIVALENTS, beginning of period 2,285 -- -- 2,285 -- -- 2,285 ----- -- -- ----- -- -- ----- CASH & CASH EQUIVALENTS, end of period $1,314 $-- $-- $1,314 $-- $-- $1,314 ====== === ========= ====== === === ======
9. Subsequent Events On July 7, 2000, XM Radio reached an agreement for a private offering of 235,000 shares for $1,000 per share of its Series C convertible redeemable preferred stock, which closed on August 8, 2000 and yielded net proceeds of approximately $227.0 million. The Series C convertible redeemable preferred stock provides for 8.25% cumulative dividends payable in cash. The Series C convertible redeemable preferred stock is convertible, at the holder's option, into shares of XM Radio's Class A common stock at the conversion price then in effect. Currently, the conversion price is $26.50. The Series C convertible redeemable preferred stock may be redeemed beginning on February 8, 2005 in cash or, at the holder's option, in Class A common stock. XM Radio must redeem the Series C convertible redeemable preferred stock in Class A common stock on February 1, 2012. XM Radio expects to record a $123.0 million beneficial conversion charge that will reduce earnings available to common stockholders. The issuance of the Series C preferred stock caused the exercise price of the warrants sold in March 2000 to be adjusted to $47.94. On July 7, 2000, XM Radio announced its regular quarterly dividend on its 8.25% Series B convertible redeemable preferred stock. The dividend was paid in 57,114 shares of Class A common stock on August 1, 2000 to preferred shareholders of record as of July 21, 2000. The net loss to common shareholders in the consolidated condensed statement of operations for quarter and six months ended June 30, 2000 reflects the accrual and payment of these dividends to the preferred stockholders. PART I- FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding our expected financial position and operating results, our business strategy, and our financing plans and requirements are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words or phrases such as, for example, "may," "will," "anticipate," "estimate," "expect," "project," or "intend." These forward-looking statements reflect our plans, expectations and beliefs, and, accordingly, are subject to certain risks and uncertainties. We cannot guarantee that any of such forward-looking statements will be realized. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements ("Cautionary Statements") include, among others, those described under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview," and elsewhere in this quarterly report, including in conjunction with the forward-looking statements included in this quarterly report. All of our subsequent written and oral forward- looking statements (or statements that may be attributed to us) are expressly qualified by the Cautionary Statements. You should carefully review the risk factors described in our other filings with the Securities and Exchange Commission (the "SEC") from time to time, including our registration statement on Form S-3 (File No. 333-42104), our Form 10-K Annual Report filed on March 30, 2000 and our Form 10-Q Quarterly Reports to be filed subsequent to this Form 10-Q, as well as our other reports and filings with the SEC. In addition, you are urged to review carefully the most recently filed prospectus of XM Radio describing the risk factors relating to its business, as well as XM Radio's Form 10-K Annual Report for 1999 and its other reports filed from time to time with the SEC. General This section provides information which we believe is relevant to an assessment and understanding of the financial condition and consolidated results of operations of Motient Corporation (with its subsidiaries, "Motient" or the "Company"). The discussion should be read in conjunction with the consolidated financial statements and notes thereto. Motient has six wholly-owned subsidiaries which, for purposes of this quarterly report, are referred to as the core wireless business, and a controlling interest in three other subsidiaries, referred to as XM Radio (defined below). On a consolidated basis, we refer to these entities as Motient. On June 29, 2000 we formed a new joint venture subsidiary, Motient Satellite Ventures LLC ('Satellite Ventures"), in which we own 80% of the membership interest. The remaining 20% interest in Satellite Ventures is owned by three investors controlled by Columbia Capital, Spectrum Equity Investors LP and Telcom Ventures, L.L.C. (collectively, the "Investors"). The investors paid $50 million to Satellite Ventures in exchange for their 20% interest. Satellite Ventures will conduct research and development activities to explore the technical, strategic, and market potential of new wireless data communications using our existing satellite network. See Item 1-Notes to Consolidated Condensed Financial Statements for further detail on this transaction. Core Wireless Business We are a leading provider of two-way mobile communications services principally to business-to-business customers and enterprises. Motient serves a variety of markets including mobile professionals, telemetry, transportation, field service, and nationwide voice dispatch, to customers in the United States. During 1999, we made substantial investments in two new products -- eLink and MobileMAX2. Our eLink service is a two-way wireless email device and electronic organizer that uses our terrestrial network. We believe that this product will capitalize on the rapid expansion of internet email usage, particularly in the business-to-business environment. We provide our industry-leading eLink two-way wireless email service to customers accessing email through corporate servers, Internet Service Providers (ISP) and Mail Service Provider (MSP) accounts, and paging network suppliers. MobileMAX2 is our second generation multi-mode mobile data messaging service which uses both our satellite and terrestrial networks to provide least-cost-routing capabilities. We believe MobileMAX2 will improve our competitive position in the transportation industry, since the product has a relatively low cost of entry, and contains added functionality that should allow us to increase our penetration of the less-than-truckload market. We expect that our rollout of eLink and MobileMAX2 will require a significant investment of financial resources. We believe that the market opportunity represented by these wireless data offerings is substantial, and we have decided to focus the majority of our available future resources on expanding our wireless data business. As a result of these factors and in light of certain regulatory developments in late 1999 with respect to our satellite voice business, we expect that the future level of investment in our voice business and satellite-related product lines will decrease as a percentage of our overall investment. While we expect that this shift in resources will ultimately yield an increase in our customer base, we expect that it will have the effect of driving down average revenue per unit as the percentage of voice customers decreases. XM Radio As of June 30, 2000, we had an equity interest in XM Satellite Radio Holdings Inc. ("XM Radio") of approximately 34.3% (or 25.0% on a fully diluted basis); however, we continue to control XM Radio through our Board of Director membership and common stock voting rights. In July 1999 we acquired all of the outstanding debt and equity interest in XM Radio from its other investor (the "XM Acquisition"). As a result, all of XM Radio's results for the period from July 7, 1999 have been included in our consolidated condensed financial statements. We will continue to consolidate XM Radio until we no longer control XM Radio. We must request and receive FCC approval to relinquish control of XM Radio. Prior to July 7, 1999, our investment in XM Radio was accounted for pursuant to the equity method of accounting. On July 14, 2000, XM Radio filed an application with the FCC to allow XM Radio to transfer its control from us to a diffuse group of owners, none of whom will have a controlling interest. This application is pending with the FCC. Under the terms outlined in this application, we will still retain our Board of Director membership but will no longer have the right to elect a majority of XM Radio's Board of Directors. At such time that we cease to control XM Radio, we will account for our investment in XM Radio pursuant to the equity method. The operations and financing of XM Radio are maintained separate and apart from the operations and financing of Motient. XM Radio completed its initial public offering in October 1999. Please refer to XM Radio's audited financial statements, included in its reports and filings with the SEC, for more detail about its business plan, risks, and financial results. Our significant acquisitions in recent years and the impact of consolidating the results of XM Radio, make period to period comparison of our financial results less meaningful, and therefore, you should not rely on them as an indication of future operating performance. Overview We have incurred significant operating losses and negative cash flows in each year since we started operations, due primarily to start-up costs, the costs of developing and building the networks and the cost of developing, selling and providing our products and services. We are, and will continue to be, highly leveraged (see discussion of Liquidity and Capital Resources -- below). Our future operating results could be adversely affected by a number of uncertainties and factors, including: o the launch of new products or the entry into new market segments, which may require us to continue to incur significant operating losses, o our ability to fully recover the value of our inventory in a timely manner, o our ability to gain market acceptance of new products and services, including our new product offerings, eLink and MobileMAX2, o the timely roll-out of certain key customer initiatives and new products, including for example MobileMAX2, o our ability to respond and react to changes in our business and the industry because we have substantial indebtedness, o our ability to fund anticipated capital expenditures, operating losses and debt service requirements and our ability to secure additional financing as necessary, o our ability to modify the organization, strategy and product mix to maximize the market opportunities as the market changes, o our ability to manage growth effectively, o competition from existing companies that provide services using existing communications technologies and the possibility of competition from companies using new technology in the future, o our ability to maintain, on commercially reasonable terms or at all, certain technologies licensed from third parties, o the loss of one or more of our key customers, o the timely availability of an adequate supply of subscriber equipment at competitive price points, o our dependence on third party distribution relationships to provide access to potential customers, o our ability to expand our networks on a timely basis and at a commercially reasonable cost, or at all, as additional future demand increases, o regulation by the FCC, and o technical anomalies that may occur within the network, including product development, which could impact, among other things, customer performance, satisfaction and revenue under contractual arrangements with certain customers, or the operation of the satellite network and the cost, scope or availability of in-orbit insurance. Additionally, XM Radio is a development stage company with no revenues, and its business is subject to a number of significant risks and uncertainties including the following: o the ability to obtain additional financing necessary to complete the build out of its system and maintain operations until such time as it can reach cash flow positive, o satellite launch failure, destruction or damage during launch, and premature failure of XM Radio's satellite that will not be fully covered by insurance, o the ability of XM Radio to successfully integrate complex technologies into a technologically feasible configuration, o the timely availability of XM Radio subscriber equipment at competitive prices, o the ability of XM Radio to gain market acceptance of its service, and o the ability of XM Radio to achieve profitability given certain distribution agreement obligations and joint development funding requirements. The Company has a significant investment in XM Radio which may be effected by the foregoing risks and impact the market price of XM Radio's stock. For an expanded discussion of XM Radio's risk factors, please refer to XM Radio's most recently filed prospectus with the SEC. Quarter and six months ended June 30, 2000 and June 30, 1999 Revenue and Subscriber Statistics Service revenues, which includes our data, voice, and capacity reseller services, approximated $18.2 million and $35.4 million for the three and six months ended June 30, 2000, respectively, which constituted a $1.6 million, or 10% increase over the three months ended June 30, 1999 and a $2.6 million or 8% increase over the six months ended June 30, 1999. The increase in service revenues for the second quarter and first half of 2000 was primarily attributable to a 38% increase in subscribers, partially offset by average revenue per user reductions. Three Months Ended June 30, Summary of Revenue 2000 1999 Change % Change ---- ---- ------ -------- (in millions) Data Services $ 13.5 $12.3 $1.2 10% Voice Service 3.4 3.2 0.2 6 Capacity Resellers and Other 1.3 1.1 0.2 18 Equipment Revenue 7.5 6.3 1.2 19 ------ ------ --- Total $ 25.7 $22.9 $2.8 12% ====== ====== ==== Six Months Ended June 30, Summary of Revenue 2000 1999 Change % Change ---- ---- ------ -------- (in millions) Data Services $ 26.0 $24.4 $1.6 7% Voice Service 6.9 6.2 0.7 11 Capacity Resellers and Other 2.5 2.2 0.3 14 Equipment Revenue 12.5 10.3 2.2 21 ------- ------ --- Total $ 47.9 $43.1 $4.8 11% ======= ====== ==== Our data service revenue increased as a result of approximately 43,800 additional subscribers at June 30, 2000 as compared to June 30, 1999, broken down as follows: Subscribers Revenue Growth ----------- -------------- elink 15,000 $0.8 Transportation 30,300 4.7 Field Service (7,000) (4.2) Other 5,500 0.3 ----------- ----------- Total 43,800 $1.6 =========== =========== The growth in our transportation segment was primarily for UPS and multi-mode customers. The decrease in field service was a result of (i) contract price reductions from existing large customers and (ii) the expiration of a large contract. The increase in service revenue from voice services was primarily the result of an increase in our voice subscribers of approximately 2,700 from June 30, 1999 to June 30, 2000. This was offset by a decrease in our average revenue per unit ("ARPU") of 20%, caused by a shift in customer usage to lower-usage emergency response services, and a continued drop in average revenue per user for our maritime customers. Service revenue from capacity resellers, who handle both voice and data services, increased primarily as a result of increased contract commitments from current customers. For the first half of 2000 we experienced a 19% decrease in ARPU caused by scheduled calendar year contract price reductions as well as a larger percentage of our customers using our data service versus our voice service, which typically have a lower ARPU, and a change in subscriber mix among market segments. The increase in revenue for the six months ended June 30, 2000 from the sale of equipment reflects the sale of hardware equipment associated with our eLink and MobileMAX2 service offerings of approximately $9.2 million, offset by a decrease in sales of single-mode, multi-mode, and voice equipment of approximately $7.1 million, which we expect to continue with the introduction of MobileMAX2 and the shift away from the voice business. As is common in our industry, we report subscriber information and average revenue per unit per month statistics. Although these measures are not required under Generally Accepted Accounting Principles ("GAAP"), we believe that this information helps to demonstrate important trends in our business. Subscribers Average Revenue Per Unit As of June 30, As of June 30, -------------- -------------- 2000 1999 2000 1999 ---- ---- ---- ---- Data 152,391 108,600 $ 34 $ 41 Voice 17,652 14,500 65 81 ------- ------- Total 170,043 123,100 $ 38 $ 47 ======= ======= Additionally, our mix of subscribers can be broken down into the following markets: As of June 30, 2000 1999 ---- ---- Field Service 25% 41% Transportation 42% 33% Telemetry 9% 10% Maritime 4% 4% eLink 9% -- Other 11% 12% As the mix of subscribers shifts more to our data business, and more of the voice business is handled by resellers, we expect that the overall average revenue per unit will continue to decline over time towards the average revenue per unit for data service. Expenses Three Months Ended June 30, Summary of Expense 2000 1999 Change % Change ------------------ ---- ---- ------ -------- (in millions) Cost of Service & Operations $ 18.8 $ 16.5 $ 2.3 14% Cost of Equipment Sales 7.9 6.6 1.3 20 Sales & Advertising 7.6 5.7 1.9 33 General & Administration 18.7 4.7 14.0 298 Depreciation & Amortization 9.2 13.6 (4.4) (32) ------ ------- ----- Total $ 62.2 $ 47.1 $15.1 32% ====== ======= ===== Six Months Ended June 30, Summary of Expense 2000 1999 Change % Change ------------------ ---- ---- ------ -------- (in millions) Cost of Service & Operations $ 36.8 $ 34.4 2.4 7% Cost of Equipment Sales 13.2 11.1 2.1 19 Sales & Advertising 13.8 10.5 3.3 31 General & Administration 40.6 9.5 31.1 327 Depreciation & Amortization 18.3 27.4 (9.1) (33) ------- ------ ----- Total $122.7 $92.9 $29.8 32% ======= ====== ===== Effective July 7, 1999, we assumed control of XM Radio and we consolidated its results with ours from that point forward. Consequently, the results for the three and six months ended June 30, 2000 reflect the costs of the consolidated entity. The results for the three and six months ended June 30, 1999 do not include expenses of XM Radio as it was accounted for under the equity method of accounting during those periods. Cost of service and operations includes costs to support subscribers and to operate the network. As a percentage of total revenues, cost of service and operations was 73% for the three months ended June 30, 2000 and 77% for six months ended June 30, 2000, compared to 72% and 80% for the three and six months ended June 30, 1999, respectively. The dollar increase in cost of service and operations for the six months ended June 30, 2000 was primarily attributable to (i) an increase of $1.4 million for communication charges associated with increased service usage and costs to support the terrestrial network, (ii) an increase of $0.4 million in maintenance costs primarily for maintenance of our base stations, (iii) an increase in employee related costs of approximately $2.1 million as we continue the build-out of our network and to support our network, and (iv) an increase of $0.6 million for site rental costs associated with the terrestrial network, offset by (i) a reduction of approximately $1.6 million in Year 2000 costs and (ii) a reduction of approximately $0.6 million in in-orbit insurance premiums. XM Radio did not incur any cost of service and operations expenses during the first half of 2000. The cost of equipment sold increased $1.3 million, or 20%, from $6.6 million for the three months ended June 30, 1999 to $7.9 million for the three months ended June 30, 2000, and $2.1 million, or 19%, from $11.1 million for the first six months of 1999, to $13.2 million for the first six months of 2000. The increase quarter over quarter in the cost of equipment sold was proportionate to the increase in equipment revenue, which reflects the roll-out of our MobileMAX2 equipment and increased sales of eLink in the first half of 2000, offset by a decrease in sales of single-mode and voice equipment. The cost of equipment for the quarter and six months ended June 30, 2000, was also impacted by approximately $0.6 million in hardware promotional discounts. Sales and advertising expenses were $7.6 million and $13.8 million for the three and six months ended June 30, 2000, respectively, compared to $5.7 million and $10.5 million during the same periods in 1999. Sales and advertising expenses as a percentage of total revenue were approximately 30% and 29% for the quarter and six months ended June 30, 2000, respectively, compared to 25% and 24% for the quarter and six months ended June 30, 1999. The increase in sales and advertising expenses from the quarter and six months ended June 30, 1999 to the quarter and six months ended June 30, 2000 was primarily attributable to (i) increased trade show activity in the second quarter and first half of 2000 compared to the same periods in 1999, (ii) costs incurred in connection with our company name change in April 2000, (iii) an increase in advertising for the first half of 2000 to heighten our presence in the marketplace particularly in the transportation market in anticipation of the rollout of MobileMAX2, and (iv) eLink customer acquisition costs. We expect these costs to continue to increase as we increase our customer acquisitions and brand recognition efforts. We recently entered into an agreement with Yahoo! Inc., a leading global Internet communications, commerce and media company, to use our eLink service to provide Yahoo! users wireless access to Yahoo! content and services. We expect our sales and advertising expenses to increase in the second half of the year in support of our Yahoo! initiative. XM Radio did not incur any sales and advertising expenses in the first half of 2000. General and administrative expenses were $18.7 million (of which $13.4 million were incurred by XM Radio) and $40.6 million (of which $29.8 million were incurred by XM Radio) for the three and six months ended June 30, 2000, respectively, compared to $4.7 million and $9.5 million during the same periods in 1999. Excluding XM Radio expenses, general and administrative expenses as a percentage of total revenue were approximately 21% and 23% for the quarter and six months ended June 30, 2000, respectively, compared to 21% and 22% for the same periods in 1999. The $1.3 million increase from the six months ended June 30, 1999 to the six months ended June 30, 2000 in our core wireless business general and administrative expenses was attributable to (i) an increase in headcount from the prior year causing an increase in employee-related costs, and (ii) a $0.3 million increase in regulatory costs, associated principally with our appeal of the FCC's decision to grant applications to competitors to provide mobile satellite services in the United States. See "Regulation" below. Depreciation and amortization expenses were $9.2 million (of which $0.3 million were incurred by XM Radio) and $18.3 million (of which $0.5 million were incurred by XM Radio) for the three and six months ended June 30, 2000, respectively, compared to $13.6 million and $27.4 million during the same periods in 1999. Excluding XM Radio, depreciation and amortization was approximately 35% and 37% of total revenue for the three and six months ended June 30, 2000, respectively, compared to 60% and 64% during the same periods in 1999. The $9.6 million decrease in depreciation and amortization expense for the six months ended June 30, 2000 was primarily attributable to the $97.4 million asset impairment charge related to our satellite and satellite related ground segment assets taken in the fourth quarter of 1999. This resulted in a reduction in depreciation expense of approximately $8.1 million for the six months ended June 30, 2000. Interest and other income was $10.0 million (of which $8.9 million was earned by XM Radio) for the second quarter of 2000 and $15.2 million (of which $13.0 million was earned by XM Radio) for the six months ended June 30, 2000, as compared to $1.9 million and $3.6 million for the same periods in 1999. Excluding $13.0 million of interest earned by XM Radio on its restricted investments, the decrease of $1.4 million for the six months ended June 30, 2000 was a result of (i) lower balances on escrows established with the proceeds from the $335 million debt offering which reduced interest income for the first half of 2000 by approximately $0.5 million and (ii) interest income of approximately $0.9 million in 1999 on our note receivable from XM Radio as XM Radio was accounted for under the equity method of accounting during the six months ended June 30, 1999. We incurred $16.0 million of interest expense in the second quarter of 2000 and $31.0 million for the six months ended June 30, 2000, of which a minimal amount was incurred by XM Radio, compared to $16.9 million and $32.8 million during the same periods in 1999. The decrease of $1.8 million for the six months ended June 30, 2000 was a result of a $3.3 million decrease in amortization of warrants, prepaid interest and debt offering costs due to the debt discount costs that were written off in 1999 when we extinguished $59 million of debt on the Term Loan Facility, offset by an $8.0 million and $2.7 million higher debt balance on our Revolving Credit Facility and vendor financing commitment, respectively. We expect that interest costs will continue to be significant as we continue to draw down on our bank revolver. In January 1999, we issued a note payable in the amount of $21.5 million to Baron Asset Fund, a stockholder and a guarantor of our bank facility. The note was secured and exchangeable for a portion of our shares of XM Radio. Since the note was indexed to XM Radio stock, which decreased in value from December 1999 to January 2000, we recorded an unrealized gain of $3.9 million before the note was exchanged. The note payable was exchanged for XM Radio stock in January 2000, and we recorded a non-recurring gain of $32.9 million for the difference between the carrying value of the debt and XM Radio stock exchanged to settle the obligation. Net capital expenditures, excluding XM Radio, for the six months ended June 30, 2000 for property and equipment were $9.6 million compared to $5.6 million in the same period of 1999. Expenditures consisted primarily of assets necessary to continue the build out of our terrestrial network. In addition, XM Radio expended $18.8 million in the first half of 2000 for leasehold improvements on their new office building, as well as for other expenditures for office furniture and equipment. Net capital expenditures for property under construction represent those costs associated with the build out of the XM Radio network. It is anticipated that these expenditures will continue to be significant as XM Radio continues to build out its satellites and ground segments. For the first half of 2000, XM Radio expended $191.3 million for property under construction. Liquidity and Capital Resources Core Wireless Business Adequate liquidity and capital are critical to our ability to continue as a going concern and to fund subscriber acquisition programs necessary to achieve positive cash flow and profitable operations. We expect to continue to make significant capital outlays to fund interest expense, new product rollouts, capital expenditures and working capital before we begin to generate positive cash flow from operations. We expect these outlays to continue for the foreseeable future. Summary of Liquidity and Financing Sources for Core Wireless Business Our current operating assumptions and projections reflect our best estimate of subscriber and revenue growth and operating expenses. We anticipate that capital expenditures, operating losses, working capital and debt service requirements through 2000 can be met by (i) cash on hand, (ii) the borrowings available under the bank financing and the vendor financing, (iii) proceeds realized through the sale of inventory relating to our new products-eLink and MobileMAX2, and (iv) additional debt or equity financing transactions. We also believe that our investment in XM Radio may provide us, in the future, with flexibility for obtaining additional liquidity, should that be necessary. However, there are various restrictions on our ability to realize liquidity on our investment in XM Radio. Our ability to meet our projections is subject to numerous uncertainties and we cannot guarantee that our current projections regarding the timing of our ability to achieve positive operating cash flow will be accurate. If our cash requirements are more than projected, we may require additional financing in amounts which may be material. The type, timing and terms of financing that we select will be dependent upon our cash needs, the availability of other financing sources and the prevailing conditions in the financial markets. We cannot guarantee that additional financing sources will be available at any given time or available on favorable terms. Our current financing arrangements are summarized below: o A $138.3 million bank financing facility, consisting of (i) a $97.3 million unsecured five-year reducing revolving credit facility and (ii) a $41 million five-year term loan facility, with up to three additional one-year extensions subject to the lenders' approval, which is secured by the assets of the Company, principally our stockholdings in XM Radio. The bank financing is severally guaranteed by Hughes Electronics Corporation, Singapore Telecommunications Ltd., and Baron Capital Partners, L.P. Both facilities bear interest, generally, at 100 basis points above London Interbank Offered Rate-- LIBOR. Certain proceeds that we may receive are required to be used to repay and reduce the bank financing, unless otherwise waived by the lenders and the guarantors. As of July 31, 2000, the Company had outstanding borrowings of $41 million under the term loan facility at 7.875%, and $65 million under the revolving credit facility at rates ranging from 7.6875% to 8.0%. Additionally, in connection with the bank financing, we entered into an interest rate swap agreement which reduces the impact of interest rate increases on the term loan facility. Under the swap agreement, we will receive an amount equal to LIBOR plus 50 basis points, paid directly to the banks on a quarterly basis, on a notional amount of $41 million until the termination date of June 30, 2001. The unamortized fee paid for the swap agreement is reflected as an asset in the accompanying financial statements. We are exposed to a credit loss in the event the counter party does not perform under this agreement; however, we do not believe there is a significant risk of non performance, since the counter party to the swap agreement is a major financial institution. o A vendor financing commitment from Motorola, Inc., a stockholder, to provide up to $10 million of vendor financing to finance up to 75% of the purchase price of additional terrestrial network base stations. Loans under this facility bear interest at a rate equal to LIBOR plus 7.0% and are guaranteed by Motient and each of its wholly-owned subsidiaries. The terms of the facility require that amounts borrowed be secured by the equipment purchased therewith. As of July 31, 2000 there were no funds available for borrowing under this facility. o $335 million of senior notes issued at the time of the Motient Communications Acquisition. The notes bear interest at 12 1/4% annually and are due in 2008. A portion of the net proceeds of the sale of the notes were used to finance pledged securities that are intended to provide for the payment of the first six interest payments on these notes. Interest payments are due semi-annually, in arrears, and began on October 1, 1998. The notes were issued by a subsidiary of Motient, and are fully guaranteed by Motient. o We have also arranged the financing of certain trade payables, and as of June 30, 2000, $0.7 million of deferred trade payables were outstanding at rates ranging from 6.07% to 12.00% and are generally payable by the end of 2000. Commitments At June 30, 2000, we had remaining contractual commitments to purchase subscriber equipment inventory, primarily related to eLink and MobileMAX2, in the amount of $34.3 million during 2000 and 2001. We have the right to terminate certain of these commitments by incurring a cancellation penalty representing a percentage of the unfulfilled portion of the contract. As of June 30, 2000 the cancellation penalty would have been approximately $5.2 million. We have also contracted for the purchase of $9.6 million of base stations to expand our coverage and complete certain necessary site build-outs and we have certain other operating expense contract commitments that total approximately $1.9 million over the next year. The aggregate fixed and determinable portion of all inventory commitments and obligations for other fixed contracts is $45.8 million of which $31.6 million is due in 2000 and $14.2 million is due in 2001. XM Radio XM Radio is operated, managed, and funded separately from our core wireless business. While we do not have any obligation or commitments to provide additional funding to XM Radio, and do not expect to provide any additional funding, we may choose to do so in the future. XM Radio will require significant additional funding in the future. If XM Radio is not successful in obtaining the additional required financing, our investment in XM Radio could be negatively impacted. In the first quarter of 2000, XM Radio raised an additional $228.6 million in net proceeds through a follow-on offering of 4.4 million shares of its Class A common stock and 2.0 million shares of Series B convertible redeemable preferred stock. In March 2000, XM Radio completed a high yield debt offering of 325,000 units, each unit consisting of $1,000 principal amount of 14% Senior Secured Notes due 2010 and one warrant to purchase 8.024815 shares of Class A common stock of XM Radio at an exercise price of $49.50 per share. XM Radio realized net proceeds of $191.3 million, excluding $123.0 million used to acquire securities which will be used to pay interest payments due under the notes for the first three years. On July 7, 2000, XM Radio reached an agreement for a private offering of 235,000 shares for $1,000 per share of its 8.25% Series C convertible redeemable preferred stock, which closed on August 8, 2000 and raised an additional net proceeds of approximately $227.0 million. XM Radio expects to record a $123.0 million beneficial conversion charge that will reduce earnings available to common stockholders. The issuance of the Series C preferred stock caused the exercise price of the warrants sold in March 2000 to be adjusted to $47.94. XM Radio is also subject to certain commitments and contingencies. XM Radio has a distribution agreement with General Motors that will require significant expenditures in the future. Under its satellite contract with Hughes Space and Communications, Inc., XM Radio will incur payment obligations of approximately $541.3 million of which $350.8 million had been paid as of June 30, 2000. XM Radio has signed a contract with LCC International, Inc. (a related party to XM Radio), for the engineering of its terrestrial repeater network with total contract payments expected to be approximately $115 million through 2001. As of June 30, 2000, XM Radio has paid $14.0 million under this contract. Effective October 1999, XM Radio signed a contract with Hughes Electronics Corporation for the design, development, and purchase of terrestrial repeater equipment. The total value of this contract is $128 million and XM Radio has paid $12.5 million under this contract as of June 30, 2000. On February 16, 2000, XM Radio and Sirius Satellite Radio, a competitor of XM Radio, signed an agreement to develop a unified standard for satellite radios to facilitate the ability of consumers to purchase one radio capable of receiving both XM Radio's and Sirius Satellite Radio's services. Other Cash used in operating activities was $75.7 million for the six months ended June 30, 2000, of which $6.3 million was attributable to XM Radio. Excluding XM Radio, cash used in operating activities was $69.4 million, compared to $51.9 million for the six months ended June 30, 1999. The increase in cash used in operating activities was primarily attributable to (i) inventory purchases for our new products, without a corresponding amount of sales, and (ii) the timing of payments on accounts payable, offset by a decrease in operating losses. Cash used in investing activities was $303.3 million for six months ended June 30, 2000, of which $320.8 million was attributable to XM Radio. Excluding XM Radio, cash used in investing activities was $17.5 million, compared to $10.3 million for the same period in 1999. Excluding $10.8 million representing the amount of the proceeds received in the Motient Ventures transaction allocated to the Asset Sale Agreement, the decrease was primarily attributable to the purchase of the XM Radio Note Receivable in 1999, offset by higher payments in 2000 for property and equipment. Cash provided by financing activities was $599.4 million in the first half of 2000, of which $543.7 million was attributable to XM Radio. Excluding XM Radio, cash provided by financing activities was $55.7 million, $18.6 million of which represented the portion of the proceeds received in the Motient Ventures transaction allocated to the investors' option to convert to Motient Common Stock, compared to $61.2 million in the first half of 1999. This decrease is due to (i) the proceeds received from a related party in 1999 of $21.5 million, and (ii) higher payments in 2000 for debt obligations, offset by $2.4 million higher proceeds in 2000 for stock option and warrant exercises. Excluding XM Radio, proceeds from the issuance of Common Stock in connection with stock option and warrant exercises as well as stock issued under our employee stock purchase plan, were $5.3 million and $2.9 million for six months ended June 30, 2000, and 1999, respectively. Excluding XM Radio, payments on long-term debt and capital leases were $4.2 million and $3.0 million for the six months ended June 30, 2000 and 1999, respectively. As of June 30, 2000, excluding XM Radio, we had $4.6 million of cash and cash equivalents, working capital of $41.3 million, and $41.0 million of current investments restricted for the payment of interest. None of the cash and working capital held by XM Radio is available for use by the Company. Regulation The ownership and operations of our communication systems are subject to significant regulation by the FCC, which acts under authority granted by the Communications Act of 1934, as amended (the "Communications Act"), and related federal laws. A number of our licenses are subject to renewal by the FCC and, with respect to our satellite operations, are subject to international frequency coordination. In addition, current FCC regulations generally limit the ownership and control of Motient by non-U.S. citizens or entities to 25%. We cannot assure that the rules and regulations of the FCC will continue to support our operations as presently conducted and contemplated to be conducted in the future, or that all existing licenses will be renewed and requisite frequencies coordinated. In November 1999 the FCC granted two applications to use a Canadian competitor's satellite system to provide mobile satellite services in the United States. This decision represents a departure from the FCC's previous statements that there is only enough spectrum in the mobile satellite services L-band to authorize a single mobile satellite services system to provide service in the United States. The United States Court of Appeals affirmed the FCC's decision and we are seeking a rehearing. Additional assignments of spectrum for such uses may occur in the future and could make it easier for new competitors to enter the market. In addition, increased competition has resulted in downward pressure on pricing for certain of the Company's products. Accounting Standards In June 1998, FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires the recognition of all derivatives as either assets or liabilities measured at fair value. This statement was originally effective for the year ended December 31, 2000. In June 1999, FASB issued Statement No. 137, which deferred the effective date of Statement No. 133 until fiscal years beginning after June 15, 2000. In June 2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which amends FASB Statement No. 133. This Statement limits the scope to certain derivatives and hedging activities. The effective date of Statement No. 138 is for fiscal years beginning after June 15, 2000. We do not believe that the adoption of Statement No. 138 will have a material impact on our financial position, results of operations and cash flows. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. We are currently evaluating the impact of SAB 101 on our consolidated results of operations and financial condition. On June 26, 2000, the SEC delayed implementation of SAB 101 until the fourth quarter of fiscal years beginning after December 15, 1999. Any change in accounting principle required from adoption of SAB 101 will be reported as a cumulative effect of a change in accounting principle as of January 1, 2000. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation ("FIN 44"). FIN 44 further defines the accounting consequence of various modifications to the terms of a previously fixed stock option or award under APB Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44 becomes effective on July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. In July 1999, XM Radio repriced certain options. FIN 44 requires that these options be accounted for as variable awards from July 1, 2000 until the date the award is exercised, forfeited, or expires unexercised. For those options that have vested as of July 1, 2000, compensation cost is recognized only to the extent that the exercise price exceeds the stock price on July 1, 2000. For those options that have not vested as of July 1, 2000, the portion of the award's intrinsic value measured at July 1, 2000 is recognized over the remaining vesting period. Additional compensation cost is measured for the full amount of any increases in stock price after the effective date and is recognized over the remaining vesting period. Any adjustment to compensation cost for further changes in the stock price after the award vests is recognized immediately. The effects of implementing FIN 44 may require XM Radio to recognize additional non-cash compensation commencing in the third quarter of 2000. Item 3. Quantitative and Qualitative Disclosures about Market Risk Quantitative and Qualitative Disclosures about Market Risk We are exposed to the impact of interest rate changes related to our credit facilities. We manage interest rate risk through the use of a combination of fixed and variable rate debt. Currently, except for the interest rate cap described below, we do not use derivative financial instruments to manage our interest rate risk. We have minimal cash flow exposure due to general interest rate changes for our fixed rate, long-term debt obligations. We invest our cash in short-term commercial paper, investment-grade corporate and government obligations and money market funds. Under our Term Loan and Revolving Credit Facility, interest is paid generally at 100 basis points above LIBOR. The exposure to interest rate fluctuations is limited due to the interest rate paid on a monthly basis being variable and based on current market conditions. We have also entered into an interest rate swap agreement which reduces the impact of interest rate increases on the Term Loan Facility. Under this agreement, we receive an amount equal to LIBOR plus 50 basis points paid directly to the banks on a quarterly basis until the swap agreement terminates on June 30, 2001. Our Senior Notes bear interest at a fixed rate of 12 1/4%. We run the risk that market rates will decline and the required payments will exceed those based on current market rates. PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds (c) On June 29, 2000, Motient Satellite Ventures LLC, a Delaware limited liability company ("MSV"), of which Motient Corporation was then the sole member, issued to several investors (the "Investors") interests in MSV (the "MSV Interests") that represented, in the aggregate, an interest in the profits and losses of MSV of 20%, with Motient retaining 80% of the MSV Interests. The Investors paid, in the aggregate, $50 million to MSV for the MSV Interests purchased by them. The Investors were: Telcom Satellite Ventures Inc., Columbia Space (QP), Inc., Columbia Space (AI), Inc., Columbia Space Partners, Inc., Spectrum Space Equity Investors IV, Inc., Spectrum Space IV Parallel, Inc., and Spectrum Space IV Managers, Inc. The MSV Interests purchased by the Investors (the "Investor Interests") were not registered under the Securities Act of 1933, as amended (the "Securities Act"). The Investor Interests were sold to the Investors pursuant to the terms of an Investment Agreement, dated as of June 22, 2000 (the "Investment Agreement"), by and among Motient, MSV, and the Investors. No underwriters were engaged in connection with the issuance of the Investor Interests. Such issuance was made in reliance upon Section 4(2) of the Securities Act as a transaction not involving a public offering, the Investors having acquired the Investor Interests for their respective accounts without a view to the distribution thereof. Subject to the terms and conditions set forth in the Investment Agreement, the Investor Interests may be converted by the Investors, at their election, into shares of common stock, par value $.01 per share, of Motient ("Motient Common Stock"), until June 29, 2002 (subject to extension in certain limited circumstances), at a conversion price which will be set at the time of exercise, between $12 and $20 per share, as specified in the Investment Agreement. The Investors may not exercise this right, however, until after December 29, 2000, except under certain limited circumstances. Item 4. Submission of Matters to a Vote of Security Holders (a) At the annual meeting of the stockholders of Motient held on May 23, 2000, the matters described under (b) and (c) below were voted upon. (b) The following nominees, constituting all of the Company's directors, were elected to the Company's board of directors: Votes For Individual Votes Withheld Douglas I. Brandon 46,431,863 157,983 Billy J. Parrott 46,431,863 157,983 Gary M. Parsons 46,275,956 313,890 Walter V. Purnell, Jr. 46,277,063 312,783 Andrew A. Quartner 46,411,648 178,198 Jack A. Shaw 46,431,863 157,983 (c)(1) The vote on the amendment to the Company's Restated Certificate of Incorporation to remove the Certificate of Incorporation's requirement of a minimum Board size was 46,031,529 for, 502,096 against, 56,221 abstaining. (2) The vote on the amendment to the Company's Restated Certificate of Incorporation to change the requirement for amending the Certificate of Incorporation from two-thirds of the outstanding common stock to a majority of the outstanding common stock was 37,027,201 for, 895,088 against and 101,857 abstaining. (3) The vote on amending and restating the Company's 1989 Employee Stock Option Plan as the Motient Stock Award Plan was 30,937,716 for, 7,033,075 against, and 53,355 abstaining. (4) The vote on the amendment to the Company's Employee Stock Purchase Plan to increase the number of authorized shares under such plan was 36,069,158 for, 1,908,494 against and 46,494 abstaining. (5) The vote on the ratification of Arthur Andersen LLP as independent accountants for the Company for 2000 was 46,547,990 for, 25,682 against, 16,174 abstaining Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 - Restated Certificate of Incorporation of the Company (as restated effective May 23, 2000) (incorporated by reference to Exhibit 3.1 to the Company's registration statement on Form S-3 (File No. 333-42104) 3.2 - Amended and Restated Bylaws of the Company (as amended and restated effective May 23, 2000) (incorporated by reference to Exhibit 3.2 to the Company's registration statement on Form S-3 (File No. 333-42104) 10.30d - Amendment No. 4 to Warrant Certificates for the Purchase of Shares of Common Stock of Motient Corporation dated as of June 29, 2000 issued to each of Hughes Electronics Corporation and Baron Capital Partners, L.P. (filed herewith) 10.32b - Amendment No. 2 to Warrant Certificates for the Purchase of Shares of Common Stock of Motient Corporation dated as of June 29, 2000 issued to each of Hughes Electronics Corporation and Baron Capital Partners, L.P. (filed herewith) 10.34d - Waiver, dated as of June 27, 2000, Under the Term Credit Agreement among the Company, Morgan Guaranty Trust Company of New York and Toronto Dominion (Texas), Inc. and the other banks party thereto (filed herewith) 10.35c - Waiver, dated as of June 27, 2000, Under the Revolving Credit Agreement among the Company, Morgan Guaranty Trust Company of New York and Toronto Dominion (Texas), Inc. and the other banks party thereto (filed herewith) 10.41 - Investment Agreement, dated as of June 22, 2000, by and among Motient Corporation, Motient Satellite Ventures LLC, and certain other investors (filed herewith) 10.42 - Asset Sale Agreement between Motient Satellite Ventures LLC and Motient Services Inc., dated as of June 29, 2000(filed herewith) 10.43 - Research & Development, Marketing and Service Agreement, dated as of June 29, 2000, by and between Motient Satellite Ventures LLC and Motient Services Inc. (filed herewith) 10.44 - First Amended and Restated Limited Liability Company Agreement of Motient Satellite Ventures LLC dated as of June 29, 2000 (filed herewith) 10.45 - Registration Rights Agreement dated as of June 29, 2000 by and among Motient Corporation and certain stockholders (filed herewith) 27.0 - Financial Data Schedule (filed herewith) (b) Current Reports on Form 8-K On June 29, 2000, the Company filed a Current Report on Form 8-K, in response to Item 5-Other Events, reporting that the Company had entered into a series of transactions relating to its satellite business. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MOTIENT CORPORATION (Registrant) August 14, 2000 /s/W. Bartlett Snell -------------------- W. Bartlett Snell Senior Vice President and Chief Financial Officer (principal financial and accounting officer and duly authorized officer to sign on behalf of the registrant) EXHIBIT INDEX Number Description 3.1 - Restated Certificate of Incorporation of the Company (as restated effective May 23, 2000) (incorporated by reference to Exhibit 3.1 to the Company's registration statement on Form S-3 (File No. 333-42104) 3.2 - Amended and Restated Bylaws of the Company (as amended and restated effective May 23, 2000) (incorporated by reference to Exhibit 3.2 to the Company's registration statement on Form S-3 (File No. 333-42104) 10.30d - Amendment No. 4 to Warrant Certificates for the Purchase of Shares of Common Stock of Motient Corporation dated as of June 29, 2000 issued to each of Hughes Electronics Corporation and Baron Capital Partners, L.P. (filed herewith) 10.32b - Amendment No. 2 to Warrant Certificates for the Purchase of Shares of Common Stock of Motient Corporation dated as of June 29, 2000 issued to each of Hughes Electronics Corporation and Baron Capital Partners, L.P. (filed herewith) 10.34d - Waiver, dated as of June 27, 2000, Under the Term Credit Agreement among the Company, Morgan Guaranty Trust Company of New York and Toronto Dominion (Texas), Inc. and the other banks party thereto (filed herewith) 10.35c - Waiver, dated as of June 27, 2000, Under the Revolving Credit Agreement among the Company, Morgan Guaranty Trust Company of New York and Toronto Dominion (Texas), Inc. and the other banks party thereto (filed herewith) 10.41 - Investment Agreement, dated as of June 22, 2000, by and among Motient Corporation, Motient Satellite Ventures LLC, and certain other investors (filed herewith) 10.42 - Asset Sale Agreement between Motient Satellite Ventures LLC and Motient Services Inc., dated as of June 29, 2000(filed herewith) 10.43 - Research & Development, Marketing and Service Agreement, dated as of June 29, 2000, by and between Motient Satellite Ventures LLC and Motient Services Inc. (filed herewith) 10.44 - First Amended and Restated Limited Liability Company Agreement of Motient Satellite Ventures LLC dated as of June 29, 2000 (filed herewith) 10.45 - Registration Rights Agreement dated as of June 29, 2000 by and among Motient Corporation and certain stockholders (filed herewith) 27.0 - Financial Data Schedule (filed herewith)