-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FMPUd6w1PKw00v+57dEPKEoW0VldKsoTr0tlmYoj5gONIHqy7vgY9qjk6oKyoXqx F0xgMsH2Uv734PGXWU7Dag== 0001214659-04-000286.txt : 20040426 0001214659-04-000286.hdr.sgml : 20040426 20040426170606 ACCESSION NUMBER: 0001214659-04-000286 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20040426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOTIENT CORP CENTRAL INDEX KEY: 0000913665 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 930976127 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23044 FILM NUMBER: 04754790 BUSINESS ADDRESS: STREET 1: 10802 PARKRIDGE BLVD CITY: RESTON STATE: VA ZIP: 20191-5416 BUSINESS PHONE: 7037586000 MAIL ADDRESS: STREET 1: 10802 PARKRIDGE BLVD CITY: RESTON STATE: VA ZIP: 20191-5416 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN MOBILE SATELLITE CORP DATE OF NAME CHANGE: 19931019 10-Q 1 s4234310q.txt FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 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 March 31, 2003 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) 300 Knightsbridge Parkway Lincolnshire, IL 60069 847-478-4200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No[X] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No[X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Number of shares of common stock outstanding at April 15, 2004: 29,476,096 1 Introductory Note This quarterly report on Form 10-Q relates to the quarter ended March 31, 2003. We did not file a report on Form 10-Q for this period previously because we have only recently completed our financial statements for this period. As we have previously disclosed in prior reports, including most recently in our annual report on Form 10-K for the year ended December 31, 2002 filed on March 22, 2004, we were not able to complete our financial statements for 2002 and 2003 until we resolved the appropriate accounting treatment with respect to certain transactions that occurred in 2000 and 2001. The transactions in question involved the formation of and certain transactions with Mobile Satellite Ventures LP, or MSV, in 2000 and 2001 and the sale of certain of our transportation assets to Aether Systems, Inc. in 2000. We have resolved these accounting issues and, on March 22, 2004, we filed our annual report on Form 10-K for the year ended December 31, 2002, as well as our quarterly reports on Form 10-Q for the quarters ended June 30, 2002 and September 30, 2002. Concurrently with the filing of these reports, we also filed an amendment to our quarterly report on Form 10-Q for the quarter ended March 31, 2002 to reflect restated financial statements for such period. We recently completed our financial statements for the quarter ended March 31, 2003 and those financial statements are included in this report. The 2002 comparative financial statements provided herein have been restated (see Note 6 of notes to consolidated financial statements, "Subsequent Events"). There have been a number of significant developments regarding Motient's business, operations, financial condition, liquidity, and outlook subsequent to March 31, 2003. Information regarding such matters is contained in this report in Note 6 ("Subsequent Events") of notes to consolidated financial statements. On January 10, 2002, we filed for protection under Chapter 11 of the Bankruptcy Code. Our Amended Joint Plan of Reorganization was filed with the United States Bankruptcy Court for the Eastern District of Virginia on February 28, 2002. The plan was confirmed on April 26, 2002, and became effective on May 1, 2002. In the consolidated financial statements provided herein, all results for periods prior to May 1, 2002 are referred to as those of the "Predecessor Company" and all results for periods including and subsequent to May 1, 2002 are referred to as those of the "Successor Company". Due to the effects of the "fresh start" accounting, results for the Predecessor Company and the Successor Company are not comparable (See Note 2, "Significant Accounting Policies," of notes to consolidated financial statements). References in this report to "Motient" and "we" or similar or related terms refer to Motient Corporation and its wholly-owned subsidiaries together, unless the context of such references requires otherwise. 2
MOTIENT CORPORATION FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2003 TABLE OF CONTENTS PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations for the Three Months Ended March 31, 2003 (Successor Company) and the Three Months Ended March 31, 2002 (Predecessor Company) 4 Consolidated Balance Sheets as of March 31, 2003 (Successor Company) and December 31, 2002 5 (Successor Company) Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 6 (Successor Company) and the Three Months Ended March 31, 2002 (Predecessor Company) Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 38 Item 3. Quantitative and Qualitative Disclosures about Market Risk 57 Item 4. Controls and Procedures 57 PART II OTHER INFORMATION Item 1. Legal Proceedings 62 Item 2. Changes in Securities and Use of Proceeds 62 Item 6. Exhibits and Reports on Form 8-K 63
3 PART I- FINANCIAL INFORMATION - ----------------------------- Item 1. Financial Statements Motient Corporation and Subsidiaries Consolidated Statements of Operations (in thousands, except per share data) (Unaudited)
(Restated) Successor Predecessor Company Company Three Months Three Months Ended March 31, Ended March 31, 2003 2002 ---- ---- REVENUES Services and related revenue $ 13,563 $ 12,467 Sales of equipment 807 4,216 -------- -------- Total revenues 14,370 16,683 COSTS AND EXPENSES Cost of services and operations (exclusive of 13,654 15,332 depreciation and amortization below) Cost of equipment sold (exclusive of 997 4,534 depreciation and amortization below) Sales and advertising 1,242 3,286 General and administrative 3,260 3,522 Restructuring Expenses -- 584 Depreciation and amortization 5,271 5,187 -------- -------- Operating loss (10,054) (15,762) Interest income (expense), net (1,312) (1,739) Other income (loss), net 1,297 837 Loss on sale of transportation assets -- (20) Equity in loss of Mobile Satellite Ventures (2,325) (1,313) -------- -------- (Loss) before reorganization items (12,394) (17,997) Reorganization items: Professional fees related to reorganization (38) (4,578) Write off of debt financing fees -- (12,975) Interest income -- 121 Net (loss) $(12,394) $(35,429) ======== ======== Basic and diluted (loss) per share of common stock: Net (loss), basic and diluted $ (0.49) $ (0.61) ======== ======== Weighted-average Common Shares outstanding - basic and diluted 25,097 58,256 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 Motient Corporation and Subsidiaries Consolidated Balance Sheets (in thousands, except share and per share data)
Successor Successor Company Company March 31, December 31, 2003 2002 ---- ---- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 3,085 $ 5,840 Accounts receivable-trade, net of allowance for doubtful accounts of $1,473 at March 31, 2003 and $1,003 at December 31, 2002 8,387 9,339 Inventory 873 1,077 Due from Mobile Satellite Ventures, net 54 234 Deferred equipment costs 3,437 2,755 Other current assets 6,890 6,796 Restricted cash and short-term investments 332 604 --------- --------- Total current assets 23,058 26,645 --------- --------- PROPERTY AND EQUIPMENT, net 42,905 46,405 FCC LICENSES AND OTHER INTANGIBLES, net 92,821 94,921 INVESTMENT IN AND NOTES RECEIVABLE FROM MSV 30,167 32,493 DEFERRED CHARGES AND OTHER ASSETS 11,560 1,757 --------- --------- Total assets $ 200,511 $ 202,221 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses 12,603 13,040 Deferred equipment revenue 3,435 2,861 Deferred revenue and other current liabilities 8,785 5,308 Vendor financing commitment, current 1,020 1,020 Obligations under capital leases 2,782 3,031 --------- --------- Total current liabilities 28,625 25,260 --------- --------- LONG-TERM LIABILITIES Capital lease obligations, net of current portion 2,857 3,219 Vendor financing commitment, net of current portion 4,452 4,927 Notes payable, including accrued interest thereon 21,381 20,943 Other long-term liabilities 2,518 4,824 --------- --------- Total long-term liabilities 31,208 33,913 --------- --------- Total liabilities 59,833 59,173 --------- --------- COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY: Preferred Stock; par value $0.01; authorized 5,000,000 shares at March 31, 2003 and December 31, 2002, no shares issued or outstanding at March 31, 2003 or December 31, 2002 -- -- Common Stock; voting, par value $0.01; 100,000,000 shares authorized and 25,097,256 shares issued and outstanding at March 31, 2003, and at December 31, 2002 251 251 Additional paid-in capital 197,814 197,814 Common stock purchase warrants 14,565 4,541 Accumulated deficit (71,952) (59,558) --------- --------- STOCKHOLDERS' EQUITY 140,678 143,048 --------- --------- Total liabilities and stockholders' equity $ 200,511 $ 202,221 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 5 Motient Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (in thousands) (Unaudited)
(Restated) Successor Predecessor Company Company Three Months Three Months Ended March 31, Ended March 31, 2003 2002 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash used in operating activities $ (2,191) $ (9,994) CASH USED BY REORGANIZATION ITEMS: Reorganization items - professional fees -- (4,578) Professional fees accrued not paid -- 3,472 Interest income -- 121 -------- -------- Net cash used in reorganization items -- (985) CASH FLOWS FROM INVESTING ACTIVITIES: Reduction in short-term or restricted investments, net 272 -- Additions to property and equipment, net (6) (494) -------- -------- Net cash (used in) provided by investing 266 (494) activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of equity securities -- 17 Principal payments under capital leases (611) (928) Principal payments under Vendor Financing (219) -- -------- -------- Net cash used in financing activities (830) (911) Net (decrease) increase in cash and cash equivalents (2,755) (12,384) CASH AND CASH EQUIVALENTS, beginning of period 5,840 33,387 -------- -------- CASH AND CASH EQUIVALENTS, end of period $ 3,085 $ 21,003 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 6 MOTIENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 2003 (Unaudited) 1. ORGANIZATION AND BUSINESS Motient Corporation (with its subsidiaries, "Motient" or the "Company") provides two-way mobile communications services principally to business-to-business customers and enterprises. Motient serves a variety of markets including mobile professionals, telemetry, transportation and field service. Motient provides its eLinksm brand two-way wireless email services to customers accessing email through corporate servers, Internet Service Providers, Mail Service Provider accounts, and paging network service providers. Motient also offers BlackBerry TM by Motient, a wireless email solution developed by Research In Motion ("RIM") and licensed to operate on Motient's network. BlackBerry TM by Motient is designed for large corporate accounts operating in a Microsoft Exchange or Lotus Notes environment. The Company considers the two-way mobile communications service described in this paragraph to be its core wireless business. Motient has six wholly-owned subsidiaries. Motient had a 25.5% interest (on a fully-diluted basis) in MSV as of March 31, 2003, and a 29.5% interest (on a fully-diluted basis) as of April 15, 2004. For further details regarding Motient's interest in MSV, please see "- Mobile Satellite Ventures LP" below and Note 6 ("Subsequent Events -- Developments Relating to MSV"). Motient Communications Inc. ("Motient Communications") owns the assets comprising Motient's core wireless business, except for Motient's Federal Communications Commission ("FCC") licenses, which are held in a separate subsidiary, Motient License Inc. ("Motient License"). Motient License is a special purpose wholly-owned subsidiary of Motient Communications that holds no assets other than Motient's FCC licenses. Motient's other four subsidiaries hold no material operating assets other than the stock of other subsidiaries and Motient's interests in MSV. On a consolidated basis, we refer to Motient Corporation and its six wholly-owned subsidiaries as "Motient." Motient is devoting its efforts to expanding its core wireless business, while also focusing on cost-cutting efforts. These efforts involve substantial risk. Future operating results will be subject to significant business, economic, regulatory, technical, and competitive uncertainties and contingencies. Depending on their extent and timing, these factors, individually or in the aggregate, could have an adverse effect on the Company's financial condition and future results of operations. In recent periods, certain factors have placed significant pressures on Motient's financial condition and liquidity position. These factors also restrained Motient's ability to accelerate revenue growth at the pace required to enable it to generate cash in excess of its operating expenses. These factors include competition from other wireless data suppliers and other wireless communications providers with greater resources, cash constraints that have limited Motient's ability to generate greater demand, unanticipated technological and development delays and general economic factors. Motient's results in recent periods, including the period covered by this report, have also been hindered by the downturn in the economy and capital markets. These factors contributed to the Company's decision in January 2002 to file a voluntary petition for reorganization under Chapter 11 of the United States Federal Bankruptcy Code. Motient's Plan of Reorganization was confirmed on April 26, 2002 and became effective on May 1, 2002. See Note 2 ("Significant Accounting Policies -- Motient's Chapter 11 Filing and Plan of Reorganization and "Fresh-Start" Accounting") below. 7 For a discussion of certain significant recent developments and trends in Motient's business after the end of the period covered by this report, please see Note 6 ("Subsequent Events"). The financial results for the period January 1, 2002 to April 30, 2002 are herein referred to as "Predecessor Company" results and the financial results for all periods after April 30, 2002 are referred to as "Successor Company" results. Mobile Satellite Ventures LP On June 29, 2000, the Company formed a joint venture subsidiary, Mobile Satellite Ventures LP (formerly known as Mobile Satellite Ventures LLC) ("MSV"), in which it owned, until November 26, 2001, 80% of the membership interests, in order to conduct research and development activities. In June 2000, the remaining 20% interests in MSV were purchased by three investors unrelated to Motient for an aggregate purchase price of $50 million. The minority investors had certain participating rights which provided for their participation in certain business decisions that were made in the normal course of business, therefore, the Company's investment in MSV has been recorded for all periods presented in the consolidated financial statements pursuant to the equity method of accounting. On November 26, 2001, Motient sold the assets comprising its satellite communications business to MSV, as part of a transaction in which certain other parties joined MSV, including TMI Communications and Company Limited Partnership ("TMI"), a Canadian satellite services provider. In this transaction, TMI also contributed its satellite communications business assets to MSV. As part of this transaction, Motient received, among other proceeds, a $15 million promissory note issued by MSV and purchased a $2.5 million convertible note issued by MSV. In July 2002, MSV commenced a rights offering seeking total funding in the amount of $3.0 million. While the Company was not obligated to participate in the offering, the Company's board determined that it was in the Company's best interests to participate so that its interest in MSV would not be diluted. On August 12, 2002, the Company funded an additional $957,000 to MSV pursuant to this offering, and received a new convertible note in such amount. This rights offering did not impact the Company's ownership position in MSV. In January 2001, MSV had filed a separate application with the FCC with respect to MSV's plans for a new generation satellite system utilizing ancillary terrestrial components, or "ATC". In January 2003, MSV's application with the FCC with respect to MSV's plans for a new generation satellite system utilizing ATC was approved by the FCC. The order granting such approval (the "ATC Order") requires that licensees, including MSV, submit a further application with the FCC to seek approval of the specific system incorporating ATC that the licensee intends to use. MSV has filed an application for ATC authority, pending the FCC's final rules and regulations. MSV has also filed a petition for reconsideration with respect to certain aspects of the ATC Order. In January 2004, certain terrestrial wireless providers petitioned the U.S. Court of Appeals for the District of Columbia to review the FCC's decision to grant ATC to satellite service providers. Oral arguments in this case are scheduled for May 2004. As of March 31, 2003, the Company had an ownership percentage, on an undiluted basis, of approximately 48% of the common and preferred units of MSV, and approximately 55% of the common units. Assuming that all of MSV's outstanding convertible notes are converted into limited partnership units of MSV, as of March 31, 2003 Motient had a 33.3% partnership interest in MSV on an "as converted" basis giving effect to the conversion of all outstanding convertible notes of MSV, and 25.5% on a fully-diluted basis, assuming certain other investors exercise their right to make additional investment in MSV as a result of the FCC ATC application process. Included within the foregoing percentages are approximately $3.5 million of convertible notes owned by Motient. 8 For a discussion of certain additional recent developments regarding MSV, including recent investments in MSV, please see Note 6 ("Subsequent Events"). New Network Offerings On March 1, 2003 Motient entered into a National Premier Dealer Agreement with T-Mobile USA. This agreement allows Motient to sell T-Mobile's third generation GSM/GPRS network subscriptions nationwide. Motient is paid for each subscriber put on to network, and can actively sell and promote wireless email and wireless Internet applications to enterprise accounts on networks with greater capacity and speed, and that are voice capable. See Note 6 ("Subsequent Events") for discussion of additional similar agreements entered into by the Company subsequent to the end of the period covered by this report. Cost Reduction Actions Since emerging from bankruptcy in May 2002, several factors have restrained the Company's ability to grow revenue at the rate it previously anticipated. These factors include the weak economy generally and the weak telecommunications and wireless sector specifically, the financial difficulty of several of the Company's key resellers, on whom it relies for a majority of its new revenue growth, and the Company's continued limited liquidity. The Company has taken a number of steps to reduce operating and capital expenditures in order to lower its cash burn rate and improve its liquidity position. Reductions in Workforce. The Company undertook reductions in its workforce in March 2003 and February 2004. These actions eliminated approximately 10% (19 employees) and 32.5% (54 employees), respectively, of its then-remaining workforce. In the aggregate, the Company has reduced its work force by approximately 39% since December 31, 2002 and reduced employee and related expenditures by approximately $0.5 million per month. Refinancing of Vendor Obligations. During the fourth quarter of 2002 and the first quarter of 2003, the Company renegotiated several of its key vendor and customer arrangements in order to reduce recurring expenses and improve its liquidity position. In some cases, the Company was able to negotiate a flat rate reduction for continuing services provided to it by its vendors or a deferral of payable amounts, and in other cases the Company renegotiated the scope of services provided in exchange for reduced rates or received pre-payments for future services. The Company continues to aggressively pursue further vendor cost reductions where opportunities arise. In January 2003, the Company negotiated a deferral of approximately $2.6 million that was owed to Motorola for maintenance services provided pursuant to the Company's service agreement with Motorola. The Company issued a promissory note to Motorola for such amount, with the note to be paid off over a two-year period beginning in January 2004. Also in January 2003, the Company restructured certain of its vendor obligations to Motorola. The remaining principal 9 obligation of approximately $3.3 million under this facility was restructured such that the outstanding amount will be paid off in equal monthly installments over a three-year period from January 2003 to December 2005. In March 2004, the amortization for both of these obligations was reduced to $100,000 in aggregate, effectively extending the amortization period for both obligations. As part of this restructuring, Motient pledged the stock of Motient License, on a second priority basis, to secure the borrowings under the Motorola promissory note and vendor financing. In the first quarter of 2003 the Company also restructured certain of its capital lease obligations with Compaq Corporation to significantly reduce the monthly amortization requirements of these facilities on an on-going basis. As part of such negotiations, the Company agreed to fund a letter of credit in twelve monthly installments during 2003, in the aggregate amount of $1.125 million, to secure certain payment obligations. This letter of credit will be released to the Company in fifteen monthly installments beginning in July 2004, assuming no defaults have occurred and are occurring. As part of these negotiations, the total amount of the Company's remaining principal obligations under its financing arrangements with Motorola and Compaq were not reduced. As of March 31, 2004, the aggregate principal amount of the Company's obligations to Motorola under these facilities was approximately $4.4 million, and the aggregate principal amount of its obligations to Compaq was approximately $2.9 million. See Note 3 ("Liquidity and Financing") for further discussion of these financing obligations. Despite these initiatives, we continue to be cash flow negative, and there can be no assurances that we will ever be cash flow positive. See Note 6 ("Subsequent Events") for discussion of additional cost reduction actions taken by the Company subsequent to the end of the period covered by this report. Changes in Management On January 17, 2003, David H. Engvall resigned as senior vice president, general counsel and secretary. On March 18, 2003, Brandon Stranzl resigned from the board of directors. On March 20, 2003, Patricia Tikkala resigned as vice president and chief financial officer. On April 17, 2003, the board of directors elected Christopher W. Downie to the position of vice president, chief financial officer and treasurer. Mr. Downie had previously been a consultant with Communication Technology Advisors LLC ("CTA"), working on Motient matters, since May 2002. See Note 6 ("Subsequent Events") for discussion of additional management changes at the Company subsequent to the end of the period covered by this report. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements have been prepared by the Company and are unaudited. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for any future period or for the full fiscal year. In the opinion of management, all 10 adjustments (consisting of normal recurring adjustments unless otherwise indicated) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2003, and for all periods presented have been made. Footnote disclosure has been condensed or omitted as permitted in interim financial statements. Motient's Chapter 11 Filing and Plan of Reorganization and "Fresh-Start" Accounting On January 10, 2002, the Company filed for protection under Chapter 11 of the Bankruptcy Code. The Company's Amended Joint Plan of Reorganization was filed with the United States Bankruptcy Court for the Eastern District of Virginia on February 28, 2002. The cases were jointly administered under the case name "In Re Motient Corporation, et. al.," Case No. 02-80125. The Company's Plan of Reorganization was confirmed on April 26, 2002 and the Company's emergence from bankruptcy became effective on May 1, 2002 (the "Effective Date"). The Company adopted "fresh start" accounting as of May 1, 2002 in accordance with procedures specified by AICPA Statement of Position ("SOP") No. 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code". The Company determined that its selection of May 1, 2002 versus April 26, 2002 for the "fresh start" date was more convenient for financial reporting purposes and that the results for the period from April 26, 2002 to May 1, 2002 were immaterial to the consolidated financial statements. All results for periods prior to the Effective Date are referred to as those of the "Predecessor Company" and all results for periods including and subsequent to the Effective Date are referred to as those of the "Successor Company." In accordance with SOP No. 90-7, the reorganized value of the Company was allocated to the Company's assets based on procedures specified by Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". Each liability existing at the plan confirmation date, other than deferred taxes, was stated at the present value of the amounts to be paid at appropriate market rates. It was determined that the Company's reorganization value computed immediately before the Effective Date was $234 million. Subsequent to the determination of this value, the Company determined that the reorganization value ascribed to MSV did not reflect certain preference rights on liquidation available to certain equity holders in MSV. Therefore, the reorganization value of MSV was reduced by $13 million and the Company's reorganization value was reduced to $221 million. The Company adopted "fresh-start" accounting because holders of existing voting shares immediately before filing and confirmation of the plan received less than 50% of the voting shares of the emerging entity and its reorganization value is less than its postpetition liabilities and allowed claims, as shown below: Postpetition current liabilities $49.9 million Liabilities deferred pursuant to chapter 11 proceedings 401.1 million ------------- Total postpetition liabilities and allowed claims 451.0 million Reorganization value (221.0 million) --------------- Excess of liabilities over reorganization value $(230.0 million) ================
The reorganization value of Motient was determined by considering several factors and by reliance on various valuation methods. For the valuation of the core wireless business, consideration was given to discounted cash flows and price/earnings and other applicable ratios, a liquidation value analysis, comparable company trading multiples, and comparable acquisition multiple analysis. The factors considered by Motient included the following: 11 o Forecasted operating cash flow results which gave effect to the estimated impact of limitations on the use of available net operating loss carryovers and other tax attributes resulting from the Plan of Reorganization and other events, o The discounted residual value at the end of the forecast period based on the capitalized cash flows for the last year of that period, o Market share and position, o Competition and general economic considerations, o Projected sales growth, and o Working capital requirements. For the valuation of the Company's investment in MSV, consideration was given to the valuation of MSV's equity reflected by recent arms-length investments in MSV, subsequently adjusted as discussed above. After consideration of the Company's debt capacity, and after extensive negotiations among parties in interest, it was agreed that Motient's reorganization capital structure should be as follows: Notes payable to Rare Medium and CSFB $19.8 million Stockholders' Equity 201.2 million -------------- $221.0 million ============== The Company allocated the $221.0 million reorganization value among its net assets based upon its current estimates of the fair value of its assets. In the case of current assets, with the exception of inventory, the Company concluded that their carrying values approximated fair values. The values of the Company's frequencies and its investment in and note receivable from MSV were based on independent analyses presented to the bankruptcy court and subsequently adjusted as discussed above. The value of the Company's fixed assets was based upon a recent valuation of the Company's software and estimates of replacement cost for network and other equipment, for which the Company believes that its recent purchases represent a valid data point. The value of the Company's other intangible assets was based on third party valuations as of May 1, 2002. In February 2003, the Company engaged a financial advisory firm to prepare a valuation of software and customer intangibles. Software and customer intangibles were not taken into consideration when the original fresh-start balance sheet was determined at May 1, 2002. The changes for the software and customer contracts are reflected below and in the financial statements and notes herein. The effect of the plan of reorganization and application of "fresh-start" accounting on the Predecessor Company's balance sheet as of April 30, 2002, is as follows: 12
Debt Discharge Preconfirmation and Reorganized Predecessor Exchange Fresh Start Successor (in thousands) Company(j) of Stock Adjustments Company ---------- -------- ----------- ------- Assets: Current assets Cash $17,463 $17,463 Receivables 10,121 10,121 Inventory 8,194 (4,352) 3,842 Deferred equipment costs 11,766 (11,766) (e) -- Other current assets 11,443 11,443 ------ ------ ------ Total current assets 58,987 (16,118) 42,869 Property and equipment 58,031 (1,553) (i) 56,478 FCC Licenses and other intangibles 45,610 56,866 (f)(i) 02,476 Goodwill 4,981 (4,981) (i) -- Investment in and notes receivable from MSV 27,262 26,593 (f) 53,855 Other long-term assets 2,864 (1,141) (e) 1,723 ----- ------- ------ Total Assets $197,735 $59,666 $257,401 ======== ======= ======== Liabilities & Stockholders' (Deficit) Equity Liabilities Not Subject to Compromise: Current liabilities: Current maturities of capital leases $4,096 $4,096 Accounts payable - trade 1,625 1,625 Vendor financing 655 655 Accrued expenses 15,727 15,727 Deferred revenue 23,284 (18,913) (g)(e) 4,371 ------ -------- ------ 45,387 (18,913) 26,474 Long term liabilities: Vendor financing 2,661 2,661 Capital lease obligation 3,579 3,579 Deferred revenue 19,931 (16,136) (e)(g) 3,795 Liabilities Subject to Compromise: Prepetition liabilities 8,785 (8,785) (a) -- Senior note, including accrued interest thereon 367,673 (367,673) (b) -- Rare Medium Note, including accrued interest thereon 27,030 (27,030) (c) -- ------ ------- ------- ---------- 403,488 (403,488) -- Rare Medium and CSFB Notes -- 19,750 (a)(c) 19,750 ---------- ------ ------ Total liabilities 475,046 (383,738) (35,049) 56,259 Stockholders' (deficit) equity: Common stock - old 584 (584) (h) -- Common stock - new 251 (d) 251 Additional paid-in capital 988,531 (988,531) 197,814 197,814 (d)(h) Common stock purchase warrants - old 93,730 (93,730) (h) Common stock purchase warrants - new 3,077 (d) 3,077 Deferred stock compensation (336) 336 (h) -- Retained (deficit) earnings (1,359,820) 1,359,820 94,715 -- ----------- (183,725) ------- ------ (94,715) (d)(h) 183,725 (h) Stockholders' Equity (Deficit) (277,311) 383,738 94,715 201,142 --------- ------- ------ ------- Total Liabilities & Stockholders' Equity (Deficit) $197,735 $ -- $59,666 $257,401 ======== ========= ======= ========
13 (a) Represents the cancellation of the following liabilities: i. Amounts due to Boeing $1,533 ii. Amounts due to CSFB 2,000 iii. Amounts due to JP Morgan Chase 1,550 iv. Amounts due to Evercore Partners LP ("Evercore") 1,948 v. Amounts due to the FCC 1,003 vi. Other amounts 751 -------- $8,785 Liabilities were cancelled in exchange for the following: a. 97,256 shares of new Motient common stock, b. a note to CSFB in the amount of $750 and c. a warrant to Evercore Partners to purchase 343,450 shares of new Motient common stock, and d. a note to Rare Medium in the amount of $19,000. (b) Represents the cancellation of the senior notes in the amount of $367,673, including interest threron, in exchange for 25,000,000 shares of new Motient common stock. Certain of the Company's other creditors received an aggregate of 97,256 shares of the Company's common stock in settlement for amounts owed to them. (c) Represents the cancellation of $27,030 of notes due to Rare Medium, including accrued interest thereon, in exchange for a new note in the amount of $19,000. The Company also issued CSFB a note in the principal amount of $750 for certain investment banking services. (d) Represents the issuance of the following: i. 25,097,256 shares of new Motient common stock. ii. warrants to the holders of pre-reorganization common stock to purchase an aggregate of approximately 1,496,512 shares of common stock, with such warrants being valued at approximately $1,100. iii. a warrant to purchase up to 343,450 shares of common stock to Evercore, valued at approximately $1,900. The retained earnings adjustment includes the gain on the discharge of debt of $183,725. (e) Represents the write off of deferred equipment costs of $12,907 and deferred equipment revenue of $12,907 since there is no obligation to provide future service post-"fresh start". (f) To reflect the step-up in assets in accordance with the reorganization value and valuations performed. (g) Represents the write off of the deferred gain associated with the Company's sale of its satellite assets to MSV in November 2001 and the write-off of the unamortized balance of the $15,000 perpetual license sold to Aether in November 2000, both of which total approximately $22,142, since there is no obligation to provide future service post-"fresh start". (h) To record the cancellation of the Company's pre-reorganization equity and to reverse the gain on extinguishment of debt of $183,725 and the gain on fair market adjustment of $94,715. (i) To record the valuation and resulting increase of customer intangibles of approximately $11,501 and frequencies of $45,365. The reduction of $4,981 is due to a write-off of goodwill. The reduction of property and equipment relates to a subsequent reduction in the carrying value of certain software from $4,942 to $3,389 and the reduction to inventory from $8,194 to $3,842 to its net realizable value. (j) The balances do not match the balances in the Company's Plan of Reorganization due to subsequent audit adjustments. Under the Plan of Reorganization, all then-outstanding shares of the Company's pre-reorganization common stock and all unexercised options and warrants to purchase the Company's pre-reorganization common stock were cancelled. The holders of $335 million in senior notes exchanged their notes for 25,000,000 shares of the Company's new common stock. Certain of the Company's other creditors received an aggregate of 97,256 shares of the Company's new common stock in settlement for amounts owed to them. These shares were issued following completion of the bankruptcy claims process; however, the value of these shares has been recorded in the financial statements as if they had been issued on the effective date of the reorganization. Holders of the Company's pre-reorganization common stock received warrants to purchase an aggregate of approximately 1,496,512 shares of common stock. The warrants may be exercised to purchase shares of Motient common stock at a price of $.01 per share, will expire May 1, 2004, or two years after the Effective Date, and will not be exercisable unless and until the average closing price of Motient's common stock 14 over a period of ninety consecutive trading days is equal to or greater than $15.44 per share. All warrants issued to the holders of the Company's pre-reorganization common stock, including those shares held by the Company's 401(k) savings plan, have been recorded in the financial statements as if they had been issued on the effective date of the reorganization. Also, in July 2002, Motient issued to Evercore, financial advisor to the creditors' committee in Motient's reorganization, a warrant to purchase up to 343,450 shares of common stock, at an exercise price of $3.95 per share. The warrant was dated May 1, 2002, and has a term of five years. If the average closing price of Motient's common stock for thirty consecutive trading days is equal to or greater than $20.00, Motient may require Evercore to exercise the warrant, provided the common stock is then trading in an established public market. The value of this warrant has been recorded in the financial statements as if it had been issued on May 1, 2002. Further details regarding the plan are contained in Motient's disclosure statement with respect to the plan, which was filed as Exhibit 99.2 to the Company's current report on Form 8-K dated March 4, 2002. Restatement of Financial Statements Subsequent to the issuance of the Company's financial statements for the quarter ended March 31, 2002 and years ended December 31, 2000 and 2001, the Company became aware that certain accounting involving the effects of several complex transactions from these years, including the formation of and transactions with a joint venture, MSV, in 2000 and 2001 and the sale of certain of our transportation assets to Aether in 2000, required revision. In addition, as a result of the Company's re-audit of the years ended December 31, 2001 and 2000 performed by the Company's current independent accounting firm, Ehrenkrantz Sterling & Co. LLC, certain accounting adjustments were proposed and accepted by the Company. A description of these adjustments is provided below. Summary of Adjustments to Prior Period Financial Statements with respect to MSV and Aether Transactions The following is a brief description of the material differences between our original accounting treatment with respect to the MSV and Aether transactions and the revised accounting treatment that we have concluded was appropriate and has been reflected in the accompanying financial statements for the respective periods. Allocation of initial proceeds from MSV formation transactions in June 2000. In the June 2000 transaction with MSV, Motient Services received $44 million from MSV. This amount represented payments due under a research and development agreement, a deposit on the purchase of certain of Motient's assets at a future date, and payment for a right for certain of the investors in MSV to convert their ownership in MSV into shares of common stock of Motient. Since the combined fair value of the three components exceeded $44 million, based on valuations of each component, Motient initially allocated the $44 million of proceeds first to the fair value of the research and development agreement and then the remaining value to the asset deposit and investor conversion option based on their relative fair values. Upon review, Motient revised its initial accounting treatment and allocated the $44 million of proceeds first to the investor conversion option based on its fair value, and the remainder to the research and development agreement and asset deposit based on their relative fair values. The effect of this reallocation increased shareholders' equity at the time of the initial recording by $12 million, as well as reduced subsequent 15 service revenue by $2.3 million and $4 million in 2000 and 2001, respectively, as a result of the lower recorded value allocated to the research and development agreement. All remaining unamortized balances were written off as part of the gain on the sale of the satellite assets. Recording of suspended losses associated with MSV in fourth quarter of 2001. In November 2001, when the asset sale described in Note 13 of notes to consolidated financial statements in each of Motient's annual reports on Form 10-K for the fiscal years ended December 2000 and 2001 was consummated, Motient and MSV amended the asset purchase agreement, with Motient agreeing to take a $15 million note as part of the consideration for the sale of the assets to MSV. Additionally, at the time of this transaction, Motient purchased a $2.5 million convertible note issued by MSV. As Motient had no prior basis in its investment in MSV, Motient had not recorded any prior equity method losses associated with its investment in MSV. When Motient agreed to take the $15 million note as partial consideration for the assets sold to MSV, Motient recorded its share of the MSV losses that had not been previously recognized by Motient ($17.5 million), having the effect of completely writing off the notes receivable in 2001. Upon review, Motient determined that it should not have recorded any suspended losses of MSV, since those losses should have been absorbed by certain of the senior equity holders in MSV. As a result, Motient concluded that it should not have written off its portion ($17.5 million) of the prior MSV losses against the value of both notes in 2001. Recording of increase in Motient's investment in MSV in November 2001. Also in the November 2001 transaction, MSV acquired assets from another company, TMI, in exchange for cash, a note and equity in MSV. Motient initially considered whether or not a step-up in the value of its investment in MSV was appropriate for the value allocated to TMI for its equity interest, and determined that a step-up was not appropriate. Upon review, Motient determined that it should have recognized a step-up in value of the MSV investment of $12.9 million under Staff Accounting Bulletin No. 51, "Accounting for Sales of Stock of a Subsidiary" ("SAB 51"), with an offsetting gain recorded directly to shareholders' equity. Recognition of gain on sale of assets to MSV in November 2001. Upon the completion of the November 2001 transactions, Motient determined that 80% of its gain from the sale of the assets should be deferred, since that was Motient's equity ownership percentage in MSV at the time the assets were sold to MSV. Upon review, Motient has determined that it was appropriate to apply Motient's ownership percentage at the completion of all of the related transactions that occurred on the same day as the asset sale transaction, since the transactions were dependent upon one another and effectively closed simultaneously. Accordingly, Motient should have deferred approximately 48% of the gain (Motient's equity ownership percentage in MSV following the completion of such transactions) as opposed to 80%. This change resulted in an increased gain on the sale of MSV of $7.9 million in 2001. Allocation of proceeds from the sale of the transportation business to Aether in November 2000. Motient received approximately $45 million for the sale of its retail transportation business assets and assumption of its liabilities to Aether. This consisted of $30 million for the assets, of which $10 million was held in an escrow account that was subsequently released in the fourth quarter of 2001 upon the satisfaction of certain conditions, and $15 million for a perpetual license to use and modify any intellectual property owned or licensed by Motient in connection with the retail transportation business. In the fourth quarter of 2000, Motient recognized a gain of $8.9 million, which represented the difference between the net book value of the assets sold and the $20 million cash portion of the purchase price for the assets received at closing. Motient recognized an additional $8.3 million gain in the fourth quarter of 2001 when the additional $10 million of proceeds were released from escrow. The $1.7 million difference between the proceeds received and the gain recognized is a result of pricing modifications that were made at the time of the release of the escrow plus certain compensation paid to former employees of the transportation business as a result of certain performance criteria having been met. 16 Motient deferred the $15 million perpetual license payment, which was then amortized into revenue over a five-year period, the estimated life of the customer contracts sold to Aether at the time of the transaction. Upon review, Motient determined that the $15 million in deferred revenue should be recognized over a four year period, which represents the life of a network airtime agreement that Motient entered into with Aether at the time of the closing of the asset sale. The decrease in the amortization period resulted in increased revenue of $63,000 and $750,000 in 2000 and 2001, respectively. Recognition of costs associated with certain options granted to Motient employees who were subsequently transferred to Aether upon consummation of the sale of Motient's transportation business to Aether in November 2000. Motient valued the vested options based on their fair value at the date of the consummation of the asset sale and recorded that value against the gain on the sale of the assets to Aether. Upon review, Motient has determined to value these vested options as a repricing under the intrinsic value method, with any charge recorded as an operating expense. In addition, for each subsequent quarter for which the unvested options continued to vest, Motient had valued these options on a fair value basis and recorded any adjustment in value as an operating expense. Upon review, we have determined that any adjustments in value should have been reflected as an increase or reduction of the gain on the sale of the assets to Aether. The revised accounting resulted in a reduction in expenses of $0.8 million in 2000 and an increase in expenses of $1.0 million in 2001. Summary of Adjustments to Prior Period Financial Statements as a result of re-audit of years ended December 31, 2000 and 2001 The following is a brief description of the differences between Motient's original accounting treatment and the revised accounting treatment that it has concluded was appropriate and has been reflected in the accompanying financial statements for the respective periods. Recognition of difference between strike price and fair market value at measurement date for options issued to ARDIS employees. Motient has restated its consolidated financial statements to recognize compensation expense related to the issuance of stock options with an exercise price below fair market value. The revised accounting resulted in a decrease in net income and a corresponding increase in additional paid in capital of $1.0 million, $0.6 million and $0.01 million for the years ended December 31, 1999, 2000 and 2001, respectively. Recognition of adoption of SAB 101,"Revenue Recognition in Financial Statements". Motient has restated its consolidated financial statements as of January 1, 2000, based on guidance provided in Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", as amended ("SAB101"). Motient's adoption of SAB101 resulted in a change of accounting for certain product shipments and activation fees. The cumulative effect of the change to retained earnings as of January 1, 2000 was $4.6 million. The cumulative effect was recognized as income in 2001 as the amounts were amortized into revenue and ultimately recognized as additional gain on the sale of the Company's satellite, transportation and certain other assets. Accrual of advertising expense in December 2000. Motient has restated its consolidated financial statements in 2000 to recognize an additional $1.1 million in advertising expense previously recognized in 2001. 17 Recognition of costs associated with inventory write-downs. Motient has restated its consolidated financial statements in 2000 to recognize an additional $1 million in Cost of Goods Sold for inventory write-downs previously recognized in 2001. In addition, Motient has restated its consolidated financial statements for the three-months ended March 31, 2002 to recognize an additional $0.4 million in Cost of Goods Sold for inventory write-downs not previously recorded. Summary of Impact of the Restatement The revised accounting treatment described above required that certain adjustments be made to the income statement and balance sheet for the quarter ended March 31, 2002. The effect of these adjustments is illustrated in the table below. Certain of the adjustments are based on assumptions that we have made about the fair value of certain assets. Quarter Ended March 31, 2002 (in thousands) Statement of operations data - ---------------------------- Net Revenue, as previously reported $16,495 Adjustments 188 --- As restated $16,683 ======= Net Operating Loss, as previously reported $(15,970) Adjustments 208 --- As restated $(15,762) ========= Net Loss, as previously reported $(32,885) Adjustments (2,544) ------- As restated $(35,429) ========= Basic and Fully Diluted Loss Per Share of Common Stock, as previously reported $(0.56) Adjustments (0.05) ------ As restated $(0.61) ======= Balance sheet data - ------------------ Total Assets, as previously reported $177,628 Adjustments 27,654 ------ As restated $205,282 ======== Total Liabilities, as previously reported $485,681 Adjustments (14,122) -------- As restated $471,559 ======== Stockholders' Equity, as previously reported $(308,053) Adjustments 41,776 ------ As restated $(266,277) ========= Total Liabilities & Stockholders' Equity, as previously reported $177,628 Adjustments 27,654 ------ As restated $205,282 ======== Consolidation The consolidated financial statements include the accounts of Motient and its wholly-owned subsidiaries. All significant inter-company transactions and accounts have been eliminated. 18 Cash Equivalents The Company considers highly liquid investments with original or remaining maturities at the time of purchase of three months or less to be cash equivalents Short-term Investments The Company considers highly liquid investments with original or remaining maturities at the time of purchase of between three months and one year to be short-term investments. Inventory Inventory, which consists primarily of communication devices and accessories, such as power supplies and documentation kits, is stated at the lower of cost or market. Cost is determined using the weighted average cost method. The Company periodically assesses the market value of its inventory, based on sales trends and forecasts and technological changes and records a charge to current period income when such factors indicate that a reduction to net realizable value is appropriate. The Company considers both inventory on hand and inventory which it has committed to purchase, if any. Periodically, the Company will offer temporary discounts on equipment sales to customers. The value of this discount is recorded as a cost of sale in the period in which the sale occurs. Concentrations of Credit Risk For the three months ended March 31, 2003, four customers accounted for approximately 45% of the Company's service revenue, with two customers, United Parcel Service of America, Inc. ("UPS") and SkyTel Communications, Inc. ("SkyTel"), each accounting for more than 15%. For the three months ended March 31, 2002, four customers accounted for approximately 45% of the Company's service revenue, with two of those customers, UPS and SkyTel, each accounting for more than 15%. SkyTel accounted for approximately 11% of the Company's accounts receivable at March 31, 2003. The revenue attributable to such customers varies with the level of network airtime usage consumed by such customers, and none of the service contracts with such customers requires that the customers use any specified quantity of network airtime, nor do such contracts specify any minimum level of revenue. There can be no assurance that the revenue generated from these customers will continue in future periods. Investment in MSV and Note Receivable from MSV The Company determined that certain adjustments to our historical financial information for 2000, 2001 and 2002 were required to reflect the effects of several complex transactions, including the formation of, and transactions with, MSV. Please see the Company's Form 8-K dated March 14, 2003 for a complete discussion of such adjustments. The Predecessor Company had no basis in either its $15 million note receivable from MSV or its $2.5 million convertible note receivable from MSV, as the Company had fully written these off in 2001 through the recording of its equity share of losses in MSV. It was determined that Motient should not have recorded any suspended losses of MSV. As a result, it was concluded that Motient should not have written off any prior MSV losses against the value of these notes. 19 As a result of the application of "fresh-start" accounting and the subsequent modifications described below, the notes and investment in MSV were valued at fair value and the Company recorded an asset in the amount of approximately $53.9 million representing the estimated fair value of our investment in and note receivable from MSV. Included in this investment is the historical cost basis of the Company's common equity ownership of approximately 48% as of May 1, 2002, or approximately $19.3 million. In accordance with the equity method of accounting, the Company recorded its approximate 48% share of MSV losses against this basis. Approximately $21.6 million of the $40.9 million value attributed to MSV is the excess of fair value over cost basis and is amortized over the estimated lives of the underlying MSV assets that gave rise to the basis difference. The Company is amortizing this excess basis in accordance with the pro-rata allocation of various components of MSV's intangible assets as determined by MSV through recent independent valuations. Such assets consist of FCC licenses, intellectual property and customer contracts, which are being amortized over a weighted-average life of approximately 12 years. Additionally, the Company has recorded the $15.0 million note receivable from MSV, plus accrued interest thereon at its fair market value, estimated to be approximately $13.0 million, after giving effect to discounted future cash flows at market interest rates. This note matures in November 2006, but may be fully or partially repaid prior to maturity, subject to certain conditions and priorities with respect to payment of other indebtedness, in certain circumstances involving the consummation of additional investments in MSV. In November 2003, Motient engaged CTA to perform a valuation of its equity interests in MSV as of December 31, 2002. Concurrent with CTA's valuation, Motient reduced the book value of its equity interest in MSV from $54 million (inclusive of Motient's $2.5 million convertible note from MSV) to $41 million as of May 1, 2002 to reflect certain preference rights on liquidation of certain classes of equity holders in MSV. Including its note receivable from MSV ($13 million at May 1, 2002), the book value of Motient's aggregate interest in MSV as of May 1, 2002 was reduced from $67 million to $53.9 million. Also, as a result of CTA's valuation of MSV, we determined that the value of our equity interest in MSV was impaired as of December 31, 2002. This impairment was deemed to have occurred in the fourth quarter of 2002. Motient reduced the value of its equity interest in MSV by $15.4 million as of December 31, 2002. The valuation of Motient's investment in MSV and its note receivable from MSV are ongoing assessments that are, by their nature, judgmental given that MSV is not traded on a public market and is in the process of developing certain next generation technologies, which depend on approval by the FCC. While the financial statements currently assume that there is value in Motient's investment in MSV and that the MSV note is collectible, there is the inherent risk that this assessment will change in the future and Motient will have to write down the value of this investment and note. For the three months ended March 31, 2003, MSV had revenues of $7.2 million, operating expenses of $6.6 million and a net loss of $ 6.6 million. For the three months ended March 31, 2002, MSV had revenues of $6.9 million, operating expenses of $7.0 million and a net loss of $ 7.2 million. For information regarding recent developments involving MSV, please see Note 6 ("Subsequent Events"). 20 Deferred Taxes The Company accounts for income taxes under the liability method as required in SFAS No. 109, "Accounting for Income Taxes". Under the liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax laws and rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under this method, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation reserve is established for deferred tax assets if the realization of such benefits cannot be sufficiently assured. The Company has paid no income taxes since inception. The Company has generated significant net operating losses for tax purposes through March 31, 2003; however, it has had its ability to utilize these losses limited on two occasions as a result of transactions that caused a change of control in accordance with the Internal Revenue Service Code Section 382. Additionally, since the Company has not yet generated taxable income, it believes that its ability to use any remaining net operating losses has been greatly reduced; therefore, the Company has established a valuation allowance for any benefit that would have been available as a result of the Company's net operating losses. Revenue Recognition The Company generates revenue principally through equipment sales and airtime service agreements, and consulting services. In 2000, the Company adopted Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," issued by the SEC. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. In certain circumstances, SAB 101 requires the deferral of the recognition of revenue and costs related to equipment sold as part of a service agreement. Revenue is recognized as follows: Service revenue: Revenues from wireless services are recognized when the services are performed, evidence of an arrangement exists, the fee is fixed and determinable and collectibility is probable. Service discounts and incentives are recorded as a reduction of revenue when granted, or ratably over a contract period. The Company defers any revenue and costs associated with activation of a subscriber on its network over an estimated customer life of two years. Equipment and service sales: The Company sells equipment to resellers who market its terrestrial product and airtime service to the public, and it also sells its product directly to end-users. Revenue from the sale of the equipment, as well as the cost of the equipment, are initially deferred and are recognized over a period corresponding to the Company's estimated customer life of two years. Equipment costs are deferred only to the extent of deferred revenue. In December 2003, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), "Revenue Recognition," which supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple-element revenue arrangements and to rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers" (FAQ) issued with SAB 101. Selected portions of the FAQ have been incorporated into SAB 104. The adoption of SAB 104 will not have a material impact on the Company's revenue recognition policies. Property and Equipment Property and equipment are recorded at cost for the Predecessor Company and adjusted for impairment, and includes "fresh-start" adjustments for the Successor Company. Property and equipment are depreciated over its useful life using the straight-line method. Assets recorded as capital leases are amortized over the shorter of their useful lives or the term of the lease. The estimated useful lives of office furniture and equipment vary from two to ten years, and the network equipment is depreciated over seven years. The Company has also capitalized certain costs to develop and implement its computerized billing system. These costs are included in property and equipment and are depreciated over three years. Repairs and maintenance do not significantly increase the utility or useful life of an asset and are expensed as incurred. 21 Property and equipment consists of the following: March 31, 2003 ---- Network equipment $48,821 Office equipment and furniture 4,862 Construction in progress 1,041 ----- 54,724 Less accumulated depreciation and amortization (11,819) ------- Property and equipment, net $42,905 ======= The Company recorded depreciation expense for the three months ended March 31, 2003 of $3.2 million. The Company has assets under capital lease as of March 31, 2003 of $6.0 million. Research and Development Costs Research and development costs are expensed as incurred. Such costs include internal research and development activities and expenses associated with external product development agreements. Advertising Costs Advertising costs are charged to operations in the year incurred. Stock-Based Compensation The Company accounts for employee stock options using the method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Generally, no expense is recognized related to the Company's stock options because the option's exercise price is set at the stock's fair market value on the date the option is granted. In cases where the Company issues shares of restricted stock, the Company will record an expense based on the value of the restricted stock on the measurement date. Options to purchase 1,477,050 shares of the Company's common stock were outstanding at March 31, 2003 under the Company's 2002 Stock Option Plan. Options to purchase 2,683,626 shares of the Predecessor Company's stock were outstanding at March 31, 2002. These options were cancelled as part of the Company's reorganization. In March 2003, the Company's board of directors approved the reduction in the exercise price of all of the outstanding stock options from $5.00 per share to $3.00 per share. The repricing will require that all options be accounted for in accordance with variable plan accounting, which requires that the value of these options are measured at their intrinsic value and any change in that value be charged to the income statement each quarter based on the difference (if any) between the intrinsic value and the then-current market value of the common stock. The other options are accounted for as a fixed plan and in accordance with intrinsic value accounting, which requires that the excess of the market price of stock over the exercise price of the options, if any, at the time that both the exercise price and the number of options are known be recorded as deferred compensation and amortized over the option vesting period. As of the 22 date of the grant, the option price per share was in excess of the market price; therefore, these options are not deemed to have any value and no expense has been recorded to date. See Note 6 ("Subsequent Events") for further discussion of stock based compensation subsequent to the end of the period covered by this report. Segment Disclosures In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", the Company had one operating segment: its core wireless business. The Company provides its core wireless business to the continental United States, Alaska, Hawaii and Puerto Rico. The following summarizes the Company's core wireless business revenue by major market categories: Successor Company Predecessor Company (Unaudited) (Unaudited) Three Months Ended Three Months Ended March 31, 2003 March 31, 2002 -------------- -------------- Summary of Revenue (restated) - ------------------ (in millions) Wireless Internet $7.1 $4.1 Field services 3.2 4.3 Transportation 2.6 3.0 Telemetry 0.6 0.7 All Other 0.1 0.4 --- --- Service Revenue 13.6 12.5 Equipment Revenue 0.8 4.2 --- --- Total $14.4 $16.7 ===== ===== The Company does not measure ultimate profit and loss or track its assets by these market categories. (Loss) Income Per Share Basic and diluted (loss) income per common share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Options and warrants to purchase shares of common stock were not included in the computation of loss per share as the effect would be antidilutive for all periods. As a result, the basic and diluted earnings per share amounts for all periods presented are the same. As of March 31, 2003, there were warrants to acquire approximately 5,464,962 shares of common stock and options outstanding for 1,477,050 shares that were not included in this calculation because of their antidilutive effect for the three months ended March 31, 2003. For the three month period ended March 31, 2002, all options and warrants had exercise prices in excess of the fair market value of the Company's common stock, and thus options and warrants were not factored into the per share calculation. Options to purchase 2,683,626 shares and warrants to purchase 7,759,760 shares of the Predecessor Company's stock were outstanding at March 31, 2002. These options and warrants were cancelled as part of the Company's reorganization. 23 New Accounting Pronouncements In November 2002, the FASB issued FASB Interpretation, or FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. However, a liability does not have to be recognized for a parent's guarantee of its subsidiary's debt to a third party or a subsidiary's guarantee of the debt owed to a third party by either its parent or another subsidiary of that parent. The initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 irrespective of the guarantor's fiscal year end. The disclosure requirements of FIN No. 45 are effective for financial statements with annual periods ending after December 15, 2002. Motient does not have any guarantees that would require disclosure under FIN No. 45. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure - an Amendment to SFAS No. 123". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 for public companies. This statement is effective for fiscal years beginning after December 15, 2002. We will adopt the disclosure requirements of SFAS No. 148 as of January 1, 2003 and plan to continue to follow the provisions of APB Opinion No. 25 for accounting for stock based compensation. In January 2003 (and revised in December 2003), the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities -- An Interpretation of ARB No. 51," which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 provides guidance related to identifying variable interest entities (previously known generally as special purpose entities, or SPEs) and determining whether such entities should be consolidated. FIN No. 46 must be applied immediately to variable interest entities created or interests in variable interest entities obtained, after January 31, 2003. For those variable interest entities created or interests in variable interest entities obtained on or before January 31, 2003, the guidance in FIN No. 46 must be applied in the first fiscal year or interim period beginning after June 15, 2003. The Company has reviewed the implications that adoption of FIN No. 46 would have on our financial position and results of operations and does not expect it to have a material impact. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies the characteristics of an obligation of the issuer. This standard is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has determined that it does not have any financial instruments that are impacted by SFAS No. 150. 24 Related Parties The Company made payments of $170,000 to related parties for service-related-obligations for the three-month period ended March 31, 2003, as compared to no payments made in the three-month period ended March 31, 2002. The Company did not receive any payments from related parties during the three-months ended March 31, 2003 and March 31, 2002. As of March 31, 2003, the Company had a net due from related parties in the amount of $0.5 million. See Note 6 ("Subsequent Events") for further discussion of other subsequent related party transactions. 3. LIQUIDITY AND FINANCING Liquidity and Financing Requirements In January 2002, the Company and three of its wholly-owned subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code. The Company's Plan of Reorganization was confirmed on April 26, 2002 and became effective on May 1, 2002. After confirmation of the plan, Motient had approximately $30.7 million of debt, comprised of capital leases, notes payable to Rare Medium and CSFB and a vendor financing facility with Motorola, Inc. ("Motorola"). Since emerging from bankruptcy protection in May 2002, the Company has undertaken a number of actions to reduce its operating expenses and cash burn rate. For a description of the Company's significant cost reduction initiatives after the end of the period covered by this report, please see Note 6 ("Subsequent Events"). The Company's liquidity constraints have been exacerbated by weak revenue growth since emerging from bankruptcy protection, due to a number of factors including the weak economy generally and the weak telecommunications and wireless sector specifically, the financial difficulty of several of the Company's key resellers, on whom the Company relies for a majority of its new revenue growth, the loss of UPS as a primary customer and the Company's continued limited liquidity which has hindered efforts at demand generation. In addition to cash generated from operations, the Company holds a $15 million promissory note issued by MSV in November 2001. This note matures in November 2006, but may be fully or partially repaid prior to maturity, subject to certain conditions and priorities with respect to payment of other indebtedness, in certain circumstances involving the consummation of additional investments in MSV. Under the terms of the Company's $19.75 million of notes issued to Rare Medium and CSFB in connection with its Plan of Reorganization, in certain circumstances the Company must use 25% of any proceeds from the repayment of the $15 million note from MSV to repay the Rare Medium and CSFB notes, on a pro-rata basis. For a discussion of certain recent developments regarding MSV, please see Note 6 ("Subsequent Events"). There can be no assurance that the balance of the MSV note will be repaid prior to maturity, or at all. The Company's future financial performance will depend on its ability to continue to reduce and manage operating expenses, as well as its ability to grow revenue. The Company's future financial performance could be negatively affected by unforeseen factors and unplanned expenses. The Company continues to pursue all potential funding alternatives. Among the alternatives for raising additional funds are the issuance of debt or equity 25 securities, other borrowings under secured or unsecured loan arrangements, and sales of assets. There can be no assurance that additional funds will be available to the Company on acceptable terms or in a timely manner. The Company's credit facility also has certain terms and conditions, subject to limits and waivers, that restrict the Company's ability to issue additional debt securities and use the proceeds from the sale of assets. The Company also recently completed a sale of $23.2 million of its common stock in April 2004 that may limit its ability to raise certain forms of capital in the future. There can be no assurance that these restrictions will be waived or reduced to allow the Company to access additional funding. For additional information, please see Note 6 ("Subsequent Events") The Company's projected cash requirements are based on certain assumptions about its business model and projected growth rate, including, specifically, assumed rates of growth in subscriber activations and assumed rates of growth of service revenue. While the Company believes these assumptions are reasonable, these growth rates continue to be difficult to predict and there is no assurance that the actual results that are experienced will meet the assumptions included in the Company's business model and projections. If the future results of operations are significantly less favorable than currently anticipated, the Company's cash requirements will be more than projected, and it may require additional financing. The type, timing and terms of financing that the Company obtains will be dependent upon its cash needs, the availability of financing sources and the prevailing conditions in the financial markets. The Company cannot guarantee that additional financing sources will be available at any given time or available on favorable terms. The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The successful implementation of the Company's business plan requires substantial funds to finance the maintenance and growth of its operations, network and subscriber base and to expand into new markets. The Company has an accumulated deficit and has historically incurred losses from operations which are expected to continue for additional periods in the future. There can be no assurance that its operations will become profitable. These factors, along with the Company's negative operating cash flows have placed significant pressures on the Company's financial condition and liquidity position. Debt Obligations & Capital Leases The following table outlines the Company debt obligations and capital leases as of March 31, 2003.
Successor Company (Unaudited) March 31, 2003 -------------- (in thousands) Senior Notes, net of discount -- Rare Medium note payable due 2005, including $20,569 accrued interest thereon CSFB note payable due 2005, including 812 accrued interest thereon Vendor financing 5,472 Obligations under Capital leases 5,639 ----- 32,492 Less current maturities 3,802 ----- Long-term debt $28,690 -------
The following table reflects the maturity of these obligations over the next five years. 26
Less then After 5 Total 1 year 1-4 years years ----- ------ --------- ----- (in thousands) Notes Payables $21,381 $ -- $21,381 $-- Capital lease obligations, including interest thereon 5,639 2,782 2,857 -- Vendor financing commitment 5,472 1,020 4,452 -- ------ ------ ------ ---- Total Contractual Cash Obligations $32,492 $3,802 $28,690 $--
Rare Medium Notes: Under the Company's Plan of Reorganization, the Rare Medium notes were cancelled and replaced by a new note in the principal amount of $19.0 million. The new note was issued by a new subsidiary of Motient Corporation that owns 100% of Motient Ventures Holding Inc., which owns all of the Company's interests in MSV. The new note matures on May 1, 2005 and carries interest at 9%. The note allows the Company to elect to accrue interest and add it to the principal, instead of paying interest in cash. The note requires that it be prepaid using 25% of the proceeds of any repayment of the $15 million note receivable from MSV. Please see Note 6 ("Subsequent Events") for further information with regards to certain payments made on these notes subsequent to the period covered by this report. CSFB $750,000 Note: Under the Company's Plan of Reorganization, the Company issued a note to CSFB, in satisfaction of certain claims by CSFB against Motient, in the principal amount of $750,000. The new note was issued by a new subsidiary of Motient Corporation that owns 100% of Motient Ventures Holdings Inc., which owns all of the Company's interests in MSV. The new note matures on May 1, 2005 and carries interest at 9%. The note allows the Company to elect to accrue interest and add it to the principal, instead of paying interest in cash. The Company must use 25% of the proceeds of any repayment of the $15 million note receivable from MSV to prepay the CSFB note. Please see Note 6 ("Subsequent Events") for further information with regards to certain payments made on these notes subsequent to the period covered by this report. Vendor Financing and Promissory Notes: Motorola had entered into an agreement with the Company to provide up to $15 million of vendor financing, to finance up to 75% of the purchase price of network base stations. Loans under this facility bear interest at a rate equal to LIBOR plus 7.0% and are guaranteed by the Company and each subsidiary of Motient Holdings. The terms of the facility require that amounts borrowed be secured by the equipment purchased therewith. Advances made during a quarter constitute a loan, which is then amortized on a quarterly basis over three years. These balances were not impacted by the Company's Plan of Reorganization. In January 2003, we restructured the then-outstanding principal under this facility of $3.5 million, with such amount to be paid off in equal monthly installments over a three-year period from January 2003 to December 2005. In January 2003, we also negotiated a deferral of approximately $2.6 million that was owed for maintenance services provided pursuant to a separate service agreement with Motorola, and we issued a promissory note for such amount, with the note to be paid off over a two-year period beginning in January 2004. The interest rate on this promissory note is LIBOR plus 4%. In March 2004, we further restructured both the vendor financing facility and the promissory note, primarily to extend the amortization periods for both the vendor financing facility and the promissory note. We will amortize the combined balances in the amount of $100,000 per month beginning in March 27 2004. We also agreed that interest would accrue on the vendor financing facility at LIBOR plus 4%. As part of this restructuring, we agreed to grant Motorola a second lien (junior to the lien held by the lenders under our term credit facility) on the stock of Motient License. This pledge secures our obligations under both the vendor financing facility and the promissory note. Capital Leases: As of March 31, 2003, approximately $5.5 million was outstanding under a capital lease for network equipment with Hewlett-Packard Financial Services Company ("Hewlett-Packard"), which has subsequently been purchased by Compaq Corporation. The lease has an effective interest rate of 12.2%. In January 2003, this agreement was restructured to provide for a modified payment schedule. We also negotiated a further extension of the repayment schedule that became effective upon the satisfaction of certain conditions, including our funding of a letter of credit in twelve monthly installments beginning in 2003, in the aggregate amount of $1.125 million, to secure our payment obligations. The letter of credit will be released in fifteen equal installments beginning in July 2004, assuming no defaults have occurred or are occurring. As of March 31, 2003, $0.1 million was outstanding under a capital lease for corporate telecommunications equipment with Avaya Financial Services. Sources of Funding In addition to cash generated from operations, the Company's primary source of funding as of March 31, 2003 was a $12.5 million term credit facility. Please see Note 6 ("Subsequent Events") for further information with regards to repayment of outstanding amounts under this facility and additional liquidity events for the Company. $12.5 Million Term Credit Facility: On January 27, 2003, the Company's wholly-owned subsidiary, Motient Communications, closed a $12.5 million term credit agreement with a group of lenders, including several of the Company's existing stockholders. The lenders include the following entities or their affiliates: M&E Advisors, L.L.C., Bay Harbour Partners, York Capital and Lampe Conway & Co. York Capital is affiliated with James G. Dinan. Bay Harbour Management and James G. Dinan each hold 5% or more of Motient's common stock. The lenders also include Gary Singer, directly or through one or more entities. Gary Singer is the brother of Steven G. Singer, one of our directors. The table below shows, as of April 15, 2004 the number of shares of Motient common stock beneficially owned by the following parties to the term credit agreement, based solely on filings made by such parties with the SEC: Name of Beneficial Owner Number of Shares ------------------------ ---------------- Bay Harbour Management, L.C. 3,217,396 JGD Management Corp. 2,276,445(1) James G. Dinan 2,276,445 (1) JGD Management Corp and James G. Dinan share beneficial ownership with respect to the 2,276,445 shares of our common stock. Mr. Dinan is the president and sole stockholder of JGD Management Corp, which manages the other funds and accounts that hold our common stock over which Mr. Dinan has discretionary investment authority. Under the credit agreement, the lenders have made commitments to lend Motient Communications up to $12.5 million. The commitments are not revolving in nature and amounts repaid or prepaid may not be reborrowed. Borrowing availability under Motient's $12.5 million term credit facility terminated on December 31, 2003. On March 16, 2004, Motient Communications entered into an amendment to the credit facility which extended the borrowing availability period until December 31, 2004. As part of this amendment, Motient Communications provided the lenders with a pledge of all of the stock of a newly-formed special purpose subsidiary of Motient Communications, Motient License, which holds all of Motient's FCC licenses formerly held by Motient Communications. 28 Under this facility, the lenders have agreed to make loans to Motient Communications through December 31, 2004 upon Motient Communications' request no more often than once per month, in aggregate principal amounts not to exceed $1.5 million for any single loan, and subject to satisfaction of other conditions to borrowing, including certain financial and operating covenants, contained in the credit agreement. As of April 1, 2004, the Company had borrowed $6.0 million under this facility, all of which has since been repaid, and may not be re-borrowed Each loan borrowed under the credit agreement has a term of three years. Loans carry interest at 12% per annum. Interest accrues, compounding annually, from the first day of each loan term, and all accrued interest is payable at each respective loan maturity, or, in the case of mandatory or voluntary prepayment, at the point at which the respective loan principal is repaid. Loans may be prepaid at any time without penalty. The obligations of Motient Communications under the credit agreement are secured by a pledge of all the assets owned by Motient Communications that can be pledged as security (including, but not limited to Motient Communication's shares in Motient License) and are not already pledged under certain other existing credit arrangements, including under Motient Communications' credit facility with Motorola and Motient Communications' equipment leasing agreement with Compaq Corporation. Motient Communications owns, directly or indirectly, all of the Company's assets relating to its terrestrial wireless communications business. In addition, Motient and its wholly-owned subsidiary, Motient Holdings Inc., have guaranteed Motient Communications' obligations under the credit agreement, and the Company has delivered a pledge of the stock of Motient Holdings Inc., Motient Communications, Motient Services and Motient License to the lenders. In addition, upon the repayment in full of the outstanding $19,750,000 in senior notes due 2005 issued by MVH Holdings Inc. to Rare Medium and CSFB in connection with the Company's approved Plan of Reorganization, the Company will pledge the stock of MVH Holdings Inc. to the lenders. On January 27, 2003, in connection with the signing of the credit agreement, we issued warrants at closing to the lenders to purchase, in the aggregate, 3,125,000 shares of our common stock. The exercise price for these warrants is $1.06 per share. The warrants were immediately exercisable upon issuance and have a term of five years. The warrants were valued at $10 million using a Black-Scholes pricing model and have been recorded as a debt discount and are being amortized as additional interest expense over three years, the term of the related debt. Upon closing of the credit agreement, the Company paid closing and commitment fees to the lenders of $500,000. These fees have been recorded on the Company's balance sheet and are being amortized as additional interest expense over three years, the term of the related debt. Under the credit agreement, the Company must pay an annual commitment fee of 1.25% of the daily average of undrawn amounts of the aggregate commitments from the period from the closing date to December 31, 2003. In December 2003, the Company paid the lenders a commitment fee of approximately $113,000. On March 16, 2004, in connection with the execution of the amendment to our credit agreement, we issued warrants to the lenders to purchase, in the aggregate, 1,000,000 shares of our common stock. The exercise price of the warrants is $4.88 per share. The warrants were immediately exercisable upon issuance and have a term of five years. The warrants will be valued using a Black-Scholes pricing model and will be recorded as a debt discount and will be 29 amortized as additional interest expense over three years, the term of the related debt. The warrants are also subject to a registration rights agreement. Under such agreement, we agreed to file a registration statement to register the shares underlying the warrants upon the request of a majority of the warrant holders, or in conjunction with the filing of a registration statement in respect of shares of common stock of the Company held by other holders. We will bear all the expenses of such registration. In connection with the amendment, we are also required to pay commitment fees to the lenders of $320,000, which were added to the principal balance of the credit facility at closing. These fees will be recorded on our balance sheet and will be amortized as additional interest expense over three years, the term of the related debt. In each of April, June and August 2003 and March of 2004, the Company made draws under the credit agreement in the amount of $1.5 million for an aggregate amount of $6.0 million. The Company used such funds to fund general working capital requirements of operations. For the monthly periods ended April 2003 through December 2003, the Company reported events of default under the terms of the credit facility to the lenders. These events of default related to non-compliance with covenants requiring minimum monthly revenue, earnings before interest, taxes and depreciation and amortization and free cash flow performance. In each period, the lenders waived these events of default. There can be no assurance that Motient will not have to report additional events of default or that the lenders will continue to provide waivers in such event. Ultimately, there can be no assurances that the liquidity provided by the credit facility will be sufficient to fund our ongoing operations. For further information regarding the pay down of balances under this term credit facility, please see Note 6 "Subsequent Events". For further details regarding the term credit facility, please see our annual report on Form 10-K for the year ended December 31, 2002, filed with the SEC on March 22, 2004, and the exhibits attached thereto. 4. COMMITMENTS AND CONTINGENCIES As of March 31, 2003, the Company had $1.5 million of outstanding commitments to purchase inventory from Research in Motion. UPS, the Company's largest customer as of December 31, 2002 and March 31, 2003, has substantially completed its migration to next generation network technology, and its monthly airtime usage of the Company's network has declined significantly. There are no minimum purchase requirements under the Company's contract with UPS and the contract may be terminated by UPS on 30 days' notice at which point any remaining prepayment would be required to be repaid. While the Company expects that UPS will remain a customer for the foreseeable future, over time the Company expects that the bulk of UPS' units will migrate to another network. As of March 31, 2004, UPS had approximately 4,260 active units on Motient's network. Until June of 2003, UPS had voluntarily maintained its historical level of payments to mitigate the near-term revenue and cash flow impact of its recent and anticipated continued reduced network usage. However, beginning in July of 2003, the revenues and cash flow from UPS declined significantly. Also, due to a separate arrangement entered into in 2002 under which UPS prepaid for network airtime to be used by it in 2004, the Company does not expect that UPS will be required to make any cash payments to the Company in 2004 for service to be provided in 2004. If UPS does not make any cash payments to the Company in 2004, 30 the Company's cash flows from operations in 2004 will decline, and its liquidity and capital resources could be materially and negatively affected. As of March 31, 2004, UPS has not been required to make any cash payments to the Company in 2004 for service provided in 2004, and the value of the Company's remaining airtime service obligations to UPS in respect of the prepayment was approximately $4.5 million. The Company is planning a number of initiatives to offset the loss of revenue and cash flow from UPS, including the following: o further reductions in the Company's employee and network infrastructure costs; o growth in new revenue from the Company's recently-announced carrier relationships with Verizon Wireless and T-Mobile, under which the Company will be selling voice and data services on such carrier's next generation wireless networks as a master agent; o increased revenue growth from the Company's various telemetry applications and initiatives; and o enhancements to the Company's liquidity which are expected to involve the sale of unneeded frequency assets, such as the recently announced sales of certain Specialized Mobile Radio ("SMR") licenses to Nextel. 5. LEGAL AND REGULATORY MATTERS Legal Motient filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on January 10, 2002. The Bankruptcy Court confirmed Motient's Plan of Reorganization on April 26, 2002, and Motient emerged from bankruptcy on May 1, 2002. For further details regarding this proceeding, please see "Motient's Chapter 11 Filing and Plan of Reorganization and "Fresh Start" Accounting" under Note 2. From time to time, Motient is involved in legal proceedings in the ordinary course of our business operations. Although there can be no assurance as to the outcome or effect of any legal proceedings to which Motient is a party, Motient does not believe, based on currently available information, that the ultimate liabilities, if any, arising from any such legal proceedings would have a material adverse impact on our business, financial condition, results of operations or cash flows. There have been no developments since the prior descriptions in our annual report on Form 10-K for the year ended December 31, 2002, and the "Legal Proceedings" section included therein. For a discussion of legal matters after the end of the period covered by this report, please see Note 6 ("Subsequent Events"). Regulatory On March 14, 2002, the FCC adopted a notice of proposed rulemaking exploring options and alternatives for improving the spectrum environment for public safety operations in the 800 MHz band. This notice of proposed rulemaking was issued by the FCC after a "white paper" proposal was submitted to the FCC by Nextel Communications Inc. in November 2001 addressing largely the same issues. In its white paper, Nextel proposed that certain of its wireless spectrum in the 700 MHz band, lower 800 MHz band and 900 MHz band be exchanged for spectrum in the upper 800 MHz band and in the 2.1 GHz band. Nextel's proposal addressed the problem of interference to public safety agencies by creating blocks of contiguous spectrum to be shared by public safety agencies. Since the notice of proposed rulemaking was issued, Motient has been actively participating with other affected licensees, including Nextel, to reach agreement on a voluntary plan to re-allocate spectrum to alleviate interference to public safety agencies. On December 24, 2002, a group of affected licensees, including 31 Motient, Nextel, and several other licensees, submitted a detailed proposal to the FCC for accomplishing the re-allocation of spectrum over a period of several years. These parties have also been negotiating a mechanism by which Nextel would agree to reimburse, up to $850 million, costs incurred by affected licensees in relocating to different parts of the spectrum band pursuant to the rebanding plan. On February 10, 2003, approximately 60 entities filed comments to the proposal submitted to the FCC on December 24, 2002. Several of the comments addressed the issue of comparable 800 MHz spectrum for Economic Area ("EA") and the need to avoid recreating the 800 MHz interference situation when Nextel integrates its 900 MHz spectrum into its integrated dispatch enhanced network, or iDEN. Reply comments, which were due February 25, 2003, included comments urging the FCC to conduct its own analysis of the adequacy of the interference protection proposed in the plan. In mid-April 2003, the FCC's Office of Engineering and Technology ("OET") sent a letter to several manufacturers requesting additional practical, technical and procedural solutions or information that may have yet to be considered. Responses were due May 8, 2003. Upon reviewing the filed comments, OET has indicated that other technical solutions were possible and were being reviewed by the FCC. To date, no action has been taken by the FCC. The Company cannot assure you that its operations will not be affected by this proceeding. For a discussion of regulatory matters after the end of the period covered by this report, please Note 6 ("Subsequent Events"). 6. SUBSEQUENT EVENTS Sale of Common Stock On April 7, 2004, Motient sold 4,215,910 shares of its common stock at a price of $5.50 per share for an aggregate purchase price of $23,187,505 to The Raptor Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund L.P., Tudor Proprietary Trading, L.L.C., Highland Crusader Offshore Partners, L.P., York Distressed Opportunities Fund, L.P., York Select, L.P., York Select Unit Trust, M&E Advisors L.L.C., Catalyst Credit Opportunity Fund, Catalyst Credit Opportunity Fund Offshore, DCM, Ltd., Greywolf Capital II LP and Greywolf Capital Overseas Fund and LC Capital Master Fund. The sale of these shares was not registered under the Securities Act of 1933, as amended (the "Securities Act") and the shares may not be sold in the United States absent registration or an applicable exemption from registration requirements. The shares were offered and sold pursuant to the exemption from registration afforded by Rule 506 under the Securities Act and/or Section 4(2) of the Securities Act. In connection with this sale, the Company signed a registration rights agreement with the holders of these shares. Among other things, this registration rights agreement requires the Company to file and cause to make effective a registration statement permitting the resale of the shares by the holders thereof. Motient also issued warrants to purchase an aggregate of 1,053,978 shares of its common stock to the investors listed, at an exercise price of $5.50 per share. These warrants will vest if and only if Motient does not meet certain deadlines between June and November, 2004, with respect to certain requirements under the registration rights agreement. If the warrants vest, they may be exercised by the holders thereof at any time through June 30, 2009. In connection with this sale, Motient issued to Tejas Securities Group, Inc., Motient's agent for the sale, warrants to purchase 1,000,000 shares of its common stock. The exercise price of these warrants is $5.50 per share. The warrants are immediately exercisable upon issuance and have a term of ten years. Motient also paid Tejas Securities Group, Inc. a placement fee of $350,000 at closing. The warrants will be valued using a Black-Scholes pricing model. 32 Credit Facility Repayment On April 13, 2004, Motient repaid all principal amounts due under its Credit Facility, including accrued interest thereon, in an amount of $6.7 million. The remaining availability under the Credit Facility of $5.8 million will remain available for borrowing to the Company until December 31, 2004, subject to the lending conditions in the agreement. Cost Reduction Actions The Company has taken a number of steps after the end of the period covered by this report to reduce operating and capital expenditures in order to lower its cash burn rate. Reductions in Workforce. The Company undertook a reduction in its workforce February 2004. This action eliminated approximately 32.5% (54 employees) of its then-remaining workforce. Network Rationalization. The Company is in the process of assessing its wireless data network in a coordinated effort to reduce network operating costs. One aspect of this rationalization encompasses reducing unneeded capacity across the network by deconstructing un-profitable base stations. In certain instances, the geographic area that the network serves may be reduced by this process. The full extent of the changes to network coverage have yet to be determined. Closure of Reston, VA Facility. On July 15, 2003, the Company substantially completed the transfer of its headquarters from Reston, VA to Lincolnshire, IL, where the Company already had a facility. This action will reduce the Company's monthly operating expenses by an amount of approximately $65,000 per month or $780,000 per year. Despite these initiatives, we continue to be cash flow negative, and there can be no assurances that we will ever be cash flow positive. Stock Option Plan In July 2003, the compensation and stock option committee of the Company's board of directors, acting pursuant to the Company's 2002 stock option plan, granted 26 employees and officers options to purchase an aggregate of 470,000 shares of the Company's common stock at a price of $5.15 per share. In September 2003, one additional employee received a grant for 25,000 shares of the Company's common stock at a price of $5.65 per share. One-half of each option grant vests with the passage of time and the continued employment of the recipient, in three equal increments, on the first, second and third anniversary of the date of grant. The other half of each grant will either vest or be rescinded based on the performance of the Company in 2003. The compensation and stock option committee of the Company's board of directors has not yet made a determination regarding whether the 2003 performance criteria were satisfied. If vested and not exercised, the options will expire on the 10th anniversary of the date of grant. 33 Developments Relating to MSV On August 21, 2003, two investors in MSV (excluding Motient) invested an additional $3.7 million in MSV in exchange for Class A preferred units of limited partnership interests in MSV. MSV used the proceeds from this investment to repay other indebtedness that is senior in its right of repayment to Motient's promissory note. Under the terms of MSV's amended and restated investment agreement, these investors had the option of investing an additional $17.6 million in MSV by December 31, 2003; however, if, prior to this time, the FCC had not issued a decision addressing MSV's petition for reconsideration with respect to the ATC Order, the option was automatically extended to March 31, 2004. As of the closing of the initial investment on August 21, 2003, Motient's percentage ownership of MSV was approximately 46.5% on an undiluted basis, 32.6% on an "as converted" basis giving effect to the conversion of all outstanding convertible notes of MSV and 29.5% on a fully diluted basis. On April 2, 2004, the above-mentioned additional $17.6 million investment was consummated. In connection with this investment, MSV's amended and restated investment agreement was amended to provide that of the total $17.6 million in proceeds, $5.0 million was used to repay certain outstanding indebtedness of MSV, including $2.0 million of outstanding interest and principal under the $15.0 million promissory note issued to Motient by MSV. Motient was required to use 25% of the $2 million it received in this transaction, or $500,000, to make prepayments under its existing notes owed to Rare Medium Group, Inc. and Credit Suisse First Boston. The remainder of the proceeds from this investment will be used for general corporate purposes by MSV. As of the closing of the initial investment on April 2, 2004, Motient's percentage ownership of MSV was approximately 46.5% on an undiluted basis, 32.6% on an "as converted" basis giving effect to the conversion of all outstanding convertible notes of MSV and 29.5% on a fully diluted basis. Agreements with Communication Technology Advisors LLC Communications Technology Advisors, LLC ("CTA") is a consulting and private advisory firm specializing in the technology and telecommunications sectors. It had previously acted as the spectrum and technology advisor to the official committee of unsecured creditors in connection with the Company's bankruptcy proceedings. In May 2002, the Company entered into a consulting agreement with CTA under which CTA provided consulting services to the Company. Since September 2002, the Company has extended its consulting agreement with CTA on either three month or month-to-month terms. For the period September 2002 to May 2003, the monthly fee was $55,000. Beginning in May 2003, the monthly fee was reduced to $39,000. This agreement was amended, and the engagement and related payment was modified on January 30, 2004. On June 20, 2003, Jared Abbruzzese, the chairman of CTA, resigned his position as Chairman of the Board and Peter D. Aquino, a senior managing director of CTA, was elected to the Company's Board on June 20, 2003. In November 2003, the Company engaged CTA to provide a valuation of its equity interest in MSV as of December 31, 2002, as described in Note 2. CTA was paid $150,000 for this valuation. On January 30, 2004, the Company engaged CTA to act as chief restructuring entity. The term of CTA's engagement is currently scheduled to end on August 1, 2004. As consideration for this work, Motient agreed to pay to CTA a monthly fee of $60,000, one-half of which will be paid monthly in cash and one-half of which will be deferred. The new agreement replaces the Company's existing consulting arrangement with CTA. 34 Management and Board Changes On April 17, 2003, the board of directors elected Christopher W. Downie to the position of vice president, chief financial officer and treasurer. Mr. Downie had previously been a consultant with CTA, working on Motient matters, since May 2002. On March 18, 2004 the board of directors elected Christopher W. Downie to the position of executive vice president, chief financial officer and treasurer, and designated Mr. Downie as the Company's principal executive officer. On June 20, 2003, Jared Abbruzzese resigned his position as chairman of the board. Steven Singer was elected chairman of the board and a new director, Peter Aquino, was elected to the board. Mr. Aquino is a senior managing director for CTA. On February 10, 2004, the Company and Walter V. Purnell, Jr. mutually agreed to end his employment as president and chief executive officer of Motient and all of its wholly owned subsidiaries. Concurrently, Mr. Purnell resigned as a director of such entities and of MSV and all of its subsidiaries. On February 18, 2004, Daniel Croft, senior vice president, marketing and business development, and Michael Fabbri, senior vice president, sales, were relieved of their duties as part of a reduction in force. Change in Accountants On April 17, 2003, the Company dismissed PricewaterhouseCoopers as its independent auditors, effective upon the completion of services related to the audit of the Company's consolidated financial statements for the period May 1, 2002 to December 31, 2002. Also on April 25, 2003, the Company's board of directors approved the engagement of Ehrenkrantz Sterling & Co. LLC as its independent auditors to (i) re-audit the Company's consolidated financial statements for the fiscal year ended December 31, 2000 and the fiscal year ended December 31, 2001, and (ii) audit the Company's consolidated financial statements for the interim period from January 1, 2002 to April 30, 2002, and the fiscal year ended December 31, 2003. On March 2, 2004, Motient dismissed PricewaterhouseCoopers as its independent auditors effective immediately. The audit committee of the Company's board of directors approved the dismissal of PricewaterhouseCoopers. PricewaterhouseCoopers was previously appointed to audit Motient's consolidated financial statements for the period May 1, 2002 to December 31, 2002, and, by its terms, such engagement was to terminate upon the completion of services related to such audit. PricewaterhouseCoopers did not report on Motient's consolidated financial statements for such period or for any other fiscal period. On March 2, 2004, the audit committee engaged Ehrenkrantz Sterling & Co. LLC as Motient's independent auditors to replace PricewaterhouseCoopers to audit Motient's consolidated financial statements for the period May 1, 2002 to December 31, 2002. For further details regarding the change in accountants, please see the Company's current report on Form 8-K filed with the SEC in April 23, 2003 and the Company's amendment to current report on Form 8-K/A filed with the SEC on March 9, 2004. 35 Research In Motion Matters Our rights to use and sell the BlackBerryTM software and Research In Motion's handheld devices may be limited or made prohibitively expensive as a result of a patent infringement lawsuit brought against Research In Motion ("RIM") by NTP Inc. (NTP v. Research In Motion, Civ. Action No. 3:01CV767 (E.D. Va.)). In that action, a jury concluded that certain of RIM's BlackBerryTM products infringe patents held by NTP covering the use of wireless radio frequency information in email communications. On August 5, 2003, the judge in the case ruled against RIM, awarding NTP $53.7 million in damages and enjoining RIM from making, using, or selling the products, but stayed the injunction pending appeal by RIM. This appeal has not yet been resolved. As a purchaser of those products, the Company could be adversely affected by the outcome of that litigation. On June 26, 2003, RIM provided the Company with a written End of Life Notification for the RIM 857 wireless handheld device. This means that RIM will no longer produce this model of handheld device. The last date for accepting orders was September 30, 2003, and the last date for shipment of devices was January 2, 2004. Motient has implemented a RIM 857 "equivalent to new" program and expects that there will be sufficient returned RIM 857s to satisfy demand for the foreseeable future. During the year ended December 31, 2002 and for the three months ended March 31, 2003, a majority of Motient's equipment revenues were attributable to sales of the RIM 857 device, and Motient estimates that approximately 35% and 41%, respectively, of its monthly recurring service revenues were derived from wireless messaging that use RIM 857 devices. New Network Offerings On May 21, 2003 Motient entered into an Authorized Agency Agreement with Verizon Wireless. This agreement allows Motient to sell Verizon's third generation CDMA/1XRTT network subscriptions, along with T-Mobile's third generation GSM/GPRS network subscriptions, nationwide. Motient is paid for each subscriber put on to either network. Each agreement allows Motient to continue to actively sell and promote wireless email and wireless Internet applications to enterprise accounts on networks with greater capacity and speed, and that are voice capable. Legal Matters On April 15, 2004 Motient filed a claim under the rules of the American Arbitration Association in Fairfax County, VA, against Wireless Matrix Corporation, a reseller of Motient's services, for the non-payment of certain amounts due and owing under the "take-or-pay" agreement between Motient and Wireless Matrix. Under this agreement, Wireless Matrix agreed to purchase certain minimum amounts of air-time on the Motient network. In February 2004 Wireless Matrix informed Motient that it was terminating its agreement with Motient. Motient does not believe that Wireless Matrix has the right to do so, and consequently filed the above mentioned claim seeking over $2.6 million in damages, which amount represents Wireless Matrix's total prospective commitment under the agreement. As of the date of this filing, Wireless Matrix has not responded to the claim or filed a counter-claim against Motient. Motient cannot assure you that Wireless Matrix will not file a counter-claim in this proceeding, nor can Motient assure you that it will prevail in any arbitration proceeding. 36 Regulatory Matters In March of 2004, the staff of the FCC recommended the adoption of the Consensus Plan. However, the staff also recommended the rejection of Nextel's offer to pay $850 million to recover the costs of the re-allocation of the spectrum, as they believed this amount to be insufficient to cover the costs of such re-allocation. On April 8, 2004, Motient filed a request with the FCC asking that the Commission relocate Motient into the so called "upper-800 MHz band" as part of the Consensus Plan. Motient has not received any response to request. Further Lane On July 29, 2003, Motient entered into a letter agreement with Further Lane Asset Management Corp. under which Further Lane is providing investment advisory services to Motient. In connection with the execution of this letter agreement, Motient issued Further Lane a warrant to purchase 200,000 shares of its common stock. The exercise price of the warrant is $5.10 per share. The warrant is immediately exercisable upon issuance and has a term of five years. The fair value of the warrant was estimated at $927,000 using a Black-Scholes model. In September 2003, the Company recorded a non-cash consultant compensation charge of $927,000 based on this valuation. Sale of SMR Licenses to Nextel Communications, Inc. On July 29, 2003, our wholly-owned subsidiary, Motient Communications, entered into an asset purchase agreement with Nextel, under which Motient Communications sold to Nextel certain of its SMR licenses issued by the FCC for $3.4 million. The closing of this transaction occurred on November 7, 2003. On December 9, 2003, Motient Communications entered into a second asset purchase agreement, under which Motient Communications will sell additional licenses to Nextel for $2.75 million. In February, 2004, the Company closed the sale of licenses covering approximately $2.2 million of the purchase price, and the Company closed the sale of approximately one-half of the remaining licenses in April 2004. The transfer of the other half of the remaining licenses has been challenged at the FCC by a third-party. While the Company believes, based on the advice of counsel, that the FCC will ultimately rule in its favor, the Company cannot assure you that it will prevail, and, in any event, the timing of any final resolution is uncertain. None of these licenses are necessary for Motient's future network requirements. Motient has and expects to continue to use the proceeds of the sales to fund its working capital requirements and for general corporate purposes. The lenders under Motient Communications' term credit agreement have consented to the sale of these licenses. 37 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This quarterly report on Form 10-Q contains and incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding our expected financial position and operating results, our business strategy, and our financing plans are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as "may," "will," "anticipate," "estimate," "expect," "project" or "intend." These forward-looking statements reflect our plans, expectations and beliefs and, accordingly, are subject to certain risks and uncertainties. We cannot guarantee that any of such forward-looking statements will be realized. Statements regarding factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, those under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Overview of Liquidity and Risk Factors," and elsewhere 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 in their entirety by the cautionary statements referred to above and contained elsewhere in this quarterly report on Form 10-Q. You should carefully review the risk factors described in our other filings with the Securities and Exchange Commission from time to time, including the risk factors contained in our Form 10-K for the period ended December 31, 2002, and our quarterly reports on Form 10-Q to be filed after this quarterly report, as well as our other reports and filings with the SEC. Our forward-looking statements are based on information available to us today, and we will not update these statements. Our actual results may differ significantly from the results discussed in these statements. Overview Motient's Chapter 11 Filing On January 10, 2002, Motient and three of its wholly-owned subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code. Motient's Plan of Reorganization was confirmed on April 26, 2002, and became effective on May 1, 2002. As a result of the reorganization and the recording of the restructuring transaction and implementation of fresh start reporting, our results of operations after April 30, 2002, are not comparable to results reported in prior periods. See Note 2 of notes to consolidated financial statements for information on consummation of our Plan of Reorganization and implementation of "fresh-start" reporting. The discussion of our Plan of Reorganization should be read in conjunction with the consolidated financial statements and notes thereto. General - The Current and Former Components of Motient's Business This section provides information regarding the various current and prior components of Motient's business, which we believe are relevant to an assessment and understanding of the financial condition and consolidated results of operations of Motient. 38 Motient presently has six wholly-owned subsidiaries and had a 25.5% interest (on a fully-diluted basis) in MSV as of March 31, 2003. For further details regarding Motient's interest in MSV, please see Note 6 ("Subsequent Events -- Developments Relating to MSV") of notes to consolidated financial statements. Motient Communications Inc. owns the assets comprising Motient's core wireless business, except for Motient's FCC licenses, which are held in a separate subsidiary, Motient License Inc. Motient License was formed on March 16, 2004, as part of Motient's amendment of its credit facility, as a special purpose wholly-owned subsidiary of Motient Communications and holds all of the FCC licenses formerly held by Motient Communications. A pledge of the stock of Motient License, along with the other assets of Motient Communications, secures borrowings under the term credit facility, and a pledge of the stock of Motient License secures, on a second priority basis, borrowings under our vendor financing facility with Motorola. For further details regarding the formation of Motient License, please see Note 3 ("Liquidity and Financing - $12.5 Million Term Credit Facility") of notes to consolidated financial statements. Motient's other four subsidiaries hold no material operating assets other than the stock of other subsidiaries and Motient's interests in MSV. On a consolidated basis, we refer to Motient Corporation and its six wholly-owned subsidiaries as "Motient." Our indirect, less-than 50% voting interest in MSV is not consolidated with Motient for financial statement purposes. Rather, we account for our interest in MSV under the equity method of accounting. Core Wireless Business We are a nationwide provider of two-way, wireless mobile data services and mobile Internet services. Our customers use our network for a variety of wireless data communications services, including email messaging and other services that enable businesses, mobile workers and consumers to transfer electronic information and messages and access corporate databases and the Internet. Over the last several years, we have made substantial investments in new products and services, including our eLinksm wireless email service. Our eLink service is a wireless email application, wirelessly enabling POP and IMAP compliant email services on the Motient network. We provide our eLink brand two-way wireless email service to customers accessing email through corporate servers, internet service providers, mail service provider, or MSP, accounts, and paging network suppliers. We also offer a BlackBerry TM by Motient solution specifically designed for large corporate accounts operating in a Microsoft Exchange and Lotus Notes environment. BlackBerry TM is a popular wireless email solution developed by Research In Motion, or RIM, and is being provided on the Motient network under an agreement with RIM. See Note 6 ("Subsequent Events") of notes to consolidated financial statements for discussion related to on-going RIM litigation and product availability. Mobile Satellite Ventures LP On June 29, 2000, the Company formed a joint venture subsidiary, Mobile Satellite Ventures LP (formerly known as Mobile Satellite Ventures LLC) ("MSV"), in which it owned, until November 26, 2001, 80% of the membership interests, in order to conduct research and development activities. In June 2000, the remaining 20% interests in MSV were purchased by three investors unrelated to Motient for an aggregate purchase price of $50 million. The minority investors had certain participating rights which provided for their participation in certain business decisions that were made in the normal course of business, therefore, the Company's investment in MSV has been recorded for all periods presented in the consolidated financial statements pursuant to the equity method of accounting. On November 26, 2001, Motient sold the assets comprising its satellite communications business to MSV, as part of a transaction in which certain other parties joined MSV, including TMI Communications and Company Limited Partnership ("TMI"), a Canadian satellite services provider. In this 39 transaction, TMI also contributed its satellite communications business assets to MSV. As part of this transaction, Motient received a $15 million promissory note issued by MSV and purchased a $2.5 million convertible note issued by MSV. In July 2002, MSV commenced a rights offering seeking total funding in the amount of $3.0 million. While the Company was not obligated to participate in the offering, the Company's board determined that it was in the Company's best interests to participate so that its interest in MSV would not be diluted. On August 12, 2002, the Company funded an additional $957,000 to MSV pursuant to this offering, and received a new convertible note in such amount. This rights offering did not impact the Company's ownership position in MSV. The $3.5 million of convertible notes from MSV mature on November 26, 2006, bear interest at 10% per annum, compounded semiannually, and are payable at maturity. The convertible notes are convertible at any time at Motient's discretion, and automatically under certain circumstances into class A preferred units of limited partnership interests of MSV. Our $15 million promissory note from MSV is subject to prepayment in certain circumstances where MSV receives cash proceeds from equity, debt or asset sale transactions. In addition, 25% of the proceeds of any repayment of the $15.0 million note from MSV must be used to prepay pro-rata both the Rare Medium and Credit Suisse First Boston Corporation, or CSFB, notes. The allocation of the 25% of the proceeds will be made in accordance with Rare Medium's and CSFB's relative outstanding balance at the time of prepayment. If not repaid earlier, the $15.0 million note from MSV, including accrued interest thereon, becomes due and payable on November 26, 2006; however, there can be no assurance that MSV would have the ability, at that time, to pay the amounts due under the note. Motient has recorded the $15.0 million note receivable from MSV, plus accrued interest thereon at its fair market value, estimated to be approximately $13.0 million at the May 1, 2002 "fresh-start" accounting date, after giving effect to discounted future cash flows at market interest rates. On August 21, 2003, two investors in MSV (excluding Motient) invested an additional $3.7 million in MSV in exchange for Class A preferred units of limited partnership interests in MSV. MSV used the proceeds from this investment to repay other indebtedness that is senior in its right of repayment to Motient's promissory note. Under the terms of MSV's amended and restated investment agreement, these investors had the option of investing an additional $17.6 million in MSV by December 31, 2003; however, if, prior to this time, the FCC had not issued a decision addressing MSV's petition for reconsideration with respect to the ATC Order, the option was automatically extended to March 31, 2004. As of the closing of the initial investment on August 21, 2003, Motient's percentage ownership of MSV was approximately 46.5% on an undiluted basis, 32.6% on an "as converted" basis giving effect to the conversion of all outstanding convertible notes of MSV and 29.5% on a fully diluted basis. On April 2, 2004, the above-mentioned additional $17.6 million investment was consummated. In connection with this investment, MSV's amended and restated investment agreement was amended to provide that of the total $17.6 million in proceeds, $5.0 million was used to repay certain outstanding indebtedness of MSV, including $2.0 million of outstanding interest and principal under the $15.0 million promissory note issued to Motient by MSV. Motient was required to use 25% of the $2 million it received in this transaction, or $500,000, to make prepayments under its existing notes owed to Rare Medium Group, Inc. and Credit Suisse First Boston. The remainder of the proceeds from this investment will be used for general corporate purposes by MSV. As of the closing of the initial investment on April 2, 2004, Motient's percentage ownership of MSV was approximately 46.5% on an undiluted basis, 32.6% on an "as converted" basis giving effect to the conversion of all outstanding convertible notes of MSV and 29.5% on a fully diluted basis. 40 Overview of Liquidity and Risk Factors In January 2002, we and three of our wholly-owned subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code. Motient Ventures Holding, Inc. did not file for Chapter 11 and had no activities during this period. The only asset of this subsidiary is its interest in MSV. Our Plan of Reorganization was confirmed on April 26, 2002 and became effective on May 1, 2002. The reorganization significantly deleveraged Motient's balance sheet and significantly reduced Motient's ongoing interest expense. As of the effective date of the plan, Motient had approximately $30.7 million of debt (comprised of capital leases, notes payable to Rare Medium and CSFB, and the outstanding Motorola, Inc. credit facility). As of March 31, 2003, Motient had approximately $32.8 million of debt. Effective May 1, 2002, the Company adopted "fresh-start" accounting, which required that the $221 million of reorganization value of the Company's net assets be allocated in accordance with procedures specified by Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" (See Note 2, "Significant Accounting Policies"). Summary of Risk Factors In addition to the challenge of growing revenue as described above, our future operating results could be adversely affected by a number of uncertainties and factors, including: o our ability, and our resellers' ability, some of whom are in bankruptcy, to attract and retain customers, and our ability to replace revenue formerly contributed by UPS, one of our largest customers, o our ability to execute on our business plan with drastically reduced personnel as a result of several significant reductions in force, o our ability to further reduce operating expenses and thereby reduce our cash burn rate, o our ability to secure additional financing necessary to fund anticipated capital expenditures, operating losses and any remaining debt service requirements, o our ability to convert customers who have purchased devices from us into active users of our airtime service and thereby generate revenue growth, o the timely roll-out of certain key customer initiatives and 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 procure new inventory in a timely manner in the quantities, quality, price and at the times required, o our ability to gain market acceptance of products and services, including eLink and BlackBerryTM by Motient, and our ability to make a profit thereon, o our ability to respond and react to changes in our business and the industry because we have limited liquidity, 41 o our ability to modify our 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, including, but not limited to, our rights to sell and distribute handheld devices manufactured by RIM and the wireless email service known as BlackBerryTM by Motient, which rights may be challenged or jeopardized as a result of a recent jury verdict finding that certain of RIM's technology for such products and services infringed certain intellectual property owned by NTP, Inc., o our dependence on technology we license from Motorola, which may become available to our competitors, o the loss of one or more of our key customers, o our ability to retain key personnel, especially in light of our recent headcount reductions, o our ability to keep up with new technological developments and incorporate them into our existing products and services and our ability to maintain our proprietary information and intellectual property rights, 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 the risk that Motient could incur substantial costs if certain proposals regarding spectrum reallocation, that are now pending with the FCC, are adopted, and o regulation by the FCC. For a more complete description of the above factors, please see the section entitled "Risk Factors" in Motient's annual report on Form 10-K for the fiscal year ended December 31, 2002. Results of Operations Due to the consummation of our bankruptcy and the application of "fresh start" accounting, results of operations for the periods after April 30, 2002 are not necessarily fully comparable to the results for previous periods. The results of operations for the three-month period ended March 31, 2003 are results for the Successor Company and the results of operations for the three-month period ended March 31, 2002 are results for the Predecessor Company. Three Months Ended March 31, 2003 and 2002 Revenue and Subscriber Statistics Service revenues approximated $13.6 million for the three months ended March 31, 2003, which was a $1.1 million increase as compared to the three months ended March 31, 2002. This increase was a result of an increase in revenue in our wireless internet market sector, partially offset by decreases in field services, transportation, telemetry and other market sectors. Total revenues approximated $14.4 million for the three months ended March 31, 2003, which was 42 a $2.3 million decrease as compared to the three months ended March 31, 2002. The decrease was primarily a result the decline in equipment revenues as a result of our decision to decrease the prices for our equipment to customers over the course of the second quarter of 2002 due to lower sales of certain of our customer devices and our assessment of market conditions, demand and competitive pricing dynamics. The tables below summarize our revenue and subscriber base for the three months ended March 31, 2003 and 2002. An explanation of certain changes in revenue and subscribers is set forth below.
Three months Ended March 31, ---------------------------- Summary of Revenue 2003 2002 Change % Change - ------------------ ---- ---- ------ -------- (in millions) (restated) Wireless Internet $7.1 $4.1 $3.0 73% Field Services 3.2 4.3 (1.1) (26) Transportation 2.6 3.0 (0.4) (13) Telemetry 0.6 0.7 (0.1) (14) All Other 0.1 0.4 (0.3) (75) --- --- ----- ---- Service Revenue 13.6 12.5 1.1 9 Equipment Revenue 0.8 4.2 (3.4) (81) --- --- ----- ---- Total $14.4 $16.7 $(2.3) (14)% ===== ===== ====== =====
The make up of our registered subscriber base was as follows:
Three months Ended March 31, ----------------------------- 2003 2002 Change % Change ---- ---- ------ -------- Wireless Internet 108,630 85,085 23,545 28% Field Services 28,599 36,161 (7,562) (21) Transportation 99,411 89,750 9,661 11 Telemetry 28,878 28,486 392 1 All Other 662 544 118 22 --- --- --- -- Total 266,180 240,026 26,154 11% ======= ======= ====== ===
o Wireless Internet: Revenue grew from $4.1 million to $7.1 million for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002. The revenue growth in the Wireless Internet sector during this period represents our continued focus on expanding the adoption of eLink and BlackBerry TM wireless email offerings to corporate customers with both direct sales people and reseller channel partners. Our existing reseller channel partners, as well as the addition of new reseller channel partners, represented a significant portion of the revenue growth during this period. o Field Services: Revenue declined from $4.3 million to $3.2 million for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002. The decrease in revenue from field services was primarily the result of the termination of one customer contract, NCR Corporation, the general reduction of units across our field service customer base and certain consulting revenues included in the first quarter of 2002 that were not included in the first quarter of 2003. o Transportation: Revenue declined from $3.0 million to $2.6 million for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002. The decrease in revenue from the transportation sector was primarily the result of the elimination, as part of fresh-start accounting, of the recognition of deferred revenue that resulted from the sale of intellectual property license sold to Aether Systems Inc. in 2000. These decreases were offset by unit growth from two primary customers, Metra and UPS. 43 o Telemetry: Revenue declined from $0.7 million to $0.6 million for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002. Although our registered subscriber base grew, the decrease in revenue from telemetry was primarily the result of the general reduction of rates for service for certain customers in our telemetry customer base. o Other: Revenue declined from $0.4 million to $0.1 million for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002. Although our registered subscriber base grew, the decrease in revenue in this category was primarily the result of the general reduction of rates for service for certain customers in our other customer base. o Equipment: Revenue declined from $4.2 million to $0.8 million for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002. The decrease in equipment revenue was primarily a result of our decision to decrease the prices for our equipment to customers over the course of the second quarter of 2002 due to lower sales of certain of our customer devices and our assessment of market conditions, demand and competitive pricing dynamics. The table below summarizes our operating expenses for the three months ended March 31, 2003 and 2002. An explanation of certain changes in operating expenses is set forth below.
Three Months Ended March 31, ----------------------------------- Summary of Expenses 2003 2002 Change % Change - ------------------- ---- ---- ------ -------- (in millions) (restated) Cost of Service and Operations $13.7 $15.3 ($1.6) (10)% Cost of Equipment Sales 1.0 4.5 (3.5) (78) Sales and Advertising 1.2 3.3 (2.1) (64) General and Administration 3.2 3.5 (0.3) (9) Restructuring Charges - 0.6 (0.6) (100) Depreciation and Amortization 5.3 5.2 0.1 2 --- --- --- - Total Operating $24.4 $32.4 $(8.0) (24%) ===== ===== ====== =====
Cost of service and operations includes costs to support subscribers, such as network telecommunications charges and site rent for network facilities, network operations employee salary and related costs, network and hardware and software maintenance charges, among other things. Costs of service and operations decreased from $15.3 million to $13.7 million for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002. The decrease was the result of lower employee salary and related costs due to the workforce reductions implemented in July and September of 2002, reductions in hardware and software maintenance costs as a result of the negotiation of lower rates on maintenance service contracts, decreased telecommunications charges as a result of the negotiation of lower rates under our primary telecommunications contract in the fourth quarter of 2002, and reductions in network maintenance costs as a result of the removal of a portion of our base stations from our national maintenance contract with Motorola, as well as the reduction of the per-base station rates under this contract in the first quarter of 2003. These network maintenance cost reductions were partially offset by increased time and material charges related to the increases in base stations not on the national contract. The decrease in cost of equipment sold to $1.0 million for the three months ended March 31, 2003, as compared to $4.5 million for the three months ended March 31, 2002 was the result of reduced sales of equipment and the write-down of the values of the equipment held for sale in the Company's inventory. The Company wrote down the value of its inventory in the second quarter of 2002 by $4.5 million. 44 Sales and advertising expenses decreased to $1.2 million for the three months ended March 31, 2003, as compared to $3.3 million for the three months ended March 31, 2002. Sales and advertising expenses as a percentage of service revenue were approximately 9% for the first three months of 2003, compared to 26% for the comparable period of 2002. The decrease in sales and advertising expenses for the three months ended March 31, 2003 was primarily attributable to lower employee salary and related costs, including sales commissions, due to the workforce reductions implemented in July and September of 2002 and the significant reduction in or elimination of sales and marketing programs after the Company's reorganization in May of 2002. General and administrative expenses for the core wireless business decreased to $3.2 million for the three months ended March 31, 2003, as compared to $3.5 million for the three months ended March 31, 2002. General and administrative expenses as a percentage of service revenue were approximately 23% for the first three months of 2003 as compared to 28% for 2002. The decrease in general and administrative expenses for the three months ended March 31, 2003 was primarily attributable to lower employee salary and related costs due to the workforce reductions implemented in July and September of 2002 and lower legal fees in the first quarter of 2003 due to the legal requirements in advance of the Company's reorganization in the first quarter of 2002. These decreases were offset by increases in the consulting costs related to the engagement of CTA in May 2002 that was continuing in the first quarter of 2003, increases in directors' retainer fees as a result of the compensation programs put in place and the frequency of meetings subsequent to the Company's reorganization, and an increase in the Company's bad debt charges as a result of the bankruptcies of a few of our reseller channel partners due to general poor economic conditions. Restructuring charges decreased to $0.0 million for the three months ended March 31, 2003, as compared to $0.6 million for the three months ended March 31, 2002. These restructuring charges related to certain employee reduction initiatives in March 31, 2002. Depreciation and amortization for the core wireless business increased to $5.3 million for the three months ended March 31, 2003, as compared to $5.2 million for the three months ended March 31, 2002. Depreciation and amortization was approximately 39% of service revenue for the first three months of 2003, as compared to 42% for the first three months of 2002. The increase in depreciation and amortization expense for the three months ended March 31, 2003 was primarily attributable to the valuations placed on certain of our assets, such as software and customer intangibles, using "fresh-start" accounting as part of our reorganization in May 2002, that generally had shorter useful lives for amortization purposes than our general property and equipment categories.
Three Months Ended March 31, 2003 2002 ---- ---- (restated) (in thousands) Interest expense, net $(1,312) $(1,739) Other income (expense), net 1,297 837 Costs associated with reorganization -- (17,432) Gain (Loss) on Disposal of Assets -- (20) Equity in loss of Mobile Satellite Ventures $(2,325) $(1,313)
45 Interest expense decreased for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002, as we eliminated the majority of our debt obligations as part of our Plan of Reorganization and "fresh-start" accounting in May 2002. In comparing the three months ended March 31, 2003 to March 31, 2002, there have been material changes in our financial position as part of our Plan of Reorganization and "fresh-start" accounting in May 2002. As part of this Plan of Reorganization, we cancelled approximately $380 million of notes and other liabilities, which materially altered the balance of our liabilities on its balance sheet and related interest expense requirements. This reduction in interest expense was partially offset by the amortization of fees and the value ascribed to warrants associated with our closing of our $12.5 million credit facility in January of 2003. Certain other transactions caused variations for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002. As part of the May 1, 2002 revaluation, we began amortization of the basis difference of our interest in MSV on that date. The income associated with this amortization is $0.1 million for the 3 months ended March 31, 2003, as compared to $0 for the three months ended March 31, 2002. Costs associated with reorganization decreased to $0 for the three months ended March 31, 2003, as compared to $17.4 million for the three months ended March 31, 2002. This decrease was attributable to reorganization activities having been substantially completed subsequent to the Company's reorganization in May 2002. Effective May 1, 2002, we are required to reflect our equity share of the losses of MSV, up to our cost basis of approximately $19.3 million. We recorded equity in losses of MSV of $2.3 million for the three months ended March 31, 2003, as compared to $1.3 million for the three months ended March 31, 2002. The MSV losses for the three months ended March 31, 2003 are Motient's 48% share of MSV's losses for the same period, losses for the 3 months ended March 31, 2002 consist of Motient's 48% share MSV losses to date reduced by the loans in priority. For the three months ended March 31, 2003, MSV had revenues of $7.2 million, operating expenses of $6.6 million and a net loss of $ 6.6 million. For the three months ended March 31, 2002, MSV had revenues of $6.9 million, operating expenses of $7.0 million and a net loss of $ 7.2 million. Liquidity and Capital Resources As of March 31, 2003, we had approximately $3.1 million of cash on hand and short-term investments. As of March 31, 2004, we had approximately $2.5 million of cash on hand and short-term investments. On April 7, 2004, Motient sold $23.3 million of its common stock to certain institutional investors. Please see Note 6, "Subsequent Events", for additional information on this recent financing event. Since emerging from bankruptcy protection in May 2002, we have undertaken a number of actions to reduce our operating expenses and cash burn rate. Our liquidity constraints have been exacerbated by weak revenue growth since emerging from bankruptcy protection, due to a number of factors including the weak economy generally and the weak telecommunications and wireless sector specifically, the loss of UPS as a primary customer, the financial difficulty of several of our key resellers, on whom we rely for a majority of our new revenue growth, and our continued limited liquidity which has hindered efforts at demand generation. For a description of our significant cost reduction initiatives since emerging from bankruptcy, please see our recently filed annual report on Form 10-K for December 31, 2002, Note 1, "Cost Reduction Actions", and Note 6 ("Subsequent Events") of notes to consolidated financial statements. In addition to cash generated from operations, our principal source of funds as of March 31, 2003 was a $12.5 million term credit facility that we entered into 46 on January 27, 2003. On April 13, 2004, the Company repaid all borrowings and accrued interest outstanding under this credit facility. Please see Note 6 ("Subsequent Events") for further information with regards to repayment of outstanding amounts under this facility and additional liquidity events for the Company. $12.5 Million Term Credit Facility: On January 27, 2003, the Company's wholly-owned subsidiary, Motient Communications, closed a $12.5 million term credit agreement with a group of lenders, including several of the Company's existing stockholders. The lenders include the following entities or their affiliates: M&E Advisors, L.L.C., Bay Harbour Partners, York Capital and Lampe Conway & Co. York Capital is affiliated with James G. Dinan. Bay Harbour Management and James G. Dinan each hold 5% or more of Motient's common stock. The lenders also include Gary Singer, directly or through one or more entities. Gary Singer is the brother of Steven G. Singer, one of our directors. The table below shows, as of April 15, 2004 the number of shares of Motient common stock beneficially owned by the following parties to the term credit agreement, based solely on filings made by such parties with the SEC: Name of Beneficial Owner Number of Shares ------------------------ ---------------- Bay Harbour Management, L.C. 3,217,396 JGD Management Corp. 2,276,445(1) James G. Dinan 2,276,445 (1) JGD Management Corp and James G. Dinan share beneficial ownership with respect to the 2,276,445 shares of our common stock. Mr. Dinan is the president and sole stockholder of JGD Management Corp, which manages the other funds and accounts that hold our common stock over which Mr. Dinan has discretionary investment authority. Under the credit agreement, the lenders have made commitments to lend Motient Communications up to $12.5 million. The commitments are not revolving in nature and amounts repaid or prepaid may not be reborrowed. Borrowing availability under Motient's $12.5 million term credit facility terminated on December 31, 2003. On March 16, 2004, Motient Communications entered into an amendment to the credit facility which extended the borrowing availability period until December 31, 2004. As part of this amendment, Motient Communications provided the lenders with a pledge of all of the stock of a newly-formed special purpose subsidiary of Motient Communications, Motient License, which holds all of Motient's FCC licenses formerly held by Motient Communications. Under this facility, the lenders have agreed to make loans to Motient Communications through December 31, 2004 upon Motient Communications' request no more often than once per month, in aggregate principal amounts not to exceed $1.5 million for any single loan, and subject to satisfaction of other conditions to borrowing, including certain financial and operating covenants, contained in the credit agreement. As of April 1, 2004, the Company had borrowed $6.0 million under this facility, all of which has since been repaid and may not be re-borrowed Each loan borrowed under the credit agreement has a term of three years. Loans carry interest at 12% per annum. Interest accrues, compounding annually, from the first day of each loan term, and all accrued interest is payable at each respective loan maturity, or, in the case of mandatory or voluntary prepayment, at the point at which the respective loan principal is repaid. Loans may be prepaid at any time without penalty. The obligations of Motient Communications under the credit agreement are secured by a pledge of all the assets owned by Motient Communications that can be pledged as security (including, but not limited to Motient Communication's shares in Motient License) and are not already pledged under certain other existing credit arrangements, including under Motient Communications' credit 47 facility with Motorola and Motient Communications' equipment leasing agreement with Compaq Corporation. Motient Communications owns, directly or indirectly, all of the Company's assets relating to its terrestrial wireless communications business. In addition, Motient and its wholly-owned subsidiary, Motient Holdings Inc., have guaranteed Motient Communications' obligations under the credit agreement, and the Company has delivered a pledge of the stock of Motient Holdings Inc., Motient Communications, Motient Services and Motient License to the lenders. In addition, upon the repayment in full of the outstanding $19,750,000 in senior notes due 2005 issued by MVH Holdings Inc. to Rare Medium and CSFB in connection with the Company's approved Plan of Reorganization, the Company will pledge the stock of MVH Holdings Inc. to the lenders. On January 27, 2003, in connection with the signing of the credit agreement, we issued warrants at closing to the lenders to purchase, in the aggregate, 3,125,000 shares of our common stock. The exercise price for these warrants is $1.06 per share. The warrants were immediately exercisable upon issuance and have a term of five years. The warrants were valued at $10 million using a Black-Scholes pricing model and have been recorded as a debt discount and are being amortized as additional interest expense over three years, the term of the related debt. Upon closing of the credit agreement, the Company paid closing and commitment fees to the lenders of $500,000. These fees have been recorded on the Company's balance sheet and are being amortized as additional interest expense over three years, the term of the related debt. Under the credit agreement, the Company must pay an annual commitment fee of 1.25% of the daily average of undrawn amounts of the aggregate commitments from the period from the closing date to December 31, 2003. In December 2003, the Company paid the lenders a commitment fee of approximately $113,000. On March 16, 2004, in connection with the execution of the amendment to our credit agreement, we issued warrants to the lenders to purchase, in the aggregate, 1,000,000 shares of our common stock The exercise price of the warrants is $4.88 per share. The warrants were immediately exercisable upon issuance and have a term of five years. The warrants will be valued using a Black-Scholes pricing model and will be recorded as a debt discount and will be amortized as additional interest expense over three years, the term of the related debt. The warrants are also subject to a registration rights agreement. Under such agreement, we agreed to file a registration statement to register the shares underlying the warrants upon the request of a majority of the warrant holders, or in conjunction with the filing of a registration statement in respect of shares of common stock of the Company held by other holders. We will bear all the expenses of such registration. In connection with the amendment, we are also required to pay commitment fees to the lenders of $320,000, which were added to the principal balance of the credit facility at closing. These fees will be recorded on our balance sheet and will be amortized as additional interest expense over three years, the term of the related debt. In each of April, June and August 2003 and March of 2004, the Company made draws under the credit agreement in the amount of $1.5 million for an aggregate amount of $6.0 million. The Company used such funds to fund general working capital requirements of operations. For the monthly periods ended April 2003 through December 2003, the Company reported events of default under the terms of the credit facility to the lenders. These events of default related to non-compliance with covenants requiring minimum monthly revenue, earnings before interest, taxes and depreciation and amortization and free cash flow performance. In each period, the lenders waived these events of default. There can be no assurance that Motient will not have to report additional events of default or that the lenders will continue to provide waivers in such event. Ultimately, there can be no assurances that the liquidity provided by the credit facility will be sufficient to fund our ongoing operations. 48 For further information regarding the pay down of balances under this term credit facility, please see Note 6, "Subsequent Events" of notes to consolidated financial statements. As of March 31, 2003, Motient had the following sources of financing, in addition to the above mentioned $12.5 million credit facility, in place: Rare Medium Notes: Under the Company's Plan of Reorganization, the Rare Medium notes were cancelled and replaced by a new note in the principal amount of $19.0 million. The new note was issued by a new subsidiary of Motient Corporation that owns 100% of Motient Ventures Holding Inc., which owns all of the Company's interests in MSV. The new note matures on May 1, 2005 and carries interest at 9%. The note allows the Company to elect to accrue interest and add it to the principal, instead of paying interest in cash. The note requires that it be prepaid using 25% of the proceeds of any repayment of the $15 million note receivable from MSV. Please see Note 6 ("Subsequent Events") of notes to consolidated financial statements for further information with regards to certain payments made on these notes subsequent to the period covered by this report. CSFB $750,000 Note: Under the Company's Plan of Reorganization, the Company issued a note to CSFB, in satisfaction of certain claims by CSFB against Motient, in the principal amount of $750,000. The new note was issued by a new subsidiary of Motient Corporation that owns 100% of Motient Ventures Holdings Inc., which owns all of the Company's interests in MSV. The new note matures on May 1, 2005 and carries interest at 9%. The note allows the Company to elect to accrue interest and add it to the principal, instead of paying interest in cash. The Company must use 25% of the proceeds of any repayment of the $15 million note receivable from MSV to prepay the CSFB note. Please see Note 6 ("Subsequent Events") of notes to consolidated financial statements for further information with regards to certain payments made on these notes subsequent to the period covered by this report. Vendor Financing and Promissory Notes: Motorola had entered into an agreement with the Company to provide up to $15 million of vendor financing, to finance up to 75% of the purchase price of network base stations. Loans under this facility bear interest at a rate equal to LIBOR plus 7.0% and are guaranteed by the Company and each subsidiary of Motient Holdings. The terms of the facility require that amounts borrowed be secured by the equipment purchased therewith. Advances made during a quarter constitute a loan, which is then amortized on a quarterly basis over three years. These balances were not impacted by the Company's Plan of Reorganization. In January 2003, we restructured the then-outstanding principal under this facility of $3.5 million, with such amount to be paid off in equal monthly installments over a three-year period from January 2003 to December 2005. In January 2003, we also negotiated a deferral of approximately $2.6 million that was owed for maintenance services provided pursuant to a separate service agreement with Motorola, and we issued a promissory note for such amount, with the note to be paid off over a two-year period beginning in January 2004. The interest rate on this promissory note is LIBOR plus 4%. In March 2004, we further restructured both the vendor financing facility and the promissory note, primarily to extend the amortization periods for both the vendor financing facility and the promissory note. We will amortize the combined balances in the amount of $100,000 per month beginning in March 2004. We also agreed that interest would accrue on the vendor financing facility at LIBOR plus 4%. As part of this restructuring, we agreed to grant Motorola a second lien (junior to the lien held by the lenders under our term credit facility) on the stock of Motient License. This pledge secures our obligations under both the vendor financing facility and the promissory note. 49 Capital Leases: As of March 31, 2003, approximately $5.5 million was outstanding under a capital lease for network equipment with Hewlett-Packard Financial Services Company ("Hewlett-Packard"), which has subsequently been purchased by Compaq Corporation. The lease has an effective interest rate of 12.2%. In January 2003, this agreement was restructured to provide for a modified payment schedule. We also negotiated a further extension of the repayment schedule that became effective upon the satisfaction of certain conditions, including our funding of a letter of credit in twelve monthly installments beginning in 2003, in the aggregate amount of $1.125 million, to secure our payment obligations. The letter of credit will be released in fifteen equal installments beginning in July 2004, assuming no defaults have occurred or are occurring. As of March 31, 2003, $0.1 million was outstanding under a capital lease for corporate telecommunications equipment with Avaya Financial Services. In addition, we own a $15.0 million promissory note issued by MSV in November 2001. This note matures in November 2006, but may be fully or partially repaid prior to maturity involving the consummation of additional investments in MSV in the form of equity, debt or asset sale transactions, subject to certain conditions and priorities with respect to payment of other indebtedness. Please see " -Overview - Mobile Satellite Ventures LP" for further discussion of this note receivable. Motient also owns an aggregate of $3.5 million of convertible notes issued by MSV. The convertible notes mature on November 26, 2006, bear interest at 10% per annum, compounded semiannually, and are payable at maturity. The convertible notes are convertible, at any time, at our discretion, and automatically in certain circumstances, into class A preferred units of limited partnership of MSV. For a discussion of certain recent developments regarding MSV, please see Note 6 ("Subsequent Events") of notes to consolidated financial statements of notes to consolidated financial statements. We continue to pursue all potential funding alternatives. Among the alternatives for raising additional funds are the issuances of debt or equity securities, other borrowings under secured or unsecured loan arrangements, and sales of assets. There can be no assurance that additional funds will be available to us on acceptable terms or in a timely manner. We expect to continue to require significant additional funds before we begin to generate cash in excess of our operating expenses, and do not expect to begin to generate cash from operations in excess of our cash operating costs until the first quarter of 2005, at the earliest. Also, even if we begin to generate cash in excess of our operating expenses, we expect to continue to require significant additional funds to meet remaining interest obligations, capital expenditures and other non-operating cash expenses. We are in the process of evaluating our future strategic direction. We have been forced to take drastic actions to reduce operating costs and preserve our remaining cash. For example, in February 2004 we effected a reduction in force that reduced our workforce from approximately 166 to 112 employees. The substantial elimination of sales and other personnel may have a negative effect on our future revenues and growth prospects and our ability to support new product initiatives and generate customer demand. Cash generated from operations may not be sufficient to pay all of our obligations and liabilities. Our projected cash requirements are based on certain assumptions about our business model and projected growth rate, including, specifically, assumed rates of growth in subscriber activations and assumed rates of growth of service revenue. While we believe these assumptions are reasonable, these growth rates continue to be difficult to predict, and there is no assurance that the actual results that are experienced will meet the assumptions included in our business model and projections. If the future results of operations are significantly 50 less favorable than currently anticipated, our cash requirements will be more than projected, and we may require additional financing in amounts that will be material. The type, timing and terms of financing that we select will be dependent upon our cash needs, the availability of 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. In December 2002 we entered into an agreement with UPS pursuant to which the customer prepaid an aggregate of $5 million in respect of network airtime service to be provided beginning January 1, 2004. The $5 million prepayment will be credited against airtime services provided to UPS beginning January 1, 2004, until the prepayment is fully credited. Based on UPS' current level of network airtime usage, we do not expect that UPS will be required to make any cash payments to us in 2004 for service provided during 2004. If UPS does not make any cash payments to us in 2004, our cash flows from operations in 2004 will decline, and our liquidity and capital resources could be materially and negatively affected. UPS has substantially completed its migration to next generation network technology, and its monthly airtime usage of our network has declined significantly. There are no minimum purchase requirements under our contract with UPS, and the contract may be terminated by UPS on 30 days' notice. While we expect that UPS will remain a customer for the foreseeable future, over time we expect that the bulk of UPS' units will migrate to another network. Until June of 2003, UPS had maintained its historical level of payments to mitigate the near-term revenue and cash flow impact of its recent and anticipated continued reduced network usage. However, beginning in July of 2003, the revenues and cash flow from UPS declined significantly. Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The successful implementation of our business plan requires substantial funds to finance the maintenance and growth of our operations, network and subscriber base and to expand into new markets. We have an accumulated deficit and have historically incurred losses from operations, which are expected to continue for additional periods in the future. There can be no assurance that our operations will become profitable. These factors, along with our negative operating cash flows have placed significant pressures on our financial condition and liquidity position. Commitments As of March 31, 2003, we had $1.5 million outstanding commitments to purchase inventory from Research in Motion. Summary of Cash Flow for the three months ended March 31, 2003 (Successor Company) and the three months ended March 31, 2002 (Predecessor Company) 51
Three months Ended March 31, ---------------------------- (in thousands) 2003 2002 ---- ---- (restated) Cash used in operating activities $(2,191) $(9,994) Cash (used in) provided by investing activities 266 (494) Cash (used in) provided by financing activities: Equity issuances -- 17 Debt payments on capital leases, vendor financing (830) (928) Net proceeds from debt issuances Other -- -- ----- ----- Cash (used in) provided by financing activities (830) (911) ----- ----- Reorganization items -- (985) ----- ----- Total change in cash and cash equivalents (2,755) $(12,384) ------- --------- Cash and cash Equivalents, end of period $3,085 $21,003 ====== =======
Cash used in operating activities decreased for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002, as a result of decreases in operating losses, due substantially to the Company's reduction in employee salary and related expenditures, reductions in network maintenance and telecommunications charges, decreases in funds provided by working capital and decreases in our cash interest expense as a result of our reorganization. The decrease in cash provided by investing activities for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002 was primarily attributable to the purchase of restricted investments to fund our Compaq Corporation letter of credit obligation and lower capital spending. The decrease in cash provided by financing activities for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002 was the result of lower vendor debt and capital lease repayments. Critical Accounting Policies and Significant Estimates Below are our accounting policies which are both important to our financial condition and operating results, and require management's most difficult, subjective and complex judgments in determining the underlying estimates and assumptions. The estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates as they require assumptions that are inherently uncertain. "Fresh-Start" Accounting In accordance with Statement of Position No. 90-7, effective May 1, 2002, we adopted "fresh-start" accounting and allocated the reorganization value of $221 million to our assets in accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations". We have allocated the $221 million reorganization value among our assets based upon our estimates of the fair value of our assets and liabilities. In the case of current assets, we concluded that their carrying values approximated fair values. The values of our frequencies and our investment in and notes receivable 52 from MSV were based on independent analyses presented to the bankruptcy court. The value of our investment in MSV was subsequently modified as it had not been appropriately calculated as of May 1, 2002 due to certain preference rights for certain classes of shareholders in MSV. The value of our fixed assets was based upon an estimate of replacement cost, for which we believe that our recent purchases represent a valid data point. Software and customer related intangibles values were determined based on third party valuations as of May 1, 2002. For a complete description of the application of "Fresh-Start" Accounting, please refer to Note 2 ("Significant Accounting Policies, Motient's Chapter 11 Filing and Plan of Reorganization and "Fresh-Start" Accounting") of notes to consolidated financial statements. Inventory Inventory, which consists primarily of communication devices and accessories, such as power supplies and documentation kits, are stated at the lower of cost or market. Cost is determined using the weighted average cost method. We periodically assess the market value of our inventory, based on sales trends and forecasts and technological changes and record a charge to current period income when such factors indicate that a reduction to net realizable value is appropriate. We consider both inventory on hand and inventory which we have committed to purchase, if any. Periodically, we will offer temporary discounts on equipment purchases. The value of this discount is recorded as a cost of sale in the period in which the sale occurs. Investment in MSV and Notes Receivable from MSV As a result of the application of "fresh-start" accounting and subsequently modified (see below), the notes and investment in MSV were valued at fair value and we recorded an asset in the amount of approximately $53.9 million representing the estimated fair value of our investment in and note receivable from MSV. Included in this investment is the historical cost basis of the Company's common equity ownership of approximately 48% as of May 1, 2002, or approximately $19.3 million. In accordance with the equity method of accounting, we recorded our approximate 48% share of MSV losses against this basis. Approximately $21.6 million of the $40.9 million value attributed to MSV is the excess of fair value over cost basis and is amortized over the estimated lives of the underlying MSV assets that gave rise to the basis difference. We are amortizing this excess basis in accordance with the pro-rata allocation of various components of MSV's intangible assets as determined by MSV through recent independent valuations. Such assets consist of FCC licenses, intellectual property and customer contracts, which are being amortized over a weighted-average life of approximately 12 years. Additionally, we have recorded the $15.0 million note receivable from MSV, plus accrued interest thereon at its fair value, estimated to be approximately $13.0 million, after giving affect to discounted future cash flows at market interest rates. This note matures in November 2006, but may be fully or partially repaid prior to maturity in certain circumstances involving the consummation of additional investments in MSV or upon the occurrence of certain other events such as issuance of other indebtedness or the sale of assets by MSV, subject to certain conditions and priorities with respect to payment of other indebtedness. For further detail on certain payments made on this note receivable, please see Note 6, "Subsequent Events" of notes to consolidated financial statements. 53 In November of 2003, Motient engaged CTA to perform a valuation of its equity interests in MSV as of December 31, 2002. As part of this valuation process, Motient determined that Motient's equity interest in MSV was not appropriately calculated as of May 1, 2002 due to certain preference rights for certain classes of shareholders in MSV. Motient reduced its equity interest in MSV from $54 million (inclusive of Motient's $2.5 million convertible note from MSV) to $41 million as of May 1, 2002. As a result of the valuation of MSV, it was determined that the value of Motient's equity interest in MSV was impaired as of December 31, 2002 from the value on Motient's balance sheet. This impairment was deemed to have occurred in the fourth quarter of 2002. Motient reduced the value of its equity interest in MSV by $15.4 million as of December 31, 2002. The valuation of our investment in MSV and our note receivable from MSV are ongoing assessments that are, by their nature, judgmental given that MSV is not traded on a public market and is in the process of developing certain next generation technologies, which depend on approval by the FCC. While the financial statements currently assume that there is value in our investment in MSV and that the MSV note is collectible, there is the inherent risk that this assessment will change in the future and we will have to write down the value of this investment and note. Deferred Taxes We have generated significant net operating losses for tax purposes through March 31, 2003. We have had our ability to utilize these losses limited on two occasions as a result of transactions that caused a change of control in accordance with the Internal Revenue Service Code Section 382. Additionally, since we have not yet generated taxable income, we believe that our ability to use any remaining net operating losses has been greatly reduced; therefore, we have fully reserved for any benefit that would have been available as a result of our net operating losses. Revenue Recognition We generate revenue principally through equipment sales and airtime service agreements, and consulting services. In 2000, we adopted SAB 101 which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. In certain circumstances, SAB 101 requires us to defer the recognition of revenue and costs related to equipment sold as part of a service agreement. Revenue is recognized as follows: Service revenue: Revenues from our wireless services are recognized when the services are performed, evidence of an arrangement exists, the fee is fixed and determinable and collectibility is probable. Service discounts and incentives are recorded as a reduction of revenue when granted, or ratably over a contract period. We defer any revenue and costs associated with activation of a subscriber on our network over an estimated customer life of two years. To date, the majority of our business has been transacted with telecommunications, field services, natural resources, professional service and transportation companies located throughout the United States. We grant credit based on an evaluation of the customer's financial condition, generally without requiring collateral or deposits. We establish a valuation allowance for doubtful accounts receivable for bad debt and other credit adjustments. Valuation allowances for revenue credits are established through a charge to revenue, while valuation allowances for bad debts are established through a charge to general and administrative expenses. We assess the adequacy of these reserves quarterly, evaluating factors such as the length of time individual receivables are past due, historical collection experience, the economic 54 environment and changes in credit worthiness of our customers. If circumstances related to specific customers change or economic conditions worsen such that our past collection experience and assessments of the economic environment are no longer relevant, our estimate of the recoverability of our trade receivables could be further reduced. Equipment and service sales: We sell equipment to resellers who market our terrestrial product and airtime service to the public. We also sell our product directly to end-users. Revenue from the sale of the equipment as well as the cost of the equipment, are initially deferred and are recognized over a period corresponding to our estimate of customer life of two years. Equipment costs are deferred only to the extent of deferred revenue. Recent Accounting Standards In November 2002, the FASB issued FASB Interpretation, or FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. However, a liability does not have to be recognized for a parent's guarantee of its subsidiary's debt to a third party or a subsidiary's guarantee of the debt owed to a third party by either its parent or another subsidiary of that parent. The initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 irrespective of the guarantor's fiscal year end. The disclosure requirements of FIN No. 45 are effective for financial statements with annual periods ending after December 15, 2002. Motient does not have any guarantees that would require disclosure under FIN No. 45. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure - an Amendment to SFAS No. 123". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 for public companies. This statement is effective for fiscal years beginning after December 15, 2002. We will adopt the disclosure requirements of SFAS No. 148 as of January 1, 2003 and plan to continue to follow the provisions of APB Opinion No. 25 for accounting for stock based compensation. In January 2003 (and revised in December 2003), the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities -- An Interpretation of ARB No. 51", which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 provides guidance related to identifying variable interest entities (previously known generally as special purpose entities, or SPEs) and determining whether such entities should be consolidated. FIN No. 46 must be applied immediately to variable interest entities created or interests in variable interest entities obtained, after January 31, 2003. For those variable interest entities created or interests in variable interest entities obtained on or before January 31, 2003, the guidance in FIN No. 46 must be applied in the first fiscal year or interim period beginning after June 15, 2003. We have reviewed the implications that adoption of FIN No. 46 would have on our financial position and results of operations and do not expect it to have a material impact. 55 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies the characteristics of an obligation of the issuer. This standard is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We have determined that there are no financial instruments impacted by SFAS No. 150. 56 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 fixed rate debt. Currently, we do not use derivative financial instruments to manage our interest rate risk. We invest our cash in short-term commercial paper, investment-grade corporate and government obligations and money market funds. Effective May 1, 2002, Motient's senior notes were eliminated in exchange for new common stock of the company. All of Motient's remaining debt obligations are fixed rate obligations. We do not believe that we have any material cash flow exposure due to general interest rate changes on these debt obligations. Item 4. Controls and Procedures Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our filings and reports under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. Such information is accumulated and communicated to our management, including our principal executive officer (currently our executive vice president, chief financial officer and treasurer) and chief financial officer (or persons performing such functions), as appropriate, to allow timely decisions regarding required disclosure. Our management, including the principal executive officer (currently our executive vice president, chief financial officer and treasurer) and the chief financial officer (or persons performing such functions), recognizes that any set of disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer (currently our executive vice president, chief financial officer and treasurer), chief financial officer and chief accounting officer (or persons performing such functions), of the effectiveness of our disclosure controls and procedures. Based on this evaluation, we concluded that our disclosure controls and procedures required improvement. As a result of our evaluation, we have taken a number of steps to improve our disclosure controls and procedures. o First, we have established a disclosure committee comprised of senior management and other officers and employees responsible for, or involved in, various aspects of our financial and non-financial reporting and disclosure functions. Although we had not previously established a formal disclosure committee, the functions performed by such committee were formerly carried out by senior management and other personnel who now comprise the disclosure committee. 57 o Second, we have instituted regular bi-quarterly meetings to review each department's significant activities and respective disclosure controls and procedures. o Third, department managers have to document their own disclosure controls and procedures. o Fourth, department managers have been tasked with tracking relevant non-financial operating metrics such as network statistics, headcount and other pertinent operating information. Quarterly reports summarizing this information will be prepared and presented to the disclosure committee and the principal executive officer (currently our executive vice president, chief financial officer and treasurer), chief financial officer and corporate controller. o Fifth, certain department heads prepare weekly activities reviews, which are shared with the members of the disclosure committee as well as the principal executive officer (currently our executive vice president, chief financial officer and treasurer), chief financial officer and corporate controller. These weekly reviews and the bi-quarterly disclosure committee meetings and associated reports are intended to help inform senior management of material developments that affect our business, thereby facilitating consideration of prompt and accurate disclosure. As a result of these improvements, management believes that its disclosure controls and procedures, though not as mature or as formal as management intends them ultimately to be, are adequate and effective under the circumstances, and that there are no material inaccuracies or omissions in this quarterly report on Form 10-Q. In addition to the initiatives outlined above, we have taken the following steps to further strengthen our disclosure controls and procedures: o We conduct and document quarterly reviews of the effectiveness of our disclosure controls and procedures; o We circulate drafts of our public filings and reports for review to key members of the senior management team representing each functional area; o In conjunction with the preparation of each quarterly and annual report to be filed with the SEC, each senior vice president and department head is required to complete and execute an internal questionnaire and disclosure certification designed to ensure that all material disclosures are reported. Internal Controls During the course of the fiscal 2002 year-end closing process and subsequent audit of the financial statements for the eight month period ended December 31, 2002, our management and our then-current independent auditors, PricewaterhouseCoopers, identified several matters related to internal controls that needed to be addressed. Several of these matters were classified by the auditors as "reportable conditions" in accordance with the standards of the American Institute of Certified Public Accountants, or AICPA. Reportable conditions involve matters coming to management's or our auditor's attention relating to significant deficiencies in the design or operation of internal control that, in the judgment of management and the auditors, could adversely affect our ability to record, process, summarize and report financial data in the financial statements. Our principal executive officer, chief technology 58 officer, chief financial officer, chief accounting officer (or persons performing such functions) and audit committee are aware of these conditions and of our responses thereto, and consider them to be significant deficiencies as defined in the applicable literature embodying generally accepted auditing standards, or GAAS. On March 2, 2004, we dismissed PricewaterhouseCoopers as our independent auditors. PricewaterhouseCoopers has not reported on Motient's consolidated financial statements for any fiscal period. On March 2, 2004, we engaged Ehrenkrantz Sterling & Co. LLC as our independent auditors to replace PricewaterhouseCoopers and audit our consolidated financial statements for the period May 1, 2002 to December 31, 2002. The following factors contributed to the significant deficiencies identified by PricewaterhouseCoopers:: o Rapid shifts in strategy following our emergence from bankruptcy on May 1, 2002, particularly with respect to a sharply increased focus on cost reduction measures; o Significant reductions in workforce following our emergence from bankruptcy and over the course of 2002 and 2003, in particular layoffs of accounting personnel, which significantly reduced the number and experience level of our accounting staff; o Turnover at the chief financial officer position during the 2002 audit period and subsequently in March of 2003; and o The closure in mid-2003 of our Reston, VA facility, which required a transition of a large number of general and administrative personnel to our Lincolnshire, IL facility. Set forth below are the significant deficiencies identified by management and PricewaterhouseCoopers, together with a discussion of our corrective actions with respect to such deficiencies through April 15, 2004. PricewaterhouseCoopers recommended several adjustments to the financial statements for the periods ended April 30, June 30, September 30 and December 31, 2002. During the 2002 audit period, PricewaterhouseCoopers noted several circumstances where our internal controls were not operating effectively. Although these circumstances continued in 2003, management began to address these issues formally in March 2003. Specifically, PricewaterhouseCoopers noted that: o Timely reconciliation of certain accounts between the general ledger and subsidiary ledger, in particular accounts receivable and fixed assets, was not performed; o Review of accounts and adjustments by supervisory personnel on monthly cut-off dates, in particular fixed assets clearing accounts, accounts receivable reserve and inventory reserve calculations, was not performed; o Cut-off of accounts at balance sheet dates related to accounts payables, accrued expenses and inventories was not achieved; and 59 o No formal policy existed to analyze impairment of long-lived assets on a recurring basis. PricewaterhouseCoopers recommended that management institute a thorough close-out process, including a detailed review of the financial statements, comparing budget to actual and current period to prior period to determine any unusual items. They also recommended that we prepare an accounting policy and procedures manual for all significant transactions to include procedures for revenue recognition, inventory allowances, accounts receivable allowance, and accruals, among other policies. In response to these comments, we have taken the following actions: o In June 2003, we initiated a process of revising, updating and improving our month-end closing process and created a checklist containing appropriate closing procedures. o We have increased our efforts to perform monthly account reconciliations on all balance sheet accounts in a timely fashion. o Beginning in July 2003, on a monthly basis the corporate controller began reviewing balance sheet account reconciliations. o We have implemented and distributed a written credit and collections policy, which includes reserve calculations and write-off requirements. o All accounts receivable sub-ledgers are reconciled to the general ledger monthly, and on a monthly basis inventory reports are produced, sub-ledgers are reconciled to the general ledger and the reserve account is analyzed. o Since September 2003, the fixed assets clearing account is no longer being used, and all asset additions are reviewed by the corporate controller to determine proper capitalization and balance sheet classification. o As of July 2003, all monthly income statement accounts are analyzed by the corporate controller prior to release of the financial statements. o We are preparing an accounting policy and procedures manual to include procedures for all significant policies, business practices, and routine and non-routine procedures performed by each functional area. Our goal is to finalize this manual by May 31, 2004. o Over the course of the third quarter of 2003, we updated our procedures for the preparation of a monthly financial reporting package to include management's discussion and analysis of results of operations, financial statements, cash and investments reporting and month-to-month variances. Under these procedures, departmental results of operations are also prepared and provided to appropriate department managers on a monthly basis. In addition to the above, since April 2003 we have reevaluated our staffing levels, reorganized the finance and accounting organization and replaced ten accounting personnel with more experienced accounting personnel, including, among others, a new chief financial officer, chief accounting officer and corporate controller, a manager of revenue assurance and a manager of financial services. 60 While management has moved expeditiously and committed considerable resources to address the identified internal control deficiencies, management has not been able to fully execute all of the salutary procedures and actions it deems desirable. It will take some additional time to realize all of the benefits of management's initiatives, and we are committed to undertaking ongoing periodic reviews of our internal controls to assess the effectiveness of such controls. We believe the effectiveness of our internal controls is improving and we further believe that the financial statements included in this quarterly report on Form 10-Q are fairly stated in all material respects. However, new deficiencies may be identified in the future. Management expects to continue its efforts to improve internal controls with each passing quarter. Our current auditors, Ehrenkrantz Sterling & Co. LLC, agree that the matters described above constitute significant deficiencies and have communicated this view to our audit committee. 61 PART II. OTHER INFORMATION Item 1. Legal Proceedings Please see the discussion regarding Legal Proceedings contained in Note 5 ("Legal and Regulatory Matters") of notes to consolidated financial statements, which is incorporated by reference herein. Item 2. Changes in Securities and Use of Proceeds (a) On January 27, 2003, in connection with the closing of the term credit facility, we issued warrants to the lenders under such facility to purchase, in the aggregate, 3,125,000 shares of our common stock. The exercise price for these warrants is $1.06 per share. The warrants were immediately exercisable upon issuance and have a term of five years. On March 16, 2004, in connection with the amendment to our term credit facility, we issued warrants to the lenders to purchase, in the aggregate, 1,000,000 shares of our common stock. The exercise price of the warrants is $4.88 per share. The warrants were immediately exercisable upon issuance and have a term of five years. All of the foregoing warrants were issued in reliance upon the exemption provided by Rule 506 under the Securities Act of 1933, as amended, and/or in reliance on the exemption afforded by Section 4(2) of the Securities Act. (b) On April 7, 2004, Motient sold 4,215,910 shares of its common stock at a per share price of $5.50 per share for an aggregate purchase price of $23,187,505 to The Raptor Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund L.P., Tudor Proprietary Trading, L.L.C., Highland Crusader Offshore Partners, L.P., York Distressed Opportunities Fund, L.P., York Select, L.P., York Select Unit Trust, M&E Advisors L.L.C., Catalyst Credit Opportunity Fund, Catalyst Credit Opportunity Fund Offshore, DCM, Ltd., Greywolf Capital II LP and Greywolf Capital Overseas Fund and LC Capital Master Fund. The sale of these shares was not registered under the Securities Act of 1933, as amended (the "Securities Act") and the shares may not be sold in the United States absent registration or an applicable exemption from registration requirements. The shares were offered and sold pursuant to the exemption from registration afforded by Rule 506 under the Securities Act and/or Section 4(2) of the Securities Act. In connection with this sale, the Company signed a registration rights agreement with the holders of these shares. Among other things, this registration rights agreement requires the Company to file and cause to make effective a registration statement permitting the resale of the shares by the holders thereof. Motient also issued warrants to purchase an aggregate of 1,053,978 shares of its common stock to the investors listed, at an exercise price of $5.50 per share. These warrants will vest if and only if Motient does not meet certain deadlines between June and November, 2004, with respect to certain requirements under the registration rights agreement. If the warrants vest, they may be exercised by the holders thereof at any time through June 30, 2009. In connection with this sale, Motient issued to Tejas Securities Group, Inc., Motient's agent for the sale, warrants to purchase 1,000,000 shares of its common stock. The exercise price of these warrants is $5.50 per share. Motient also paid Tejas Securities Group, Inc. a placement fee of $350,000 at closing. The warrants are immediately exercisable upon issuance and have a term of ten years. The warrants will be valued using a Black-Scholes pricing model. 62 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The Exhibit Index filed herewith is incorporated herein by reference. (b) Current Reports on Form 8-K On January 28, 2003, the Company filed a Current Report on Form 8-K, in response to Item 5, reporting that the Company had entered into a new $12.5 million term credit facility. On March 14, 2003, the Company filed a Current Report on Form 8-K, in response to Item 5, to provide an update on the status of certain unresolved accounting matters. On April 23, 2003, the Company filed a Current Report on Form 8-K, in response to Item 4, reporting that the Company had dismissed its independent auditors, PricewaterhouseCoopers LLP, and engaged Ehrenkrantz Sterling & Co. LLC as its independent auditors. On July 29, 2003, the Company filed a Current Report on Form 8-K, in response to Item 5, reporting certain changes to its board of directors. On August 6, 2003, the Company filed a Current Report on Form 8-K, in response to Item 5, to report a recent transaction with Nextel and to provide an update on the status of its periodic SEC reports. On November 4, 2003, the Company filed a Current Report on Form 8-K, in response to Item 5, to report an update of recent transaction with Nextel, to report the loss of its largest customer UPS, and to provide an update on the status of its periodic SEC reports. On December 11, 2003, the Company filed a Current Report on Form 8-K, in response to Item 5, to report a recent transaction with Nextel. On February 12, 2004, the Company filed a Current Report on Form 8-K, in response to Item 5, to report the termination of employment of Walter V. Purnell, Jr. as the Company's president and chief executive officer, and to provide an update on the status of its periodic SEC reports. On February 20, 2004, the Company filed a Current Report on Form 8-K, in response to Item 5, to report a reduction in personnel. On March 9, 2004, the Company filed an amendment to Current Report on Form 8-K/A, in response to Item 4, to report the dismissal of PricewaterhouseCoopers as its independent auditors for the period May 1, 2002 to December 31, 2002 and the engagement of Ehrenkrantz Sterling & Co. LLC as the Company's independent auditors for the period May 1, 2002 to December 31, 2002. 63 On April 8, 2004, the Company filed a Current Report on Form 8-K, in response to Items 5 and 7, to report the sale of 4,215,910 shares of its common stock at a per share price of $5.50 per share. 64 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) April 23, 2004 /s/Christopher W. Downie -------------------------------- Christopher W. Downie Executive Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer and duly authorized officer to sign on behalf of the registrant) 65 EXHIBIT INDEX Number Description 10.38 Common Stock Purchase Agreement, dated as of April 7, 2004, by and among Motient Corporation and the Raptor Global Portfolio, Ltd., et al 10.39 Registration Rights Agreement, dated as of April 7, 2004, by and among Motient Corporation and the Raptor Global Portfolio, Ltd., et al 10.40 Form of Common Stock Purchase Warrant, dated as of April 7, 2004 31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the Executive Vice President, Chief Financial Officer and Treasurer (principal executive officer and principal financial officer) (filed herewith). 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the of the Executive Vice President, Chief Financial Officer and Treasurer (principal executive officer and principal financial officer) (filed herewith). 66 EX-10.38 2 ex1038.txt COMMON STOCK PURCHASE AGREEMENT EXHIBIT 10.38 MOTIENT CORPORATION COMMON STOCK PURCHASE AGREEMENT This COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is dated as of April 7, 2004 and is by and among (i) MOTIENT CORPORATION, a Delaware corporation, with its principal office at 300 Knightsbridge Pkwy., Lincolnshire, IL 60069 (the "Company") (ii) The Raptor Global Portfolio, Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund L.P. and Tudor Proprietary Trading, L.L.C., (collectively, "Tudor"), each of which is listed on Schedule 1 hereto, and (iii) each other investor listed on Schedule 1 hereto (each of the persons or entities described in clauses (ii) and (iii), individually, a "Purchaser" and, collectively, the "Purchasers"). WHEREAS, the Company desires to issue and sell to the Purchasers, and the Purchasers desire to purchase from the Company, an aggregate of 4,215,910 shares (the "Shares") of the authorized but unissued shares of common stock, $0.01 par value per share, of the Company (including any securities into which or for which such shares may be exchanged for, or converted into, pursuant to any stock dividend, stock split, stock combination, recapitalization, reclassification, reorganization or other similar event the "Common Stock"), at an aggregate purchase price of $23,187,505, all upon the terms and subject to the conditions set forth in this Agreement; WHEREAS, simultaneously with entering in this Agreement, the Company and the Purchasers are entering into that certain Registration Rights Agreement, dated as of the date hereof (the "Registration Rights Agreement"), pursuant to which the Company shall register for resale the Shares and the Warrant Shares (as defined below) on the terms set forth therein; NOW THEREFORE, in consideration of the mutual agreements, representations, warranties and covenants herein contained, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the following respective meanings: (a) "Affiliate" means any Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, a Person, as such terms are used and construed under Rule 144 (as defined below), and with respect to Tudor, in addition to the foregoing, the term "Affiliate" shall also include the Related Entities. (b) "Board" means the board of directors of the Company. (c) "Closing Date" means the date hereof. 1 (d) "Effective Date" means the earlier to occur of (i) date that occurs ninety (90) days after the initial filing by the Company with the SEC of a registration statement covering the resale of the Shares, and (ii) September 30, 2004. (e) "Exchange Act" means the Securities Exchange Act of 1934, as amended, and all of the rules and regulations promulgated thereunder. (f) "Fully Diluted Common Stock" means the outstanding Common Stock and shares of Common Stock issued or issuable upon exercise of Warrants. (g) "Majority Purchasers" has the meaning set forth in Section 8.9. (h) "Material Adverse Effect" has the meaning set forth in Section 3.1 of this Agreement. (i) "Person" (whether or not capitalized) means an individual, entity, partnership, limited liability company, corporation, association, trust, joint venture, unincorporated organization, and any government, governmental department or agency or political subdivision thereof. (j) "Related Entities" includes, with respect to Tudor, any entities for which any of the Tudor Entities or any its affiliates serve as general partner and/or investment adviser or in a similar capacity, and all mutual funds or other pooled investment vehicles or entities under the control or management of any of the Tudor Entities or the general partner or investment adviser thereof, or an any affiliate of any of them. For purposes of this Agreement, (a) "Tudor Entities" means each of the following: any entity for which Tudor Investment Corporation or an Affiliate thereof acts as general partner and/or investment adviser, Tudor Investment Corporation, Tudor Group Holdings LLC, their respective Affiliates, or any Affiliate or Affiliated Group of Tudor Investment Corporation and/or Tudor Group Holdings LLC, and (b) with respect to the Tudor Entities, "Affiliated Group" has the meaning given to it in Section 1504 of the Internal Revenue Code of 1986, as amended, and in addition includes any analogous combined, consolidated, or unitary group, as defined under any applicable state, local or foreign income tax law. (k) "Rule 144" means Rule 144 promulgated under the Securities Act and any successor or substitute rule, law or provision. (l) "SEC" means the Securities and Exchange Commission. (m) "Securities Act" means the Securities Act of 1933, as amended, and all of the rules and regulations promulgated thereunder. (n) "Transfer Agent Instructions" means the Irrevocable Transfer Agent Instructions, in substantially the form of Exhibit B, executed by the Company and delivered to and acknowledged in writing by the Company's transfer agent. 2 (o) "Transaction Documents" means, collectively, the Registration Rights Agreement and the Warrants. (p) "Warrants" means the warrants to purchase Common Stock, dated as of the date hereof, issued by the Company to the Purchasers, in substantially the form attached hereto as Exhibit C. (q) "Warrant Shares" means the shares of Common Stock issued or issuable upon the exercise of the Warrants. 2. Purchase and Sale of Shares. 2.1 Purchase and Sale. Subject to and upon the terms and conditions set forth in this Agreement, the Company agrees to issue and sell to each Purchaser, and each Purchaser hereby agrees, severally and not jointly, to purchase from the Company, at the Closing, the number of Shares set forth opposite such Purchaser's name on Schedule 1 hereto, at a purchase price equal to $5.50 per share. The aggregate purchase price payable by the Purchasers to the Company for all of the Shares shall be $23,187,505. 2.2 Closing. The closing of the transactions contemplated under this Agreement (the "Closing") shall take place at 5:00 pm (Eastern Time) at the offices of Bingham McCutchen LLP, 150 Federal Street, Boston, Massachusetts 02110 on the Closing Date, or on such other date and at such time as may be agreed upon between the Purchasers, on the one hand, and the Company, on the other hand. At the Closing, the Company shall deliver to each Purchaser a single stock certificate, registered in the name of such Purchaser, representing the number of Shares purchased by such Purchaser, against payment of the purchase price by wire transfer of immediately available funds to such account as the Company shall designate in writing. 2.3 Tejas Securities Group, Inc. Fee. Upon the Closing or as otherwise required by any agreement between the Company and Tejas Securities Group, Inc. ("Tejas"), the Company shall pay to Tejas a broker fee in connection with the transactions contemplated hereunder in the amount of $350,000, by wire transfer of immediately available funds to such account as Tejas shall designate in writing. 2.4 Tejas Securities Group, Inc. Warrants. Upon the Closing or as otherwise required by any agreement between the Company and Tejas, the Company shall issue to Tejas in connection with the transactions contemplated hereunder, warrants to purchase One Million (1,000,000) shares of Common Stock at an exercise price of $5.50 per share. 3. Representations and Warranties of the Company. The Company hereby represents and warrants to each Purchaser, as of the date hereof and except as set forth on the disclosure schedule furnished by the Company to each Purchaser (the "Disclosure Schedule") attached hereto as Schedule 2, as follows: 3 3.1 Incorporation. Each of the Company and the Subsidiaries (as defined in Section 3.18 below) is a corporation or other entity duly organized, validly existing and in good standing under the laws of the State of Delaware (or such other applicable jurisdiction of incorporation or formation), and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or the character of the property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not result in a material adverse effect on the assets, liabilities (contingent or otherwise), business, affairs, operations, prospects or condition (financial or otherwise) of the Company ("Material Adverse Effect"). Each of the Company and the Subsidiaries has all requisite corporate power and authority to carry on its business as now conducted and to carry out the transactions contemplated hereby. Neither the Company nor any of the Subsidiaries is in violation of any of the provisions of its Certificate of Incorporation (or other charter document) or By-laws. 3.2 Capitalization. The authorized capital stock of the Company consists of (i) 100,000,000 shares of Common Stock, of which 25,246,682 shares were outstanding as of the date hereof, and (ii) 5,000,000 shares of preferred stock, of which no shares are outstanding as of the date hereof. All shares of the Company's issued and outstanding capital stock have been duly authorized, are validly issued and outstanding, and are fully paid and nonassessable. Except as set forth in Schedule 3.2 to the Disclosure Schedule, there are no existing options, warrants, calls, preemptive (or similar) rights, subscriptions or other rights, agreements, arrangements or commitments of any character obligating the Company to issue, transfer or sell, or cause to be issued, transferred or sold, any shares of the capital stock of the Company or other equity interests in the Company or any securities convertible into or exchangeable for such shares of capital stock or other equity interests, including the Shares, the Warrants and the Warrant Shares, and there are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any shares of its capital stock or other equity interests. The issue and sale of the Shares, the Warrants and the Warrant Shares will not obligate the Company to issue or sell, pursuant to any pre-emptive right or otherwise, shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under such securities. 3.3 Registration Rights. Except as set forth on Schedule 3.3 to the Disclosure Schedule, the Company has not granted or agreed to grant to any Person any right (including "piggy-back" and demand registration rights) to have any capital stock or other securities of the Company registered with the SEC or any other government authority. 3.4 Authorization. All corporate action on the part of the Company, its officers and directors necessary for the authorization, execution, 4 delivery and performance of this Agreement and the Transaction Documents and the consummation of the transactions contemplated herein and therein has been taken. When executed and delivered by the Company, each of this Agreement and the Transaction Documents shall constitute a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such may be limited by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally and by general equitable principles. The Company has all requisite corporate power and authority to enter into this Agreement and the Transaction Documents and to carry out and perform its obligations under their respective terms. 3.5 Valid Issuance of the Shares. The Shares, the Warrants and the Warrant Shares have been duly authorized, and the Shares and the Warrant Shares, upon issuance pursuant to the terms hereof and the terms of the Warrants, respectively, will be validly issued, fully paid and nonassessable and not subject to any encumbrances, preemptive rights or any other similar contractual rights of the stockholders of the Company or any other Person. The Company has reserved from its duly authorized capital stock the number of shares of Common Stock issuable upon execution of this Agreement and upon the exercise in full of the Warrants (assuming such Warrants vest in full). 3.6 Financial Statements. The Company has furnished to the Purchasers, and attached as Schedule 3.6 to the Disclosure Schedule, true and complete copies of (i) the audited consolidated balance sheet of the Company and the Subsidiaries as of the fiscal year ended December 31, 2002, and the related audited consolidated income statement, audited consolidated statement of cash flows and audited consolidated statement of stockholders' equity of the Company and the Subsidiaries for the year then ended (the "Audited Financial Statements"), (ii) a draft of the unaudited consolidated balance sheet of the Company and the Subsidiaries as of the fiscal year ended December 31, 2003, and the related audited consolidated income statement, audited consolidated statement of cash flows and audited consolidated statement of stockholders' equity of the Company and the Subsidiaries for the year then ended, and (iii) the unaudited consolidated balance sheet of the Company and the Subsidiaries as of February 29, 2004 (the "Balance Sheet") and the related consolidated income statement, consolidated statement of cash flows and consolidated statement of stockholders' equity of the Company for the two (2) months then ended (the financial statements in clause (ii) and this clause (iii) are hereinafter referred to, collectively, as the "Unaudited Financial Statements"). All of the financial statements described in clauses (i)-(iii) above are hereinafter referred to, collectively, as the "Financial Statements". The Financial Statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods covered thereby, subject, in the case of the Unaudited Financial Statements, to normal year-end adjustments (which individually and in the aggregate are not material) and to the absence of footnotes thereto, and present fairly, in all material respects, the financial position of the Company and the Subsidiaries and the results of operations as of the date and for the periods indicated therein. 5 3.7 SEC Documents. The Company has furnished to the Purchasers true and complete copies of the following reports of the Company (collectively, the "SEC Documents"): (i) the annual report on Form 10-K for the year ended December 31, 2002 (the "Annual Report") and (ii) quarterly reports on Form 10-Q for the periods ended March 31, 2002, June 30, 2002 and September 30, 2002. As of their respective filing dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act, and the rules and regulations promulgated thereunder, and none of the SEC Documents contain any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply in all material respects with applicable accounting requirements and the rules and regulations of the SEC with respect thereto in effect at the time of filing. All material agreements to which the Company is a party or to which the property or assets of the Company are subject are included as part of or specifically identified in the SEC Documents to the extent required by the rules and regulations of the SEC as in effect at the time of filing. The Company has prepared and filed with the SEC all filings and reports required by the Securities Act and the Exchange Act to make the Company's filings and reports current in all respects, except for the Company's periodic reports under the Exchange Act required to be filed for fiscal year 2003 and any filings made pursuant to the Securities Act which rely on such reports for their continued effectiveness. 3.8 Consents. Except for (a) the filing and effectiveness of any registration statement required to be filed by the Company under the Securities Act pursuant to the terms of the Registration Rights Agreement and (b) any required state "blue sky" law filings in connection with the transactions contemplated hereunder or under the Transaction Documents, all consents, approvals, orders and authorizations required on the part of the Company in connection with the execution or delivery of, or the performance of the obligations under, this Agreement and the Transaction Documents, and the consummation of the transactions contemplated herein and therein, have been obtained and will be effective as of the date hereof. The execution and delivery by the Company of this Agreement and the Transaction Documents, the consummation of the transactions contemplated herein and therein, and the issuance of the Shares, the Warrants and the Warrant Shares, do not require the consent or approval of the stockholders of, or any lender to, the Company. 3.9 No Conflict; Compliance With Laws. (a) The execution, delivery and performance by the Company of this Agreement and the Transaction Documents, and the consummation of the transactions contemplated hereby and thereby, including the issuance of the Shares, the Warrants and the Warrant Shares, do not and will not (i) conflict with or violate any provision of the Certificate of Incorporation (or other charter documents) or By-laws of the Company or any of the Subsidiaries, (ii) breach, conflict with or result in any violation of or default (or an event that with notice or lapse of time or both would become a default) under, or give rise to a right of termination, amendment, acceleration or cancellation (with or 6 without notice or lapse of time, or both) of any obligation, contract, commitment, lease, agreement, mortgage, note, bond, indenture or other instrument or obligation to which the Company or any of the Subsidiaries is a party or by which they or any of their properties or assets are bound, except in each case to the extent such breach, conflict, violation, default, termination, amendment, acceleration or cancellation does not, and could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, or (iii) result in a violation of any statute, law, rule, regulation, order, ordinance or restriction applicable to the Company, the Subsidiaries or any of their properties or assets, or any judgment, writ, injunction or decree of any court, judicial or quasi-judicial tribunal applicable to the Company, the Subsidiaries or any of their properties or assets. (b) Neither the Company nor any of the Subsidiaries (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any of the Subsidiaries), nor has the Company or any of the Subsidiaries received written notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties or assets is bound (whether or not such default or violation has been waived), (ii) is in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters, except in each case as does not, and could not, reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 3.10 Brokers or Finders. Other than as described in Sections 2.3 and 2.4 above, neither the Company nor any of the Subsidiaries has dealt with any broker or finder in connection with the transactions contemplated by this Agreement or the Transaction Documents, and neither the Company nor any of the Subsidiaries has incurred, or shall incur, directly or indirectly, any liability for any brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or the Transaction Documents, or any transaction contemplated hereby or thereby. 3.11 OTC Bulletin Board. The Company's Common Stock is currently actively traded, and thus quoted, on the over-the-counter bulletin board. 3.12 Absence of Litigation. Except as set forth on Schedule 3.12 to the Disclosure Schedule, there are no pending or, to the Company's knowledge, threatened actions, suits, claims, proceedings or investigations against or involving the Company or any of the Subsidiaries except to the extent described in the SEC Documents. 3.13 No Undisclosed Liabilities; Indebtedness. Since the date of the Balance Sheet, the Company and the Subsidiaries have incurred no liabilities or obligations, whether known or unknown, asserted or unasserted, fixed or contingent, accrued or unaccrued, matured or unmatured, liquidated or 7 unliquidated, or otherwise, except for liabilities or obligations that, individually or in the aggregate, do not or would not have a Material Adverse Effect and other than (a) liabilities and obligations arising in the ordinary course of business and (b) the liabilities and obligations set forth on Schedule 3.13 to the Disclosure Schedule. Except for indebtedness reflected in the Balance Sheet, the Company has no indebtedness outstanding as of the date hereof. The Company is not in default with respect to any outstanding indebtedness or any instrument relating thereto. 3.14 Contracts. All contracts, agreements, instruments and other documents required to be filed as exhibits to any of the periodic reports required to be filed by the Exchange Act are legal, valid, binding and in full force and effect and are enforceable by the Company in accordance with their respective terms, except as such may be limited by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally and by general equitable principles. 3.15 Title to Assets. Each of the Company and the Subsidiaries has good and marketable title to all real and personal property owned by it that is material to the business of the Company or such Subsidiaries, in each case free and clear of all liens and encumbrances, except those, if any, reflected in the Financial Statements or incurred in the ordinary course of business consistent with past practice. Any real property and facilities held under lease by the Company or the Subsidiaries are held by it or them under valid, subsisting and enforceable leases (subject to laws of general application relating to bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and other equitable remedies) with which the Company and the Subsidiaries are in compliance in all material respects. 3.16 Labor Relations. Except as set forth on Schedule 3.16 to the Disclosure Schedule, no labor or employment dispute exists or, to the knowledge of the Company, is imminent or threatened, with respect to any of the employees or consultants of the Company that has, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 3.17 Intellectual Property. The Company is the sole and exclusive owner of, or has the exclusive right to use, all right, title and interest in and to all material foreign and domestic patents, patent rights, trademarks, service marks, trade names, brands, copyrights (whether or not registered and, if applicable, including pending applications for registration) and other proprietary rights or information, owned or used by the Company (collectively, the "Rights"), and in and to each material invention, software, trade secret, and technology used by the Company or any of the Subsidiaries (the Rights and such other items, the "Intellectual Property"), and, to the Company's knowledge, the Company owns and has the right to use the same, free and clear of any claim or conflict with the rights of others (subject to the provisions of any applicable license agreement). Except as set forth on Schedule 3.17 to the Disclosure Schedule, there have been no written claims made against the Company or any of the Subsidiaries asserting the invalidity, abuse, misuse, or unenforceability of any of the Intellectual Property, and, to the Company's knowledge, there are no reasonable grounds for any such claims. 8 3.18 Subsidiaries; Joint Ventures. Except for the subsidiaries listed on Schedule 3.18 to the Disclosure Schedule (the "Subsidiaries"), the Company has no subsidiaries and does not otherwise own or control, directly or indirectly, any other Person. Except as described in the SEC Documents, the Company is not a participant in any joint venture, partnership, or similar arrangement material to its business. 3.19 Taxes. The Company and each of the Subsidiaries has filed (or has had filed on its behalf), will timely file or will cause to be timely filed, or has timely filed for an extension of the time to file, all material Tax Returns (as defined below) required by applicable law to be filed by it or them prior to or as of the date hereof, and such Tax Returns are, or will be at the time of filing, true, correct and complete in all material respects. Each of the Company and the Subsidiaries has paid (or has had paid on its behalf) or, where payment is not yet due, has established (or has had established on its behalf and for its sole benefit and recourse) or will establish or cause to be established in accordance with United States generally accepted accounting principles on or before the date of hereof an adequate accrual for the payment of, all material Taxes (as defined below) due with respect to any period ending prior to or as of the date hereof. "Taxes" shall mean any and all taxes, charges, fees, levies or other assessments, including income, gross receipts, excise, real or personal property, sales, withholding, social security, retirement, unemployment, occupation, use, goods and services, license, value added, capital, net worth, payroll, profits, franchise, transfer and recording taxes, fees and charges, and any other taxes, assessment or similar charges imposed by the Internal Revenue Service or any taxing authority (whether state, county, local or foreign) (each, a "Taxing Authority"), including any interest, fines, penalties or additional amounts attributable to or imposed upon any such taxes or other assessments. "Tax Return" shall mean any report, return, document, declaration or other information or filing required to be supplied to any Taxing Authority, including information returns, any documents with respect to accompanying payments of estimated Taxes, or with respect to or accompanying requests for extensions of time in which to file any such return, report, document, declaration or other information. There are no claims or assessments pending against the Company or any of the Subsidiaries for any material alleged deficiency in any Tax, and neither the Company nor any of the Subsidiaries has been notified in writing of any material proposed Tax claims or assessments against the Company or any of the Subsidiaries. No Tax Return of the Company or any of the Subsidiaries is or has been the subject of an examination by a Taxing Authority. Each of the Company and the Subsidiaries has withheld from each payment made to any of its past or present employees, officers and directors, and any other person, the amount of all material Taxes and other deductions required to be withheld therefrom and paid the same to the proper Taxing Authority within the time required by law. 3.20 Pensions and Benefits. (a) Schedule 3.20(a) to the Disclosure Schedule contains a true and complete list of each "employee benefit plan" within the meaning of Section 3(3) of the United States Employee Retirement Income Security Act of 9 1974, as amended ("ERISA"), including, without limitation, multiemployer plans within the meaning of Section 3(37) of ERISA, and all retirement, profit sharing, stock option, stock bonus, stock purchase, severance, fringe benefit, deferred compensation, and other employee benefit programs, plans, or arrangements, whether or not subject to ERISA, under which (i) any current or former directors, officers, employees or consultants of the Company has any present or future right to benefits and which are contributed to, sponsored by or maintained by the Company or any of the Subsidiaries, or (ii) the Company or any of the Subsidiaries has any present or future liability. All such programs, plans, or arrangements shall be collectively referred to as the "Company Plans." Each Company Plan is included as part of or specifically identified in the SEC Documents to the extent required by the rules and regulations of the SEC as in effect at the time of filing. (b) (i) Each Company Plan has been established and administered in all material respects in accordance with its terms and in compliance with the applicable provisions of ERISA, the Internal Revenue Code of 1986, as amended (the "Code"), and other applicable laws, rules and regulations; (ii) each Company Plan which is intended to be qualified within the meaning of Section 401(a) of the Code is so qualified and has received a favorable determination letter as to its qualification (or if maintained pursuant to a prototype form of instrument the sponsor thereof has received a favorable opinion letter as to its qualification), and to the Company's knowledge nothing has occurred, whether by action or failure to act, that could reasonably be expected to cause the loss of such qualification; and (iii) no Company Plan provides retiree health or life insurance benefits (whether or not insured), and neither the Company nor the Subsidiaries have any obligations to provide any such retiree benefits other than as required pursuant to Section 4980B of the Code or other applicable law. (c) No Company Plan is a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA) or a plan subject to the minimum funding requirements of Section 302 or ERISA or Section 412 of the Code or Title IV of ERISA, and neither the Company, the Subsidiaries, nor any member of their Controlled Group has any liability or obligation in respect of, any such multiemployer plan or plan. With respect to any Company Plan and to the Company's knowledge, (i) no actions, suits or claims (other than routine claims for benefits in the ordinary course) are pending or threatened, and (ii) no administrative investigation, audit or other administrative proceeding by the Department of Labor, the Pension Benefit Guaranty Corporation, the Internal Revenue Service or other governmental agencies are pending, threatened or in progress. 3.21 Private Placement. Neither the Company nor any person acting on the Company's behalf has sold or offered to sell or solicited any offer to buy the Shares, the Warrants or the Warrant Shares by means of any form of general solicitation or advertising. Neither the Company nor any of its Affiliates nor any person acting on the Company's behalf has, directly or indirectly, at any time within the past six (6) months, made any offer or sale of any security or solicitation of any offer to buy any security under circumstances that would (i) eliminate the availability of the exemption from registration under Regulation D under the Securities Act in connection with the sale or issuance of the Shares, the Warrants and the Warrant Shares as contemplated hereby or (ii) cause the offering or issuance of the Shares, the 10 Warrants or the Warrant Shares pursuant to this Agreement or any of the Transaction Documents to be integrated with prior offerings by the Company for purposes of any applicable law, regulation or stockholder approval provisions. None of the Company or any of the Subsidiaries is, or is an Affiliate of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. None of the Company or any of the Subsidiaries is a United States real property holding corporation within the meaning of the Foreign Investment in Real Property Tax Act of 1980. No consent, license, permit, waiver approval or authorization of, or designation, declaration, registration or filing with, the SEC or any state securities regulatory authority is required in connection with the offer, sale, issuance or delivery of the Shares, the Warrants or the Warrant Shares other than the possible filing of Form D with the SEC. 3.22 Material Changes. Except as set forth on Schedule 3.22 to the Disclosure Schedule, since the date of the Balance Sheet, the Company has conducted its business only in the ordinary course, consistent with past practice, and since such date there has not occurred: (i) any event, occurrence or development that has had, or that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company or any of the Subsidiaries; (ii) any amendments or changes in the charter documents or by-laws of the Company or the Subsidiaries; (iii) any: (A) incurrence, assumption or guarantee by the Company or the Subsidiaries of any debt for borrowed money other than (1) equipment leases made in the ordinary course of business, consistent with past practice and (2) any such incurrence, assumption or guarantee with respect to an amount of $25,000 or less that has been disclosed in the SEC Documents; (B) issuance or sale of any securities convertible into or exchangeable for securities of the Company other than to directors, employees and consultants pursuant to existing equity compensation or stock purchase plans of the Company; (C) issuance or sale of options or other rights to acquire from the Company or the Subsidiaries, directly or indirectly, securities of the Company or any securities convertible into or exchangeable for any such securities, other than options issued to directors, employees and consultants in the ordinary course of business, consistent with past practice; (D) issuance or sale of any stock, bond or other corporate security other than to directors, employees and consultants pursuant to existing equity compensation or stock purchase plans of the Company; (E) declaration or making of any payment or distribution to stockholders or purchase or redemption of any share of its capital stock or other security other than to or from directors, officers and employees of the Company or the Subsidiaries as compensation for or in connection with services rendered to the Company or the Subsidiaries (as applicable) or for reimbursement of expenses incurred on behalf of the Company or the Subsidiaries (as applicable); (F) sale, assignment or transfer of any of its intangible assets except in the ordinary course of business, consistent with past practice, or cancellation of any debt or claim except in the ordinary course of business, consistent with past practice; (G) waiver of any right of substantial value whether or not in the ordinary course of business; (H) material change in officer compensation, except in the ordinary course of business and consistent with past practice; or (I) other commitment (contingent or otherwise) to do any of the foregoing; (iv) any creation, sufferance or 11 assumption by the Company or any of the Subsidiaries of any lien on any asset or any making of any loan, advance or capital contribution to or investment in any Person, in an aggregate amount which exceeds $25,000 outstanding at any time; (v) any entry into, amendment of, relinquishment, termination or non-renewal by the Company or the Subsidiaries of any material contract, license, lease, transaction, commitment or other right or obligation, other than in the ordinary course of business, consistent with past practice; or (vi) any transfer or grant of a right with respect to the Intellectual Property Rights owned or licensed by the Company or the Subsidiaries, except as among the Company and the Subsidiaries. 3.23 Regulatory Permits. The Company and the Subsidiaries possess all certificates, approvals, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their businesses as described in the SEC Documents, except where the failure to possess such permits does not, and could not have, individually or in the aggregate, a Material Adverse Effect (the "Material Permits"), and the Company has not received any written notice of proceedings relating to the revocation or modification of any Material Permits except as described in the SEC Documents. 3.24 Transactions with Affiliates and Employees. Except as set forth in the SEC Documents or on Schedule 3.24 to the Disclosure Schedule, none of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company, is presently a party to any transaction or agreement with the Company (other than for services as employees, officers and directors) exceeding $60,000, including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. 3.25 Insurance. The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary for the business in which the Company and the Subsidiaries are engaged. The Company has no reason to believe that it will not be able to renew existing insurance coverage for itself and the Subsidiaries as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary or appropriate to continue business. 3.26 Solvency. Based on the consolidated financial condition of the Company and the Subsidiaries as of the date hereof, (i) the fair saleable value of the Company's assets exceeds the amount that will be required to be paid on or in respect of the Company's existing debts and other liabilities (including known and contingent liabilities) as they mature; (ii) the Company's assets do not constitute unreasonably small capital to carry on its business for the current fiscal year as now conducted and as proposed to be conducted, including its capital needs taking into account the particular capital requirements of the business conducted by the Company, projected capital requirements and capital availability thereof; and (iii) the current cash flow 12 of the Company, together with the proceeds the Company would receive were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its debts when such amounts are required to be paid. The Company has no present intention to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). 3.27 Internal Accounting Controls. Except as disclosed in the SEC Filings, the Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with United States generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorizations, (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences, and (v) the Company is otherwise in compliance with the Securities Act, the Exchange Act and all other rules and regulations promulgated by the SEC and applicable to the Company, including the Sarbanes-Oxley Act of 2002, as amended. 3.28 Disclosure. Neither the Company nor, to the Company's knowledge, any other Person acting on its behalf and at the direction of the Company, has provided to any Purchaser or its agents or counsel any information that in the Company's reasonable judgment, at the time such information was furnished, constitutes material, non-public information, except such information as may have been disclosed to certain Board members, who are affiliated with certain Purchasers (other than Tudor and its Affiliates), in their capacity as directors of the Company. The Company understands and confirms that each Purchaser will rely on the representations and covenants contained herein in effecting the transactions contemplated by this Agreement and the Transaction Documents, and in the securities of the Company after the Closing. All disclosure provided to the Purchasers regarding the Company, its business and the transactions contemplated hereby, including the Schedules to this Agreement furnished by or on behalf of the Company, taken as a whole is true and correct and does not contain any untrue statement of material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or information exists with respect to the Company or the Subsidiaries or its or their business, properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed. The Company acknowledges and agrees that no Purchaser makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 4. 4. Representations and Warranties of the Purchasers. Each Purchaser represents and warrants, severally and not jointly, to the Company as follows: 13 4.1 Authorization. All action on the part of such Purchaser and, if applicable, its officers, directors, managers, members, shareholders and/or partners necessary for the authorization, execution, delivery and performance of this Agreement and the Registration Rights Agreement, and the consummation of the transactions contemplated herein and therein, has been taken. When executed and delivered, each of this Agreement and the Registration Rights Agreement will constitute the legal, valid and binding obligation of such Purchaser, enforceable against such Purchaser in accordance with its terms, except as such may be limited by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally and by general equitable principles. Each Purchaser has all requisite corporate power and authority to enter into each of this Agreement and the Registration Rights Agreement, and to carry out and perform its obligations under the terms of hereof and thereof. 4.2 Purchase Entirely for Own Account. Each Purchaser is acquiring the Shares, Warrants and Warrant Shares for its own account for investment and not for resale or with a view to distribution thereof in violation of the Securities Act. 4.3 Investor Status; Etc. Each Purchaser certifies and represents to the Company that it is an "accredited investor" as defined in Rule 501 of Regulation D promulgated under the Securities Act and was not organized for the purpose of acquiring any of the Shares, the Warrants or the Warrant Shares. Each Purchaser's financial condition is such that it is able to bear the risk of holding the Shares for an indefinite period of time and the risk of loss of its entire investment. Each Purchaser has sufficient knowledge and experience in investing in companies similar to the Company so as to be able to evaluate the risks and merits of its investment in the Company. 4.4 Securities Not Registered. Each Purchaser understands that the Shares, the Warrants and the Warrant Shares have not been registered under the Securities Act, by reason of their issuance by the Company in a transaction exempt from the registration requirements of the Securities Act, and that the Shares, the Warrants and the Warrant Shares must continue to be held by such Purchaser unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration. Each Purchaser understands that the exemptions from registration afforded by Rule 144 (the provisions of which are known to it) promulgated under the Securities Act depend on the satisfaction of various conditions, and that, if applicable, Rule 144 may afford the basis for sales only in limited amounts. 4.5 No Conflict. The execution and delivery of this Agreement and the Registration Rights Agreement by each Purchaser, and the consummation of the transactions contemplated hereby and thereby, will not conflict with or result in any violation of or default by such Purchaser (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit under (i) any provision of the organizational documents of such Purchaser or (ii) any agreement or instrument, permit, franchise, license, judgment, order, statute, law, ordinance, rule or regulations, applicable to such Purchaser. 14 4.6 Brokers. Such Purchaser has not retained, utilized or been represented by any broker or finder in connection with the transactions contemplated by this Agreement. 4.7 Consents. All consents, approvals, orders and authorizations required on the part of such Purchaser in connection with the execution, delivery or performance of this Agreement and the consummation of the transactions contemplated herein have been obtained and are effective as of the date hereof. 4.8 Disclosure of Information. Such Purchaser believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the Securities. Such Purchaser further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares, Warrants and Warrant Shares and the business, properties, prospects and financial condition of the Company. 5. Conditions Precedent. 5.1. Conditions to the Obligation of the Purchasers to Consummate the Closing. The obligation of each Purchaser to consummate the Closing and to purchase and pay for the Shares is subject to the satisfaction of the following conditions precedent: (a) The representations and warranties of the Company contained herein shall be true and correct on and as of the date hereof with the same force and effect as though made on and as of the Closing Date. The Company shall have performed all obligations and conditions herein required to be performed or complied with by the Company on or prior to the Closing Date. (b) There shall have been no material adverse change (actual or threatened) in the assets, liabilities (contingent or otherwise), affairs, business, operations, prospects, or condition (financial or otherwise) of the Company prior to the Closing Date; and the Company shall have performed all obligations and conditions herein required to be performed or observed by the Company on or prior to the Closing Date. (c) No proceeding challenging this Agreement or the Transaction Documents, or the transactions contemplated hereby or thereby, or seeking to prohibit, alter, prevent or materially delay the Closing, shall have been instituted before any court, arbitrator or governmental body, agency or official or shall be pending against or involving the Company. (d) The sale of the Shares and the issuance of the Warrants (and the Warrant Shares) to the Purchasers shall not be prohibited by any law, rule, governmental order or regulation. All necessary consents, approvals, licenses, permits, orders and authorizations of, or registrations, declarations and filings with, any governmental or administrative agency or of or with any other Person with respect to any of the transactions contemplated hereby shall have been duly obtained or made and shall be in full force and effect. 15 (e) All instruments and corporate proceedings of the Company in connection with the transactions contemplated by this Agreement and the Transaction Documents shall be satisfactory in form and substance to each Purchaser, and each Purchaser shall have received copies (executed or certified, as may be appropriate) of all documents which the Purchasers may have reasonably requested in connection with such transactions. (f) Each Purchaser shall have received from Andrews Kurth LLP, outside counsel to the Company, an opinion addressed to such Purchaser, dated the Closing Date and substantially in the form of Exhibit A hereto. (g) The Registration Rights Agreement shall have been executed and delivered by the Company. (h) Each Purchaser shall have received from the Company an original stock certificate evidencing the purchase of the Shares and an original Warrant, in each case for the number of shares of Common Stock and the number of Warrant Shares, respectively, set forth opposite such Purchaser's name on Schedule 1 hereto. (i) Each Purchaser shall have received duly executed Transfer Agent Instructions acknowledged by the Company's transfer agent. (j) The Company shall pay up to an additional aggregate of $25,000 for the Purchasers' expenses incurred in connection with the preparation, execution and delivery of this Agreement and the Transaction Documents, in accordance with Section 8.8 hereof. (k) The Company shall have delivered, in form and substance satisfactory to each Purchaser, a certificate dated the Closing Date and signed by the secretary or another officer of the Company, certifying (i) that attached copies of the Certificate of Incorporation, the By-Laws and resolutions of the Board approving this Agreement, the Transaction Documents and the transactions contemplated hereby and thereby, are all true, complete and correct and remain in full force and effect as of the date hereof, and (ii) as to the incumbency and specimen signature of each officer of the Company executing this Agreement, the Transaction Documents and any other document delivered in connection herewith on behalf of the Company. (l) The Company shall deliver to each Purchaser, a certificate in form and substance satisfactory to each Purchaser, dated the Closing Date and signed by the Company's chief financial officer, certifying that (i) the representations and warranties of the Company contained in Section 3 hereof are true and correct in all respects on the Closing Date and (ii) the Company has performed and complied with all of the agreements and conditions set forth or contemplated herein that are required to be performed or complied with by the Company on or before the Closing Date. 16 5.2. Conditions to the Obligation of the Company to Consummate the Closing. The obligation of the Company to consummate the Closing and to issue and sell the Shares to each Purchaser at the Closing is subject to the satisfaction of the following conditions precedent: (a) The representations and warranties of the Purchasers contained herein shall be true and correct in all respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. (b) The Registration Rights Agreement shall have been executed and delivered by the Purchasers. (c) The Purchasers shall have performed all obligations and conditions herein required to be performed or complied with by the Purchasers on or prior to the Closing Date. (d) No proceeding challenging this Agreement or the Transaction Documents, or the transactions contemplated hereby or thereby, or seeking to prohibit, alter, prevent or materially delay the Closing, shall have been instituted before any court, arbitrator or governmental body, agency or official or shall be pending against or involving such Purchaser. (e) The sale of the Shares and the issuance of the Warrants (and the Warrant Shares) by the Company shall not be prohibited by any law, rule, governmental order or regulation. All necessary consents, approvals, licenses, permits, orders and authorizations of, or registrations, declarations and filings with, any governmental or administrative agency or of any other Person with respect to any of the transactions contemplated hereby shall have been duly obtained or made and shall be in full force and effect. (f) All instruments and corporate proceedings in connection with the transactions contemplated by this Agreement to be consummated at the Closing shall be satisfactory in form and substance to the Company, and the Company shall have received counterpart originals, or certified or other copies of all documents, including without limitation records of corporate or other proceedings, which it may have reasonably requested in connection therewith. 6. Certain Covenants and Agreements. 6.1. Transfer of Securities. Each Purchaser shall not sell, assign, pledge, transfer or otherwise dispose of or encumber any of the Shares, the Warrants or the Warrant Shares, except (i) pursuant to an effective 17 registration statement under the Securities Act, (ii) to an Affiliate (so long as such Affiliate agrees to be bound by the terms and provisions of this Agreement as if, and to the fullest extent as, such Purchaser), or (iii) pursuant to an available exemption from registration under the Securities Act (including sales permitted pursuant to Rule 144) and applicable state securities laws and, if requested by the Company, upon delivery by such Purchaser of either an opinion of counsel of such Purchaser reasonably satisfactory to the Company to the effect that the proposed transfer is exempt from or does not require registration under the Securities Act and applicable state securities laws or a representation letter of such Purchaser reasonably satisfactory to the Company setting forth a factual basis for concluding that such proposed transfer is exempt from or does not require registration under the Securities Act and applicable state securities laws. Any transfer or purported transfer of the Shares in violation of this Section 6.1 shall be void. The Company shall not register any transfer of the Shares in violation of this Section 6.1. The Company may, and may instruct any transfer agent for the Company, to place such stop transfer orders as may be required on the transfer books of the Company in order to ensure compliance with the provisions of this Section 6.1. 6.2. Legends. (a) To the extent applicable, each certificate or other document evidencing the Shares and the Warrant Shares shall be endorsed with the legend set forth below, and each Purchaser covenants that, except to the extent such restrictions are waived by the Company, it shall not transfer the shares represented by any such certificate without complying with the restrictions on transfer described in this Agreement and the legends endorsed on such certificate: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, or in a transaction not subject to, REGISTRATION UNDER SAID ACT." (b) The legend set forth in Section 6.2(a) shall be removed from the certificates evidencing the Shares and the Warrant Shares, (i) following any sale of such Shares or Warrant Shares pursuant to Rule 144 or any effective registration statement, or (ii) if such Shares or Warrant Shares are eligible for sale under Rule 144(k) (and the holder of such Shares or Warrant Shares has submitted a written request for removal of the legend indicating that the holder has complied with the applicable provisions of Rule 144 or such judicial interpretation or pronouncement), or (iii) if such legend is not 18 required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the Staff of the Commission) (and the holder of such Shares or Warrant Shares has submitted a written request for removal of the legend indicating that the holder has complied with the applicable provisions of Rule 144). The Company shall cause its counsel to issue a legal opinion to the Company's transfer agent promptly upon the occurrence of any of the events in clauses (i), (ii) or (iii) above to effect the removal of the legend on certificates evidencing the Shares or the Warrant Shares and shall also cause its counsel to issue a "blanket" legal opinion to the Company's transfer agent promptly after the Effective Date (provided that there is an effective registration statement covering the resale of the Shares or the Warrant Shares, as the case may be), if required by the Company's transfer agent, to allow sales without restriction pursuant to an effective registration statement. The Company agrees that at such time as such legend is no longer required under this Section 6.2(b), it will, no later than three (3) business days following the delivery by a Purchaser to the Company or the Company's transfer agent of a certificate representing the Shares or Warrant Shares issued with a restrictive legend, deliver or cause to be delivered to such Purchaser a certificate representing such Shares or Warrant Shares that is free from all restrictive and other legends; provided that in the case of removal of the legend for reasons set forth in clause (ii) above, the holder of such Shares or Warrant Shares has submitted a written request for removal of the legend indicating that the holder has complied with the applicable provisions of Rule 144. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section. 6.3 Publicity. Except to the extent required by applicable laws, rules, regulations or stock exchange requirements, neither (i) the Company, the Subsidiaries or any of their Affiliates nor (ii) any Purchaser or any of its Affiliates shall, without the written consent of the other, make any public announcement or issue any press release with respect to the transactions contemplated by this Agreement. In no event will either (i) the Company, the Subsidiaries or any of their Affiliates or (ii) any Purchaser or any of its Affiliates make any public announcement or issue any press release with respect to the transactions contemplated by this Agreement without consulting with the other party, to the extent feasible, as to the content of such public announcement or press release. 6.4 Material, Nonpublic Information. Except as required by law, the Company and its directors, officers, employees and agents shall not provide any Purchaser with any material non-public information regarding the Company or any of the Subsidiaries at any time after the Closing, except such information as may be required to be disclosed to certain Board members, who are affiliated with certain Purchasers (other than Tudor and its Affiliates), in their capacity as directors of the Company. In the event of a breach of the foregoing covenant following the Effective Date, or in the event that Company is legally required to make certain disclosures to any Purchaser (and does so) following the Effective Date, then in addition to any other remedy provided for herein, in the Transaction Documents or in equity or at law, each Purchaser to whom information has been disclosed (whether as a result of breach or as required by law) may request, in writing, that the Company promptly (but in no event more than five (5) business days after the date of such writing) publicly disclose, by press release, SEC filing, or otherwise, an appropriate summary of the information that, in such Purchaser's reasonable judgment, constitutes the then material non-public information. After such five (5) business-day period, the Purchaser(s) who was or were in receipt of such material non-public information shall be automatically authorized to make all of the information, or any portion thereof, available to the public generally, without incurring any liability to the Company for such disclosure. 19 6.5 Filing of Information. The Company shall use best efforts to, and shall, promptly after the date hereof and in any event on or prior to June 30, 2004, make current in all respects all filings and reports required by applicable securities laws, including the preparation and filing of all periodic reports under the Exchange Act, the filing of audited financial statements for fiscal year 2003, and the filing of any statements required by or pursuant to the Securities Act. The Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports (other than the periodic reports with respect to fiscal year 2003 and the first quarter of 2004) required to be filed by the Company pursuant to all applicable securities laws, including the Exchange Act. At any time if the Company is not required to file reports pursuant to such laws, it will prepare and furnish to the Purchasers and make publicly available in accordance with paragraph (c) of Rule 144 such information as is required for the Purchasers to sell the Shares and the Warrant Shares under Rule 144. The Company further covenants that it will take such further action as any holder of Shares or Warrant Shares may reasonably request to satisfy the provisions of Rule 144 applicable to the issuer of securities relating to transactions for the sale of securities pursuant to Rule 144. 6.6 Additional Issuance. The Company shall not issue any capital stock or other securities in connection with the raising of additional financing or capital until all of the Shares have been registered for resale pursuant to an effective registration statement and otherwise in accordance with the terms set forth in the Registration Rights Agreement; provided; however, that the foregoing shall not prohibit the Company from issuing shares of Common Stock or securities convertible into or exercisable for Common Stock: (i) upon conversion of the Warrants or other securities issuable upon conversion of securities outstanding as of the date hereof, (ii) to employees, consultants, officers or directors of the Company pursuant to stock option, stock purchase or stock bonus plans or agreements or other stock incentive plans or arrangements approved by the Board, which are in existence as of the date hereof, (iii) pursuant to the acquisition of another business entity or business segment of any such entity by the Company by merger, purchase of substantially all the assets or other reorganization or corporate partnering agreement if such issuance is approved by the Board, (iv) in connection with any stock split, stock dividend or recapitalization of the Company, (v) with respect to warrants to purchase Common Stock issued to Tejas and as described in Section 2.4 hereof, and (vi) in connection with lease lines, bank loans, corporate partnering or other similar transactions, provided such issuances described in this clause (vi) are not primarily for the purpose of equity financing and are approved by the Board. 6.7 Use of Proceeds. The Company covenants and agrees that the proceeds from the sale of the Shares shall be used by the Company for working capital and general corporate purposes or any other purpose approved by the Company's board of director, including, without limitation, growth initiatives, capital expenditures and potential acquisitions; under no circumstances shall any portion of the proceeds be applied to: (i) the payment of dividends or other 20 distributions on any capital stock or other securities of the Company; (ii) the purchase of debt or equity securities of any Person for cash, including the Company, except in connection with investment of excess cash in high quality (A1/P1 or better) money market instruments having maturities of one year or less; (iii) any expenditure not directly related to the business of the Company; or (iv) the call, repurchase or redemption of any Company equity or equity-equivalent securities. 6.8 Integration. The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Shares in a manner that would require the registration under the Securities Act of the sale of the Shares or the issuance of the Warrants or the Warrant Shares to the Purchasers. 6.9 Pre-Emptive Right. Each Purchaser shall have the right to purchase a pro rata share of New Securities (as defined in this Section 6.9) that the Company may, from time to time, propose to sell and issue. Each Purchaser's pro rata share, for purposes of this right, is the ratio of the number of shares of Fully Diluted Common Stock owned by such holder immediately prior to the issuance of New Securities to the total number of shares of Fully Diluted Common Stock outstanding immediately prior to the issuance of New Securities. Each Purchaser shall also have the right of over-allotment to purchase additional New Securities set forth in paragraph (b) of this Section 6.9. This pre-emptive right shall be subject to the following provisions: (a) "New Securities" shall mean any capital stock (including Common Stock) of the Company whether now authorized or not, and any rights, options or warrants to purchase such capital stock, and securities of any type whatsoever that are, or may become, convertible into or exchangeable for capital stock; provided that the term "New Securities" does not include securities issued: (i) upon conversion of the Warrants or other securities issuable upon conversion of securities outstanding as of the date hereof, (ii) to employees, consultants, officers or directors of the Company pursuant to stock option, stock purchase or stock bonus plans or agreements or other stock incentive plans or arrangements approved by the Board, which are in existence as of the date hereof, (iii) pursuant to the acquisition of another business entity or business segment of any such entity by the Company by merger, purchase of substantially all the assets or other reorganization or corporate partnering agreement if such issuance is approved by the Board, (iv) in connection with any stock split, stock dividend or recapitalization of the Company, (v) in connection with lease lines, bank loans, corporate partnering or other similar transactions, provided such issuances described in this clause (v) are not primarily for the purpose of equity financing and are approved by the Board, and (vii) to directors of the Company as compensation for their service as directors pursuant to a restricted stock plan to be implemented and approved by the stockholders of the Company; provided that such issuance of restricted stock shall not exceed 100,000 shares per year. (b) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Purchaser certified written notice of its intention, describing the type of New Securities, their price and the general 21 terms upon which the Company proposes to issue the same. Each Purchaser shall have thirty (30) days after any such notice is mailed or delivered to agree to purchase all or any portion of such Purchaser's pro rata share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. Each Purchaser shall have the right of over-allotment such that if any Purchaser fails to exercise its right under this Section 6.9 to purchase its full pro rata share of New Securities, the other Purchasers may purchase the portion of such Purchaser's remaining portion on a pro rata share within ten (10) days from the date such non-purchasing Purchaser fails to exercise its right hereunder to purchase its full pro rata share of New Securities. (c) In the event the Purchasers fail to exercise the pre-emptive right within such thirty (30) day period and after the expiration of the ten (10) day period for the exercise of the over-allotment provisions of this Section 6.9, the Company shall have ninety (90) days thereafter to sell the New Securities respecting which the Purchasers' pre-emptive right set forth in this Section 6.9 was not exercised, at a price and upon terms no more favorable to the purchasers thereof or to the Company than specified in the Company's notice to the Purchasers pursuant to Section 6.9(b) above. In the event the Company has not sold the New Securities respecting which the Purchasers' preemptive right set forth in the Section 6.9 was not exercised within such ninety (90) day period, the Company shall not thereafter issue or sell any New Securities, without first again offering such securities to the Purchasers in the manner provided in Section 6.9(b) above. 6.10 Reservation of Common Stock for Issuance; Listing of Shares. The Company agrees to reserve from its duly authorized capital stock the total number of shares of Common Stock issuable upon execution of this Agreement and upon the exercise in full of the Warrants. The Company agrees that at any time, if and when its shares of Common Stock are listed on NASDAQ, that it will use reasonable efforts to promptly list and qualify the Shares and the Warrant Shares for trading on NASDAQ. 7. Indemnification. 7.1 By the Company. The Company agrees to indemnify, defend and hold harmless each Purchaser and its Affiliates and their respective officers, directors, agents, employees, subsidiaries, partners, members and controlling persons (collectively, the "Purchaser Indemnitees") to the fullest extent permitted by law from and against any and all claims, losses, liabilities, damages, deficiencies, judgments, assessments, fines, settlements, costs or expenses (including interest, penalties and reasonable fees, disbursements and other charges of counsel) (collectively, "Losses") based upon, arising out of or otherwise in respect of any breach by the Company of any representation, warranty, covenant or agreement of the Company contained in this Agreement or in the Transaction Documents, or for any Losses claimed by Tejas or any other broker or placement agent. 7.2 Claims All claims for indemnification by a Purchaser Indemnitee pursuant to this Section 7 shall be made as follows: 22 (a) If a Purchaser Indemnitee has incurred or suffered Losses for which it is entitled to indemnification under this Section 7, then such Purchaser Indemnitee shall give prompt written notice of such claim (a "Claim Notice") to the Company. Each Claim Notice shall state the amount of claimed Losses (the "Claimed Amount"), if known, and the basis for such claim. (b) Within 30 days after delivery of a Claim Notice, the Company (the "Indemnifying Party") shall provide to each Purchaser Indemnitee (the "Indemnified Party"), a written response (the "Response Notice") in which the Indemnifying Party shall: (i) agree that all of the Claimed Amount is owed to the Indemnified Party, (ii) agree that part, but not all, of the Claimed Amount (the "Agreed Amount") is owed to the Indemnified Party, or (iii) contest that any of the Claimed Amount is owed to the Indemnified Party. The Indemnifying Party may contest the payment of all or a portion of the Claimed Amount only based upon a good faith belief that all or such portion of the Claimed Amount does not constitute Losses for which the Indemnified Party is entitled to indemnification under this Section 7. If no Response Notice is delivered by the Indemnifying Party within such 30-day period, then the Indemnifying Party shall be deemed to have agreed that all of the Claimed Amount is owed to the Indemnified Party. (c) If the Indemnifying Party in the Response Notice agrees (or is deemed to have agreed) that all of the Claimed Amount is owed to the Indemnified Party, then the Indemnifying Party shall owe to the Indemnified Party an amount equal to the Claimed Amount to be paid in the manner set forth in this Section 7. If the Indemnifying Party in the Response Notice agrees that part, but not all, of the Claimed Amount is owed to the Indemnified Party, then the Indemnifying Party shall owe to the Indemnified Party an amount equal to the agreed amount set forth in such Response Notice to be paid in the manner set forth in this Section 7. (d) No delay on the part of the Indemnified Party in notifying the Indemnifying Party shall relieve the Indemnifying Party of any liability or obligation hereunder except to the extent of any actual prejudice caused by or arising out of such delay. 7.3. Payment of Claims. An Indemnifying Party shall make payment of any portion of any Claimed Amount that such Indemnifying Party has agreed in a Response Notice that it owes to an Indemnified Party, or that such Indemnifying Party is deemed to have agreed it owes to such Indemnifying Party, said payment to be made within thirty (30) days after such Response Notice is delivered by such Indemnifying Party or should have been delivered by such Indemnifying Party, as the case may be. 7.4. Limitations. (a) Time for Claims. No Indemnifying Party will be liable for any Losses hereunder arising out of a breach of representation or warranty unless a written claim for indemnification is given by the Indemnified Party to 23 the Indemnifying Party on or prior to the third anniversary of the date on which the registration statement covering the resale of the Shares initially became effective. (b) Maximum Amount. Notwithstanding anything contained herein to the contrary, no Indemnifying Party will be liable for any Losses hereunder in excess of $23,187,505. 7.5 Applicability; Exclusivity. Notwithstanding any term to the contrary in this Section 7, the indemnification and contribution provisions of the Registration Rights Agreement shall govern any claim made with respect to registration statements filed pursuant thereto or sales made thereunder. The parties hereby acknowledge and agree that in addition to remedies of the parties hereto in respect of any and all claims relating to any breach or purported breach of any representation, warranty, covenant or agreement that is contained in this Agreement pursuant to the indemnification provisions of this Section 7, all parties shall always retain the right to pursue and obtain injunctive relief in addition to any other rights or remedies hereunder. 8. Miscellaneous Provisions. 8.1 Rights Cumulative. Each and all of the various rights, powers and remedies of the parties shall be considered to be cumulative with and in addition to any other rights, powers and remedies which such parties may have at law or in equity in the event of the breach of any of the terms of this Agreement. The exercise or partial exercise of any right, power or remedy shall neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to such party. 8.2 Pronouns. All pronouns or any variation thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person, persons, entity or entities may require. 8.3 Notices. (a) Any notices, reports or other correspondence (hereinafter collectively referred to as "correspondence") required or permitted to be given hereunder shall be sent by postage prepaid first class mail, overnight courier or telecopy, or delivered by hand to the party to whom such correspondence is required or permitted to be given hereunder. The date of giving any notice shall be the date of its actual receipt. 24 (b) All correspondence to the Company shall be addressed as follows: Motient Corporation 300 Knightsbridge Parkway Lincolnshire, IL 60069 Attention: Christopher Downie, Executive Vice President and Chief Financial Officer Telecopier: (847) 478-4810 with copies to: Motient Corporation 300 Knightsbridge Parkway Lincolnshire, IL 60069 Attention: Robert Macklin, Esq. Telecopier: (847) 478-4810 Andrews Kurth LLP 450 Lexington Avenue New York, NY 10017 Attention: Paul Silverstein, Esq. Telecopier: (212) 850-2929 (c) All correspondence to the Purchasers shall be addressed as follows: Tudor Investment Corporation 15303 Ventura Boulevard, Suite 900 Sherman Oaks, CA 91403 Attention: Darryl L. Schall Telecopier: (203) 552-6248 with copies to: Tudor Investment Corporation 1275 King Street Greenwich, CT 06831 Attention: Stephen N. Waldman, Esq. Telecopier: (203) 861-5144 Bingham McCutchen, LLP 150 Federal Street Boston, Massachusetts 02110 Attention: Victor J. Paci, Esq. Meerie M. Joung, Esq. Telecopier: (617) 951-8736 25 (d) Any entity may change the address to which correspondence to it is to be addressed by notification as provided for herein. 8.4 Captions. The captions and paragraph headings of this Agreement are solely for the convenience of reference and shall not affect its interpretation. 8.5 Severability. Should any part or provision of this Agreement be held unenforceable or in conflict with the applicable laws or regulations of any jurisdiction, the invalid or unenforceable part or provisions shall be replaced with a provision which accomplishes, to the extent possible, the original business purpose of such part or provision in a valid and enforceable manner, and the remainder of this Agreement shall remain binding upon the parties hereto. 8.6 Governing Law. This Agreement shall be governed by and construed in accordance with the internal and substantive laws of the State of New York and without regard to any conflicts of laws concepts which would apply the substantive law of some other jurisdiction. 8.7 Waiver. No waiver of any term, provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or be construed as, a further or continuing waiver of any such term, provision or condition or as a waiver of any other term, provision or condition of this Agreement. 8.8 Expenses. The Company shall pay its expenses incurred in connection with the preparation, execution and delivery of this Agreement and the Transaction Documents. The Company shall also pay the fees and expenses of the Purchasers reasonably incurred in connection with the preparation, execution and delivery of this Agreement and the Transaction Documents (including the legal fees and expenses of outside counsel to Tudor), in an amount up to $75,000, of which $50,000 was paid prior to the Closing (and which shall be non-refundable whether or not the transactions contemplated by this Agreement close) and up to an additional $25,000 shall be paid upon the Closing. The Purchasers will pay their expenses exceeding $75,000 incurred in connection with the preparation, execution and delivery of this Agreement and the Transaction Documents. 8.9 Assignment. The rights and obligations of any party hereto shall inure to the benefit of and shall be binding upon the authorized successors and permitted assigns of such party. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of Purchasers who hold a majority of the outstanding Shares (the "Majority Purchasers"). Each Purchaser may assign or transfer any or all of its rights under this Agreement to any Person provided that such assignee or transferee agrees in writing to be bound, with respect to the transferred Shares and the Warrant Shares, by the provisions hereof that apply to such assigning or transferring Purchaser; whereupon such assignee or transferee shall be deemed to be a "Purchaser" (and "Tudor" as may be appropriate) for all purposes of this Agreement. 26 8.10 Survival. The respective representations and warranties given by the parties hereto shall survive the Closing Date and the consummation of the transactions contemplated herein for a period of time equal to the time for which indemnification may be sought hereunder, without regard to any investigation made by any party. The respective covenants and agreements agreed to by a party hereto shall survive the Closing Date and the consummation of the transactions contemplated herein in accordance with their respective terms and conditions. 8.11 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto respecting the subject matter hereof and supersedes all prior agreements, negotiations, understandings, representations and statements respecting the subject matter hereof, whether written or oral. No modification, alteration, waiver or change in any of the terms of this Agreement shall be valid or binding upon the parties hereto unless made in writing and duly executed by the parties hereto. 8.12 Amendments. Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provisions of this Agreement shall be effective only if made or given in writing and signed by the Company and the Majority Purchasers; provided, that with respect to any amendment, supplement, modification or waiver relating to Tudor, the consent or waiver of Tudor shall also be required. 8.13 No Third Party Rights. This Agreement is intended solely for the benefit of the parties hereto and is not intended to confer any benefits upon, or create any rights in favor of, any Person (including, without limitation, any stockholder or debt holder of the Company) other than the parties hereto. 8.14 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. The parties hereto confirm that any facsimile copy of another party's executed counterpart of this Agreement (or its signature page thereof) will be deemed to be an executed original thereof. [signature pages to follow] 27 IN WITNESS WHEREOF, the parties hereto have executed this Common Stock Purchase Agreement under seal as of the day and year first above written. MOTIENT CORPORATION By: /s/ Chris Downie ----------------------------------------------- Name: Christopher Downie Title: Executive VP & CFO THE RAPTOR GLOBAL PORTFOLIO LTD. By: Tudor Investment Corporation, Investment Advisor By: /s/ William T. Flaherty ---------------------------------------------- Name: William T. Flaherty Title: Managing Director THE TUDOR BVI GLOBAL PORTFOLIO, LTD. By: Tudor Investment Corporation, Trading Advisor By: /s/ William T. Flaherty ----------------------------------------------- Name: William T. Flaherty Title: Managing Director THE ALTAR ROCK FUND L.P. By: Tudor Investment Corporation, General Partner By: /s/ William T. Flaherty ---------------------------------------------- Name: William T. Flaherty Title: Managing Director TUDOR PROPRIETARY TRADING, L.L.C. By: /s/ William T. Flaherty ---------------------------------------------- Name: William T. Flaherty Title: Managing Director 28 HIGHLAND CRUSADER OFFSHORE PARTNERS, L.P. By: Highland Capital Management, L.P. as General Partner By: /s/ Todd Travers ---------------------------------------------- Name: Todd Travers Title: Senior Portfolio Manager YORK DISTRESSED OPPORTUNITIES FUND, L.P. By: /s/ Adam J. Semler ----------------------------------------------- Name: Adam J. Semler Title: CFO YORK SELECT, L.P. By: /s/ Adam J. Semler ---------------------------------------------- Name: Adam J. Semler Title: CFO YORK SELECT UNIT TRUST By: /s/ Adam J. Semler ---------------------------------------------- Name: Adam J. Semler Title: CFO of its Investment Manager M&E ADVISORS LLC By: /s/ Philip Mandelbaum ---------------------------------------------- Name: Philip Mandelbaum Title: CFO 29 CATALYST CREDIT OPPORTUNITY FUND By Catalyst Investment Management, LLC, its managing member By: /s/ Francis X. Gallagher ----------------------------------------------- Name: Francis X. Gallagher Title: Principal CATALYST CREDIT OPPORTUNITY FUND OFFSHORE By Catalyst Investment Management, LLC, its managing member By: /s/ Francis X. Gallagher ---------------------------------------------- Name: Francis X. Gallagher Title: Principal DCM LTD. By Catalyst Investment Management, LLC, its managing member By: /s/ Francis X. Gallagher ----------------------------------------------- Name: Francis X. Gallagher Title: Principal GREYWOLF CAPITAL II L.P. By: /s/ William Troy ----------------------------------------------- Name: William Troy Title: COO GREYWOLF CAPITAL OVERSEAS FUND By: /s/ William Troy ----------------------------------------------- Name: William Troy Title: COO 30 LC CAPITAL MASTER FUND By: /s/ Richard F. Conway ----------------------------------------------- Name: Richard F. Conway Title: Director 31 Schedule 1 ----------
Schedule of Purchasers ---------------------- No. of Shares of No.of Name Common Stock Warrant Shares ---- ------------ -------------- The Raptor Global Portfolio Ltd. 1,882,115 470,529 The Tudor BVI Global Portfolio Ltd. 418,437 104,609 Tudor Proprietary Trading, L.L.C. 224,221 56,055 The Altar Rock Fund L.P. 20,682 5,171 Highland Crusader Offshore Partners, L.P. 545,455 136,364 York Distressed Opportunities Fund, L.P. 150,000 37,500 York Select, L.P. 45,000 11,250 York Select Unit Trust 30,000 7,500 M&E Advisors LLC 100,000 25,000 Catalyst Credit Opportunity Fund 14,000 3,500 Catalyst Credit Opportunity Fund Offshore 34,800 8,700 DCM Ltd. 1,200 300 Greywolf Capital II L.P. 175,000 43,750 Greywolf Capital Overseas Fund 325,000 81,250 LC Capital Master Fund 250,000 62,500 Total: 4,215,910 1,053,978 ------ --------- ---------
EX-10.39 3 ex1039.txt REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.39 MOTIENT CORPORATION REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of April 7, 2004 by and among (i) MOTIENT CORPORATION, a Delaware corporation, (the "Company") (ii) The Raptor Global Portfolio, Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund L.P. and Tudor Proprietary Trading, L.L.C. (collectively, the "Tudor Investors"), each of which is listed on Schedule 1 hereto, and (iii) each other investor listed on Schedule 1 hereto (each of the persons or entities described in clauses (ii) and (iii), individually, an "Investor" and, collectively, the "Investors"). WHEREAS, the Company has agreed to issue and sell to the Investors, and the Investors have agreed to purchase from the Company, an aggregate of 4,215,910 shares (the "Shares") of the Company's common stock, $0.01 par value per share (including any securities into which or for which such shares may be exchanged for, or converted into, pursuant to any stock dividend, stock split, stock combination, recapitalization, reclassification, reorganization or other similar event, the "Common Stock"), all upon the terms and conditions set forth in the Common Stock Purchase Agreement, dated as of the date hereof, between the Company and the Investors (the "Stock Purchase Agreement"); and WHEREAS, the terms of the Stock Purchase Agreement provide that it shall be a condition precedent to the closing of the transactions thereunder, for the Company and the Investors to execute and deliver this Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties hereto hereby agree as follows: 1. DEFINITIONS. The following terms shall have the meanings provided therefor below or elsewhere in this Agreement as described below: "Affiliates" means any Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, a Person, as such terms are used and construed under Rule 144, and with respect to the Tudor Investors, in addition to the foregoing, the term "Affiliate" shall also include the Related Entities. "Board" means the board of directors of the Company. "Business Day" means any day except Saturday, Sunday and any day which shall be a federal legal holiday or a day on which banking institutions in the State of Delaware are authorized or required by law or other governmental action to close. 1 "Closing Date" means the date on which the transactions contemplated by the Stock Purchase Agreement are consummated. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and all of the rules and regulations promulgated thereunder. "Person" (whether or not capitalized) means an individual, partnership, limited liability company, corporation, association, trust, joint venture, unincorporated organization, and any government, governmental department or agency or political subdivision thereof. "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective Registration Statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Shares covered by such Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference in such Prospectus. "Registrable Shares" means, at the relevant time of reference thereto, the Shares and the Warrant Shares (including any shares of capital stock that may be issued in respect thereof pursuant to a stock split, stock dividend, recombination, reclassification or the like), provided, however, that the term "Registrable Shares" shall not include any of the Shares or Warrant Shares that are actually sold pursuant to a registration statement that has been declared effective under the Securities Act by the SEC. "Registration Statement" means the Mandatory S-1 Registration Statement, any Demand Registration on Form S-3, and any additional registration statements contemplated by this Agreement, including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference in such registration statement or Prospectus. "Related Entities" includes, with respect to Tudor, any entities for which any of the Tudor Entities or any its affiliates serve as general partner and/or investment adviser or in a similar capacity, and all mutual funds or other pooled investment vehicles or entities under the control or management of any of the Tudor Entities or the general partner or investment adviser thereof, or an any affiliate of any of them. For purposes of this Agreement, (a) "Tudor Entities" means each of the following: any entity for which Tudor Investment Corporation or an Affiliate thereof acts as general partner and/or investment adviser, Tudor Investment Corporation, Tudor Group Holdings LLC, their respective Affiliates, or any Affiliate or Affiliated Group of Tudor Investment Corporation and/or Tudor Group Holdings LLC, and (b) with respect to the Tudor Entities, "Affiliated Group" has the meaning given to it in Section 1504 of the Internal Revenue Code of 1986, as amended, and in addition includes any analogous combined, consolidated, or unitary group, as defined under any applicable state, local or foreign income tax law. 2 "Rule 144" means Rule 144 promulgated under the Securities Act and any successor or substitute rule, law or provision. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended, and all of the rules and regulations promulgated thereunder. "Warrants" means the warrants to purchase Common Stock, dated as of the date hereof, issued by the Company to the Investors pursuant to the Stock Purchase Agreement, a form of which is attached hereto as Exhibit A. "Warrant Shares" means the shares of Common Stock issued or issuable upon the exercise of the Warrants. 2. MANDATORY FORM S-1 REGISTRATION. (a) As promptly as possible after the date hereof, and in any event no later than June 30, 2004 (the "Filing Date") the Company will prepare and file with the SEC a registration statement on Form S-1 for the purpose of registering under the Securities Act all of the Registrable Shares for resale by, and for the account of, each Investor as an initial selling stockholder thereunder (the "Mandatory S-1 Registration Statement"). The Mandatory S-1 Registration Statement shall permit the Investors to offer and sell, on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, any or all of the Registrable Shares. The Company agrees to use its best efforts to cause the Mandatory S-1 Registration Statement to be declared effective as soon as possible but in no event later than ninety (90) calendar days after the Filing Date (the "Mandatory Effective Date") (including filing with the SEC, within three (3) Business Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the SEC that the Mandatory S-1 Registration Statement will not be "reviewed" or will not be subject to further review, a request for acceleration of effectiveness in accordance with Rule 461 promulgated under the Securities Act (an "Acceleration Request"), which request shall request an effective date that is within three (3) Business Days of the date of such request). The Company shall notify each Investor in writing promptly (and in any event within one (1) Business Day) after the Company's submission of an Acceleration Request to the SEC. The Company shall be required to keep the Mandatory S-1 Registration Statement continuously effective (including through the filing of any required post-effective amendments) until the earlier to occur of (i) the date after which all of the Registrable Shares registered thereunder shall have been sold and (ii) the second (2nd) anniversary of the later to occur of (a) the Mandatory Effective Date and (b) the date on which each Warrant has either vested in full, or the date on which by the terms of such Warrant there are no additional Warrant Shares with respect to which it is possible for the Warrant to vest; provided, that in either case such date shall be extended by the amount of time of any Suspension Period. Thereafter, the Company shall be entitled to withdraw the Mandatory S-1 Registration Statement and, upon such withdrawal, the Investors shall have no further right to offer or sell any of the Registrable Shares pursuant to the Mandatory S-1 Registration Statement (or any Prospectus relating thereto). 3 (b) Notwithstanding anything in this Section 2 to the contrary, if the Company shall furnish to the Investors a certificate signed by the President or Chief Executive Officer of the Company stating that the Board has made the good faith determination (i) that the continued use by the Investors of the Mandatory S-1 Registration Statement for purposes of effecting offers or sales of Registrable Shares pursuant hereto would require, under the Securities Act and the rules and regulations promulgated thereunder, premature disclosure in the Mandatory S-1 Registration Statement (or the Prospectus relating thereto) of material, nonpublic information concerning the Company, its business or prospects or any proposed material transaction involving the Company, (ii) that such premature disclosure would be materially adverse to the Company, its business or prospects or any such proposed material transaction or would not be in the best interests of the Company and (iii) that it is therefore essential to suspend the use by the Investors, of the Mandatory S-1 Registration Statement (and the Prospectus relating thereto), then the right of the Investors to use the Mandatory S-1 Registration Statement (and the Prospectus relating thereto) for purposes of effecting offers or sales of Registrable Shares pursuant thereto shall be suspended for a period (the "Suspension Period") not greater than fifteen (15) consecutive Business Days during any consecutive twelve (12) month period. During the Suspension Period, the Investors shall not offer or sell any Registrable Shares pursuant to or in reliance upon the Mandatory S-1 Registration Statement (or the Prospectus relating thereto). The Company agrees that, as promptly as possible, but in no event later than one (1) Business Day, after the consummation, abandonment or public disclosure of the event or transaction that caused the Company to suspend the use of the Mandatory S-1 Registration Statement (and the Prospectus relating thereto) pursuant to this Section 2(c), the Company will as promptly as possible lift any suspension, provide the Investors with revised Prospectuses, if required, and will notify the Investors of their ability to effect offers or sales of Registrable Shares pursuant to or in reliance upon the Mandatory S-1 Registration Statement. (c) It shall be a condition precedent to the obligations of the Company to register Registrable Shares for the account of an Investor pursuant to this Section 2 or Section 3 that such Investor furnish to the Company such information regarding itself, the Registrable Securities held by it, and the method of disposition of such securities as shall be required to effect the registration of such Investor's Registrable Securities. (d) Notwithstanding anything in this Agreement to the contrary, the Investors' sole remedy for the failure of the Company to file the Mandatory S-1 Registration Statement on or prior to June 30, 2004, shall be the vesting of the Warrants as provided for therein. 2A. MANDATORY S-3 REGISTRATION RIGHTS (a) If at any time any Registrable Shares are not able to be resold pursuant to an effective Registration Statement, Form S-3 (or other equivalent form) is then available for the registration of such Registrable Shares, and the Company shall receive from any Investor (including for this purpose its Affiliates) who holds (or who together hold) at least twenty-five percent (25%) of the then outstanding Registrable Shares a written request or requests (a "Demand Notice") that the Company effect a registration on Form S-3 (a "Demand Registration"), or 4 any successor or substitute form, with respect to all or a part of the Registrable Shares owned by such Investor(s), then the Company will promptly give written notice of the proposed registration and the Investor's or Investors' request therefor to all other Investors, and use best efforts to effect such registration, as soon as practicable and in any event within thirty (30) days, of all or such portion of such Investor's or Registrable Shares as are specified in such request, together with all or such portion of the Registrable Shares of any other Investor or Investors joining in such request as are specified in a written request given within ten (10) business days after receipt of such written notice from the Company; provided, however, that the Company may temporarily suspended the use of such registration statement for the same reasons and on the same terms as described in Section 2(b) above. The Company shall not be required to effect more than three (3) registrations pursuant to this Section 2A(a) during any consecutive twelve (12) month period. (b) It shall be a condition precedent to the obligations of the Company to register Registrable Shares for the account of an Investor pursuant to this Section 2 or Section 3 that such Investor furnish to the Company such information regarding itself, the Registrable Securities held by it, and the method of disposition of such securities as shall be required to effect the registration of such Investor's Registrable Securities. 3. "PIGGYBACK REGISTRATION". (a) If at any time any Registrable Shares are not able to be resold pursuant to an effective Registration Statement, and the Company proposes to register any of its Common Stock under the Securities Act, whether as a result of an offering for its own account or the account of others (but excluding any registrations to be effected on Forms S-4 or S-8 or other applicable successor Forms), the Company shall, each such time, give to the Investors twenty (20) days' prior written notice of its intent to do so, and such notice shall describe the proposed registration and shall offer such Investors the opportunity to register such number of Registrable Shares as each such Investor may request. Upon the written request of any Investor given to the Company within fifteen (15) days after the receipt of any such notice by the Company, the Company shall include in such Registration Statement all or part of the Registrable Shares of such Investor, to the extent requested to be registered. (b) If a registration pursuant to Section 3 hereof involves an underwritten offering and the managing underwriter shall advise the Company in writing that, in its opinion, the number of shares of Common Stock requested by the Investors to be included in such registration is likely to affect materially and adversely the success of the offering or the price that would be received for any shares of Common Stock offered in such offering, then, notwithstanding anything in this Section 3 to the contrary, the Company shall only be required to include in such registration, to the extent of the number of shares of Common Stock which the Company is so advised can be sold in such offering, (i) first, the number of shares of Common Stock requested to be included in such registration for the account of any stockholders of the Company (including the Investors), pro rata among such stockholders on the basis of the number of shares of Common Stock that each of them has requested to be included in such registration, and (ii) second, any shares of Common Stock proposed to be included in such registration for the account of the Company. 5 (c) In connection with any offering involving an underwriting of shares, the Company shall not be required under this Section 3 or otherwise to include the Registrable Shares of any Investor therein unless such Investor accepts and agrees to the terms of the underwriting, which shall be reasonable and customary, as agreed upon between the Company and the underwriters selected by the Company. 4. OBLIGATIONS OF THE COMPANY. In connection with the Company's registration obligations hereunder, the Company shall, as expeditiously as practicable: (a) No less than five (5) Business Days prior to filing, as required hereunder, the Mandatory S-1 Registration Statement or Prospectus or any amendments or supplements thereto (including any document that would be incorporated or deemed to have been incorporated therein by reference (other than documents containing material nonpublic information)), the Company shall (i) furnish to each Investor and any counsel selected by the Investors holding a majority of the Registrable Shares ("Investors' Counsel") copies of all such documents to be filed with the SEC, which documents shall be subject to the review of the Investors and Investors' Counsel, (ii) cause its officers and directors, counsel and certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of Investors' Counsel, to conduct a reasonable investigation within the meaning of the Securities Act, and (iii) notify the Investors and the Investors' Counsel of any stop order issued or threatened by the SEC and use best efforts to prevent the entry of such stop order or to remove it if entered. The Company shall not file the Mandatory S-1 Registration Statement, Prospectus or any amendments or supplements (other than periodic reports required under the Exchange Act) thereto to which Investors holding a majority of the Registrable Shares shall reasonably object to in writing prior to filing; provided; however that the deadline set forth in Section 2 hereof by which date the Mandatory S-1 Registration Statement is to be filed shall be tolled during any period in which the Company and the Investors address matters raised by the Investors in such written objection only if, and for so long as, such objecting Investors consent in writing to such tolling. (b) Prepare and file with the SEC such amendments and supplements, including post-effective amendments, to each Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement continuously effective as required herein, and prepare and file with the SEC such additional Registration Statements as necessary to register for resale under the Securities Act all of the Registrable Shares (including naming any permitted transferees of Registrable Shares as selling stockholders in such Registration Statement); (ii) cause any related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as possible to any comments received from the SEC with respect to each Registration Statement or any amendment thereto and as promptly as possible provide the Investors true and complete copies of all correspondence from and to the SEC relating to the Registration Statement (other than correspondence containing material nonpublic information); and (iv) comply with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Shares covered by such Registration Statement as so amended or in such Prospectus as so supplemented. 6 (c) Notify the Investors and Investors' Counsel as promptly as possible (i) when the SEC notifies the Company whether there will be a "review" of a Registration Statement and whenever the SEC comments in writing on such Registration Statement; and (ii) when a Registration Statement, or any post-effective amendment or supplement thereto, has become effective, and after the effectiveness thereof: (A) of any request by the SEC or any other federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (B) of the issuance by the SEC or any state securities commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Shares or the initiation of any proceedings for that purpose; and (C) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Shares for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose. Without limitation of any remedies to which the Investors may be entitled under this Agreement, if any of the events described in Section 4(c)(ii)(A), 4(c)(ii)(B), and 4(c)(ii)(C) occur, the Company shall use best efforts to respond to and correct the event. (d) Notify the Investors and Investors' Counsel as promptly as possible of the happening of any event as a result of which the Prospectus included in or relating to a Registration Statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading; and, thereafter, the Company will as promptly as possible prepare (and, when completed, give notice to each Investor) a supplement or amendment to such Prospectus so that, as thereafter delivered to the purchasers of such Registrable Shares, such Prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; provided that upon such notification by the Company, the Investors will not offer or sell Registrable Shares until the Company has notified the Investors that it has prepared a supplement or amendment to such Prospectus and delivered copies of such supplement or amendment to the Investors (it being understood and agreed by the Company that the foregoing proviso shall in no way diminish or otherwise impair the Company's obligation to as promptly as possible prepare a Prospectus amendment or supplement as above provided in this Section 4(d) and deliver copies of same as above provided in Section 4(h) hereof), and it being further understood that, in the case of the Mandatory S-1 Registration Statement, any such period during which the Investors are restricted from offering or selling Registrable Shares shall constitute a Suspension Period. (e) Upon the occurrence of any event described in Section 4(d) hereof, as promptly as possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading. (f) Use best efforts to avoid the issuance of or, if issued, obtain the withdrawal of, (i) any order suspending the effectiveness of any Registration 7 Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Shares for sale in any jurisdiction, as promptly as possible (it being understood that, in the case of the Mandatory S-1 Registration Statement, any period during which the effectiveness of the Mandatory S-1 Registration Statement or the qualification of any Registrable Shares is suspended shall constitute a Suspension Period). (g) Furnish to the Investors and Investors' Counsel, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, and all exhibits to the extent requested by such Investor or Investors' Counsel (including those previously furnished or incorporated by reference) as promptly as possible after the filing of such documents with the SEC. (h) As promptly as possible furnish to each selling Investor, without charge, such number of copies of a Prospectus, including a preliminary Prospectus, in conformity with the requirements of the Securities Act, and such other documents (including, without limitation, Prospectus amendments and supplements) as each such selling Investor may reasonably request in order to facilitate the disposition of the Registrable Shares covered by such Prospectus and any amendment or supplement thereto. The Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Investors in connection with the offering and sale of the Registrable Shares covered by such Prospectus and any amendment or supplement thereto to the extent permitted by federal and state securities laws and regulations. (i) Use best efforts to register and qualify (or obtain an exemption from such registration and qualification) the Registrable Shares under such other securities or blue sky laws of such jurisdictions as each Investor shall request, to keep such registration or qualification (or exemption therefrom) effective during the periods each Registration Statement is effective, and do any and all other acts or things which may be reasonably necessary or advisable to enable each Investor to consummate the public sale or other disposition of Registrable Shares in such jurisdiction, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions where it is not then qualified or subject to process. (j) Cooperate with the Investors to facilitate the timely preparation and delivery of certificates representing the Registrable Shares to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by the Stock Purchase Agreement and applicable law, of all restrictive legends, and to enable such Registrable Shares to be in such denominations and registered in such names as such Investors may request. (k) Cooperate with any reasonable due diligence investigation undertaken by the Investors, any managing underwriter participating in any disposition pursuant to a Registration Statement, Investors' Counsel and any attorney, accountant or other agent retained by Investors or any managing underwriter, in connection with the sale of the Registrable Shares, including, without limitation, making available any documents and information; provided, however, that the Company will not deliver or make available to any Investor 8 material, nonpublic information unless such Investor specifically requests and consents in advance in writing to receive such material, nonpublic information and, if requested by the Company, such Investor agrees in writing to treat such information as confidential. (l) At the request of an Affiliate, the Company shall amend any Registration Statement to include such Affiliate as a selling stockholder in such Registration Statement. (m) Comply with all applicable rules and regulations of the SEC in all material respects. 5. EXPENSES OF REGISTRATION. The Company shall pay for all expenses incurred in connection with a registration pursuant to this Agreement and compliance with Section 4 of this Agreement, including without limitation (i) all registration, filing and qualification fees and expenses (including without limitation those related to filings with the SEC, the Nasdaq National Market System and in connection with applicable state securities or blue sky laws), (ii) all printing expenses, (iii) all messenger, telephone and delivery expenses incurred by the Company, (iv) all fees and disbursements of counsel for the Company and Investors' Counsel, and (v) all fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. 6. DELAY OF REGISTRATION. Subject to Section 11(d) hereof, the Investors and the Company (other than with respect to Section 4(d) hereof) shall not take any action to restrain, enjoin or otherwise delay any registration as the result of any controversy which might arise with respect to the interpretation or implementation of this Agreement. 7. INDEMNIFICATION. In the event that any Registrable Shares of the Investors are included in a Registration Statement pursuant to this Agreement: (a) To the fullest extent permitted by law, the Company will indemnify and hold harmless each Investor and each officer, director, fiduciary, agent, investment advisor, employee, member (or other equity holder), general partner and limited partner (and affiliates thereof) of such Investor, each broker or other person acting on behalf of such Investor and each person, if any, who controls such Investor within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, (the "Losses") to which they may become subject under the Securities Act or otherwise, insofar as such Losses (or actions in respect thereof) arise out of or relate to any untrue or alleged untrue statement of any material fact contained in the Registration Statement, or arise out of or relate to the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or state securities or blue sky laws applicable to the Company and leading to action or inaction required of the Company in connection with such registration or qualification under such Securities Act or state securities or blue sky laws; and, subject to the provisions of Section 7(c) hereof, the Company will reimburse on demand such Investor, such broker or other person acting on behalf of such Investor or such officer, director, fiduciary, employee, member (or other equity holder), general partner, limited partner, affiliate or controlling person for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 7(a) shall not apply to amounts paid in 9 settlement of any such Losses if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, damage, liability or action to the extent that it solely arises out of or is based upon an untrue statement of any material fact contained in the Registration Statement or omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, in reliance upon and in conformity with written information furnished by such Investor expressly for use in connection with such Registration Statement. (b) To the fullest extent permitted by law, each Investor, severally and not jointly, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, each person, if any, who controls the Company within the meaning of the Securities Act, and all other Investors against any Losses to which the Company or any such director, officer or controlling person or other Investor may become subject to, under the Securities Act or otherwise, insofar as such Losses (or actions in respect thereto) solely arise out of or are based upon any untrue statement of any material fact contained in the Registration Statement, or solely arise out of or relate to the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement in reliance upon and in conformity with written information furnished by such Investor expressly for use in connection with such Registration Statement; and, subject to the provisions of Section 7(d) hereof, such Investor will reimburse on demand any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, or other Investor in connection with investigating or defending any such Losses, provided, however, that the maximum amount of liability of such Investor hereunder shall be limited to the proceeds (net of underwriting discounts and commissions, if any) actually received by such Investor from the sale of Registrable Shares covered by such Registration Statement; and provided, further, however, that the indemnity agreement contained in this Section 7(b) shall not apply to amounts paid in settlement of any such Losses if such settlement is effected without the consent of such Investor against which the request for indemnity is being made (which consent shall not be unreasonably withheld). (c) As promptly as possible after receipt by an indemnified party under this Section 7 of notice of the threat, assertion or commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof and the indemnifying party shall have the right to participate in and, to the extent the indemnifying party desires, jointly with any other indemnifying party similarly noticed, to assume at its expense the defense thereof with counsel mutually satisfactory to the parties; provided, however, that, the failure to notify an indemnifying party promptly of 10 the threat, assertion or commencement of any such action shall not relieve such indemnifying party of any liability to the indemnified party under this Section 7 except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the indemnifying party. (d) If any indemnified party shall have reasonably concluded that there may be one or more legal defenses available to such indemnified party which are different from or additional to those available to the indemnifying party, or that such claim or litigation involves or could have an effect upon matters beyond the scope of the indemnity agreement provided in this Section 7, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party, and such indemnifying party shall reimburse such indemnified party and any person controlling such indemnified party for the fees and expenses of counsel retained by the indemnified party which are reasonably related to the matters covered by the indemnity agreement provided in this Section 7. Subject to the foregoing, an indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall not be at the expense of the Company. (e) If the indemnification provided for in this Section 7 from the indemnifying party is applicable by its terms but unavailable to an indemnified party hereunder in respect of any Losses, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative faults of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Sections 7(a), 7(b) 7(c) and 7(d), any legal or other fees, charges or expenses reasonably incurred by such party in connection with any investigation or proceeding. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 7(e) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. (f) The indemnity and contribution agreements contained in this Section are in addition to any liability that any indemnifying party may have to any indemnified party. 11 8. REPORTS UNDER THE EXCHANGE ACT. With a view to making available to the Investors the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit the Investors to sell the Registrable Shares to the public without registration, the Company agrees to use best efforts to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, (ii) file with the SEC in a timely manner all reports and other documents required to be filed by an issuer of securities registered under the Securities Act or the Exchange Act; provided the parties hereto acknowledge that such filings may not be made in a timely manner prior to June 30, 2004, (iii) as long as any Investor owns any Shares or Warrant Shares, to furnish in writing upon such Investor's request a written statement by the Company that it has complied with the reporting requirements of Rule 144 and of the Securities Act and the Exchange Act, and to furnish to such Investor a copy of the most recent annual and quarterly reports of the Company, and such other reports and documents so filed by the Company as may be reasonably requested in availing such Investor of any rule or regulation of the SEC permitting the selling of any such Shares without registration and (iv) undertake any additional actions reasonably necessary to maintain the availability of a Registration Statement, including any successor or substitute forms, or the use of Rule 144. 9. TRANSFER OF REGISTRATION RIGHTS. Each Investor may assign or transfer any or all of its rights under this Agreement to any Person, provided such assignee or transferee agrees in writing to be bound by the provisions hereof that apply to such assigning or transferring Investor. Upon any such, and each successive, assignment or transfer to any permitted assignee or transferee in accordance with the terms of this Section 9, such permitted assignee or transferee shall be deemed to be an "Investor" (and a "Tudor Investor," as may be appropriate) for all purposes of this Agreement. 10. ENTIRE AGREEMENT. This Agreement constitutes and contains the entire agreement and understanding of the parties with respect to the subject matter hereof, and it also supersedes any and all prior negotiations, correspondence, agreements or understandings with respect to the subject matter hereof. 11. MISCELLANEOUS. (a) This Agreement, and any right, term or provision contained herein, may not be amended, modified or terminated, and no right, term or provision may be waived, except with the written consent of (i) the holders of a majority of the then outstanding Registrable Shares and (ii) the Company; provided that, with respect to any right, term or provision relating to the Tudor Investors, such right, term or provision shall not be amended, modified or terminated, and no such right, term or provision shall be waived, except with the written consent of (A) the Tudor Investors and (B) the Company. (b) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York. This Agreement shall be binding upon the parties hereto and their respective heirs, personal representatives, successors and permitted assigns and transferees, provided that the terms and conditions of Section 9 hereof are satisfied. Notwithstanding anything in this Agreement to the contrary, if at any time any Investor (including any successors or assigned) shall cease to own any Registrable Shares, all of such Investor's rights under this Agreement shall immediately terminate. 12 (c) Any notices to be given pursuant to this Agreement shall be in writing and shall be given by certified or registered mail, return receipt request. Notices shall be deemed given when personally delivered or when mailed to the addresses of the respective parties as set forth on Exhibit A hereto, or to such changed address of which any party may notify the others pursuant hereto, except that a notice of change of address shall be deemed given when received. (d) The parties acknowledge and agree that in the event of any breach of this Agreement, remedies at law will be inadequate, and each of the parties hereto shall be entitled to specific performance of the obligations of the other parties hereto and to such appropriate injunctive relief as may be granted by a court of competent jurisdiction. All remedies, either under this Agreement or by law or otherwise afforded to any of the parties, shall be cumulative and not alternative. (e) This Agreement may be executed in a number of counterparts. All such counterparts together shall constitute one Agreement, and shall be binding on all the parties hereto notwithstanding that all such parties have not signed the same counterpart. The parties hereto confirm that any facsimile copy of another party's executed counterpart of this Agreement (or its signature page thereof) will be deemed to be an executed original thereof. (f) Except as contemplated in Section 9 hereof, this Agreement is intended solely for the benefit of the parties hereto and is not intended to confer any benefits upon, or create any rights in favor of, any Person (including, without limitation, any stockholder or debt holder of the Company) other than the parties hereto. (g) If any provision of this Agreement is invalid, illegal or unenforceable, such provision shall be ineffective to the extent, but only to the extent of, such invalidity, illegality or unenforceability, without invalidating the remainder of such provision or the remaining provisions of this Agreement, unless such a construction would be unreasonable. (h) This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their permitted successors and assigns. [signature pages to follow] 13 IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement as of the date and year first above written. MOTIENT CORPORATION By: /s/ Christopher Downie ---------------------------------------- Name: Christopher Downie Title: Executive Vice President & CFO INVESTORS: THE RAPTOR GLOBAL PORTFOLIO LTD. By: Tudor Investment Corporation, Investment Advisors By: /s/ William T. Flaherty ----------------------------------------- Name: William T. Flaherty Title: Managing Director THE TUDOR BVI GLOBAL PORTFOLIO, LTD. By: Tudor Investment Corporation, Trading Advisor By: /s/ William T. Flaherty ----------------------------------------- Name: William T. Flaherty Title: Managing Director THE ALTAR ROCK FUND L.P. By: Tudor Investment Corporation, General Partner By: /s/ William T. Flaherty ----------------------------------------- Name: William T. Flaherty Title: Managing Director TUDOR PROPRIETARY TRADING, L.L.C. By: /s/ William T. Flaherty ----------------------------------------- Name: William T. Flaherty Title: Managing Director 14 HIGHLAND CRUSADER OFFSHORE PARTNERS, L.P. By: Highland Capital Management, L.P. As General Partner By: /s/ Todd Travers ---------------------------------------- Name: Todd Travers Title: Senior Portfolio Manager YORK DISTRESSED OPPORTUNITIES FUND, L.P. By: /s/ Adam J. Semler ---------------------------------------- Name: Adam J. Semler Title: CFO YORK SELECT, L.P. By: /s/ Adam J. Semler ----------------------------------------- Name: Adam J. Semler Title: CFO YORK SELECT UNIT TRUST By: /s/ Adam J. Semler ----------------------------------------- Name: Adam J. Semler Title: CFO M&E ADVISORS LLC By: /s/ Philip Mandelbaum ----------------------------------------- Name: Philip Mandelbaum Title: CFO 15 CATALYST CREDIT OPPORTUNITY FUND By Catalyst Investment Management, LLC, its managing member By: /s/ Francis X. Gallagher ----------------------------------------- Name: Francis X. Gallagher Title: Principal CATALYST CREDIT OPPORTUNITY FUND OFFSHORE By Catalyst Investment Management, LLC, its managing member By: /s/ Francis X. Gallagher ----------------------------------------- Name: Francis X. Gallagher Title: Principal DCM LTD. By Catalyst Investment Management, LLC, its managing member By: /s/ Francis X. Gallagher ----------------------------------------- Name: Francis X. Gallagher Title: Principal GREYWOLF CAPITAL II L.P. By: /s/ William Troy ---------------------------------------- Name: William Troy Title: COO GREYWOLF CAPITAL OVERSEAS FUND By: /s/ William Troy ----------------------------------------- Name: William Troy Title: COO 16 LC CAPITAL MASTER FUND By: /s/ Richard P. Conway ----------------------------------------- Name: Richard P. Conway Title: Director 17 Exhibit A All correspondence to the Company shall be addressed as follows: Motient Corporation 300 Knightsbridge Parkway Lincolnshire, IL 60069 Attention: Christopher Downie, Executive Vice President and Chief Financial Officer Telecopier: (847) 478-4810 with copies to: Motient Corporation 300 Knightsbridge Parkway Lincolnshire, IL 60069 Attention: Robert Macklin, Esq. Telecopier: (847) 478-4810 Andrews Kurth LLP 450 Lexington Avenue New York, NY 10017 Attention: Paul Silverstein, Esq. Telecopier: (212) 850-2929 All correspondence to the Tudor Investors shall be addressed as follows: Tudor Investment Corporation 15303 Ventura Boulevard, Suite 900 Sherman Oaks, CA 91403 Attention: Darryl L. Schall Telecopier: (818) 380-3065 with copies to: Tudor Investment Corporation 1275 King Street Greenwich, CT 06831 Attention: Stephen N. Waldman, Esq. Telecopier: (203) 861-5144 Bingham McCutchen, LLP 150 Federal Street Boston, Massachusetts 02110 Attention: Victor J. Paci, Esq. Meerie M. Joung, Esq. Telecopier: (617) 951-8736 18 Schedule 1 List of Investors ----------------- The Raptor Global Portfolio Ltd. The Tudor BVI Global Portfolio, Ltd. The Altar Rock Fund L.P. Tudor Proprietary Trading, L.L.C. Highland Crusader Offshore Partners, L.P. York Distressed Opportunities Fund, L.P. York Select, L.P. York Select Unit Trust M&E Advisors LLC Catalyst Credit Opportunity Fund Catalyst Credit Opportunity Fund Offshore DCM, Ltd. Greywolf Capital II L.P. Greywolf Capital Overseas Fund LC Capital Master Fund EX-10.40 4 ex1040.txt FORM OF COMMON STOCK PURCHASE WARRANT EXHIBIT 10.40 NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY BE SOLD OR TRANSFERRED UNLESS THE REGISTRATION PROVISIONS OF THE SAID ACT AND APPLICABLE STATE SECURITIES LAWS HAVE BEEN COMPLIED WITH OR UNLESS COMPLIANCE WITH SUCH PROVISIONS IS NOT REQUIRED. April 7, 2004 MOTIENT CORPORATION FORM OF COMMON STOCK PURCHASE WARRANT Void after June 30, 2009 This Warrant (the "Warrant") entitles [___________________________] (including any successors or assigns, the "Holder"), for value received, to purchase from motient corporation, a Delaware corporation, at any time and from time to time, subject to the terms and conditions set forth herein, during the period starting from 5:00 a.m. on the Initial Exercise Date (as defined in Section 1 below) to 5:00 p.m., Eastern time, on the Expiration Date (as defined in Section 1 below), at which time this Warrant shall expire and become void, all or any portion of the vested Warrant Shares at the Exercise Price (as defined in Section 1 below). This Warrant also is subject to the following terms and conditions: 1. Definitions. As used in this Warrant, the following terms shall have the respective meanings set forth below or elsewhere in this Warrant as referred to below: "Affiliate" means any Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, a Person, as such terms are used and construed under Rule 144, and any Person (or group of Persons) who share(s) voting or investment power or is (are) deemed a beneficial owner(s), as such terms are used and construed under Rule 13d-3 of the rules and regulations promulgated under the Securities Exchange Act of 1934, as amended. "Closing Date" means the date of the closing of the transactions contemplated under the Stock Purchase Agreement. "Common Stock" means the common stock, $0.01 par value per share, of the Company (including any securities into which or for which such shares may be 1 exchanged for, or converted into, pursuant to any stock dividend, stock split, stock combination, recapitalization, reclassification, reorganization or other similar event). "Company" means Motient Corporation, a Delaware corporation. "Effective Date" means the earlier to occur of (i) date that occurs ninety (90) days after the initial filing by the Company with the SEC of a registration statement covering the resale of the Shares, and (ii) September 30, 2004. "Exercise Price" means, as applicable and as adjusted from time to time pursuant to the terms of this Warrant, $5.50 per share of Common Stock. "Expiration Date" means June 30, 2009. "Fair Market Value" shall mean (i) if the Common Stock is traded on Nasdaq, then the last reported sale price per share of Common Stock on the Nasdaq-NMS or any national securities exchange in which such Common Stock is quoted or listed, as the case may be, on the date immediately preceding each date the Warrant is exercised or, if no such sale price is reported on such date, such price on the next preceding business day in which such price was reported, (ii) if the Common Stock is actively traded over-the-counter, then the average of the closing bid and asked prices quoted on the Nasdaq-NMS (or similar system) over the five (5) trading days ended on the trading day immediately preceding each date the Warrant is exercised or (iii) if such Common Stock is not traded, quoted or listed on the Nasdaq-NMS or any national securities exchange or the over-the-counter market, then the fair market value of a share of Common Stock, as determined in good faith by the Board of Directors of the Company. "Holder" has the meaning set forth in the preamble of this Warrant. "Initial Exercise Date" means the date on which this Warrant first vests in accordance with Section 2.1 hereof. "Person" (whether or not capitalized) means an individual, entity, partnership, limited liability company, corporation, association, trust, joint venture, unincorporated organization, and any government, governmental department or agency or political subdivision thereof. "SEC" means the Securities and Exchange Commission "Shares" means the aggregate of 4,215,910 shares of Common Stock issued pursuant to the Stock Purchase Agreement. "Stock Purchase Agreement" means that certain Common Stock Purchase Agreement dated April 7, 2004, by and between the Company and the initial Holder hereof. 2 "Warrant Shares" means an aggregate of [_____________] shares of Common Stock, after giving effect to all adjustments thereto provided for herein, including, without limitation, those set forth in Section 4 hereof. 2. Exercise of Warrant. 2.1 Method of Exercise; Vesting. Subject to all of the terms and conditions hereof (including the vesting provisions set forth below), this Warrant may be exercised in whole or in part, with respect to then vested Warrant Shares, at any time and from time to time during the period commencing on the Initial Exercise Date and ending on the Expiration Date. Exercise shall be by presentation and surrender to the Company at its principal office of this Warrant and the notice and subscription form annexed hereto, executed by the Holder, which shall indicate the number of shares for which the Holder intends to exercise this Warrant, together with payment to the Company in accordance with Section 3 hereof in an amount equal to the product of the Exercise Price multiplied by the number of Warrant Shares being purchased upon such exercise. Upon and as of receipt by the Company of such properly completed and duly executed purchase form accompanied by payment as herein provided, the Holder shall be deemed to be the Holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not then actually be, or have been, delivered to the Holder. This Warrant shall become exercisable with respect to Warrant Shares ("vest") as follows: (i) with respect to 25% of the Warrant Shares, on June 30, 2004 if the Company shall not have prepared and filed a registration statement with the SEC covering the resale of the Shares by such date, (ii) with respect to an additional 25% (for a cumulative amount of 50%) of the Warrant Shares, on the Effective Date if a registration statement covering the resale of the Shares shall not have been declared effective by the SEC by such date, (iii) with respect to an additional 25% (for a cumulative amount of 75%) of the Warrant Shares, on the 30th day after the Effective Date, if a registration statement covering the resale of the Shares shall not have been declared effective by the SEC by such date and (iv) with respect to the remaining 25% (for a cumulative amount of 100%) of the Warrant Shares, on the 60th day after the Effective Date, if a registration statement covering the resale of the Shares shall not have been declared effective by the SEC by such date; provided, however, that (i) if this Warrant does not vest and become exercisable for any Warrant Shares in accordance with this paragraph, then this Warrant shall become null and void and (ii) no Warrant Shares shall vest, in any event, after April 7, 2007. 2.2 Delivery of Stock Certificates on Exercise. As soon as practicable after the exercise of this Warrant, and in any event within three (3) business days thereafter, the Company, at its expense, and in accordance with applicable securities laws, will cause to be issued in the name of and delivered to the Holder, or as the Holder may direct (subject in all cases, to the provisions of Section 9 hereof), a certificate or certificates for the number of Warrant Shares purchased by the Holder on such exercise, plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash equal to such fraction multiplied by the Fair Market Value. 3 2.3 Shares To Be Fully Paid and Nonassessable. All Warrant Shares issued upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable, free of all liens, taxes, charges and other encumbrances or restrictions on sale (other than those set forth herein). 2.4 Fractional Shares. No fractional shares of Common Stock or scrip representing fractional shares of Common Stock shall be issued upon the exercise of this Warrant. With respect to any fraction of a share of Common Stock called for upon any exercise hereof, the Company shall make a cash payment to the Holder as set forth in Section 2.2 hereof. 2.5 Issuance of New Warrants; Company Acknowledgment. Upon any partial exercise of this Warrant, the Company, at its expense, will forthwith and, in any event within three (3) business days, issue and deliver to the Holder a new warrant or warrants of like tenor, registered in the name of the Holder, exercisable, in the aggregate, for the balance of the Warrant Shares. Moreover, the Company shall, at the time of any exercise of this Warrant, upon the request of the Holder, acknowledge in writing its continuing obligation to afford to the Holder any rights to which the Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant; provided, however, that if the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to the Holder any such rights. 2.6 Payment of Taxes and Expenses. The Company shall pay any recording, filing, stamp or similar tax which may be payable in respect of any transfer involved in the issuance of, and the preparation and delivery of certificates (if applicable) representing, (i) any Warrant Shares purchased upon exercise of this Warrant and/or (ii) new or replacement warrants in the Holder's name or the name of any transferee of all or any portion of this Warrant. 3. Payment of Exercise Price. The Exercise Price for the Warrant Shares being purchased may be paid (i) in cash, by certified check or by wire transfer to an account designated in writing by the Company, (ii) by cancellation of indebtedness owing from the Company to the Holder, (iii) by the Holder surrendering a number of Warrant Shares having a Fair Market Value on the date of exercise equal to, greater than (but only if by a fractional share) or less than the required aggregate Exercise Price, in which case the Holder shall receive the number of Warrant Shares to which it would otherwise be entitled upon such exercise, less the surrendered shares, or (iv) any combination of the methods described in the foregoing clauses (i), (ii) and (iii). 4. Adjustment of Exercise Price. The Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as follows: 4.1. Subdivision or Combination of Stock. If at any time or from time to time after the date hereof, the Company shall subdivide (by way of stock dividend, stock split or otherwise) its outstanding shares of Common Stock, the Exercise Price in effect immediately prior to such subdivision shall 4 be reduced proportionately and the number of Warrant Shares (calculated to the nearest whole share) shall be increased proportionately, and conversely, in the event the outstanding shares of Common Stock shall be combined (whether by stock combination, reverse stock split or otherwise) into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be increased proportionately and the number of Warrant Shares (calculated to the nearest whole share) shall be decreased proportionately. The Exercise Price and the number of Warrant Shares, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described in this Section 4.1. 4.2 Adjustment for Stock Dividends. If at any time after the date hereof, the Company shall declare a dividend or make any other distribution upon any class or series of stock of the Company payable in shares of Common Stock or securities convertible into shares of Common Stock, the Exercise Price and the number of Warrant Shares to be obtained upon exercise of this Warrant shall be adjusted proportionately to reflect the issuance of any shares of Common Stock or convertible securities, as the case may be, issuable in payment of such dividend or distribution. The Exercise Price and the number of Warrant Shares, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described in this Section 4.2. 4.3 Adjustments for Reclassifications. If the Common Stock issuable upon the conversion of this Warrant shall be changed into the same or a different number of shares of any class(es) or series of stock, whether by reclassification or otherwise (other than an adjustment under Sections 4.1 and 4.2 or a merger, consolidation, or sale of assets provided for under Section 4.4), then and in each such event, the Holder hereof shall have the right thereafter to convert each Warrant Share into the kind and amount of shares of stock and other securities and property receivable upon such reclassification, or other change by holders of the number of shares of Common Stock into which such Warrant Shares would have been convertible immediately prior to such reclassification or change, all subject to successive adjustments thereafter from time to time pursuant to and in accordance with, the provisions of this Section 4. 4.4 Adjustments for Merger or Consolidation. In the event that, at any time or from time to time after the date hereof, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other Person, or (c) sell or transfer all or substantially all of its properties or assets or more than 50% of the voting capital stock of the Company (whether issued and outstanding, newly issued, from treasury, or any combination thereof) to any other person under any plan or arrangement contemplating the consolidation or merger, sale or transfer, or dissolution of the Company, then, in each such case, the Holder, upon the exercise of this Warrant as provided in Section 2.1 hereof at any time or from time to time after the consummation of such reorganization, consolidation, merger or sale or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Warrant Shares issuable on such exercise immediately prior to such consummation or such effective date, as the case may be, the stock and property (including cash) to which the Holder would have been entitled upon the consummation of such consolidation or merger, or sale or transfer, or in connection with such dissolution, as the case may be, if the Holder had so exercised this Warrant 5 immediately prior thereto (assuming the payment by the Holder of the Exercise Price therefor as required hereby in a form permitted hereby, which payment shall be included in the assets of the Company for the purposes of determining the amount available for distribution), all subject to successive adjustments thereafter from time to time pursuant to, and in accordance with, the provisions of this Section 4. 4.5 Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any such transfer) referred to in this Section 4, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of Common Stock and other securities and property receivable upon the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such Common Stock or other securities, including, in the case of any such transfer, the Person acquiring all or substantially all of the properties or assets or more than 50% of the voting capital stock of the Company (whether issued and outstanding, newly issued or from treasury or any combination thereof), whether or not such Person shall have expressly assumed the terms of this Warrant. 4.6 Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Exercise Price and number of Warrant Shares pursuant to this Section 4, this Warrant shall, without any action on the part of the Holder, be adjusted in accordance with this Section 4, and the Company, at its expense, promptly shall compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the Holder a certificate setting forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based. The Company will forthwith send a copy of each such certificate to the Holder in accordance with Section 11.4 below. 5. Registration Rights. The Warrant Shares shall be entitled to registration rights and all other rights as applicable to such shares in accordance with that certain Registration Rights Agreement, dated as of April 7, 2004, as amended, by and among the Company and the Investors named therein. 6. Notices of Record Date. Upon (a) any establishment by the Company of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or right or option to acquire securities of the Company, or any other right, or (b) any capital reorganization, reclassification, recapitalization, merger or consolidation of the Company with or into any other corporation, any transfer of all or substantially all the assets of the Company, or any voluntary or involuntary dissolution, liquidation or winding up of the Company, or the sale, in a single transaction, of a majority of the Company's voting stock (whether newly issued, or from treasury, or previously issued and then outstanding, or any combination thereof), the Company shall mail to the Holder at least ten (10) business days, or such longer period as may be required by law, prior to the record date specified therein, a notice specifying (i) the date established as the record date for the purpose of such dividend, distribution, option or right and a description of such dividend, distribution, 6 option or right, (ii) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up, or sale is expected to become effective and (iii) the date, if any, fixed as to when the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up. 7. Exchange of Warrant. Subject to the provisions of Section 9 hereof (if and to the extent applicable), this Warrant shall be exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for new warrants of like tenor, each registered in the name of the Holder or in the name of such other persons as the Holder may direct (upon payment by the Holder of any applicable transfer taxes). Each of such new warrants shall be exercisable for such number of Warrant Shares as the Holder shall direct, provided that all of such new warrants shall represent, in the aggregate, the right to purchase the same number of Warrant Shares and cash, securities or other property, if any, which may be purchased by the Holder upon exercise of this Warrant at the time of its surrender. 8. No Dilution or Impairment. The Company will not, by amendment of its Certificate of Incorporation or By-Laws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all action as may be necessary or appropriate in order to protect the rights of the Holder against dilution, or other impairment. 9. Transfer Provisions, etc. 9.1 Legends. Each certificate representing any Warrant Shares issued upon exercise of this Warrant, and of any shares of Common Stock into which such Warrant Shares may be converted, shall bear the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, or in a transaction not subject to, REGISTRATION UNDER SAID ACT." 9.2 Mechanics of Transfer. (a) Any transfer of all or any portion of this Warrant (and the Warrant Shares), or of any interest herein or therein, that is otherwise in compliance with applicable law shall be effected by surrendering this Warrant to the Company at its principal office, together with a duly executed form of assignment, in the form attached hereto. In the event of any such transfer of this Warrant, the Company shall issue a new warrant or warrants of like tenor to the 7 transferee(s), representing, in the aggregate, the right to purchase the same number of Warrant Shares and cash, securities or other property, if any, which may be purchased by the Holder upon exercise of this Warrant at the time of its surrender. (b) In the event of any transfer of all or any portion of this Warrant in accordance with Section 9.2(a) above, the Company shall issue (i) a new warrant of like tenor to the transferee, representing the right to purchase the number of Warrant Shares, and cash, securities or other property, if any, which were purchasable by the Holder of the transferred portion of this Warrant, and (ii) a new warrant of like tenor to the Holder, representing the right to purchase the number of Warrant Shares, and cash, securities or other property, if any, purchasable by the Holder of the un-transferred portion of this Warrant. Until this Warrant or any portion thereof is transferred on the books of the Company, the Company may treat the Holder as the absolute holder of this Warrant and all right, title and interest therein for all purposes, notwithstanding any notice to the contrary. 9.3 No Restrictions on Transfer. Subject to compliance with applicable securities laws, this Warrant and any portion hereof, the Warrant Shares and the rights hereunder may be transferred by the Holder in its sole discretion at any time and to any Person or Persons, including without limitation Affiliates and affiliated groups of such Holder, without the consent of the Company. 9.4 Warrant Register. The Company shall keep at its principal office a register for the registration, and registration of transfers, of the Warrants. The name and address of each Holder of one or more of the Warrants, each transfer thereof and the name and address of each transferee of one or more of the Warrants shall be registered in such register. The Company shall give to any Holder of a Warrant promptly upon request therefor, a complete and correct copy of the names and addresses of all registered Holders of the Warrants. 10. Lost, Stolen or Destroyed Warrant. Upon receipt by the Company of evidence satisfactory to it of loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of a customary affidavit of the Holder and indemnity agreement, or, in the case of mutilation, upon surrender of this Warrant, the Company at its expense will execute and deliver, or will instruct its transfer agent to execute and deliver, a new Warrant of like tenor and date, and any such lost, stolen or destroyed Warrant thereupon shall become void. 11. General. 11.1 Authorized Shares, Reservation of Shares for Issuance. At all times while this Warrant is outstanding, the Company shall maintain its corporate authority to issue, and shall have authorized and reserved for issuance upon exercise of this Warrant, such number of shares of Common Stock, any other capital stock or other securities as shall be sufficient to perform its obligations under this Warrant (after giving effect to any and all adjustments to the number and kind of Warrant Shares purchasable upon exercise of this Warrant). 8 11.2 No Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities, sale or other transfer of any of its assets or properties, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder hereunder against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the amount payable therefor on such exercise, and (b) will take all action that may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant. 11.3 No Rights as Stockholder. The Holder shall not be entitled to vote or to receive dividends or to be deemed the holder of Common Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the Holder any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings (except to the extent otherwise provided in this Warrant), or to receive dividends or subscription rights, until the Holder shall have exercised this Warrant and been issued Warrant Shares in accordance with the provisions hereof. 11.4 Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been given if personally delivered or delivered by overnight courier or mailed by first-class registered or certified mail, postage prepaid, return receipt requested, or sent by fax machine, addressed as follows: (a) if to the Company at: Motient Corporation 300 Knightsbridge Parkway Lincolnshire, IL 60069 Attention: Christopher Downie, Executive Vice President and Chief Financial Officer Telecopier: 847-478-4810 9 with copies to: Motient Corporation 300 Knightsbridge Parkway Lincolnshire, IL 60069 Attention: Robert Macklin, Esq. Telecopier: 847-478-4810 Andrews Kurth LLP 450 Lexington Avenue New York, NY 10017 Attention: Paul Silverstein, Esq. Telecopier: (212) 850-2929 (b) if to the Holder, at the Holder's address appearing in the books maintained by the Company. 12. Amendment and Waiver. No failure or delay of the Holder in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Holder are cumulative and not exclusive of any rights or remedies which it would otherwise have. The terms of this Warrant may be amended, modified or waived only with the written consent of the Company and the Holder. 13. Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware, as such laws are applied to contracts entered into and wholly to be performed within the State of Delaware and without giving effect to any principles of conflicts or choice of law that would result in the application of the laws of any other jurisdiction. 14. Covenants To Bind Successor and Assigns. All covenants, stipulations, promises and agreements in this Warrant contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. 15. Severability. In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 16. Construction. The definitions of this Warrant shall apply equally to both the singular and the plural forms of the terms defined. Wherever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The section and paragraph headings used herein are for convenience of reference only, are not part of this Warrant and are not to affect the construction of or be taken into consideration in interpreting this Warrant. 10 17. Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. In any action or proceeding brought to enforce any provision of this Warrant or where any provision hereof is validly asserted as a defense, the successful party to such action or proceeding shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. [SIGNATURE PAGE TO FOLLOW] 11 IN WITNESS WHEREOF, the Company has executed this Common Stock Purchase Warrant as of April 7, 2004. COMPANY: MOTIENT CORPORATION By: /s/ Chris Downie ----------------------------------- Name: Christopher Downie Title: Executive Vice President and Chief Financial Officer 12 NOTICE AND SUBSCRIPTION To: MOTIENT CORPORATION Date: ------------ 300 Knightsbridge Parkway Lincolnshire, IL 60069 The undersigned hereby irrevocably elects to exercise the right of purchase represented by the attached Warrant for, and to exercise thereunder, __________ shares of Common Stock, of MOTIENT CORPORATION a Delaware corporation, and tenders herewith payment of $__________, representing the aggregate purchase price for such shares based on the price per share provided for in such Warrant. Such payment is being made in accordance with [Section 3(i)] [Section 3(ii)] [Section 3(iii)] [Section 3(iv)] of the attached Warrant. Please issue a certificate or certificates for such shares of Common Stock in the following name or names and denominations and deliver such certificate or certificates to the person or persons listed below at their respective addresses set forth below: If said number of shares of Common Stock shall not be all the shares of Common Stock issuable upon exercise of the attached Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of such shares of Common Stock less any fraction of a share of Common Stock paid in cash. Dated: , --------- ----- ------------------------------- Signature 13 FORM OF ASSIGNMENT (To be executed upon assignment of Warrant) For value received, __________________________________ hereby sells, assigns and transfers unto __________________ the attached Warrant [__% of the attached Warrant], together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________________ attorney to transfer said Warrant [said percentage of said Warrant] on the books of MOTIENT CORPORATION, a Delaware corporation, with full power of substitution in the premises. If not all of the attached Warrant is to be so transferred, a new Warrant is to be issued in the name of the undersigned for the balance of said Warrant. The undersigned hereby agrees that it will not sell, assign, or transfer the right, title and interest in and to the Warrant unless applicable federal and state securities laws have been complied with. Dated: , --------- ---- ------------------------------ Signature 14 EX-31 5 ex311.txt EXHIBIT 31.1 CERTIFICATION The undersigned, in his capacity as the Executive Vice President, Chief Financial Officer and Treasurer of Motient Corporation, being the principal executive officer and principal financial officer, as the case may be, provides the following certifications required by 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. I, Christopher W. Downie, hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of Motient Corporation, a Delaware corporation (the "Company"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. /s/ Christopher W. Downie ------------------------------------ Christopher W. Downie Executive Vice President, Chief Financial Officer and Treasurer (principal executive officer and principal financial officer) April 23, 2004 EX-32 6 ex321.txt EXHIBIT 32.1 Certification Pursuant To 8 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the quarterly report of Motient Corporation, a Delaware corporation (the "Company"), on Form 10-Q for the period ending March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Christopher W. Downie, Executive Vice President, Chief Financial Officer and Treasurer of the Company, certify, in my capacity as principal executive officer and principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge and based on my review of the Report: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Christopher W. Downie ------------------------------------------- Christopher W. Downie Executive Vice President, Chief Financial Officer and Treasurer (principal executive officer and principal financial officer) April 23, 2004 -----END PRIVACY-ENHANCED MESSAGE-----