10-Q/A 1 s32361310qa.txt 09/30/05 - AMENDMENT NO. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- Amendment No. 1 to Form 10-Q FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 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 [X] No[_] 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 [X] No[_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [_] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Number of shares of common stock outstanding at October 31, 2005: 62,527,423 EXPLANATORY PARAGRAPH The purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q of Motient Corporation (the "Company"), filed with the Securities and Exchange Commission on March 30, 2006, is to amend and restate the Company's condensed consolidated financial statements and related notes as of and for the three and nine months ended September 30, 2005. This amendment and restatement includes changes to Part I, Items 1 and 2, and no other information included in the original Form 10-Q is amended hereby. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the original filing has been amended to contain currently dated certifications from our Executive Vice President, Chief Operating Officer and Treasurer (Principal Executive Officer) and Controller and Chief Accounting Officer (Principal Financial Officer), as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of the Principal Executive Officer and Principal Financial Officer are attached to this Form 10 Q/A as exhibits 31.1, 31.2, 32.1 and 32.2. Except for the aforementioned changes, this Form 10-Q/A does not modify or update any disclosure in the Company's Form 10-Q, including the nature and character of such disclosure to reflect events occurring after the initial filing date of the Company's Form 10-Q. This amendment reflects the restatement of the Company's condensed consolidated financial statements as of and for the three and nine months ended September 30, 2005 to properly reflect the accounting for its proportionate share of the non-cash stock compensation expense recorded by Mobile Satellite Ventures LP ("MSV"), including the effects of a restatement of the unaudited interim financial statements of MSV. Subsequent to the issuance of the Company's condensed consolidated financial statements as of and for the three and six months ended June 30, 2005, the Compensation Committee of MSV's Board of Directors determined that a change in control of MSV, as defined in MSV's Unit Incentive Plan, had occurred during the three months ended March 31, 2005. This change in control triggered the immediate vesting of all of MSV's then outstanding unit options that were subject to accelerated vesting and recognition of an additional $3.8 million of deferred compensation expense associated with these options. For the three and nine months ended September 30, 2005, MSV recognized $1.6 million and $8.0 million, respectively of stock compensation expense. The accompanying condensed consolidated financial statements have been restated to reflect the Company's proportionate share of the net loss of MSV. In addition, this amendment reflects the restatement of the Company's condensed consolidated financial statements as of and for the three and nine months ended September 30, 2005 to properly reflect the accounting for its differential between cost and book value of equity method investments associated with the Company's February 9, 2005 transactions. On February 9, 2005, the Company exchanged shares of Motient common stock valued at $371 million for MSV LP units resulting in an additional interest in MSV of 10.24%. Under the guidance of APB 18, the Company failed to recognize the differential between the book and fair values of MSV's assets and amortize the excess over the life of the assets. As restated, for the three months and nine months ended September 30, 2005, the Company has recognized amortization of $1.7 million and $4.3 million, respectively related to the excess of the cost of the February 9, 2005 investment over the fair value of the net assets acquired. This amendment also reflects the restatement of the Company's condensed consolidated financial statements as of the nine months ended September 30, 2005 to properly reflect the accounting for its issuance of warrants in connection with the February 9, 2005 transaction. The Company did not record the warrants at the time of the merger transaction, as it was uncertain as to whether any of the warrants would vest and therefore no value could be ascribed to the warrants. As the Company has filed a registration statement on February 14, 2005 for the shares sold to the entities, 70% of the warrants will never vest. The remainder vested in August 2005. As previously reported, the Company failed to recognize the vesting of these warrants during the nine months ended September 30, 2005. As restated, for the nine months ended September 30, 2005, the Company has recognized, using a Black-Scholes model, $8.3 million as the fair value of the vested warrants. The effect of recording the warrants is to increase the Company's Investment in MSV, thereby increasing the cost of the February 9, 2005 merger transaction, and to increase the Company's common stock purchase warrants. The Company concluded that these restatements were appropriate at a meeting of its Audit Committee of the board of directors, held on March 28, 2006. Accordingly, the Company believes that the financial statements it issued prior to this restatement which relate to the periods being restated hereby, should not be relied upon. The Audit Committee has discussed the matters disclosed in this filing with the Company's independent public accountants. MOTIENT CORPORATION FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2005 TABLE OF CONTENTS PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements - (Unaudited) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2005 and 2004 3 Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 30 Item 3. Quantitative and Qualitative Disclosures about Market Risk 51 Item 4. Controls and Procedures 51 PART II OTHER INFORMATION Item 1. Legal Proceedings 54 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54 Item 6. Exhibits 54 2 PART I- FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements Motient Corporation and Subsidiaries Consolidated Statements of Operations (in thousands, except per share data)
Three Months Nine Months Ended Ended September Three Months September Nine Months 30, 2005 Ended 30, 2005 Ended (Restated- September (Restated- September See Note 7) 30, 2004 See Note 7) 30, 2004 ----------- -------- ---------- -------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) REVENUES Services and related revenue $ 3,032 $ 7,329 $ 10,833 $ 27,446 Sales of equipment 131 1,024 888 3,846 -------- -------- -------- -------- Total revenues $ 3,163 $ 8,353 $ 11,721 $ 31,292 -------- -------- -------- -------- COSTS AND EXPENSES Cost of services and operations (including stock-based compensation of $(452) and $70, respectively for the three months ended September 30, 2005 and September 30, 2004, and $551 and $2,028, respectively for the nine months ended September 30, 2005 and September 30, 2004, exclusive of depreciation and amortization below) 3,853 7,768 16,676 29,532 Cost of equipment sold (exclusive of depreciation and amortization below) 104 939 842 3,705 Sales and advertising (including stock-based compensation of $(12) and $(85), respectively for the three months ended September 30, 2005 and September 30, 2004, and $79 and $804, respectively for the nine months ended September 30, 2005 and September 30, 2004, exclusive of depreciation and amortization below) 220 166 749 2,058 General and administrative (including stock-based compensation of $1,760 and $102, respectively for the three months ended September 30, 2005 and September 30, 2004 of $11,963 and $1,131, respectively for the nine months ended September 30, 2005 and September 30, 2004, and including expense from MSV, a related party, of $559 and $0, for the three months ended September 30, 2005 and September 30, 2004, respectively and $842 and $0 for the nine months ended September 30, 2005 and September 30, 2004, respectively, exclusive of depreciation and amortization below) 7,565 2,026 26,601 6,902 Research and development (including expense to MSV, a related party, of $1,312 and $0 for the three months ended September 30, 2005 and September 30, 2004, respectively and $1,663 and $0 for the nine months ended September 30 2005 and September 30, 2004, respectively) 1,325 -- 1,676 -- Restructuring and impairment charges -- -- 5,665 6,264 Depreciation and amortization 4,055 3,686 12,783 12,071 (Gain)/Loss on asset disposal 741 (2) 735 (2) (Gain) on debt and capital lease retirement -- -- -- (802) -------- -------- -------- -------- Total costs and expenses 17,863 14,583 65,727 59,728 -------- -------- -------- -------- Operating loss (14,700) (6,230) (54,006) (28,436) -------- -------- -------- -------- Interest income (expense), net 2,755 (556) 4,870 (3,595) Write-off of deferred financing fees -- -- -- (8,052) Other income, net -- 66 80 265 Other income from UPS 1,112 --- 1,112 --- Other income from Aether -- 650 -- 1,957 Equity in loss of Mobile Satellite Ventures (3,954) (3,779) (18,675) (8,617) Minority interests in losses of TerreStar 1,348 -- 1,752 -- -------- -------- -------- -------- Net (loss) (13,439) (9,849) (64,867) (46,478) -------- -------- -------- -------- Less: Dividends on Series A Cumulative Convertible Preferred Stock (5,916) -- (10,791) -- Accretion of issuance costs associated with Series A Cumulative Convertible Preferred Stock (763) -- (1,377) -- -------- -------- -------- -------- Net (loss) available to Common Stockholders $(20,118) $ (9,849) $(77,035) $(46,478) ======== ======== ======== ======== Basic and Diluted (Loss) Per Share of Common Stock: $ (0.32) $ (0.29) $ (1.24) $ (1.59) Weighted-Average Common Shares Outstanding - basic and diluted 62,464 33,418 61,946 29,323 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 Motient Corporation and Subsidiaries Consolidated Balance Sheets (in thousands, except share and per share data)
September 30, 2005 (Restated - See Note 7) December 31, 2004 ------------------ ----------------- (Unaudited) (Audited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 240,194 $ 16,945 Restricted cash and short-term investments 42,225 --- Restricted cash for Series A Cumulative Convertible Preferred Stock 21,446 --- Accounts receivable-trade, net of allowance for doubtful accounts of $80 at September 30, 2005 and $256 at December 31, 2004 812 1,917 Inventory 2 75 Due from Mobile Satellite Ventures, net --- 5 Deferred equipment costs 117 874 Issuance costs associated with Series A Cumulative Convertible Preferred Stock 3,145 --- Assets held for sale 261 261 Other current assets 1,887 1,348 ----------- --------- Total current assets 310,089 21,425 ----------- --------- RESTRICTED INVESTMENTS 76 76 PROPERTY AND EQUIPMENT, net 16,162 17,261 INTANGIBLE ASSETS, net 136,777 67,649 INVESTMENT IN MSV 502,592 141,635 RESTRICTED CASH FOR SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK 21,446 --- ISSUANCE COSTS ASSOCIATED WITH SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK 12,961 --- DEFERRED CHARGES AND OTHER ASSETS 23 34 ----------- --------- Total assets $ 1,000,126 $ 248,080 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses (including amounts due to MSV, a related party, of $1,541 and $0 at September 30, 2005 and December 31, 2004, respectively) $ 8,131 $ 6,327 Deferred equipment revenue 140 933 Deferred revenue and other current liabilities 982 5,414 Series A Cumulative Convertible Preferred Stock dividends 10,791 --- ----------- --------- Total current liabilities 20,044 12,674 ----------- --------- LONG-TERM LIABILITIES Other long-term liabilities 484 675 ----------- --------- Total long-term liabilities 484 675 ----------- --------- Total liabilities 20,528 13,349 ----------- --------- COMMITMENTS AND CONTINGENCIES --- --- MINORITY INTEREST 76,287 --- SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK ($0.01 par value; 5,000,000 shares authorized at September 30, 2005 and December 31, 2004, 408,500 and 0 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively) 408,500 --- STOCKHOLDERS' EQUITY: Common Stock; voting, par value $0.01; 200,000,000 and 100,000,000 shares authorized and 65,431,404 and 51,544,596 shares issued and outstanding at September 30, 2005 and at December 31, 2004, respectively 654 516 Additional paid-in capital 743,878 399,635 Less: 2,906,989 common shares held in treasury stock (56,916) --- Common stock purchase warrants 78,239 28,589 Accumulated deficit (271,044) (194,009) ----------- --------- STOCKHOLDERS' EQUITY 494,811 234,731 ----------- --------- Total liabilities and stockholders' equity $ 1,000,126 $ 248,080 =========== =========
The accompanying notes are an integral part of these consolidated financial statements. 4 Motient Corporation and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
Nine Months Ended September Nine Months 30, 2005 Ended (Restated - September See Note 7) 30, 2004 ----------- -------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ (64,867) $ (46,478) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Depreciation and amortization 12,783 12,071 Equity in loss of MSV 18,675 8,617 Minority interests in losses of TerreStar (1,752) -- Restructuring and impairment charges, asset and intangible disposals 3,580 2,798 (Gain)/loss on disposal of assets 735 -- (Gain) on debt restructuring -- (802) Write-off of deferred financing fees -- 8,052 Non cash amortization of deferred financing costs -- 2,026 Non cash stock compensation 12,793 3,990 Changes in assets and liabilities, net of acquisitions and dispositions: Inventory 73 144 Accounts receivable -- trade 1,105 1,728 Other current assets (522) 6,867 Accounts payable and accrued expenses (including $1,727 and $0 in payments made to MSV, a related party, for the periods ended September 30, 2005 and September 30, 2004, respectively.) 202 (3,449) Accrued interest -- (3,080) Deferred revenue and other deferred items (4,659) (7,062) --------- --------- Net cash (used in) operating activities (21,854) (14,578) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from MSV note -- 2,000 Proceeds from sale of property and equipment 26 2 Proceeds (purchase) of restricted investments (85,117) 1,544 Cash acquired in TerreStar asset purchase 6,165 -- Additions to property and equipment, net (3,244) (1,101) --------- --------- Net cash (used in) provided by investing activities (82,170) 2,445 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under capital leases -- (2,419) Principal payments under vendor financing -- (2,582) Repayment from term credit facility -- (6,785) Proceeds from term credit facility -- 1,500 Proceeds from issuance of stock 679 55,480 Proceeds from issuance of employee stock options 1,241 1,235 Proceeds from issuance of Series A Cumulative Convertible Preferred Stock 408,500 -- Issuance costs associated with Series A Cumulative Convertible Preferred Stock (17,483) -- Stock issuance costs and other charges (9) (1,422) Repayment of notes payable (8,739) (19,750) Purchase of treasury stock (56,916) -- --------- --------- Net cash provided by financing activities 327,273 25,257 --------- --------- Net increase in cash and cash equivalents 223,249 13,124 --------- --------- CASH AND CASH EQUIVALENTS, beginning of period 16,945 3,618 --------- --------- CASH AND CASH EQUIVALENTS, end of period $ 240,194 $ 16,742 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 5 MOTIENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 2005 (Unaudited) 1. ORGANIZATION AND BUSINESS Overview Motient owns, operates and develops two-way wireless communications businesses. It is currently developing a satellite communications service via its 61% ownership of TerreStar Networks Inc., a development stage company in the process of building its first satellite. Motient also owns and operates a two-way wireless data network (the DataTac network) that it uses to provide its customers with two-way wireless data communication services. Motient also has the capabilities to integrate the DataTac network and its back-office and support systems with convenient and cost-effective access to other wireless data networks, such as the Sprint and Cingular networks. In addition, Motient also owns 49% of Mobile Satellite Ventures, LP (MSV), but does not have operating control of its business. Proposed Consolidation of Ownership of MSV and TerreStar On September 22, 2005, Motient announced that it had entered into a non-binding letter of intent with SkyTerra Communications, Inc. and TMI Communications & Company, among others, relating to a transaction to consolidate the ownership of MSV and TerreStar within Motient. The parties anticipate that these transactions, if consummated, will simplify the ownership and governance of both MSV and TerreStar, better enabling both of them to pursue more effectively their deployment of separate hybrid satellite and terrestrial based communications networks providing ubiquitous wireless coverage across all of North America in the L-band and S-band, respectively. The letter of intent sets forth the basic terms of the proposed transaction, which include, among other things, the following: o In connection with all the transactions contemplated by the letter of intent, Motient would issue or commit to issue approximately 77 million shares of common stock in exchange for the outstanding MSV interests not already owned by Motient, and approximately 16 million shares for the outstanding TerreStar shares not already owned by Motient. o All of the outstanding MSV and TerreStar interests not already owned by Motient, other than those held by TMI, would be transferred to Motient at closing. o TMI would receive the right to exchange its interests in MSV and TerreStar at any time at the same exchange ratios that are being offered to the other shareholders and would subscribe for shares of a new class of Motient preferred stock with nominal economic value but having voting rights in Motient equivalent to those TMI would receive upon exchange of its MSV and TerreStar interests for Motient common stock. 6 o SkyTerra would dividend to its securityholders shares of a newly formed company that would hold all of its assets other than its interests in MSV and TerreStar, and then SkyTerra, which would then consist only of its stakes in MSV and TerreStar, would merge in a tax-free transaction with and into a subsidiary of Motient. As a result, in addition to the dividend, SkyTerra's stockholders would receive Motient common stock at an exchange ratio reflecting equivalent economic value for MSV/TerreStar as received by the other MSV/TerreStar stockholders. In total, SkyTerra common and preferred stockholders would receive approximately 26 million shares of Motient common stock. SkyTerra's preferred stock would be retired in exchange for Motient common stock with a value equal to its liquidation preference and SkyTerra's common stockholders would receive the balance of the Motient shares. o The parties anticipate that, after the closing of the transaction, TerreStar would likely be spun-off to the stockholders of Motient (including those receiving shares in connection with these transactions). However, this spin-off would be evaluated following the closing of the other transactions, and would only be executed if it is judged by Motient's Board of Directors to be in the best interests of its stockholders at that time. In the event of a spin off of TerreStar, the exchange ratios applicable to TMI's exchange right would be modified accordingly. o The boards of Motient, MSV and TerreStar would be reconstituted with nine members mutually acceptable to the parties and in compliance with the independence rules and regulations of NASDAQ. TerreStar would have a similarly structured board after the completion of the transaction, separate of Motient and MSV. o The parties anticipate that Alex Good, CEO of MSV, would become Motient's new CEO after the transaction. The parties also anticipate that Robert Brumley, CEO of TerreStar, would continue in that role after the transaction with TerreStar maintaining its own management team. The consummation of the transactions will require successful completion of due diligence, negotiation and execution of definitive documentation, Motient and SkyTerra board and stockholder approval, and various regulatory approvals. Because the letter of intent is non-binding, the parties have no obligation to negotiate such documentation or otherwise consummate the transactions. Therefore, the parties can provide no assurances that the transactions will be consummated on the currently proposed terms or will ever be consummated, or that the required corporate or regulatory approvals will be obtained. Motient's Satellite Communications Business - TerreStar Networks Inc. In February 2002, MSV established TerreStar, as a wholly owned subsidiary of MSV, to develop business opportunities related to the proposed receipt of certain licenses to operate a satellite communications system in the 2 GHz band, also known as the "S-band". On May 11, 2005, Motient Ventures Holding Inc., or MVH, a wholly owned subsidiary of Motient Corporation, purchased 8,190,008 shares of newly issued common stock of TerreStar from TerreStar for $200 million pursuant to a Purchase Agreement by and between MVH and TerreStar. On the same day, TerreStar was spun-off by MSV to its limited partners and, in connection with that spin-off, Motient acquired ownership of approximately 48% of the 7 issued and outstanding shares of capital stock of TerreStar and the subsequent $200 million stock purchase increased Motient's ownership to its current 61% of TerreStar's issued and outstanding common stock. Pursuant to an Intellectual Property License from MSV, TerreStar received a perpetual, royalty-free license to utilize MSV's patent portfolio, including those patents related to "ancillary terrestrial component", or ATC, technology. ATC is an FCC granted authority subject to which a Mobile Satellite Service, or MSS, provider can, subject to certain restrictions, integrate a satellite communications system with a terrestrial network. Motient anticipates that TerreStar could use ATC to effectively integrate satellite-based two-way communications services with land-based two-way communications services. Mobile devices using ATC could be used for a myriad of communications applications, including potentially voice, data and video services. ATC can enhance satellite availability, efficiency and economic viability by terrestrially reusing at least some of the frequencies that are allocated to the satellite systems. Without ATC, it may be challenging for mobile satellite systems to reliably serve densely populated areas, because the satellite's signal may be blocked by high rise structures and may not penetrate into buildings. As a result, the satellite spectrum may be underutilized or unused in such areas. The use of ATC retransmission can reduce or eliminate this problem. ATC could, for instance, eventually allow a user to utilize a mobile phone that would communicate with a traditional land-based wireless network when in range of that network, but communicate with a satellite when not in range of such a land-based network. Ideally, ATC would allow a user to have a communications device that would provide ubiquitous service across North America. TerreStar's ability to effectively use ATC depends on its continued ability to license certain intellectual property from MSV. During 2002, TerreStar entered into a contract to purchase a satellite system, including certain ground infrastructure for use with the 2 GHz band. The satellite represents one component of a communications system that would include a spare satellite, ground-switching infrastructure, launch costs and insurance. Total cost of this satellite system could exceed $550 million. In order to finance future payments, TerreStar will be required to obtain additional debt or equity financing, or may enter into various joint ventures to share the cost of development. There can be no assurance that such financing or joint venture opportunities will be available to TerreStar or available on terms acceptable to TerreStar. Motient's Terrestrial Wireless Business - Motient Communications Inc. Motient is a provider of two-way, wireless mobile data services and wireless internet services in the top 40 metropolitan statistical areas, or MSA's, in the United States. Owning and operating a wireless radio data network that provides wireless mobile data service to customers, Motient primarily generates revenue from the sale of airtime on its network and from the sale of communications devices, which are manufactured by other companies. Motient's customers use its network and wireless applications for wireless email messaging and wireless data communications services. This enables businesses, mobile workers and consumers to wirelessly transfer electronic information and messages and to wirelessly access corporate databases and the Internet. Motient's network is designed to offer a broad array of wireless data services, such as: 8 o mobile data and mobile management systems used by transportation and other companies to wirelessly coordinate remote, mobile assets and personnel; o two-way mobile Internet services, including Motient's own eLinkSM wireless email service and the BlackBerry (TM) by Motient wireless email service, each providing personal consumers and corporate customers with wireless access to a broad range of email and information services; o wireless data systems used by companies involved in data transmission and processing, used to connect remote equipment, such as wireless point-of-sale terminals, with a central monitoring facility In addition to selling wireless data services that use our own network, Motient is also a reseller of airtime on the Cingular and Sprint wireless networks. Motient has reseller agreements with these companies that allow it to sell and promote wireless data applications and solutions to customers using these networks, which are more modern and have greater capacity than Motient's own network, while still maintaining a direct relationship with the customer, since "back office" functions like customer support, application design and implementation, and billing, among other support services, are handled by Motient. These arrangements allow Motient to provide integrated wireless data solutions to our customers using a variety of networks. In December 2004, Motient launched a new set of products and services designed to provide these integrated wireless data solutions to its customers called iMotient Solutions. iMotient allows Motient's customers to use these multiple networks via a single connection to Motient's back-office systems, providing a single alternative for application and software development, device management and billing across multiple networks, including but not limited to GPRS, 1XRTT and Motient's own DataTac network. Once connected to iMotient, customers will receive our proprietary applications and services that reduce airtime usage, improve performance and reduce costs. A subscriber's wireless device, which may be mobile or stationary, receives and transmits wireless data messages to and from terrestrial base stations via radio frequencies. Terrestrial messages are then routed to their destination via data switches that Motient owns, which connect to the public data network. Motient's network is a wireless packet-switched network based on technologies developed prior to newer networks built around CDMA or GSM technologies, and, unlike those networks, cannot accommodate wireless telephony. Mobile Satellite Ventures LP MSV is a provider of mobile satellite-based communications services. MSV currently uses two satellites to provide service, which allow customers access to satellite-based wireless data, voice, fax and dispatch radio services almost anywhere in North and Central America, northern South America, the Caribbean, Hawaii and in various coastal waters. MSV, together with Mobile Satellite Ventures (Canada) Inc., licensed by Industry Canada, has access to more than 28 MHz of L-band spectrum that is authorized for use in every market in North America. The L-band spectrum is positioned within the range of frequencies used by terrestrial wireless providers in North America. 9 In May 2005, MSV received FCC authorization to launch and operate a next generation L-Band satellite. This authorization follows the April 2005 Industry Canada authorization to MSV's Canadian affiliate for an L-band satellite. Use of the two authorizations together enables MSV to replace its existing satellites and utilize the full complement of spectrum available to it. MSV is also developing a next-generation system; a hybrid satellite/terrestrial wireless network over North America that MSV expects will utilize new satellites working with MSV's patented ATC technology. MSV expects to be able to deploy terrestrial two-way wireless network technology in thousands of locations across the United States, allowing subscribers to integrate satellite-based communications services with more traditional land-based wireless communications services. MSV is headquartered in Reston, VA, with an office in Ottawa, ON, Canada. MSV is structured as a limited partnership, of which Motient is one of the limited partners. Motient holds a proportionate ownership interest in the corporate general partner. Motient has certain rights to appoint directors to the sole general partner of the limited partnership, but does not have any direct or indirect operating control over MSV. For the three and nine months ended September 30, 2005, MSV had revenues of $7.9 and $22.6 million, operating expenses of $27.0 and $61.5 million and net losses of $6.7 and $33.4 million, respectively. To the extent that MSV will need future cash to support its operations, Motient is under no contractual obligation to provide it, and the value of our investment in MSV could be negatively impacted if MSV cannot meet any such funding requirements. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared by the Company and are unaudited. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results to be expected for any future period or for the full fiscal year. In the opinion of management, all adjustments (consisting of normal recurring adjustments unless otherwise indicated) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2005, and for all periods presented, have been made. Footnote disclosure has been condensed or omitted as permitted in interim financial statements. Consolidation The consolidated financial statements include the accounts of Motient and its wholly and majority-owned subsidiaries. All significant inter-company transactions and accounts have been eliminated. Cash Equivalents The Company considers highly liquid investments with original or remaining maturities at the time of purchase of three months or less to be cash equivalents. 10 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. Restricted Investments The Company considers investments segregated for a specific contractual purpose such as collateral or payment of a future obligation to be restricted cash. Restricted cash includes interest payable on Series A Cumulative Convertible Preferred Stock and is presented separately on the Consolidated Balance Sheet. Investment in MSV The Company uses the equity method of accounting for its investment in MSV. The Company considers whether the fair value of its investment has declined below its carrying value whenever adverse events or circumstances indicate that the recorded value may not be recoverable. If the Company considers such decline to be other than temporary, a write down would be recorded to estimate fair value. Business Combinations The Company accounts for Business Combinations under SFAS No. 141, "Business Combinations". SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. Impairment The Company reviews and accounts for asset impairment under SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead will be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. SFAS No. 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadens the presentation of discontinued operations to include more disposal transactions. The Company reviews its assets for impairment at a minimum, on an annual basis, and immediately recognizes an impairment in interim periods. 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 11 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. Revenue Recognition The Company generates revenue through equipment sales, airtime service agreements and consulting services. In 2000, the Company adopted SAB No. 101, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. In certain circumstances, SAB No. 101 requires the Company to defer the recognition of revenue and costs related to equipment sold as part of a service agreement. In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue Recognition", which supersedes SAB No. 101, "Revenue Recognition in Financial Statements". SAB No. 104's primary purpose is to rescind accounting guidance contained in SAB No. 101 related to multiple-element revenue arrangements and to rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers" ("FAQ") issued with SAB No. 101. Selected portions of the FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104 did not have a material impact on the Company's revenue recognition policies. Effective July 1, 2003, the Company adopted Emerging Issues Task Force (EITF) No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which is being applied on a prospective basis. The consensus addresses how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Revenue arrangements with multiple deliverables are required to be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration must be allocated among the separate units of accounting based on their relative fair values. The consensus also supersedes certain guidance set forth in Securities and Exchange Commission (SEC) Staff Accounting Bulletin Number 101, Revenue Recognition in Financial Statements (SAB 101). Revenue is recognized as follows: Service revenue: Revenues from the Company's wireless services are recognized when the services are performed, evidence of an arrangement exists, the fee is fixed and determinable and collectability is probable. Service discounts and incentives are recorded as a reduction of revenue when granted, or ratably over a contract period. The Company defers and amortizes any revenue and costs associated with activation of a subscriber over an estimated customer life of two years. The Company packages airtime usage that involves a wide variety of volume packaging, anything from a 35 kilobytes per month plan up to unlimited kilobyte usage per month, with various gradations in between. Discounts may be applied when comparing one customer to another, and such service discounts are recorded as a reduction of revenue when granted. Service discounts and incentives are recorded as a reduction of revenue when granted, or ratably over a contract period. The Company does not offer incentives generally as part of its service offerings, however, if offered they would be recorded as a reduction of revenue ratably over a contract period. 12 To date, the majority of the Company's business has been transacted with telecommunications, field services, professional service and transportation companies located throughout the United States. The Company grants credit based on an evaluation of the customer's financial condition, generally without requiring collateral or deposits. The Company establishes a valuation allowance for doubtful accounts receivable for bad debt and other credit adjustments. Valuation allowances for revenue credits are established through a charge to revenue, while valuation allowances for bad debts are established through a charge to general and administrative expenses. The Company assesses the adequacy of these reserves quarterly, evaluating factors such as the length of time individual receivables are past due, historical collection experience, the economic environment and changes in credit worthiness of the Company's customers. If circumstances related to specific customers change or economic conditions worsen such that the Company's past collection experience and assessments of the economic environment are no longer relevant, the Company's estimate of the recoverability of its trade receivables could be further reduced. Equipment and service sales: The Company sells equipment to resellers who market its terrestrial product and airtime service to the public. The Company also sells its product directly to end-users. Revenue from the sale of the equipment, as well as the cost of the equipment, are initially deferred and are recognized over a period corresponding to the Company's estimate of customer life of two years. Equipment costs are deferred only to the extent of deferred revenue. As of September 30, 2005 and 2004, the Company had capitalized a total of $0.1 million and $1.5 million of deferred equipment revenue, respectively, and had deferred equipment costs of $0.1 million and $1.5 million, respectively. Property and Equipment 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 that do not significantly increase the utility or useful life of an asset are expensed as incurred. Restructuring and Impairment Charges In February 2004 and March 2005, the Company reduced its workforce by 54 and 11 employees, respectively. In accordance with SFAS No. 112, "Employers' Accounting for Post-employment Benefits - an amendment of FASB statements No. 5 and 43", the Company recorded a liability for the severance, employee benefits and estimated payroll taxes of $1.1 million and $0.1 million respectively related to the reductions in workforce. In June 2004, the Company recorded a restructuring charge of $5.1 million related to certain network rationalization initiatives, consisting of base station deconstruct costs of $0.5 million, the loss on the retirement of certain base station equipment of $2.8 million and termination liabilities of $1.8 13 million for site leases no longer required for removed base stations. Of these amounts, as of September 30, 2005, the Company had incurred base station deconstruct costs of $0.5 million, the loss on the retirement of certain base station equipment of $2.8 million and termination liabilities of $1.4 million for site leases no longer required for removed base stations. The Company recorded these charges in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". In June 2005, the Company recorded a restructuring charge of $5.6 million related to additional network rationalization initiatives for Motient Communications, consisting of base station deconstruct costs of $0.1 million, the loss on the cancellation of frequencies of $3.6 million and termination liabilities of $1.9 million for site leases no longer required for removed base stations. Of these amounts, as of September 30, 2005, the Company had incurred base station deconstruct costs of than $0.1 million, the loss on the cancellation of frequencies of $3.6 million and termination liabilities of $0.6 million for site leases no longer required for removed base stations. The Company recorded these charges in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". In January, 2005 the Company identified the base station equipment associated with the 2005 rationalization and adjusted their remaining useful lives for depreciation purposes, resulting in approximately $1.8 million of accelerated depreciation expense. The Company recorded these charges in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets".
Base Station Employee FCC License Asset Base Station FCC License Site Lease Terminations Terminations Write-Offs Deconstruction Terminations Terminations Total ------------ ------------ ---------- -------------- ------------ ------------ ----- ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 2004 $(350) $ --- $ --- $ --- $ 5 $ (942) $(1,287) ------------------------------------------------------------------------------------------------------------------------------------ Restructure Charge (85) (3,581) --- (147) --- (1,852) (5,665) ------------------------------------------------------------------------------------------------------------------------------------ Increase due to reclassification of site lease accrual --- --- --- --- --- (206) (206) ------------------------------------------------------------------------------------------------------------------------------------ Deductions - Cash 435 --- --- 147 --- 1,315 1,897 ------------------------------------------------------------------------------------------------------------------------------------ Deductions - Non-Cash --- 3,581 --- --- (5) --- 3,576 ------------------------------------------------------------------------------------------------------------------------------------ Balance September 30, 2005 $ --- $ --- $ --- $ --- $ --- $(1,685) $(1,685) ------------------------------------------------------------------------------------------------------------------------------------
Research and Development Costs Research and development costs are expensed as incurred. Such costs include development efforts on the TerreStar satellite system and expenses associated with external development agreements. We expect these costs from TerreStar to increase in the future as development efforts on its satellite system accelerate. 14 Advertising Costs Advertising costs (inclusive of airtime commissions) are charged to operations in the year incurred. Stock-Based Compensation The Company accounts for stock options issued to non-employees, under Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation". The Company's issuance of employee stock options is accounted for using the intrinsic value method under APB Opinion No. 25, Accounting for Stock issued to Employees ("APB 25"). Statement of Financial Accounting Standards No. 123 "Accounting for Stock -- based Compensation", ("SFAS No. 123") as amended by Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure" requires the Company to provide pro forma information regarding net earnings and earnings per common share as if compensation cost for the Company's stock options had been determined in accordance with the fair value based method prescribed in SFAS No. 123. We have generally granted stock options to our employees at exercise prices equal to or greater than the fair value of the shares at the date of grant and accounted for these stock option grants in accordance with APB 25. Under APB 25, when stock options are issued with an exercise price equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized in the statement of operations. In 2004 we amended our stock option plan to provide for the grants of restricted stock and other forms of equity compensation in addition to stock options. In December 2004, APB 25 was replaced by Statement of Financial Accounting Standards No. 123 (Revised) ("Statement 123(R)"), which will be effective for all accounting periods beginning after December 15, 2005. The Company will adopt Statement 123(R) on January 1, 2006, and will be required to recognize an expense for the fair value of its outstanding stock options. Under Statement 123(R), the Company must determine the transition method to be used at the date of adoption, the appropriate fair value model to be used for valuing share-based payments and the amortization method for compensation cost. The transition methods include prospective and retroactive adoption methods. Under the retroactive method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective option requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of Statement 123(R), while the retroactive option would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. Both transition methods would require management to make accounting estimates. The Company has not yet concluded which method it will utilize, nor has it determined what the impact will be on its earnings per share. The following table illustrates the effect on income (loss) attributable to common stockholders and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. 15
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ---- ---- ---- ---- Net loss available to common stockholders, as reported $(20,118) $ (9,849) $(77,035) $(46,478) (Deduct)/Add: Stock-based employee compensation expense included in net loss, net of related tax effects 1,296 87 12,593 3,963 (Deduct)/Add: Total stock-based employee compensation (expense) income determined under fair value based method for all awards, net of tax related effects (1,536) (1,790) (14,705) (2,218) -------- -------- -------- -------- Pro forma net loss $(20,358) $(11,552) $(79,147) $(44,733) Weighted average common shares outstanding 62,464 33,418 61,946 29,323 Loss per share: Basic and diluted---as reported $ (0.32) $ (0.29) $ (1.24) $ (1.59) Basic and diluted---pro-forma $ (0.33) $ (0.35) $ (1.28) $ (1.53)
Under SFAS No. 123 the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004 ------------------ ------------------ ------------------ ------------------ Expected life (in years) 8 8 8 8 Risk-free interest rate 3.44% 0.88%-1.46% 2.28%-3.44% 0.88%-1.46% Volatility 840% 146%-258% 456%-840% 146%-258% Dividend yield 0% 0% 0% 0%
Segment Disclosures SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", requires companies to report financial and descriptive information about their reportable operating segments, including segment profit or loss, certain specific revenue and expense items and segment assets as well as information about the revenues derived from the company's products and services and major customers. This statement requires the use of the management approach to determine the information to be reported. The management approach is based on the way management organizes the enterprise to assess performance and make operating decisions regarding the allocation of resources. It is management's opinion that beginning in May, 2005 with the TerreStar asset purchase, the Company has two reportable segments, Motient Communications and TerreStar Networks Inc. In 2004, the Company had one reportable segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company's core customer base can be generally divided into six broad categories, Wireless Internet, Field Services, Transportation, Telemetry, iMotient and Other. Wireless Internet primarily consists of customers using the Company's network and applications to access certain internet functions, like email. Devices and airtime used by transportation and shipping companies, or by personnel in the field service industries (such as repair personnel), for dispatching, routing and other vital communications functions are known as 16 transportation and field service, respectively. Telemetry typically covers devices and airtime to connect remote equipment, such as wireless point-of-sale terminals, with a central monitoring facility. iMotient consists of integrated wireless data solutions revenues through the resale of airtime on the Cingular and Sprint wireless networks. Other revenues may consist of sales commissions, consulting fees or other fees. The following summarizes the Company's core wireless business revenue by these market categories (in millions):
Three Months Ended Three Months Nine Months Nine Months September 30, Ended September Ended September Ended September 2005 30, 2004 30, 2005 30, 2004 ---- -------- -------- -------- Summary of Revenue ------------------ Wireless Internet $1.7 $4.3 $6.4 $15.7 Transportation 0.4 0.9 1.4 2.7 Field services 0.1 1.4 1.0 4.7 Telemetry 0.4 0.6 1.3 1.8 iMotient 0.1 - 0.2 - All Other 0.3 0.2 0.5 2.6 Service revenue 3.0 7.4 10.8 27.5 Equipment revenue 0.1 1.0 0.9 3.8 Total Revenue $3.1 $8.4 $11.7 $31.3
The Company does not measure ultimate profit and loss or track its assets by these market categories. TerreStar does not currently generate any revenues and we do not anticipate that it will do so until 2008. Additional financial information concerning the Company's reportable segments is shown in the following table (in thousands):
Three Months Ended Nine Months Ended September 30, 2005 September 30, 2005 Motient TerreStar Total Motient TerreStar Total ------- --------- ----- ------- --------- ----- Operating (loss) $(8,889) $(5,811) $(14,700) $(47,099) $ (6,907) $ (54,006) Depreciation expense $ 1,518 $ --- $ 1,518 $ 6,921 $ --- $ 6,921 Amortization expense $ 1,227 $ 1,310 $ 2,537 $ 3,819 $ 2,043 $ 5,862 Identifiable assets N/a N/a N/a $724,104 $276,022 $ 1,000,126 Capital expenditures $ 71 $ 3,137 $ 3,208 $ 107 $ 3,137 $ 3,244
(Loss) 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. As of September 30, 2005 there were 408,500 shares of Series A Cumulative Convertible Preferred Stock entitled to be converted into a total of 12,255,000 shares of common stock, shares that were not included in this calculation because of their antidilutive effect for the three and nine months ended September 30, 2005. Options and warrants to purchase shares of common stock were not included in the computation of loss per share as the effect would be antidilutive for all periods. As a result, the basic and diluted earnings per share amounts for all periods presented are the same. As of September 30, 2005 and 2004, there were warrants to acquire approximately 6,740,376 and 6,063,450, 17 respectively, shares of Motient common stock. As of September 30, 2005 and 2004, there were options to purchase 796,743 and 633,719, respectively, shares of Motient common stock that were not included in this calculation because of their antidilutive effect for the three and nine months ended September 30, 2005 and 2004. Additionally, there were options to purchase 4,153,151 and 0 shares of TerreStar common stock at September 30, 2005 and September 30, 2004. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based Payment" ("SFAS No. 123R") that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued to Employees", that was provided in Statement 123 as originally issued. Under SFAS No. 123R companies are required to record compensation expense for all share based payment award transactions measured at fair value. This statement is effective for quarters ending after December 15, 2005. We have not yet determined the impact of applying the various provisions of SFAS No. 123R. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs: an amendment of ARB No. 43, Chapter 4", to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company has adopted SFAS No. 151 and when applied, SFAS 151 did not have an impact on our financial position or results of operations. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets -- An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS 153). SFAS 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005 and is was adopted by the Company in the third quarter of 2005. The adoption of SFAS 153 did not have a material effect on our results of operations as the Company currently does not and does not expect to exchange any non-monetary assets. Related Parties The Company made cash payments of $1,777,000 and $3,255,000 to related parties for service-related obligations for the three and nine-month periods ended September 30, 2005, as compared to $196,000 and $967,000 for the three and nine-month periods ended September 30, 2004. For the three months ended September 30, 2005, $1,597,000 was paid to MSV for consulting services related to TerreStar Networks, Inc. and $180,000 was paid to CTA, a consulting and private advisory firm specializing in the technology and telecommunications sectors. CTA has been engaged to act as chief restructuring entity of Motient. 18 As consideration for this work, Motient has agreed to pay to CTA a monthly fee of $60,000. This engagement extends to December 31, 2005 and may be extended or terminated at the Company's discretion. In February 2005, the board approved a success-based consulting fee of $3,709,796, payable 60% to CTA and certain of its affiliates, and 40% to The Singer Children's Management Trust, a trust established for the benefit of the children of Gary Singer, a former lender under the 2003 Term Credit Agreement and the brother of Steven Singer, Motient's chairman of the board. The fee was paid in cash and stock, and was related to the closing of Motient's acquisition of certain interests in MSV in February 2005. Such fee is equal to 1% of the aggregate consideration paid by Motient for such MSV interests. In September, 2005, Steven Singer, Motient's chairman, in accordance with the terms of the August 2005 grants of restricted stock, sold 6,989 shares of his grant to Motient for $23.75 per share. 3. COMMITMENTS AND CONTINGENCIES As of September 30, 2005, the Company had no contractual inventory commitments. UPS Deposits and Deferred Revenue --------------------------------- In December 2002, Motient entered into an agreement with UPS pursuant to which UPS prepaid an aggregate of $5 million in respect of network airtime service to be provided beginning January 1, 2004. In April 2005, this agreement was amended, and then in September 2005, the agreement was amended again. Motient made a payment of $2.0 million to UPS, and in exchange, all but $0.6 million of the outstanding prepayment of $3.7 million was terminated. The remaining $0.6 million prepayment must be used by UPS prior to March 31, 2006. If not used, UPS will forfeit this prepayment, and it will not be repaid. Series A and Series B Cumulative Convertible Preferred Stock ------------------------------------------------------------ The Company accounts for Series A and Series B Cumulative Convertible Preferred Stock under Accounting Series Release 268. "Redeemable Preferred Stocks". On April 15, 2005, Motient sold 408,500 shares of Series A Cumulative Convertible Preferred Stock, $0.01 par value in a private placement exempt from the registration requirements of the Securities Act of 1933. Motient received cash proceeds, net of $17.5 million in placement agent commissions and other fees (before escrowing a portion of the proceeds as required under the terms of the preferred stock, described below) of approximately $391 million. On October 26, 2005, Motient exchanged $318.5 million face amount of its Series A Preferred Stock for Series B Preferred stock, with substantially identical economic terms. In connection with the sale of preferred stock and the subsequent exchange offer, Motient entered into a registration rights agreement with the purchasers. Under this agreement, Motient is obligated to use its reasonable best efforts to cause a registration statement relating to the resale by the purchasers of the Motient shares of common stock issuable upon conversion of the preferred stock or the warrants issued in connection therewith to become effective as soon as possible. In addition, Motient granted warrants exercisable for an aggregate of 19 154,109 shares of Motient common stock to the purchasers. The warrants have a term of five years and an exercise price equal to $26.51 per share. Upon the consummation of the exchange offer, Motient believes that all of these warrants will vest by September 8, 2006. As of September 30, 2005, the Company had assigned a fair value to these warrants of $3.9 million of which $0.2 million had vested. For additional information regarding the Series A Preferred, see Item 4, "Legal and Regulatory Matters." 4. LEGAL AND REGULATORY MATTERS Legal On August 16, 2005, Highland Legacy Limited, a stockholder of Motient, filed suit in the Court of Chancery of the State of Delaware in and for New Castle County against: Motient; Steven Singer, Gerald Kittner, Barry Williamson, Raymond Steele and Gerald Goldsmith, directors of Motient; Peter D. Aquino, a former director of Motient; Christopher Downie, Chief Operating Officer of Motient; Gary Singer; Tejas Inc.; Tejas Securities, Inc.; Communications Technology Advisors LLC; Capital & Technology Advisors, Inc.; and Jared Abbruzzese. Highland Legacy Limited is an affiliate of James Dondero, a director of Motient. The lawsuit alleges breaches of duties allegedly owed to Motient by the defendants and seeks the recovery of fees from certain of these parties relating to prior transactions with Motient. Most of these fees were approved by Mr. Dondero in his capacity as a director of Motient. The defendants in this lawsuit filed a motion to dismiss these claims on October 14, 2005. Motient's independent audit committee, along with independent special counsel, has conducted an investigation of Mr. Dondero's allegations and has found no basis to his allegations. On August 16, 2005, Highland Equity Focus Fund, L.P., Highland Crusader Offshore Partners, L.P., Highland Capital Management Services, Inc., and Highland Capital Management, L.P. filed a lawsuit in Dallas County, Texas against Motient challenging the validity of the Series A Preferred on the basis of the confusion regarding the voting rights of the Series A Preferred and seeking rescission of their purchase of the shares of Series A Preferred that they purchased from Motient in the private placement in April 2005. These entities acquired 90,000 shares of Series A Preferred for a purchase price of $90 million in that private placement. Although Motient currently has sufficient cash to refund this purchase price and rescind the purchase of Series A Preferred by these investors, Motient believes that this claim is without merit and intends to vigorously defend this lawsuit. On October 7, 2005, Highland Equity Focus Fund, L.P., Highland Crusader Offshore Partners, L.P., Highland Capital Management Services, Inc., Highland Capital Management, L.P on behalf of themselves and all those similarly situated, filed a class action lawsuit in the Court of Chancery of the State of Delaware against Motient and each of its directors, other than Mr. Dondero, alleging that Motient has provided inadequate information to the holders of Series A Preferred relating to the Exchange Offer for the Series A Preferred, and that the Exchange Offer is coercive. These parties have also requested that the court enjoin the Exchange Offer. The Exchange Offer closed on October 26, 2005, and accordingly, Motient has requested that this suit be dismissed as moot. 20 On October 19, 2005, Motient Corporation filed two lawsuits against James D. Dondero, one in the United States District Court for the Northern Division of Texas, and one in the District Court of Dallas County, Texas. The complaint filed in state court alleges that Mr. Dondero has seriously and repeatedly breached his fiduciary duties as a director of Motient in order to advance his own personal interests. The complaint filed in Federal court alleges selective disclosure of material inside information and other improper actions undertaken by Mr. Dondero, the net result of which have been to drive down the price of Motient's stock. It also alleges that Mr. Dondero has solicited, and is still soliciting, the replacement of Motient's current board and management in violation of federal law. Issuance of Series A Preferred Motient issued the Series A Preferred in a private placement on April 15, 2005. As originally proposed, the Series A Preferred would have voted along with Motient's common stock on all matters on an as-converted basis. During negotiations with respect to the Series A Preferred, investors affiliated with Jim Dondero, a director of Motient, requested that the voting rights of the Series A Preferred be limited so that these investors would not be required to file applications under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR"). Motient agreed to limit the voting rights of the Series A Preferred to the extent appropriate so that these investors would not be required to file HSR applications. However, due to a mistake, the voting rights were incorrectly stated in the Certificate of Designations for the Series A Preferred as originally filed with the Secretary of State of Delaware. Upon discovering this mistake, Motient promptly filed a Certificate of Corrections with the Secretary of State of Delaware to correctly state the voting rights of the Series A Preferred. Motient's Certificate of Incorporation contains a provision that prohibits the issuance by Motient of "non-voting stock." As described below, the investors affiliated with Jim Dondero who requested that the voting rights of the Series A Preferred be limited have now filed lawsuits against Motient claiming, among other things, that the Series A Preferred is void because the limited voting rights set forth in the Certificate of Incorporation make the Series A Preferred "non-voting stock" and that the Certificate of Corrections is not effective to remedy this. Motient believes that the Certificate of Corrections was effective to remedy any problems caused by the mistake, and that the limited voting rights granted in the Certificate of Designations were sufficient to make the Series A Preferred not be "non-voting stock." Subsequent to our sale of Series A Preferred, entities affiliated with Mr. Dondero filed an HSR application based on their purchases of Motient's securities in February 2005, two months prior to our issuance of the Series A Preferred. Exchange Offer On October 27, 2005, Motient completed an exchange offer in which it allowed each holder of Series A Preferred the opportunity to exchange their shares of Series A Preferred and a release of any claims relating to the issuance of the Series A Preferred for shares of Series B Preferred, which will have rights, preferences and privileges substantially identical to the Series A Preferred, except that upon (a) the accumulation of accrued and unpaid dividends on the outstanding shares of Series B Preferred for two or more six month periods, whether or not consecutive; (b) the failure of Motient to properly redeem the Series B Preferred Stock, or (c) the failure of Motient to comply with any of the other covenants or agreements set forth in the Certificate of Designations for the Series B Preferred Stock, and the continuance of such failure for 30 21 consecutive days or more after receipt of notice of such failure from the holders of at least 25% of the Series B Preferred then outstanding, then the holders of at least a majority of the then-outstanding shares of Series B Preferred, with the holders of shares of any parity securities upon which like voting rights have been conferred and are exercisable, voting as a single class, will be entitled to elect a majority of the members of Motient's Board of Directors for successive one-year terms until such defect listed above has been cured. All of the holders of the Series A Preferred except for those affiliated with Highland Capital Management exchanged their shares in this offer. Accordingly, approximately $318.5 million in face amount of Series A Preferred shares were exchanged for Series B Preferred shares of the same face amount, and only $90 million in face amount of Series A Preferred shares remain outstanding. From time to time, Motient is involved in legal proceedings in the ordinary course of its business operations. Although there can be no assurance as to the outcome or effect of any legal proceedings to which Motient is a party, Motient does not believe, based on currently available information, that the ultimate liabilities, if any, arising from any such legal proceedings not otherwise disclosed would have a material adverse impact on its business, financial condition, results of operations or cash flows. Regulation Overview Motient's wireless communications businesses are regulated to varying degrees at the federal, state and local levels. Various legislative and regulatory proposals under consideration from time to time by Congress and the FCC have in the past materially affected and may in the future materially affect the telecommunications industry in general, and Motient's wireless businesses in particular. The following is a summary of significant laws, regulations and policies affecting the operation of Motient's wireless businesses. In addition, many aspects of regulation at the federal, state and local level currently are subject to judicial review or are the subject of administrative or legislative proposals to modify, repeal, or adopt new laws and administrative regulations and policies. Neither the outcome of these proceedings nor their impact on Motient's operations can be predicted at this time. Regulation Of Our DataTac Network The ownership and operation of Motient's DataTac network is subject to the rules and regulations of the FCC, which acts under authority established by the Communications Act of 1934, as amended, and related federal laws. Among other things, the FCC allocates portions of the radio frequency spectrum to certain services and grants licenses to and regulates individual entities using that spectrum. Motient operates pursuant to various licenses granted by the FCC. Motient's FCC licenses are subject to restrictions in the Communications Act that (i) some FCC licenses may not be held by a corporation of which more than 20% of its capital stock is directly owned of record or voted by non-U.S. citizens or entities or their representatives and (ii) no such FCC license may be held by a corporation controlled by another corporation, referred to as indirect ownership, if more than 25% of the controlling corporation's capital 22 stock is owned of record or voted by non-U.S. citizens, entities or their representatives, if the FCC finds that the public interest is served by the refusal or revocation of such license. However, with the implementation of the Basic Telecommunications Agreement, negotiated under the auspices of the World Trade Organization and to which the United States is a party, the FCC will presume that indirect ownership interests in our FCC licenses in excess of 25% by non-U.S. citizens or entities will be permissible to the extent that the ownership interests are from World Trade Organization-member countries. If the 25% foreign ownership limit is exceeded, the FCC could take a range of potential actions that could harm Motient's business. The FCC licenses used for the DataTac network are renewable, site-based, 800 MHz licenses, granted for a term of 10 years. Renewal is granted in the ordinary course for 800 MHz licenses like those which Motient holds. As a commercial mobile radio service provider in the 800 MHz terrestrial business, Motient is regulated as a common carrier. Motient must therefore offer service at just and reasonable rates on a first-come, first-served basis, without any unjust or unreasonable discrimination, and Motient is subject to the FCC's complaint processes. The FCC has decided not to apply or to withhold its right, at this time, to apply numerous common carrier provisions of the Communications Act to commercial mobile radio service providers. In particular, Motient is not subject to traditional public utility rate-of-return regulation, and is not required to file tariffs with the FCC. In order to address certain concerns from wireless users in the public safety community, such as fire and police departments, on July 8, 2004, the FCC approved adoption of a reconfiguration plan for the 800 MHz spectrum band. Under the plan, Nextel Communications Inc. will occupy spectrum in the 1.9 GHz band in exchange for, among other things, (1) relocating and retuning public safety licensees in the 800 MHz band, and (2) consolidating its own 800 MHz frequencies in the so-called "upper 800" MHz band. On December 22, 2004, the FCC clarified that Motient would generally be allowed, subject to certain conditions, to move its 800 MHz frequencies to the upper-800 MHz band. Motient cannot assure you that its operations will be not affected by the adoption or implementation of this order or any subsequent addenda. As a result of our ongoing network rationalization efforts, some of our 800 MHz FCC licenses have been lost and others may be lost in the future in markets to which we are discontinuing service. We believe that the value of our FCC licenses in these smaller markets is very small compared to the value of our FCC licenses in the top 40 MSAs. While we are taking steps to avoid this possibility, and while we believe that any such losses would not be material to our business, we can provide no assurance that any such losses would not negatively impact our business. Regulation Of TerreStar ATC In January 2003, the FCC adopted an order governing ancillary terrestrial component, or ATC, technology, giving mobile satellite operators broad authority to use their assigned spectrum to operate an ATC. This order was applicable to both the L-band (MSV), and the S-band (TerreStar). The ATC Order established a set of preconditions and technical limits for ATC operations, as well as an application process for ATC approval of the specific system incorporating the ATCs that the licensee intends to use. A number of parties, principally wireless carriers, challenged the validity of that order by filing petitions for reconsideration and/or court appeals. On November 18, 2003, MSV filed an 23 application with the FCC to expand the use of its L-band spectrum and construct its next-generation hybrid network with ATC. On November 8, 2004 the FCC issued an order granting MSV the first ATC license ever granted by the FCC. The FCC also approved several of MSV's waiver requests, allowing MSV to further enhance its service coverage, but it specifically deferred its ruling on other MSV waiver requests. The order sets forth various limitations and conditions necessary to the use of ATC by MSV, but there can be no assurances that such conditions will be satisfied by MSV, or that such limitations will not be unnecessarily burdensome to MSV. One of MSV's competitors has asked the FCC to review the November 8, 2004 decision. We cannot predict the outcome of this review. On February 25, 2005, the FCC adopted its ATC Reconsideration Order, which upheld the essential elements of the January 2003 ATC Order and denied wireless carriers' requests, on reconsideration, to effectively prevent MSS providers, including those in the 2 GHz band, from offering an ATC service. Moreover, the sole remaining entity challenging the January 2003 ATC Order in court ended its appeal in June 2005. One L-band entity has asked the FCC to review some of the revised ATC rules adopted in the ATC Reconsideration Order. We cannot predict the outcome of this review. TerreStar has not applied for ATC authority, and there are several regulatory and technical conditions that must be satisfied prior to any grant of ATC authority by the FCC to TerreStar. As a result, Motient can provide no assurances that ATC authority will be granted if and when TerreStar applies for such authority. TerreStar Licenses TMI holds the approval issued by Industry Canada for a 2 GHz space station authorization and related spectrum licenses for the provision of Mobile Satellite Service, or MSS, in the 2 GHz band in Canada, as well as an authorization from the FCC for the provision of MSS in the 2 GHz band in the United States. These authorizations are subject to various milestones relating to the construction, launch, and operational date of the system. TMI is contractually obligated to transfer the authorizations to an entity designated by TerreStar that is eligible to hold the authorizations, subject to obtaining the necessary regulatory approvals. In December 2002, TMI and TerreStar jointly applied to the FCC for authority to transfer TMI's MSS authorization to TerreStar. However, certain wireless carriers urged the FCC to cancel TMI's MSS authorization, and to dismiss the application to transfer TMI's MSS authorization to TerreStar. In February 2003, the FCC's International Bureau adopted an order canceling TMI's MSS authorization due to an alleged failure to enter into a non-contingent satellite construction contract before the specified first milestone date, and dismissing the application for TMI to transfer its MSS authorization to TerreStar. In June 2004, upon review of the International Bureau's decision, the FCC agreed to waive aspects of the first milestone requirement applicable to TMI's MSS authorization and, therefore, also reinstated that authorization, along with the application to transfer TMI's MSS authorization to TerreStar. The FCC also modified the milestone schedule applicable to TMI's MSS authorization. TMI recently certified to the FCC its compliance with the second and third milestones under its MSS authorization. The FCC is currently reviewing that certification for compliance with the requirements of TMI's MSS authorization. The application to transfer TMI's MSS authorization to TerreStar is still pending before the FCC. The remaining milestones relate to satellite launch and operation, and are in November 2007 and 2008, respectively. 24 Currently, the FCC has provided TMI a reservation of 2 x 4 MHz of spectrum within the 2GHz MSS band. TMI does not yet have a specific spectrum assignment within that band, because current FCC rules do not allow it to request a specific assignment until such time that its satellite reaches its intended orbit. Spectrum in the 2 GHz MSS band is reserved on a pro rata basis among the existing licensees. TMI's current spectrum reservation from the FCC and Industry Canada reflect the cancellation of U.S. authorizations of three of the eight entities that were authorized to provide 2 GHz MSS in 2001: Mobile Communications Holding Inc. (MCHI), Constellation Communications Holdings, Inc. (Constellation), and Globalstar LP. Globalstar LLC, the successor-in-interest to Globalstar LP, along with another interested entity, Globalstar Satellite LP, has collectively challenged cancellation of its license on reconsideration to the FCC. With ICO Global Communications (Holdings) Limited, MCHI and Constellation have jointly challenged cancellation of their licenses on appeal to the U.S. Court of Appeals for the D.C. Circuit. On October 28, 2005, that court affirmed the FCC's decision to cancel the MCHI and Constellation licenses; it is unclear whether those entities will seek review of that decision by the U.S. Supreme Court. If any or all of those licenses were reinstated, TMI would likely have access to less spectrum than it would otherwise. The FCC has not yet redistributed spectrum surrendered in March 2005 by three of the then remaining five 2 GHz MSS licensees. In April 2005, TMI and TerreStar filed a letter at the FCC requesting redistribution of half of the surrendered MSS spectrum to TMI. A number of terrestrial wireless and MSS entities opposed that request. In July 2005, the FCC issued public notices opening two proceedings to manage redistribution of the surrendered MSS spectrum. In the first proceeding, IB Docket No. 05-220, the FCC tentatively concluded that it would distribute approximately 10.67 MHz of surrendered MSS spectrum on a pro rata basis to TMI and ICO Satellite Services (ICO); it also sought public comment on that tentative conclusion. If the FCC were to take such action, TMI would have access to a total of approximately 2 x 6.67 MHz of MSS spectrum. In the second proceeding, IB Docket No. 05-221, the FCC requested comment on the following three possible options for distribution of the other approximately 13.34 MHz of surrendered 2 GHz MSS spectrum: (1) distribute the spectrum pro rata to TMI and ICO, (2) open a new MSS processing round to distribute the spectrum to new MSS licensee(s) , or (3) initiate a rulemaking to reallocate some or all of the remaining surrendered spectrum to another (i.e., non-MSS) service. Numerous parties, including MSS competitors Inmarsat and Globalstar, as well as terrestrial wireless companies, have commented in these proceedings to oppose distribution of any of the surrendered spectrum to TMI. The FCC has not announced any decision as to how to distribute the surrendered MSS spectrum at issue in IB Docket Nos. 05-220 and 05-221. Motient cannot guarantee that TMI will receive access to more then the 2 x 4 MHz of spectrum currently provided for in the MSS authorization issued by the FCC. On July 26, 2005, Industry Canada modified TMI's S-band authorization to provide for a 2 x 10 MHz reservation. Specifically, this reservation consists of 7 MHz in each direction, with an additional 3 MHz in each direction available on the condition that it does not constrain the entry of another MSS operator into the Canadian market. In September 2004, the FCC issued an order allowing PCS operation in the 1995-2000 MHz band, which may be adjacent to the 2 GHz frequencies ultimately assigned to TMI. TerreStar has commented in the proceedings to establish service rules for the 1995-2000 MHz band. There can be no assurance that the FCC will not adopt service rules that will create interference to MSS operators in the 2 GHz band, including TerreStar. 25 The 2 GHz MSS band and certain adjacent bands are currently occupied by broadcast auxiliary service licensees, cable television relay service licensees, local television transmission service licensees, fixed service licensees, and certain other licensees. Most if not all of those licensees, and especially those in the broadcast auxiliary service, will need to relocate their operations to a new band to accommodate 2 GHz MSS and other new entrants. As a 2 GHz MSS entrant, TMI and/or TerreStar will have certain obligations to compensate those incumbent licensees for their relocation costs and for the costs of providing "comparable facilities" to them. However, the level to which TMI and/or TerreStar will be required to participate in such reimbursement is uncertain due to a variety of factors. Among other factors that could affect these obligations, and, pursuant to a separate FCC order, Nextel Communications Inc. (Nextel) must relocate incumbent broadcast auxiliary service licensees in the 1990-2025 MHz band by September 6, 2007. To the extent that Nextel complies with its band clearing obligations, 2 GHz MSS entrants commencing operations after Nextel has cleared the band would not have to clear the band themselves, but could still have obligations to reimburse Nextel for certain of its band clearing costs. Whether a 2GHz MSS entrant will be required to share in certain of Nextel's relocation costs will likely depend upon whether that entrant commences operations prior to June 27, 2008. By March 2006, Nextel must notify the MSS licensees as to whether it will or will not be seeking reimbursement from them. Even if Nextel bears all costs of relocating incumbent licensees in the 1990-2025 MHz band, TMI and/or TerreStar will still likely be responsible for relocating certain incumbent licensees in the 2165-2200 MHz band, although it may have the right to recoup certain costs from wireless entrants in the 2165-2180 MHz band. We cannot predict what these band clearing costs will be to Motient and/or TerreStar, if any. 5. TERRESTAR ASSET PURCHASE On May 11, 2005, Motient Ventures Holding Inc., or MVH, a wholly owned subsidiary of Motient Corporation, purchased 8,190,008 shares of newly issued common stock of TerreStar from TerreStar for $200 million pursuant to a Purchase Agreement by and between MVH and TerreStar. On the same day, TerreStar was spun-off by MSV to its limited partners and, in connection with that spin-off, Motient acquired ownership of approximately 48% of the issued and outstanding shares of capital stock of TerreStar and the subsequent $200 million stock purchase increased Motient's ownership to its current 61% of TerreStar's issued and outstanding common stock. Assets acquired and liabilities assumed in the asset purchase were recorded on the Company's Consolidated Balance Sheet as of the purchase date based upon their fair values at such date. The results of operations of the net assets acquired by the Company have been included in the Company's Statements of Operations since its date of purchase. Approximately $78 million was allocated to intangible assets that include the rights to receive licenses in the 2 GHz band and other intangibles. These intangible assets are being amortized over an average life of 15 years. The allocation is calculated as follows (in thousands): Purchase price $200,000 Minority interest 39.1455% -------- Subtotal 78,291 -------- Increase in Motient ownership 13.4% TerreStar net book value before purchase 643 -------- Add: Motient interest in increased book value 86 -------- Remaining value (a) $78,377 ======== (a) The remaining value was allocated as follows: Value allocated to FCC license rights $66,699 ======== Value allocated to Intellectual Property $11,678 ======== 26 There was no excess purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed. In certain circumstances, the allocation of the purchase price is based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when the Company receives final information and other analyses. Revisions to the fair values, which may be significant, will be recorded by the Company as further adjustments to the purchase price allocations. For additional information regarding TerreStar, see Note 1. Organization and Business as well as Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Pro Forma Financial Data The following table sets forth our unaudited pro forma results of operations for the nine months ended September 30, 2005 and 2004, reflecting our purchase of the TerreStar Networks Inc. assets. The pro forma results are based on our historical financial statements and the historical financial statements of the operations of TerreStar. The unaudited pro forma statements of operations give effect to the transaction as if the transaction occurred on January 1, 2005 and 2004, respectively. The pro forma financial results are presented for informational purposes only and are not intended to be indicative of either future results of our operations or results that might have been achieved had the transactions actually occurred since the beginning of the fiscal periods. Motient Corporation and Subsidiaries Selected Consolidated Pro-forma Results of Operations --------------------- Nine Months Ended ----------------- September 30, 2005 September 30, 2004 ------------------ ------------------ Net Revenues $11,721 $31,292 Operating Loss $(58,642) $(33,687) Operating loss, per share $(0.95) $(1.15) 6. SUBSEQUENT EVENTS On November 4, 2005, the Executive Committee of the Board of Directors of Motient Corporation authorized Motient to repurchase up to $50 million of its outstanding common shares. Motient intends to repurchase shares from time to time in the open market or otherwise under this program. The number of shares to be purchased and the timing of the purchases will be based on the level of cash balances, general business conditions and other factors, including alternative investment opportunities. The program may be discontinued at any time. 27 7. Restatement The Company has restated its condensed consolidated financial statements as of and for the three and nine months ended September 30, 2005 to properly reflect the accounting for its proportionate share of the non-cash stock compensation expense recorded by MSV, including the effects of a restatement of the unaudited interim financial statements of MSV. Subsequent to the issuance of the Company's condensed consolidated financial statements as of and for the three and six months ended June 30, 2005, the Compensation Committee of MSV's Board of Directors determined that a change in control of MSV, as defined in MSV's Unit Incentive Plan, had occurred during the three months ended March 31, 2005. This change in control triggered the immediate vesting of all of MSV's then outstanding unit options that were subject to accelerated vesting and recognition of an additional $3.8 million of deferred compensation expense associated with these options. For the three and nine months ended September 30, 2005, MSV recognized $1.6 million and $8.0 million, respectively of stock compensation expense. The accompanying condensed consolidated financial statements have been restated to reflect the Company's proportionate share of the net loss of MSV. In addition, this amendment reflects the restatement of the Company's condensed consolidated financial statements as of and for the three and nine months ended September 30, 2005 to properly reflect the accounting for its differential between cost and book value of equity method investments associated with the Company's February 9, 2005 transactions. On February 9, 2005, the Company exchanged shares of Motient common stock valued at $371 million for MSV LP units resulting in an additional interest in MSV of 10.24%. Under the guidance of APB 18, the Company failed to recognize the differential between the book and fair values of MSV's assets and amortize the excess over the life of the assets. As restated, for the three months and nine months ended September 30, 2005, the Company has recognized amortization of $1.7 million and $4.3 million, respectively related to the excess of the cost of the February 9, 2005 investment over the fair value of the net assets acquired. This amendment also reflects the restatement of the Company's condensed consolidated financial statements as of the nine months ended September 30, 2005 to properly reflect the accounting for its issuance of warrants in connection with the February 9, 2005 transaction. The Company did not record the warrants at the time of the merger transaction, as it was uncertain as to whether any of the warrants would vest and therefore no value could be ascribed to the warrants. As the Company has filed a registration statement on February 14, 2005 for the shares sold to the entities, 70% of the warrants will never vest. The remainder vested in August 2005. As previously reported, the Company failed to recognize the vesting of these warrants during the nine months ended September 30, 2005. As restated, for the nine months ended September 30, 2005, the Company has recognized, using a Black-Scholes model, $8.3 million as the fair value of the vested warrants. The effect of recording the warrants is to increase the Company's Investment in MSV, thereby increasing the cost of the February 9, 2005 merger transaction, and to increase the Company's common stock purchase warrants. 28 The following is a summary of the significant effects of the restatements on the accompanying condensed consolidated balance sheets (in thousands): September 30, 2005 -------- Investment in Mobile Satellite Ventures, as previously reported $ 501,400 Impact of restatement of the operating results of MSV (2,878) Impact of restatement of the amortization of cost over book value of MSV intangibles (4,277) Impact of restatement of issuance of common stock purchase warrants 8,347 --------- Investment in Mobile Satellite Ventures, as restated $ 502,592 ========= Common stock purchase warrants as previously reported $ 69,892 Impact of restatement of issuance of common stock purchase warrants 8,347 --------- Common stock purchase warrants as restated $ 78,239 ========= Accumulated deficit, as previously reported $(263,889) Impact of restatement of the operating results of MSV (2,878) Impact of restatement of the amortization of cost over book value of MSV intangibles (4,277) --------- Accumulated deficit, as restated $(271,044) =========
The following is a summary of the significant effects of the restatements on the accompanying condensed consolidated statements of operations (in thousands): Three Months Ended Nine Months Ended September 30, 2005 September 30, 2005 As As Previously As Previously As Reported Restated Reported Restated -------- -------- -------- -------- Equity in losses of Mobile Satellite Ventures $ (2,308) $ (3,954) $(11,520) $(18,675) Net (loss) $(11,793) $(13,439) $(57,712) $(64,867) Net (loss) available to Common Stockholders $(18,472) $(20,118) $(69,880) $(77,035) Net (loss), basic and diluted $ (0.30) $ (0.32) $ (1.13) $ (1.24)
29 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis is intended to help the reader understand Motient Corporation. It is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes. 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 registration statements on Form S-1, and our reports on Form 10-K and 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 owns, operates and develops two-way wireless communications businesses. In addition to our own two-way wireless data network (our DataTac network) which we use to provide our customers with two-way wireless data communication services, we have the capabilities to provide our customers with convenient access to other wireless data networks, such as the Sprint and Cingular networks. We also are in the process of developing a satellite communications service via our 61% ownership of TerreStar Networks Inc., a development stage company in the process of building its first satellite. We acquired our ownership in TerreStar in May 2005. TerreStar was formerly a subsidiary of another satellite communications company, Mobile Satellite Ventures, LP, or MSV, as it is commonly known. We own 49% of MSV, but do not have operating control of its business and do not consolidate its financial statements into Motient. 30 Acquisition of MSV and TerreStar On September 22, 2005, we announced that we had entered into a non-binding letter of intent to consolidate the ownership of MSV and TerreStar within Motient. We anticipate that this transaction will, if consummated, simplify the ownership and governance of both MSV and TerreStar, better enabling both of them to pursue more effectively their deployment of separate hybrid satellite and terrestrial based communications networks providing ubiquitous wireless coverage across all of North America in the L-band and S-band, respectively. The letter of intent sets forth the basic terms of the proposed transaction, which include, among other things, (i) our issuance of approximately 93 million shares of our common stock in exchange for the MSV interests and TerreStar shares not already owned by us, (ii) a possible spin-off of TerreStar after the closing (the spin-off would be executed if it is judged by Motient's Board of Directors to be in the best interests of its stockholders following the closing), and (iii) the reconstitution of the boards of Motient, MSV and TerreStar with nine members mutually acceptable to the parties and in compliance with the independence rules and regulations of NASDAQ. The interests of MSV and TerreStar held by one of the owners, TMI Communications and Company, will not be transferred at the time of the closing. Instead, TMI would receive the right to exchange its interests in MSV and TerreStar at any time at the same exchange ratios that are being offered to the other shareholders and would subscribe for shares of a new class of Motient preferred stock with nominal economic value but having voting rights in Motient equivalent to those TMI would receive upon exchange of its MSV and TerreStar interests for Motient common stock. The consummation of the transaction will require successful completion of due diligence, negotiation and execution of definitive documentation, board and stockholder approval, and various regulatory approvals. Because the letter of intent is non-binding, the parties have no obligation to negotiate such documentation or otherwise consummate the transactions. Therefore, the transactions may not be consummated on the currently proposed terms or may never be consummated. Our Terrestrial Wireless Business We are a provider of two-way, wireless mobile data services and mobile Internet services in the top 40 MSAs in the United States. Owning and operating a wireless radio data network that provides wireless mobile data service to customers, we generate revenue primarily from the sale of airtime on our network and from the sale of communications devices to our customers. Our customers use our network and our wireless applications for wireless email messaging and wireless data transmission, enabling businesses, mobile workers and consumers to wirelessly transfer electronic information and messages and to access corporate databases and the Internet. In addition to selling wireless data services that use our own network, Motient is also a reseller of airtime on the Cingular and Sprint wireless networks. These arrangements allow Motient to provide integrated wireless data solutions to its customers using a variety of networks. In December 2004, Motient launched a new set of products and services designed to provide these integrated wireless data solutions to its customers called iMotient SolutionsTM. iMotient allows Motient's customers to use these multiple networks via a single connection to Motient's back-office systems, providing a single alternative for application and software development, device management and billing across multiple networks, including but not limited to GPRS, 1XRTT and our own DataTac network. Once connected to iMotient, customers receive proprietary applications and services that reduce airtime usage, improve performance and reduce costs. Motient only recently generated initial revenues from iMotient Solutions and it anticipates that iMotient revenues will increase over the course of 2005. Motient cannot anticipate whether these revenues will increase rapidly enough to offset anticipated revenue declines in other segments of its business. 31 Of our revenues, for the nine months ended September 30, 2005, approximately 55% were generated in connection with our BlackBerry TM by Motient wireless email service and our own eLinkSM wireless email service, our "Wireless Internet" market segment. These wireless email services are utilized by our customers primarily in conjunction with Research In Motion's RIM 850 and 857 wireless handheld devices, which are no longer produced by Research in Motion. We believe that consumers, in general, wish to use and purchase wireless internet devices that cannot be supported on our DataTac network, such as wireless internet devices that are data and voice capable. We expect our revenues from these products will continue to decline, but we will attempt to capture revenue from the migration of our wireless internet customers to newer technologies through, among other alternatives, our reseller agreements with RACO Wireless, Inc. and eAccess Solutions, Inc., which allows us to receive a one-time commission for signing up customers to use alternative network providers wireless internet service. Motient is currently exploring ways to offer Wireless Internet services under our iMotient SolutionsTM platform, but Motient can make no assurances that it will ever be able to effectively offer such a product. Over the course of 2004, Motient implemented and completed certain initiatives to rationalize the size of its network, primarily to remove unprofitable base stations and reduce unneeded capacity and coverage. During the first quarter of 2005, Motient announced a plan to refocus its DataTac network primarily on the top 40 Metropolitan Statistical Areas (MSAs), and in the second quarter of 2005, we deconstructed DataTac network components and terminated service in previously served MSAs above the top 40. Given the similar coverage profiles of the Cingular and Sprint networks, the significantly increased bandwidth capabilities of these networks relative to the DataTac network and the concentration of our revenues in the top 40 MSAs, we determined that this plan best allowed us to match our network infrastructure costs with our revenue base, while continuing to meet the needs of as many of our customers as possible. Although these actions resulted in a decline in our revenues, we believe that the initial revenue decline will be offset by a reduction in our network operating costs. These network changes may put further negative pressure on our revenues in all market segments in 2005 as customers may elect to pursue other alternative network carriers with alternative coverage. We are making every effort to retain our customers or migrate them to our iMotient SolutionsTM product and services, but we can make no assurances that it will be able to retain these customers. Our Satellite Communications Business - TerreStar Networks Inc. On May 11, 2005, we acquired approximately an additional 13.4% ownership in TerreStar Networks, Inc. for a total 61% ownership interest in, and operating control over, TerreStar Networks Inc. Prior to that date, TerreStar was a subsidiary of MSV established to, among other things, develop a satellite communications system in the 2 GHz frequency band, often known as the "S-band". We acquired our ownership interest in TerreStar when, in conjunction of a spin-off of TerreStar to the owners of MSV, we purchased an additional $200 million of newly issued TerreStar common stock. In conjunction with this transaction, TerreStar also received a perpetual, royalty-free license to utilize MSV's patent portfolio, including those patents related to "ancillary terrestrial component", or ATC, which we anticipate will allow us to deploy a communications network that seamlessly integrates satellite and terrestrial communications, giving a user ubiquitous wireless coverage across North America. Approximately $78 million was allocated to intangible assets that include the rights to receive licenses in the 2 GHz band and other intangibles. The allocation is calculated as follows (in thousands): 32 Purchase price $200,000 Minority interest 39.1455% -------- Subtotal 78,291 -------- Increase in Motient ownership 13.4% TerreStar net book value before purchase 643 -------- Add: Motient interest in increased book value 86 -------- Remaining value (a) $78,377 ======== (a) The remaining value was allocated as follows: Value allocated to FCC license rights $66,699 ======== Value allocated to Intellectual Property $11,678 ======== By offering Mobile Satellite Service, or MSS, in the S-band in conjunction with ATC, TerreStar can effectively deploy a hybrid satellite and terrestrial wireless communications network. This network could, for instance, eventually allow a user to utilize a mobile device that would communicate with a traditional land-based wireless network when in range of that network, but communicate with a satellite when not in range of such a land-based network. These mobile devices could be used for a myriad of communications applications, including potentially voice, data and video services. TerreStar is currently in the process of building its first satellite pursuant to a construction contract with Space Systems/Loral, Inc. This satellite is scheduled to be completed in November 2007, with commercial operations scheduled to begin in 2008. Once launched, the satellite, with an antenna almost sixty feet across, will be able to communicate with terrestrial base stations and standard wireless devices. The construction, launch and operation of this satellite will require significant additional capital, with satellite construction costs alone expected to exceed $550 million, paid out over the next several years. Our ability to offer these services depends on TerreStar's right to receive certain regulatory authorizations allowing it to provide MSS in the S-band. In order to use ATC, TerreStar will need to apply for authority with the FCC, which has not yet done. These authorizations are subject to various regulatory milestones relating to the construction, launch and operational date of the satellite system required to provide this service. Over the course of 2005 through 2008, we expect that TerreStar will continue to work on building, testing and deploying its satellite communications system, which will require large capital expenditures, as well as the incurrence of significant operating expenses. During this period, we do not expect that TerreStar will generate any revenues. Therefore, we anticipate that TerreStar will generate operating losses during this period. We anticipate that TerreStar will not be in a position to generate revenues from business operations until 2008 at the earliest. 33 Intangible Assets FCC licenses and other intangible assets consist of the following: September 30, 2005 December 31, (unaudited) 2004 ----------- ---- (in thousands) ----------------------------- FCC 800 MHz licenses $76,141 $80,594 FCC 2 GHz licenses 66,864 -- Intellectual property 11,707 -- Customer contracts 349 349 -- -- 155,061 80,943 Less accumulated amortization (18,284) (13,294) -------- -------- FCC licenses and other intangible assets, net $136,777 $67,649 ======== ======= The Company has utilized numerous assumptions and estimates in applying its valuation methodologies and in projecting future operating characteristics for the TerreStar business enterprise. In general, the Company considered population, market penetration, products and services offered, unit prices, operating expenses, depreciation, taxes, capital expenditures and working capital. The Company also considered competition, satellite and wireless communications industry projections and trends, regulations and general economic conditions. In the application of its valuation methodologies, the Company applies certain royalty and discount rates that are based on analyses of public company information, assessment of risk and other factors and estimates. The Company's valuation of TerreStar's intellectual property rights was determined utilizing a form of the income approach referred to as the relief from royalty valuation method. The Company assumed a 10% to 12% royalty rate applied to a projected revenue stream generated by a hypothetical licensee utilizing such intellectual property rights. The projected revenue was based on a business case for the operations and consisted of the following principal assumptions and estimates: - A 20 year forecast period. - Specific cash outflows in the first four years of the forecast period to account for TerreStar's portion of satellite design, construction and launch expenditures. - Annual population growth of 1.6% based on U.S. Census Bureau estimates of the U.S. population in 2004. - Market penetration assumptions of zero to 7% to 12% over the forecast period, depending on the specific market and when the market is launched. - Average monthly revenue per customer of $40.00 when services are launched, increasing to $44.50 over the forecast period. This increase equates to a compound annual growth rate of 0.6%. A substantial portion of this revenue is generated by the terrestrial component of the ATC network. - Tax rate of 40% after the consumption of net operating losses generated in the early years of the forecast period. - A 25% discount rate based on a weighted average cost of capital (WACC) determined by analyzing and weighting the cost of capital for a peer group of publicly traded satellite service providers, wireless communications companies and telecommunications companies in general. The Company's valuation of its spectrum assets is based on a form of the income approach known as the "Build-Out Method." The method applies a discounted cash flow framework to the Company's "build-out" business case. This build-out 34 approach is intended to incorporate all of historical and future development costs, as well as projected revenues, operating expenses and cash flows generated from the build-out of a hybrid satellite and terrestrial communications system utilizing the Company's frequency assets. This "build-out method" business case and the applied discounted cash flow valuation consisted of the following principal assumptions and estimates: - A 20-year forecast period, comprised of a high growth period for the first 10 years and a declining growth period beginning in year 11 and a terminal period to perpetuity. - Development cash outflows and capital expenditures related to the design and construction of two satellites in the first 3 years of the forecast period and the launch of one of these satellites in the fourth year of the forecast period. Replacement costs for the construction and launch of one satellite are included in the declining growth period. - Satellite only revenues based on market size data for traditional satellite segments (maritime, fleet management, public safety, telematics and aeronautical) compiled generally by third party research groups and penetration estimates of 10% to 40% of this potential customer base, depending on the specific market segment addressed over the 20 year forecast period. - Terrestrial revenues calculated as eleven percent of the total revenues generated by a joint or strategic partner with whom TerreStar would intend to deploy a terrestrial infrastructure and launch terrestrial services. Total partnership revenues are based on (i) market penetration assumptions of zero to 7 to 12% over the forecast period depending on the specific city and when the city is launched, and (ii) average monthly revenue per customer of $40.00 when services are launched, increasing to $44.50 over the forecast period. This increase equates to a compound annual growth rate of 0.6%. - Operating expenses covering the operation of satellite facilities. These include a network operations center, tracking, telemetry and command systems, interconnect costs, in-orbit insurance, technical staff, and general and administrative personnel. Under the projected expense structure, EBITDA margins grow to 60% early in the forecast period and expand to 70% later in the forecast period. - All capital expenditures required to design and construct two satellites and launch one satellite during the first four years of the forecast period. Additional capital expenditures for constructing ground station segments and investing in handset development. - Tax rate of 40% after the consumption of net operating losses generated in the early years of the forecast period. - A 19 to 21% discount rate based on a weighted average cost of capital (WACC) determined by analyzing and weighting the cost of capital for a peer group of publicly traded satellite service providers, wireless communications companies and telecommunications companies in general, with more weight given to traditional satellite service providers. A terminal value calculated using a WACC of 12% and a perpetuity growth rate of 2.5%. The Company will test for impairment of its intangible assets by reviewing all of the assumptions and estimates utilized relative to the valuation methodologies discussed above. To the extent that it determines that these assumptions and estimates are no longer accurate, either because actual results have materially differed from the assumptions and estimates, or because changing circumstances have caused the Company to reevaluate these assumptions and estimates for future periods, the Company will revalue these intangible assets based on revised assumptions and estimates. 35 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 We Are Not Cash Flow Positive, And We Will Need Additional Liquidity To Fund Our Operations And Fully Fund All Of The Necessary TerreStar Capital Expenditures. o We Will Continue To Incur Significant Losses. o We May Not Be Able To Realize Value From Our Investment In TerreStar Or MSV Due To Risks Associated With Their Next-Generation Business Plans. o We May Not Be Able To Effectively Execute TerreStar's Business Plan. o Funding Requirements For TerreStar May Jeopardize Our Investment In, And Control Over, TerreStar. o We Could Lose Market Share And Revenues As A Result Of Increasing Competition From Companies In The Wireless Communications Industry That Have Greater Resources, Name Recognition And Newer Technologies. o We Generate A Large Part Of Our Revenues And Cash Flows From A Small Number Of Customers On Our DataTac Network, And The Loss Of One Or More Key Customers Could Result In A Significant Reduction In Revenues And Cash Flows. o The Value Of Our Intangible Assets In Our Financial Statements Is Based On Assumptions And Estimates, Which May Not Be Correct. o We May Not Be Able To Develop, Acquire And Maintain Proprietary Information And Intellectual Property Rights, Which Could Limit The Growth Of Our Business And Reduce Our Market Share. o Government Regulation May Increase Our Cost Of Providing Services, Slow Our Expansion Into New Markets, Subject Our Services To Additional Competitive Pressures And Affect The Value Of Our Common Stock. o Motient's Competitive Position May Be Harmed If The Wireless Terrestrial Network Technology It Licenses From Motorola Is Made Available To Competitors. o We Do Not Expect To Pay Any Dividends On Our Common Stock For The Foreseeable Future. o Future Sales Of Our Common Stock Could Adversely Affect Its Price And/Or Our Ability To Raise Capital. o Motient May Have To Take Actions That Are Disruptive To Its Business To Avoid Registration Under The Investment Company Act Of 1940. o We Face Burdens Relating To The Recent Trend Toward Stricter Corporate Governance And Financial Reporting Standards. o Failure To Achieve And Maintain Effective Internal Control Over Financial Reporting In Accordance With Rules Of The Securities And Exchange Commission Promulgated Under Section 404 Of The Sarbanes-Oxley Act Could Harm Our Business And Operating Results And/Or Result In A Loss Of Investor Confidence In Our Financial Reports, Which Could In Turn Have A Material Adverse Effect On Our Business And Stock Price. o The Consummation and Potential Impact of the Proposed Consolidation of MSV and TerreStar by Motient is Uncertain. o Ongoing Litigation Could Negatively Impact Our Value and Our Ability to Successfully Implement Our Business Plan. For a more complete description of the above factors, please see the section entitled "Risk Factors" in Motient's recently filed registration statement on Form S-1. 36 Results of Operations Due to our purchase of ownership interests in TerreStar on May 11, 2005 and our consequent 61% ownership of TerreStar, the operating results herein include the operating results of TerreStar from that date through September 30, 2005. We have identified the impact of TerreStar on our results of operations where material. Subscriber Statistics Our customer base can be generally divided into six broad categories, Wireless Internet, Field Services, Transportation, Telemetry, iMotient and Other. Wireless Internet primarily consists of customers using our network and applications to access certain internet functions, like email. Devices and airtime used by transportation and shipping companies, or by personnel in the field service industries (such as repair personnel), for dispatching, routing and other vital communications functions are known as Transportation and Field Service, respectively. Telemetry typically covers devices and airtime used to connect remote equipment, such as wireless point-of-sale terminals, with a central monitoring facility. iMotient consists of integrated wireless data solutions revenues through the resale of airtime on the Cingular and Sprint wireless networks. Other revenues may consist of sales commissions, consulting fees or other fees. An explanation of certain changes in revenue and subscribers is set forth below. The table below summarizes the make up of our registered subscriber base. Wireless devices may be divided into three categories, registered, billable and active. Registered devices represent devices that our customers have registered for use on our network. Certain numbers of these devices may be kept in inventory by our customers for future use and generally are not revenue producing. Customers then move such inventory into a production status upon which it typically becomes billable and generates revenue. However, billable units may not pass traffic and thus will not be counted as active. We count a device as active when it is removed from inventory by the customer and transmits greater than zero kilobytes of data traffic.
As of September 30, 2005 2004 % Change -------- Registered Billable Active Registered Billable Active Registered Billable Active ---------- -------- ------ ---------- -------- ------ ---------- -------- ------ Wireless Internet(1) 38,148 14,981 5,539 81,738 41,708 25,651 (53)% (64)% (78)% Field Services 1,703 1,701 125 10,951 10,901 5,421 (84) (84) (98) Transportation 49,038 38,286 38,376 46,361 39,677 38,286 6 (4) 0 Telemetry 24,413 17,523 7,139 31,058 28,500 13,834 (21) (39) (48) iMotient 1,753 2,096 1,208 -- -- -- -- -- -- All Other 208 96 81 393 244 159 (47) (61) (49) ------- ------- ------- ------- ------- ------- ------- ------- ------- Total 115,263 74,683 52,468 170,501 121,030 83,351 (32)% (38)% (37)% ======= ======= ======= ======= ======= ======= ======= ======= =======
1) Reflects deregistration of units by SkyTel on December 30, 2004 of approximately 30,000 units and deregistration of 9,000 units in the first quarter of 2005 by certain other resellers. 37 Revenues The tables below set forth, for the periods indicated, a year-over-year comparison of the key components of revenue.
Three Months Ended September 30, ------------------------------------- Summary of Revenue 2005 2004 Change % Change ------------------ ---- ---- ------ -------- (in millions) Wireless Internet $ 1.7 $ 4.3 (2.6) (60)% Field Services 0.1 1.4 (1.3) (91) Transportation 0.4 0.9 (0.5) (56) Telemetry 0.4 0.6 (0.2) (37) iMotient 0.1 -- 0.1 -- All Other 0.3 0.2 0.1 55 ------- ------- ------ ------ Service Revenue 3.0 7.4 (4.4) (59) Equipment Revenue 0.1 1.0 (0.9) (89) ------- ------- ------ ------ Total $ 3.1 $ 8.4 $ (5.3) (63)% ======= ======= ====== ======
Nine Months Ended September 30, ------------------------------------- Summary of Revenue 2005 2004 Change % Change ------------------ ---- ---- ------ -------- (in millions) Wireless Internet $ 6.4 $ 15.7 (9.3) (59)% Field Services 1.0 4.7 (3.7) (78) Transportation 1.4 2.7 (1.3) (47) Telemetry 1.3 1.8 (0.5) (29) iMotient 0.2 -- 0.2 -- All Other 0.5 2.6 (2.1) (80) ------- ------- ------ ------ Service Revenue 10.8 27.5 (16.7) (61) Equipment Revenue 0.9 3.8 (2.9) (77) ------- ------- ------ ------ Total $ 11.7 $ 31.3 $(19.6) (63)% ======= ======= ====== ======
The decrease in service revenue was the result of a decrease in revenue in all our market segments (except iMotient), primarily as a result of migration by our customers to newer technologies with capabilities that our network is not capable of supporting (such as voice enabled handheld devices), or more modern networks with greater capacity than our own (such as so-called 2G or 3G networks from providers such as Sprint, Cingular, Verizon or T-Mobile). We believe that our network reduction efforts, announced to our customers in the first quarter, may have also caused negative pressure on our revenues as certain customer may have elected to terminate service with Motient in favor of other alternative wireless carriers. If we cannot generate additional revenue from other sources to offset this lost revenue, our overall revenues will decline in the future. The decrease in total revenue was primarily a result of decreased service and equipment revenues. During the first quarter of 2005, Motient initiated a plan to refocus its DataTac network primarily on the top 40 MSAs of the United States. This plan involves the decommissioning of DataTac network components and termination of service in previously served MSAs other than the top 40. Given the similar coverage profiles of the Cingular and Sprint networks, the significantly increased bandwidth capabilities of these networks relative to DataTac and the concentration of our revenues in the top 40 MSAs, we determined that this plan best allowed us to match our network infrastructure costs with our revenue base, while continuing to meet the needs of as many of our customers as possible. This decommissioning occurred in June 2005. We are making every effort to provide any impacted customers with alternatives to migrate their services and applications to either our new iMotient Solutions(TM) platform or to other networks using our agreements with RACO Wireless, Inc. and eAccess Solutions, Inc. These network changes may put further negative pressure on our revenues in all market segments in 2005 as customers may elect to pursue other alternative network carriers with alternative coverage. We are making every effort to retain our customers or migrate them to our iMotient Solutions(TM) product and services, but Motient can make no assurances that it will be able to retain these customers. 38 By revenue segment, we note that: o Wireless Internet: The revenue decline in the Wireless Internet sector during this period represented customer losses that we are experiencing in both our direct and reseller channels as a result of the migration of Wireless Internet customers to other networks with additional features, such as voice-capable wireless internet devices. These customer losses have been exacerbated because Research in Motion, or RIM, no longer manufactures any devices which will operate on our DataTac network, which has and will continue to negatively impact the ability of our resellers to add new devices to our network to replace those that are migrating from their respective customer bases. These factors, in addition to our continued network reduction efforts, may lead to additional declining Wireless Internet revenues in 2005. In September 2005, we recorded $0.3 million of revenues from RIM that had previously been deferred related to the settlement of a dispute over certain overage charges the Company charged RIM in 2003, 2004 and 2005. This dispute has been resolved and will not recur in any later period. Motient is currently exploring ways to offer Wireless Internet services under our iMotient Solutions(TM) platform, but Motient can make no assurances that it will ever be able to effective offer such a product. o Field Services: The decrease in field service revenue was primarily the result of the termination of several large customer contracts, including IBM, Brinks, Bannex, Pitney Bowes and Schindler, as well as the general reduction of units and/or rates across the remainder of our field service customer base. Our network changes, discussed above, may put further negative pressure on our revenues in this market segment in 2005. Motient believes that this market segment will potentially present new opportunities to generate new revenues with our iMotient Solutions(TM) products and services. o Transportation: The decrease in revenue from the transportation sector was primarily the result of UPS removing units from our network. UPS represented $0.1 million and $0.4 million of revenue for the three and nine months ended September 30, 2005 as compared to $0.2 million and $0.7 million of revenue for the three and nine months ended September 30, 2004. Our network changes, discussed above, may put further negative pressure on our revenues in this market segment in 2005. Motient believes that this market segment will potentially present new opportunities to generate new revenues with our iMotient Solutions(TM) products and services. o Telemetry: While we experienced revenue growth in certain telemetry customer accounts, this revenue growth was equally offset by customer losses in other telemetry accounts. Our network changes, discussed above, may put further negative pressure on our revenues in this market segment in 2005. Motient believes that this market segment will potentially present new opportunities to generate new revenues with our iMotient Solutions(TM) products and services. o iMotient: We activated our first customer units and generated our initial revenue from the iMotient platform in February of 2005. As of September 30, 2005, we had 2,096 billable units utilizing our iMotient platform and generated $0.2 million in revenues for the nine months ended September 30, 2005. We expect iMotient revenues to increase over the course of 2005. 39 o All Other: The decrease in other revenue for the nine months ended September 30, 2005 as compared to the same period in 2004 was primarily due to the termination of our agreements with Verizon and T-Mobile, which allowed us to sell and promote wireless email and wireless internet applications on their networks. We no longer generate significant revenues in this product segment and do not expect to generate material revenues in the future. The increase in other revenue for the three months ended September 30, 2005 as compared to the same period in 2004 was the result of certain consulting revenues related to certain customer projects. o Equipment: The decrease in equipment revenues for these periods was the result of the decline sales of devices attributable to our now-terminated agency and dealer agreements with Verizon and T-Mobile. Operating Expenses The tables below summarize our operating expenses for the three and nine months ended September 30, 2005 and 2004. An explanation of certain changes in operating expenses is set forth below.
Three Months Ended September 30, -------------------------------------- Summary of Expenses 2005 (1) 2004 (2) Change % Change ------------------- -------- -------- ------ -------- (in millions) Cost of Service and Operations $ 3.9 $ 7.8 $ (3.9) (50)% Cost of Equipment Sales 0.1 0.9 (0.8) (89) Sales and Advertising 0.2 0.2 -- -- General and Administration 7.6 2.0 5.6 280 Research and Development 1.3 -- 1.3 -- Operational Restructuring Costs -- -- -- -- Depreciation and Amortization 4.1 3.7 0.4 11 (Gain)/Loss on Asset Disposal 0.7 -- 0.7 100 (Gain) on Debt & Capital Lease Retirement -- -- -- -- ------- ------- ------ ------- Total $ 17.9 $ 14.6 $ 3.3 22% ======= ======= ====== =======
(1) Includes expenses of $1.3 million related to stock compensation. (2) Includes expenses of $0.1 million related to stock compensation.
Nine Months Ended September 30, -------------------------------------- Summary of Expenses 2005 (1) 2004 (2) Change % Change ------------------- -------- -------- ------ -------- (in millions) Cost of Service and Operations $ 16.6 $ 29.5 $ (12.8) (44)% Cost of Equipment Sales 0.9 3.7 (2.9) (76) Sales and Advertising 0.8 2.1 (1.3) (62) General and Administration 26.6 6.9 19.6 283 Research and Development 1.7 -- 1.7 -- Operational Restructuring Costs 5.7 6.3 (0.6) (10) Depreciation and Amortization 12.8 12.1 0.7 6 (Gain)/Loss on Asset Disposal 0.7 -- 0.7 -- (Gain) on Debt & Capital Lease Retirement -- (0.8) 0.8 100 ------- ------- ------ ------- Total $ 65.8 $ 59.8 $ 5.9 10% ======= ======= ====== =======
(1) Includes compensation expense of $12.6 million related to stock compensation. (2) Includes compensation expense of $4.0 million related to stock compensation. 40 o Cost of Service and Operations: Our largest single cost center is the cost of service and operations, which includes costs to support subscribers, such as network telecommunications charges and site rent for network facilities, network operations employee salary and related costs, network and hardware and software maintenance charges, among other things. The decrease in these expenses was partially the result of lower employee salary and related costs of $0.3 million and $1.1 million for the three and nine months ended September 30, 2005 as compared to the same periods in 2004 due to workforce reductions implemented in February 2004 and March 2005. The decrease in these expenses was also partially the result of lower fees paid to RIM of $0.6 and $2.2 million for the three and nine months ended September 30, 2005 as compared to the same periods in 2004 for licensing Blackberry as a result of the decline of Wireless Internet units and revenues, which fees we anticipate will continue to decline in the future as well. The decrease in these expenses was also impacted by the continued removal of older-generation base stations from the network and the removal of base stations and other network equipment under our network rationalization efforts initiated in the second quarter of 2004 and the first quarter 2005 and the resulting decreases in telecommunications of $1.5 million and $4.9 million for the three and nine months ended September 30, 2005 as compared to the same periods in 2004, site lease rental cost decreases of $0.9 million and $2.9 million for the three and nine months ended September 30, 2005 as compared to the same periods in 2004 and base station maintenance decreases of $0.1 million and $0.6 million for the three and nine months ended September 30, 2005 as compared to the same periods in 2004. As we continue to remove base stations from the network, these costs will continue to decrease. The decrease in costs of service and operations was also partially the result of reductions in hardware and software maintenance costs as a result of the network rationalization efforts and negotiation of lower rates on maintenance service contracts in 2004. The decreases in costs discussed above were partially offset by compensation expenses associated with stock options issued to employees of $(0.5) and $0.6 million for the three and nine months ended September 30, 2005. Compensation expenses associated with stock options issued to employees totaled $0.7 and $2.0 million for the three and nine months ended September 30, 2004. Excluding these compensation charges, cost of service and operations decreased $3.4 million, or 44%, for the three months ended September 30, 2005, and $11.3 million, or 41%, for the nine months ended September 30, 2005 as compared to the same periods in 2004. Given our ongoing cost-reduction efforts, we expect these costs to continue to decrease. The extent of the decrease will depend both upon our ability to successfully manage our cost-reduction efforts as well as the necessity for these expenditures in the future if our customer base declines. o Cost of Equipment: The decrease in cost of equipment was the result of the elimination of sales of devices attributable to agency and dealer agreements with Verizon Wireless and T-Mobile USA. Our efforts to sell under our agent relationships with T-Mobile USA and Verizon Wireless were reduced significantly in the third and fourth quarter of 2004 and these contracts were terminated in the fourth quarter of 2004 to accommodate our agreements with Sprint and Cingular. We anticipate that these costs will be minor in the future given the elimination of the T-Mobile USA and Verizon Wireless reseller agreements. o Sales and Advertising: Sales and advertising expense was approximately the same for the three month period ended September 30, 2005 as compared to the same period for 2004. The decrease in sales and advertising expense for the nine month period ended September 30, 2005 as compared to the same period 41 for 2004 was primarily attributable to lower employee salaries of $0.7 million, including sales commissions, due to lower sales volumes and the workforce reductions implemented in February 2004 and March 2005. These decreases included compensation expenses associated with stock options issued to employees of $0.0 and $0.1 million for the three and nine months ended September 30, 2005 as compared to $0.1 and $0.8 million for the same periods in 2004. Excluding these compensation charges, sales and advertising expense decreased $0.0 million, or 9%, for the three months ended September 30, 2005, and $0.5 million, or 44%, for the nine months ended September 30, 2005 as compared to the same periods in 2004. We anticipate that these costs will increase in the future in conjunction with our increasing efforts to sell and promote our iMotient Solutions(TM) platform. o General and Administrative: The increase in general and administrative expenses was primarily attributable to increases in legal, audit and regulatory fees, fees paid to advisors and consultants for both TerreStar and Motient. Our audit expenses increased $0.3 and $1.5 million for the three and nine months ended September 30, 2005 as compared to the same periods in 2004, mainly due to our requirements to comply with Sarbanes-Oxley guidelines for 2004 and our corporate finance activity in the first and second quarters of 2005. Legal and regulatory fees increased $2.5 and $2.7 million for the three and nine months ended September 30, 2005 as compared to the same periods in 2004 as a result of our corporate finance activity in the first nine months of 2005, our mergers and acquisitions activity in the first nine months, our litigation support requirements and our related reporting and security registration requirements. General and administrative expenses also increased as a result of certain costs to support our development efforts with TerreStar and certain regulatory fees paid related to our rationalization efforts and our Motient Communications frequencies. Consulting and advisory fees increased $1.4 and $12.2 million for the three and nine months ended September 30, 2005 as compared to the same periods in 2004 due to certain corporate finance related fees discussed below, fees paid to consultants to support our regulatory efforts for both Motient Communications and TerreStar and consulting support we utilize for our success-based site lease negotiation efforts. A consulting fee of $3.7 million, consisting of $0.9 million in cash and 95,000 shares of stock valued at $2.8 million, was paid to CTA and an affiliated entity of Gary Singer in the first quarter of 2005 for services rendered in conjunction with the acquisition of further MSV interests from Telcom Ventures, Columbia Capital and Spectrum Equity in February 2005. Salaries increased $0.3 million and $0.4 million for the three and nine months ended September 30, 2005 as compared to the same periods in 2004 mainly due to the TerreStar salary expenses. These increases were partially offset by lower directors and officers liability insurance costs. General and Administrative expenses include approximately $2.9 million of general and administrative costs from TerreStar from the period May 11, 2005 to September 30, 2005. We expect these costs from TerreStar to increase in the future as development efforts on its satellite system accelerate. Compensation expense associated with stock options issued under the Company's stock option plan and the stock issued to advisors as a result of the corporate finance activity discussed above totaled $1.8 and $12.0 million for the three and nine months ended September 30, 2005. Compensation expenses associated with stock options issued to employees totaled $0.1 and $1.1 million for the same periods in 2004. Excluding these compensation charges, general and administrative expenses increased $3.9 million, or 201%, for the three months ended September 30, 2005, and $8.8 million, or 151%, for the nine months ended 42 September 30, 2005 as compared to the same periods in 2004. We anticipate certain general and administrative costs will decline in the future in conjunction with the completion of our initial Sarbanes-Oxley report, and our overall cost-cutting efforts. As we expand our efforts on TerreStar, however, related general and administrative expenses are anticipated to increase. o Research and Development: Research and development consists of approximately $1.3 and $1.7 million of research and development costs from TerreStar for the three months ended September 30, 2005 and the period May 11, 2005 to September 30, 2005. We expect these costs from TerreStar to increase in the future as development efforts on its satellite system accelerate. o Operational Restructuring Charges: The 2005 operational restructuring charges of $5.7 million include $0.1 million in the first quarter of 2005 resulting from the severance and related salary charges as a result of the reductions in force in March 2005 and $5.6 million in the second quarter of 2005 resulting from additional network rationalization initiatives in June 2005. Operational restructuring charges of $6.3 million in 2004 consist of $1.2 million in the first quarter of 2004 resulting from the severance and related salary charges as a result of the reductions in force in February 2004, and $5.1 million in the second quarter of 2004 related to certain network rationalization initiatives in June 2004. o Depreciation and Amortization: Depreciation and amortization expense increased $1.3 and $2.0 million for the three months ended September 30, 2005 and the period May 11, 2005 to September 30, 2005 as a result of the amortization of our intangible assets of TerreStar and $1.8 million for the nine months ended September 30, 2005 due to our June 2005 network rationalization for which we accelerated the depreciation of certain base station equipment. Excluding these items, our depreciation and amortization expense declined $1.1 million or 30% and $3.1 million or 26% for the three and nine months ended September 30, 2005 as compared to the same periods for 2004. Our depreciation expense declined as a result of our decline in asset value related to network reduction efforts in 2004 and 2005 and our write-down of related assets and reduced amortization as a result of our additional impairment of our customer contract intangibles in December 2004. As a result of continued network restructuring initiatives planned in 2005, we expect depreciation and amortization to continue to decrease in 2005. 43 Other Expenses & Income
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30 September 30 September 30, Summary of Expenses 2005 2004 2005 2004 ------------------- ---- ---- ---- ---- (in thousands) Interest Income (Expense), net $ 2,755 $ (556) $ 4,870 $ (3,595) Write-off of deferred financing costs -- -- -- (8,052) Other Income, net -- 66 80 265 Other Income from UPS 1,112 -- 1,112 -- Other Income from Aether -- 650 -- 1,957 Equity in Losses of Mobile Satellite Ventures (3,954) (3,779) (18,675) (8,617) Minority Interest in TerreStar 1,348 -- 1,752 --
o For the three and nine months ended September 30, 2005, we generated interest income of $2.8 and $4.9 million on cash balances from the proceeds of our financing transactions. In 2004, we generated interest income on the interest accrued on our note receivable from MSV, however, as a result of November 2004 investment transaction into MSV, the principal and interest outstanding under our note receivable from MSV was converted into limited partnership units in MSV. Interest expense decreased for the three and nine months ended September 30, 2005 as compared to the same periods in 2004, due to income on cash balances, the April 2004 repayment of our term credit facility and its subsequent termination on December 31, 2004. o In April 2004, we expensed $8.1 million of deferred financing costs related to the repayment of our term credit facility. o Other income of $1.1 million is related to the September 2005 UPS agreement. Motient made a payment of $2.0 million to UPS, and in exchange, all but $0.6 million of the outstanding prepayment of $3.7 million was terminated. o We recorded equity in losses of MSV of $4.0 and $18.7 million for the three and nine months ended September 30, 2005, as compared to $3.8 and $8.6 million for the same periods in 2004. The 2005 MSV losses are Motient's 38.6% and 48.8% of MSV's losses for the same period, and losses for 2004 are Motient's 46.5% of MSV's losses for the same period. For the three and nine months ended September 30, 2005, MSV had revenues of $7.9 and $22.6 million, operating expenses of $27.0 and $61.5 million and net losses of $6.7 and $33.4 million, respectively. o For the three months ended September 30, 2005 and the period May 11, 2005 through September 30, 2005, the Company recorded approximately a $3.4 and $4.5 million net loss respectively for TerreStar Networks. The $1.3 and $1.8 million minority interest in TerreStar represents the approximately 39% of TerreStar Networks that is not owned by the Company. Liquidity and Capital Resources As of September 30, 2005, we had approximately $240 million of cash and cash equivalents, which includes approximately $150 million of unrestricted cash held by TerreStar. Approximately $42 of additional cash, also as of September 30, 2005 is held in an escrow account that will be used to make payments in 44 accordance with our TerreStar satellite construction contract with Space Systems/Loral, Inc. Approximately $43 million of additional cash, also as of September 30, 2005 is held in an escrow account that will be used to make the first two years of dividend payments on our Series A and Series B Preferred Stock. The first such payment, representing interest earned for the first six months of such period, was made on October 15, 2005. The increase of $223 million from September 30, 2004 is mainly attributable to an increase in cash provided by financing activities, offset by decreases in net cash used in operating and investing activities, as described below. Our principal source of funds is currently, and as of September 30, 2005, cash on hand. On November 4, 2005, the Executive Committee of the Board of Directors of Motient Corporation authorized Motient to repurchase up to $50 million of its outstanding common shares. Motient intends to repurchase shares from time to time in the open market or otherwise under this program. The number of shares to be purchased and the timing of the purchases will be based on the level of cash balances, general business conditions and other factors, including alternative investment opportunities. The program may be discontinued at any time. Summary of Cash Flow for the nine months ended September 30, 2005 and 2004
Nine Months Ended Nine Months Ended September 30, 2005 September 30, 2004 (Unaudited) (Unaudited) ----------- ----------- Cash Flows from Operating Activities: $ (21,854) $ (14,578) Cash Flows from Investing Activities: (82,170) 2,445 Cash Flows from Financing Activities: Proceeds from issuance of employee stock options 1,241 1,235 Proceeds from issuance of stock 679 55,480 Stock issuance costs and other charges (9) (1,422) Principal payments under capital leases -- (2,419) Proceeds from issuance of Series A Cumulative Convertible Preferred Stock 408,500 -- Issuance cost associated with Series A Cumulative Convertible Preferred Stock (17,483) -- Principal payments under Vendor Financing -- (2,582) Repayment under Term Credit Facility -- (6,785) Proceeds from Term Credit Facility -- 1,500 Repayment of Notes Payable (8,739) (19,750) Purchase of treasury stock (56,916) -- --------- --------- Net cash provided by financing activities 327,273 25,257 --------- --------- Net increase in cash and cash equivalents 223,249 13,124 Cash and Cash Equivalents, beginning of period 16,945 3,618 --------- --------- Cash and Cash Equivalents, end of period $ 240,194 $ 16,742 ========= =========
Cash used in operating activities increased primarily as a result of decreases in funds provided by revenue and increases in certain fees and expenses related to financial reporting requirements, corporate finance transactions and TerreStar expenses. While we are attempting to reduce cash used in operating activities as a result of our cost cutting efforts and through our attempts to increase our revenues by focusing on our iMotient Solutions(TM) products and services, it is possible revenue declines will be sufficient to offset or overtake the cash saved by our cost cutting efforts in the future. 45 The increase in cash used in investing activities was attributable to increases in restricted cash consisting of approximately $42 million related to the satellite construction contract for TerreStar Networks, approximately $43 million related to future interest payments on Series A and Series B Cumulative Convertible Preferred Stock and capital equipment purchases of approximately $2 million for TerreStar in the first nine months of 2005 as compared to the same period in 2004, offset by $6 million in restricted cash acquired in the TerreStar purchase. The increase in cash provided by financing activities was the result of the proceeds from the preferred stock financing completed in April 2005 and the exercise of certain employee stock options and warrants, offset by the repayment of the TerreStar note payable to MSV, the purchase of treasury stock and deferred financing fees related to the Series A Cumulative Convertible Preferred Stock. We believe that our funds available at September 30, 2005 will be adequate to satisfy our current and planned operations for at least the next 12 months. We have no definite plans with respect to the acquisition of any additional debt or equity financing. However, to the extent that we require additional liquidity to fund our operations (including, but not limited to, construction costs of TerreStar's communications network), we may undertake additional debt or equity financings. Outstanding Obligations As of September 30, 2005, Motient had no outstanding debt obligations other than obligations with respect to the repayment of its Series A Preferred Stock. On October 27, 2005, $318.5 million of the Series A Preferred Stock was exchanged for Series B Preferred Stock, which has substantially identical economic terms. If not converted or repaid, the entire amount of $408.5 million of Series A and Series B Preferred Stock will be due on April 15, 2010. The first two years' dividend payments (approximately $43 million) were placed in escrow, and approximately $11 million of such escrowed funds were distributed on October 15, 2005. Future dividend payments will be due bi-annually, payable in cash (at a 5.25% annual interest rate) or in common stock (at a 6.25% annual interest rate). Restructuring Costs In February 2004, the Company recorded a restructuring charge for a workforce reduction of $1.1 million. In June 2004, the Company recorded a restructuring charge of $5.1 million related to certain network rationalization initiatives, consisting of base station deconstruct costs of $0.5 million, the loss on the retirement of certain base station equipment of $2.8 million and termination liabilities of $1.8 million for site leases no longer required for removed base stations. In March 2005, the Company recorded a restructuring charge for a further workforce reduction of $0.1 million. In June 2005, the Company recorded a restructuring charge of $5.6 million related to additional network rationalization initiatives, consisting of base station deconstruct costs of $0.1 million, the loss on the cancellation of frequencies of $3.6 million and termination liabilities of $1.9 million for site leases no longer required for removed base stations. Of these amounts, as of June 30, 2005, the Company had incurred workforce reduction cost of $0.9 million, base station deconstruct costs of $0.5 million, the loss on the retirement of certain base station equipment of $2.8 million, termination liabilities of $1.4 million for site leases no longer required for removed base stations and $3.6 million for the cancellation of frequencies. 46 The following table displays the activity and balances of the restructuring reserve account from January 1, 2004 to September 30, 2005:
Base Station Employee FCC License Asset Base Station FCC License Site Lease Terminations Terminations Write-Offs Deconstruction Terminations Terminations Total ------------ ------------ ---------- -------------- ------------ ------------ ----- Balance January 1, 2004 $--- $--- $--- $--- $--- $--- $--- ------------------------------------------------------------------------------------------------------------------------------ Restructure Charge (1,107) --- --- --- --- --- (1,107) Deductions - Cash 333 --- --- --- --- --- 333 ------------------------------------------------------------------------------------------------------------------------------ Balance March 31, 2004 (774) --- --- --- --- --- (774) ----------------------------------------------------------------------------------------------------------------------------- Restructure Charge --- --- (2,795) (398) (113) (1,854) (5,160) Deductions - Cash 242 --- --- 75 25 61 403 Deductions - Non- Cash --- --- 2,795 --- --- --- 2,795 ----------------------------------------------------------------------------------------------------------------------------- Balance June 30, 2004 (532) --- --- (323) (88) (1,793) (2,736) ------------------------------------------------------------------------------------------------------------------------------ Deductions - Cash 132 --- --- 252 39 416 839 ------------------------------------------------------------------------------------------------------------------------------ Balance September 30, 2004 (400) --- --- (71) (49) (1,377) (1,897) ------------------------------------------------------------------------------------------------------------------------------ Deductions - Cash 50 --- --- 71 54 435 610 ------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 2004 (350) --- --- --- 5 (942) (1,287) ------------------------------------------------------------------------------------------------------------------------------ Restructure Charge (85) --- --- --- --- --- (85) Deductions - Cash 39 --- --- --- --- 197 236 ------------------------------------------------------------------------------------------------------------------------------ Balance March 31, 2005 (396) --- --- --- 5 (745) (1,136) ------------------------------------------------------------------------------------------------------------------------------ Restructure Charge --- (3,581) --- (147) --- (1,852) (5,580) ------------------------------------------------------------------------------------------------------------------------------ Increase due to reclassification of site lease accrual --- --- --- --- --- (206) (206) ------------------------------------------------------------------------------------------------------------------------------ Deductions - Cash 164 --- 24 --- 498 686 ------------------------------------------------------------------------------------------------------------------------------ Deductions - Non- Cash --- 3,581 --- --- --- --- 3,581 ------------------------------------------------------------------------------------------------------------------------------ Balance June 30, (232) --- --- (123) 5 (2,305) (2,655) 2005 ------------------------------------------------------------------------------------------------------------------------------ Deductions - Cash 232 --- --- 123 --- 620 975 ------------------------------------------------------------------------------------------------------------------------------ Deductions - Non- Cash --- --- --- (5) --- (5) ------------------------------------------------------------------------------------------------------------------------------ Balance September 30, 2005 $--- $--- $--- $--- $--- $(1,685) $(1,685) ------------------------------------------------------------------------------------------------------------------------------
Commitments As of September 30, 2005, we had no outstanding commitments to purchase inventory. 47 Series A Cumulative Convertible Preferred Stock ----------------------------------------------- The Company accounts for Series A Cumulative Convertible Preferred Stock under Accounting Series Release 268. "Redeemable Preferred Stocks". On April 15, 2005, the Company issued 408,500 shares of Series A Preferred Stock, par value of $0.01; 5,000,000 shares authorized at June 30, 2005 and December 31, 2004; 408,500 shares issued and outstanding at September 30, 2005, no shares issued or outstanding at December 31, 2004. On October 26, 2005, $318.5 million (318,500 shares) of the Series A Preferred Stock was exchanged for a like amount of Series B Preferred Stock, which has substantially identical economic terms. On August 16, 2005, Highland Equity Focus Fund, L.P., Highland Crusader Offshore Partners, L.P., Highland Capital Management Services, Inc., and Highland Capital Management, L.P. filed a lawsuit in Dallas County, Texas against Motient challenging the validity of the Series A Preferred on the basis of the confusion regarding the voting rights of the Series A Preferred and seeking rescission of their purchase of the shares of Series A Preferred that they purchased from Motient in the private placement in April 2005. These entities acquired 90,000 shares of Series A Preferred for a purchase price of $90 million in that private placement. Motient believes that this claim is without merit and intends to vigorously defend this lawsuit. UPS Deferred Revenue and Prepayment ----------------------------------- In December 2002, Motient entered into an agreement with UPS pursuant to which UPS prepaid an aggregate of $5 million in respect of network airtime service to be provided beginning January 1, 2004. In April 2005, this agreement was amended, and then in September 2005, the agreement was amended again. Motient made a payment of $2.0 million to UPS, and in exchange, all but $0.6 million of the outstanding prepayment of $3.7 million was terminated. The remaining $0.6 million prepayment must be used by UPS prior to March 31, 2006. If not used, UPS will forfeit this prepayment, and it will not be repaid. 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. Concentrations of Credit Risk ----------------------------- For the three months ended September 30, 2005, four customers accounted for approximately 47% of the Company's service revenue, with two customers, RIM and SkyTel accounting for 18% and 16%, respectively. In September 2005, we recognized $0.3 million of deferred revenue from RIM related to the settlement of a dispute over certain overage charges the Company charged RIM in 2003, 2004 and 2005. Excluding the $0.3 million, RIM accounted for 11% of the Company's service revenue for the three months ended September 30, 2005. For the nine months ended September 30, 2005, four customers accounted for approximately 37% 48 of the Company's service revenue, with one customer, SkyTel Communications, Inc. ("SkyTel"), accounting for more than 12%. As of September 30, 2005, two customers, Geologic Solutions and Avaya, Inc. accounted for approximately 11% and 10%, respectively of our net accounts receivable. No other single customer accounted for more than 10% of our net accounts receivable. For the three month period ended September 30, 2004, four customers accounted for approximately 44% of the Company's service revenue, with one customer, SkyTel, accounting for more than 23%. For the nine month period ended September 30, 2004, four customers accounted for approximately 41% of the Company's service revenue, with one customer, SkyTel, accounting for more than 21%. RIM accounted for 13% of the Company's net accounts receivable at September 30, 2004; no other single customer accounted for more than 9% of the Company's net accounts receivable at September 30, 2004. 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 ----------------- The Company uses the equity method of accounting for its investment in MSV. The Company considers whether the fair value of its investment has declined below its carrying value whenever adverse events or circumstances indicate that the recorded value may not be recoverable. If the Company considers such decline to be other than temporary, a write down would be recorded to estimate fair value. TerreStar Asset Purchase ------------------------ On May 11, 2005, Motient Ventures Holding Inc., or MVH, a wholly owned subsidiary of Motient Corporation, purchased 8,190,008 shares of newly issued common stock of TerreStar from TerreStar for $200 million pursuant to a Purchase Agreement by and between MVH and TerreStar. On the same day, TerreStar was spun-off by MSV to its limited partners and, in connection with that spin-off, Motient acquired ownership of approximately 48% of the issued and outstanding shares of capital stock of TerreStar and the subsequent $200 million stock purchase increased Motient's ownership to its current 61% of TerreStar's issued and outstanding common stock. Assets acquired and liabilities assumed in the asset purchase were recorded on the Company's Consolidated Balance Sheet as of the purchase date based upon their fair values at such date. The results of operations of the net assets acquired by the Company have been included in the Company's Statements of Operations since its date of purchase. Approximately $78 million was allocated to intangible assets that include the rights to receive licenses in the 2 GHz band and other intangibles. These intangible assets are being amortized over an average life of 15 years. Approximately $78 million represents the 39% minority interest in TerreStar. There was no excess purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed. In certain circumstances, the allocation of the purchase price is based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when the Company receives final information and other analyses. Revisions to the fair values, which may be significant, will be recorded by the Company as further adjustments to the purchase price allocations. 49 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. Revenue Recognition ------------------- The Company generates revenue through equipment sales, airtime service agreements and consulting services. In 2000, the Company adopted SAB No. 101, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. In certain circumstances, SAB No. 101 requires the Company to defer the recognition of revenue and costs related to equipment sold as part of a service agreement. In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue Recognition", which supersedes SAB No. 101, "Revenue Recognition in Financial Statements". SAB No. 104's primary purpose is to rescind accounting guidance contained in SAB No. 101 related to multiple-element revenue arrangements and to rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers" ("FAQ") issued with SAB No. 101. Selected portions of the FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104 did not have a material impact on the Company's revenue recognition policies. Effective July 1, 2003, the Company adopted Emerging Issues Task Force (EITF) No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which is being applied on a prospective basis. The consensus addresses how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Revenue arrangements with multiple deliverables are required to be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration must be allocated among the separate units of accounting based on their relative fair values. The consensus also supersedes certain guidance set forth in Securities and Exchange Commission (SEC) Staff Accounting Bulletin Number 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 was amended in December 2003 by Staff Accounting Bulletin Number 104 (SAB 104). Revenue is recognized as follows: Service revenue: Revenues from the Company's wireless services are recognized when the services are performed, evidence of an arrangement exists, the fee is fixed and determinable and collectability is probable. Service discounts and incentives are recorded as a reduction of revenue when granted, or ratably over a contract period. The Company defers and amortizes any revenue and costs associated with activation of a subscriber on the Company's network over an estimated customer life of two years. 50 The Company packages airtime usage on its network that involves a wide variety of volume packaging, anything from a 35 kilobytes per month plan up to unlimited kilobyte usage per month, with various gradations in between. Discounts may be applied when comparing one customer to another, and such service discounts are recorded as a reduction of revenue when granted. Service discounts and incentives are recorded as a reduction of revenue when granted, or ratably over a contract period. The Company does not offer incentives generally as part of its service offerings, however, if offered they would be recorded as a reduction of revenue ratably over a contract period. To date, the majority of the Company's business has been transacted with telecommunications, field services, professional service and transportation companies located throughout the United States. The Company grants credit based on an evaluation of the customer's financial condition, generally without requiring collateral or deposits. The Company establishes a valuation allowance for doubtful accounts receivable for bad debt and other credit adjustments. Valuation allowances for revenue credits are established through a charge to revenue, while valuation allowances for bad debts are established through a charge to general and administrative expenses. The Company assesses the adequacy of these reserves quarterly, evaluating factors such as the length of time individual receivables are past due, historical collection experience, the economic environment and changes in credit worthiness of the Company's customers. If circumstances related to specific customers change or economic conditions worsen such that the Company's past collection experience and assessments of the economic environment are no longer relevant, the Company's estimate of the recoverability of its trade receivables could be further reduced. Equipment and service sales: The Company sells equipment to resellers who market its terrestrial product and airtime service to the public. The Company also sells its product directly to end-users. Revenue from the sale of the equipment, as well as the cost of the equipment, are initially deferred and are recognized over a period corresponding to the Company's estimate of customer life of two years. Equipment costs are deferred only to the extent of deferred revenue. As of September 30, 2005 and 2004, the Company had capitalized a total of $0.1 million and $1.5 million of deferred equipment revenue, respectively, and had deferred equipment costs of $0.1 million and $1.5 million, respectively. Item 3. Quantitative and Qualitative Disclosures about Market Risk Quantitative and Qualitative Disclosures about Market Risk 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. Item 4. Controls and Procedures Evaluation of disclosure controls and procedures ------------------------------------------------ We have performed an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal 51 financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this quarterly report on Form 10-Q. As previously disclosed in the Company's annual Report on Form 10-K for the year ended December 31, 2004, the Company determined that, as of the end of December 2004, there were material weaknesses affecting aspects of its internal control over financial reporting and, as a result of those weaknesses, the Company's disclosure controls and procedures were not effective. As described below, the Company believes it has remediated those material weaknesses, but cannot finalize the results of our third quarter testing until after the filing of our September 30, 2005 Form 10-Q. Consequently, based on the evaluation described above, the Company's management, including its principal executive officer and principal financial officer, have concluded that, as of the end of the third quarter of 2005, the Company's disclosure controls and procedures were not effective. Changes in internal control over financial reporting During the second and third quarters of 2005, the Company was engaged in an ongoing review of its internal control over financial reporting as described below. Based on that review, management believes that during 2005 there were changes in the company's internal control over financial reporting, as described below, that have materially affected, or are reasonably likely to materially affect, those controls. We believe that the corrective actions described below, taken as a whole, will remediate the internal control deficiencies identified in this report, but the Company and the Audit Committee will continue to monitor the effectiveness of these actions and will make any other changes or take such other actions as management determines to be appropriate. It is expected that all in process remediation and interim testing will be completed by the end of the fourth quarter 2005. Two material weaknesses have been identified by management, including our principal executive officer and principal financial officer as part of our SOX process 404 report completed on April 30, 2005. 1. Management identified a material weakness relating to the lack of information security and access to initiate, authorize, and record transactions in all functional areas relating to the financial reporting software application. 2. Management identified the following significant deficiencies that when aggregated give rise to a material weakness. Management identified certain control procedures that were not sufficiently documented relating to a) information technology back-up and recovery, b) operating systems access, c) firewall protections, as well as, d) control policies and procedures in certain transaction cycles. Management also identified various segregation of duties deficiencies in a) information security and access to non-financial reporting software applications, b) program change management in the customer management and billing systems and c) over the initiation, authorization, review and transaction recording for certain transaction cycles and non-routine transaction processing. 52 Additionally, management identified a lack of sufficient oversight and review of the processes involved in the financial close and reporting process, in particular as it relates to several complex and sophisticated transactions. These deficiencies in the design and implementation of the Company's internal control over financial reporting did not result in an actual misstatement to the financial statements. However, due to (a) the significance of the potential material misstatement that could have resulted due to the deficient controls and (b) the absence of other mitigating controls, there is more than a remote likelihood that a material misstatement of the interim and annual financial statements would not have been prevented or detected. Actions Taken to Correct Material Weaknesses -------------------------------------------- We have taken the following actions to remediate the above-identified material weaknesses: With respect to our first material weakness (the lack of information security and access to initiate, authorize, and record transactions in all functional areas relating to the financial reporting software application), we have prevented access to the software applications that certain management level personnel previously had, which permitted them to change or record transactions in our financial reporting software application. We conducted a review and evaluation of the access to our financial reporting software applications by all personnel, and reassigned the access rights used to control the financial reporting process. With respect to our second material weakness, which was an aggregation of significant deficiencies that, individually, did not rise to the level of a material weakness, but in aggregate did, we have taken the following steps: o We have written and have implemented remedial control procedures to address (i) operating systems access and (ii) control policies and procedures in certain transaction cycles. We are in the process of implementing remedial control procedures to address: (i) information technology back-up and recovery and (ii) firewall protections. o We have implemented additional monitoring activities, as well as evaluated job responsibilities, in order to improve internal controls related to (i) our information security and access to non-financial reporting software applications, (ii) our program change management in customer management and billing systems and (iii) the initiation, authorization, review and transaction recording for certain transaction cycles and non-routine transaction processing. o We have enhanced our corporate accounting function by creating and filling the new position of Assistant Controller, we are utilizing the consulting services of an independent certified public accounting firm and we subscribe to a GAAP and SEC compliance service. We believe that the control deficiencies involving (i) segregation of duties, (ii) lack of sufficient oversight and review of the processes involved in the financial close and reporting process, in particular as it relates to complex and sophisticated transactions, and (iii) lack of control policy documentation, have been remedied with the addition of these additional resources. 53 PART II. OTHER INFORMATION Item 1. Legal Proceedings Please see the discussion regarding Legal Proceedings contained in Note 4 ("Legal and Regulatory Matters") of notes to consolidated financial statements, which is incorporated by reference herein. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On October 26, 2005, Motient completed an exchange offer in which it allowed each holder of Series A Preferred the opportunity to exchange their shares of Series A Preferred and a release of any claims relating to the issuance of the Series A Preferred for shares of Series B Preferred, which will have rights, preferences and privileges substantially identical to the Series A Preferred, except that upon (a) the accumulation of accrued and unpaid dividends on the outstanding shares of Series B Preferred for two or more six month periods, whether or not consecutive; (b) the failure of Motient to properly redeem the Series B Preferred Stock, or (c) the failure of Motient to comply with any of the other covenants or agreements set forth in the Certificate of Designations for the Series B Preferred Stock, and the continuance of such failure for 30 consecutive days or more after receipt of notice of such failure from the holders of at least 25% of the Series B Preferred then outstanding, then the holders of at least a majority of the then-outstanding shares of Series B Preferred, with the holders of shares of any parity securities upon which like voting rights have been conferred and are exercisable, voting as a single class, will be entitled to elect a majority of the members of Motient's Board of Directors for successive one-year terms until such defect listed above has been cured. All of the holders of the Series A Preferred except for those affiliated with Highland Capital Management exchange their shares in this offer. Accordingly, approximately 318,500 shares of Series A Preferred shares were exchanged for Series B Preferred shares of the same face amount, and 90,000 shares of Series A Preferred shares remain outstanding. Issuer Purchases of Equity Securities During the fiscal quarter ended September 30, 2005, we repurchased shares of our common stock on the dates and in the amounts set forth in the table below:
------------------------------------------------------------------------------------------------------------- Period (a) Total Number of (b) Average Price (c) Total Number of (d) Maximum Number Shares (or Units) Paid per Share (or Shares (or Units) (or Approximate Purchased Unit) Purchased as Part Dollar Value) of of publicly Shares (or Units) Announced Plans or that May Yet Be Programs Purchased Under the Plans or Programs ------------------------------------------------------------------------------------------------------------- July 1, 2005 - July 31, 0 N/A 0 0 2005 ------------------------------------------------------------------------------------------------------------- August 1, 2005 - August 0 N/A 0 0 31, 2005 ------------------------------------------------------------------------------------------------------------- September 1, 2005 - 6,989 $23.75 0 0 September 30, 2005 ------------------------------------------------------------------------------------------------------------- Total 6,989 $23.75 0 0 -------------------------------------------------------------------------------------------------------------
(1) All shares were repurchased in privately negotiated transactions. Item 6. Exhibits The Exhibit Index filed herewith is incorporated herein by reference. 54 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) March 30, 2006 /s/Christopher W. Downie ------------------------ Christopher W. Downie Executive Vice President, Chief Operating Officer and Treasurer (principal executive officer and duly authorized officer to sign on behalf of the registrant) 55 EXHIBIT INDEX Number Description 3.1 - Certificate of Designations of the Series A Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on April 18, 2005) 3.2 - Certificate of Correction to the Series A Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K/A filed on August 2, 2005) 3.3 - Amendment to Restated Certificate of Incorporation (incorporated by reference to Motient's Registration Statement on Form S-1 filed on June 24, 2005). 3.4 - Certificate of Designations of the Series B Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated October 31, 2005) 10.56 - Consent Agreement, dated January 27, 2005, by and among Columbia Space (QP), Inc., et al (incorporated by reference to Exhibit 10.56 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005) 10.57 - Merger Agreement, dated as of February 9, 2005, by and among Motient Corporation, Telcom Satellite Ventures Inc., et al (incorporated by reference to Exhibit 10.57 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005) 10.58 - Form of Stock Purchase Agreement, dated February 9, 2005 (incorporated by reference to Exhibit 10.58 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005) 10.59 - Registration Rights Agreement, dated February 9, 2005 by and among Motient Corporation, Telcom Satellite Ventures Inc., et al (incorporated by reference to Exhibit 10.59 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005) 10.60 - Form of Warrant to purchase Motient common stock, dated February 9, 2005 (incorporated by reference to Exhibit 10.60 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005) 10.61 - Form of Stockholder's Agreement, dated February 9, 2005 (incorporated by reference to Exhibit 10.61 to the Company's Registration Statement on Form S-1/A filed on February 14, 2005) 56 10.62 - Securities Purchase Agreement dated April 15, 2005 by and among the Registrant and the Purchasers listed on Schedule 1 thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 18, 2005) 10.63 - Amended and Restated Registration Rights Agreement dated October 26, 2005 by and among the Registrant and the Purchasers listed on Schedule 1 thereto (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated October 31, 2005) 10.64 - Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on April 18, 2005) 10.65 - Purchase Agreement dated May 11, 2005 by and between Motient Ventures Holding Inc. and TerreStar Networks Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated May 11, 2005) 10.66 - Conditional Waiver and Consent Agreement dated May 11, 2005 by and among the Registrant and each other party listed on the signature page thereto (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated May 11, 2005) 10.67 - Stockholders Agreement dated May 11, 2005 by and among Motient Ventures Holding Inc. and the other parties thereto (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K dated May 11, 2005) 10.68 - Purchase Agreement dated May 13, 2005 by and between Motient Corporation and George Haywood (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated May 19, 2005) 10.69 - Form of Purchase Agreement dated May 17, 2005 by and between Motient Corporation and Columbia Capital Investors III, LLC, et al (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated May 19, 2005) 10.70 - Amendment to Motient Corporation 2002 Stock Option Plan (incorporated by reference to Motient's Registration Statement on Form S-1 filed June 24, 2005) 10.71 - Amended and Restated Registration Escrow Agreement dated October 26, 2005 by and among the Registrant and Computershare (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated October 31, 2005) 31.1 - Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the Executive Vice President, Chief Operating Officer and Treasurer (principal executive officer) (filed herewith). 31.2 - Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the Controller and Chief Accounting Officer (principal financial officer) (filed herewith) 57 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 Executive Vice President, Chief Operating Officer and Treasurer (principal executive officer) (filed herewith). 32.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Controller and Chief Accounting Officer (principal financial officer) (filed herewith) 58