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