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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT ON
FORM 10-K
For the fiscal year ended December 31, 1999
COMMISSION FILE NUMBER 0-18287
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ORBITAL SCIENCES CORPORATION
(Exact name of registrant as specified in charter)
DELAWARE 06-1209561
(State of Incorporation of Registrant) (I.R.S. Employer I.D. No.)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166
(Address of principal executive offices)
(703) 406-5000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01
(LISTED ON THE NEW YORK STOCK EXCHANGE)
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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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing sales price as reported on the New York
Stock Exchange on April 10, 2000 was approximately $504,043,250.
As of April 10, 2000, 37,417,245 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement dated April 24,
2000 are incorporated by reference in Part III of this Report.
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TABLE OF CONTENTS
ITEM PAGE
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PART I
ITEM 1. Business.................................................... 1
ITEM 2. Properties.................................................. 11
ITEM 3. Legal Proceedings........................................... 12
ITEM 4. Submission of Matters to a Vote of Security Holders......... 12
ITEM 4A. Executive Officers of the Registrant........................ 13
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 15
ITEM 6. Selected Financial Data..................................... 16
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 25
ITEM 8. Financial Statements and Supplementary Data................. 26
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 67
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 69
ITEM 11. Executive Compensation...................................... 69
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 69
ITEM 13. Certain Relationships and Related Transactions.............. 69
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 70
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Pegasus is a registered trademark and service mark of Orbital Sciences
Corporation; Taurus is a registered trademark of Orbital Sciences Corporation;
Orbital and ORBNAV are trademarks and service marks of Orbital Sciences
Corporation; OrbView and ORBIMAGE are registered service marks of Orbital
Imaging Corporation; and ORBCOMM is a registered service mark of ORBCOMM Global
L.P.
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PART I
ITEM 1. BUSINESS
BACKGROUND
Orbital Sciences Corporation, together with its subsidiaries and affiliates
("Orbital" or the "company"), is a leading space and information systems company
that designs, manufactures, operates and markets a broad range of space-related
products and services. Our products and services are grouped into three general
business sectors: space and ground infrastructure systems, satellite access
products and satellite services. Space and ground infrastructure systems include
launch vehicles and advanced programs, satellites and related space systems,
electronics and sensor systems and transportation management systems, satellite
ground systems, space robotics, and mapping and land information services.
Satellite access products include satellite-based navigation, positioning and
communications products. Satellite services include satellite-based mobile data
communications services, satellite-based remote imaging services,
satellite-based automotive information services and satellite-based voice
communications.
Orbital was incorporated in Delaware in 1987 to consolidate the assets,
liabilities and operations of Space Systems Corporation and Orbital Research
Partners, L.P. Since inception, it has been our strategy to develop and grow a
core integrated business of space systems technologies and products, starting
with the design and manufacturing of small satellites and lightweight rockets
and other inexpensive space systems intended to capitalize on the commercial
development of space. A major part of this strategy has centered on market-
expanding innovations that we have pioneered. For example, in the last ten
years, our innovations have included the world's first privately-developed space
launch vehicle, the first commercial orbit transfer vehicle, the first
operational low-Earth orbit commercial communications network, and the first
hand-held satellite communications device.
In the last ten years, we have also expanded our space-based product lines
through a number of acquisitions and strategic investments. For example, in 1994
and 1997, we acquired Fairchild Space and Defense Corporation and the space
systems and communications service businesses of CTA Incorporated, ("CTA")
respectively, broadening our satellite system and subsystem development and
production capabilities and expanding our product lines by adding various
sophisticated electronics products and transportation management systems. We
further enhanced our transportation management systems product line with the
1998 acquisition of Raytheon Company's transportation management systems
business and the 1999 purchase of Harris Corporation's transit management
systems product line. Through our 1994 acquisition of Magellan Corporation
("Magellan"), we expanded our technology base and product lines into the
consumer markets for hand-held receivers for Global Positioning System, or GPS,
satellite-based navigation and positioning. We expanded our GPS business with
the 1997 acquisition of the satellite-aided automotive navigation product line
from Rockwell International Corporation and the 1997 merger of Magellan with
Ashtech Inc. ("Ashtech"), a developer and supplier of high-precision GPS
products, components and technologies. In 1995, we acquired MacDonald, Dettwiler
and Associates Ltd. ("MDA"), a leading supplier of commercial satellite imaging
ground stations and related information processing software based in Vancouver,
British Columbia. In 1999, we expanded our infrastructure product line with
MDA's acquisition of the space robotics division of Spar Aerospace Limited
("Spar"). Through several acquisitions and strategic partnerships, MDA has also
expanded its product lines to include mapping and business-to-business
e-commerce-based land information services. In December 1999, we sold one-third
of our equity interest in MDA to an investor group consisting primarily of
Canadian entities.
In 1990, we developed the "ORBCOMM" concept and in 1993, our subsidiary,
Orbital Communications Corporation ("OCC"), and Teleglobe Mobile Partners
("Teleglobe Mobile"), an affiliate of Teleglobe Inc. ("Teleglobe"), formed
ORBCOMM Global, L.P. ("ORBCOMM") for the design, development, construction,
integration, testing and operation of a low-Earth orbit satellite communications
system known as the ORBCOMM System. OCC and Teleglobe Mobile were each 50%
general partners in ORBCOMM through December 31, 1999. Additionally, through
December 31, 1999, OCC was a 2% general partner in ORBCOMM USA, L.P. ("ORBCOMM
USA") and Teleglobe Mobile was a 2% general partner in
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ORBCOMM International Partners, L.P. ("ORBCOMM International"), two partnerships
formed to market the ORBCOMM System. ORBCOMM was a 98% general partner in each
of the two marketing partnerships. We controlled and, therefore, consolidated
ORBCOMM USA's results of operations. We did not control ORBCOMM's or ORBCOMM
International's operational or financial affairs and, therefore, did not
consolidate their results of operations. Effective January 1, 2000, Teleglobe,
through Teleglobe Mobile, became the majority owner and sole general partner of
ORBCOMM. OCC converted its general partner interest into a limited partner
interest. As of March 15, 2000, OCC held an approximate 34% interest in ORBCOMM.
In January, ORBCOMM USA and ORBCOMM International were merged into ORBCOMM.
In 1992, we established a subsidiary, Orbital Imaging Corporation
("ORBIMAGE"), to develop and operate commercial remote imaging satellites and to
market the products and services derived from such satellites. We own
approximately 100% of ORBIMAGE's outstanding common stock and approximately 58%
of the total voting interest in ORBIMAGE (after giving effect to the conversion
of ORBIMAGE's outstanding convertible preferred stock). Based on certain rights
granted to ORBIMAGE's preferred equity investors, we do not control ORBIMAGE's
operational or financial affairs and, therefore, do not consolidate its results
of operations.
In 1999, we formed a subsidiary, Orbital Navigation Corporation ("ORBNAV"),
to develop, operate and market, directly or through joint ventures,
satellite-aided automotive guidance and related value-added information services
for the rental car, private passenger car, commercial delivery vehicle and
emergency vehicle markets. ORBNAV plans to leverage Magellan's satellite access
products, ORBCOMM's satellite data network and other technologies to pursue
growth opportunities in these markets. ORBNAV's current focus is on developing
the rental car market through a 60% owned joint venture, Navigation Solutions,
LLC ("Navigation Solutions"), with The Hertz Corporation ("Hertz").
DESCRIPTION OF ORBITAL'S PRODUCTS AND SERVICES
Our products and services are grouped into three general business sectors:
space and ground infrastructure systems, satellite access products and satellite
services. Our overall business is not seasonal to any significant extent.
SPACE AND GROUND INFRASTRUCTURE SYSTEMS
Our space and ground infrastructure systems sector currently includes
launch vehicles and advanced programs, satellites and related space systems,
electronics and sensor systems and transportation management systems, and
satellite ground systems, space robotics, and mapping and land information
services, and is described more fully below.
Launch Vehicles and Advanced Programs. We developed and produce the
Pegasus and Taurus space launch vehicles that place small satellites into Earth
orbit, and in January 2000, we successfully carried out the first launch of the
new Minotaur space launch vehicle for the U.S. Air Force. Our Pegasus launch
vehicle is launched from beneath our L-1011 carrier aircraft to deploy
satellites weighing up to 1,000 pounds into low-Earth orbit. The Taurus launch
vehicle is a ground-launched derivative of the Pegasus vehicle that can carry
payloads weighing up to 3,000 pounds to low-Earth orbit. The ground-launched
Minotaur launch vehicle combines Minuteman II rocket motors with our Pegasus
technology to launch payloads of up to 1,500 pounds into low-Earth orbit.
The Pegasus has performed a total of 28 missions, including three
successful launches in 1999. The Taurus has performed a total of five launches,
including one successful mission in 1999 for South Korea's space agency, and
most recently a successful mission in March 2000 for the Department of Energy.
Customers for Pegasus launch services currently include the National Aeronautics
and Space Administration ("NASA"), the U.S. Air Force, ORBCOMM and ORBIMAGE.
Customers for Taurus missions currently include ORBIMAGE and NASA. We perform
Minotaur missions under a contract with the U.S. Air Force.
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Under a research and development contract with NASA, we are designing and
constructing three unmanned reusable X-34 launch vehicles that will be launched
from our L-1011 carrier aircraft. The X-34 will test and demonstrate advanced
reusable launch system technologies and materials as part of a NASA program
focused on the development of next-generation, lower cost launch vehicles. In
1999, we delivered the first vehicle and commenced the captive flight test phase
of the X-34. NASA has contracted with us to conduct 27 test flights using the
X-34.
We also produce suborbital launch vehicles, which place payloads into a
variety of high-altitude trajectories but, unlike space launch vehicles, do not
place payloads into orbit around the Earth. Our suborbital launch products
include suborbital vehicles and their principal subsystems, payloads carried by
such vehicles, and related launch support installations and systems used in
their assembly and operation. Customers typically use our suborbital launch
vehicles to launch scientific and other payloads and for defense-related
applications such as target signature and interceptor experiments. Our primary
customers for suborbital launch vehicles include NASA and various branches of
the U.S. military. Since 1982, we (including a predecessor company) have
performed 101 suborbital missions.
Orbital's space launch technology is also the basis for several other space
and suborbital programs, including supporting efforts to develop technologies
that could be applied to hypersonic aircraft, crew transport vehicles and space
planes.
Satellites and Related Space Systems. We design and manufacture small and
medium-class satellites to be used in low-Earth orbit, or LEO, and in
geosynchronous orbit, or GEO. Our satellites are used by various commercial and
governmental customers for a wide range of communications, broadcasting, remote
imaging, scientific and military missions. Since 1982, we (including two
predecessor companies) have built and delivered 86 satellites, including 44
commercial satellites, 33 military/national security satellites and nine
scientific satellites.
Ten Orbital-built satellites were deployed during 1999. Customers for our
LEO satellites include NASA, the U.S. Air Force, ORBCOMM and ORBIMAGE. Customers
for our GEO communications satellites include Japan's Broadcast Satellite
Systems Corporation and Japan's NTT Mobile Communications Network, Inc.
We design and manufacture various other space systems, including satellite
command and data handling, attitude control and structural subsystems for a
variety of government and commercial customers. In addition, we provide a broad
range of spacecraft design and engineering services, including specialized
space-related analytical engineering services for U.S. government agencies,
including NASA, the Jet Propulsion Laboratory, the Department of Defense ("DoD")
and the Department of Energy.
Electronics and Sensor Systems and Transportation Management
Systems. Orbital develops and manufactures defense electronics products,
including advanced avionics and data management systems for aircraft flight
operations and ground support applications. These systems collect, process and
store mission-critical data for, among other things, mission planning and flight
operations, and manage on-board equipment for aircraft and similar platforms.
The primary customers for data management systems are the U.S. Navy, the U.S.
Air Force, and various DoD prime contractors and foreign governments. We are the
leading supplier of certain avionics systems and products, including mission
data equipment for the U.S. Navy and data transfer equipment and digital terrain
systems for the U.S. Air Force and foreign military customers. In addition, we
provide stores management systems, including weapons arming and firing functions
for use on tactical aircraft and helicopters, and high-speed solid state
recorders. The avionics systems and products are deployed on a number of
platforms, including the F-4, F-14, F-16, F-18 and F-22 aircraft and the LAMPS
helicopter. Since 1982, we (including a predecessor company) have delivered more
than 31,000 defense electronics systems to customers in over a dozen countries.
Orbital also produces satellite-borne scientific sensors and instruments,
such as atmospheric ozone monitoring instruments and environmental sensors. For
example, our instruments have successfully operated in space measuring ozone
concentrations around the world. We also developed and produced an atmospheric
monitoring system for use on the International Space Station. We provide sensors
performing similar functions
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for U.S. and British Navy nuclear submarines, and we are developing sensors for
the DoD for use in the detection of chemical or biological weapons. In addition,
Orbital manufactures and markets sensors that analyze gas properties for
commercial customers in the petrochemical, pharmaceutical and steel industries.
During the last 18 years, we (including a predecessor company) have produced
over 3,400 sensors and instruments for these markets.
Orbital also produces satellite-aided vehicle location and fleet management
systems that have been used primarily for metropolitan mass transit operators.
Our transportation management systems combine GPS vehicle tracking technology
with local area wireless terrestrial communications to help manage public bus
and light rail systems, provide for voice and data communications, and transmit
precise GPS-based location information in emergency situations. We also provide
fleet management software for utilities and other companies. The 1999 purchase
of Harris Corporation's transit management systems product line expanded our
existing satellite-based transit system capabilities. Major customers for our
transportation management systems include the metropolitan mass transit
authorities in Chicago, New York, Houston, Denver, Oakland, Philadelphia,
Baltimore, Atlanta, Santa Clara and San Mateo (California) and Las Vegas, as
well as a number of smaller state and municipal transit systems and vehicle
fleets. To date, we (including predecessor companies) have installed more than
14,000 transportation management systems in the United States.
Satellite Ground Systems, Space Robotics, and Mapping and Land Information
Services. Through our MDA subsidiary, we are the leading supplier of turn-key
commercial imaging satellite ground stations and a provider of advanced image
processing software used in such stations. In recent years, our ground systems
have also expanded to include software-intensive products designed for air and
sea navigation systems, along with a variety of military applications including
naval mine-hunting operations, and command and control.
Of approximately 45 major non-military imaging satellite ground stations
around the world, Orbital has been the prime contractor or a major supplier in
the construction of 35 ground stations in 20 countries. We have also carried out
subsequent substantial upgrades on over 40 ground stations that we and other
companies originally built. These ground stations are designed to receive and
process data from the eight major civil and commercial Earth observation
satellites currently in operation. Orbital also develops and markets software
that generates and processes imagery from satellites and airborne sensors.
Customers for our ground stations and Earth information systems and system
upgrades include the European and Canadian space agencies as well as ORBIMAGE,
EarthWatch, Incorporated and various other commercial and government customers
in the United States, Brazil, China, Europe and Japan. MDA is also the prime
contractor for Canada's RadarSat-2 commercial radar imaging satellite system.
In May 1999, we purchased the space robotics division of Toronto-based
Spar, which engages in the design, manufacture, marketing and support of
robotics systems primarily for space applications. Our robotics products are
used on Space Shuttle missions and will be used in the International Space
Station. Since 1982, our principal robotics product, the Shuttle Remote
Manipulator Systems, or Canadarm, has performed successfully on 53 Space Shuttle
missions involving satellite deployment and retrieval, International Space
Station assembly and other tasks.
We also produce automated aeronautical information and air traffic control
systems. Faster and less expensive to operate than traditional manual systems,
automated aeronautical information systems provide pilots and other users with
aeronautical and meteorological information on a timely basis. Customers for our
aeronautical systems products include the military and civil aviation
authorities in various countries such as Australia, Belgium, Canada, Malaysia,
Norway and Switzerland.
We are building on our expertise in satellite image processing software by
expanding into land-oriented information systems. In 1999, we entered into a
license agreement with the British Columbia provincial government to operate and
enhance the provincial government's electronic information access system, which
provides the public with electronic access to a series of land-related
government databases, such as land titles, tax records and property assessment
information. We intend to provide Internet-based services using these databases.
In addition, we have expanded our product line to include digital mapping and
business-to-business e-commerce-based land information services.
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In December 1999, we sold one-third of our equity interest in MDA to an
investor group consisting primarily of Canadian entities for gross proceeds of
$75 million. In connection with the transaction, MDA's new shareholders were
granted certain rights, including, among others, an option to purchase
additional MDA shares, or to cause a sale of MDA, in certain circumstances,
including (1) if an initial public offering of MDA does not occur on or before
June 22, 2002, or (2) if certain bankruptcy events involving Orbital occur. In
addition, under certain circumstances, including clause (1) above, MDA's new
shareholders will have the right to exchange their MDA stock for common stock of
Orbital pursuant to a specified formula as set forth in an Exchange and
Registration Rights Agreement. Orbital and the other MDA shareholders are
currently exploring an initial public offering by MDA in Canada.
SATELLITE ACCESS PRODUCTS
Our satellite access products include the satellite-based navigation,
positioning and communications products of our Magellan subsidiary as described
more fully below. Over the last 10 years, Magellan has produced and shipped over
1,800,000 access products in its major product lines.
Magellan's product line consists of inexpensive satellite-based navigation
and positioning products for consumer markets as well as GPS products that are
used for professional and other high-precision industrial applications. Its
consumer products are marketed to recreational marine and general aviation
customers and outdoor recreation users such as campers, hunters and hikers.
Magellan's satellite communications devices combine GPS and wireless data
communications functions. The first generation of Magellan products are used
primarily in conjunction with the ORBCOMM System described below.
Professional and industrial applications include using GPS for precision
surveying, guiding aircraft under low-visibility conditions, monitoring
movements of the Earth's surface for researchers, and managing natural
resources. In addition, some of Magellan's higher-performance products
incorporate technology that provides access to both the U.S. GPS satellites and
GLONASS, the comparable Russian satellite navigation system, which improves
performance and accuracy.
Magellan has also entered the market for GPS-based car navigation products
with its automotive navigation system, which uses GPS information to provide
electronic map guidance to individual motorists. In 1999, Orbital and Hertz
entered into an exclusive joint venture whereby 50,000 of Magellan's automotive
navigation systems are now being delivered and installed in Hertz' NeverLost(TM)
rental car service in the United States and Canada. Magellan's automotive
navigation system is currently in use in approximately 25,000 Hertz rental cars.
Magellan also pursues technology license agreements whereby Magellan
licenses its GPS and GLONASS technology to manufacturers of GPS consumer and
industrial products. Magellan has entered into such license arrangements with a
Mitsubishi subsidiary, Philips Semiconductor and Matsushita Electric Works.
In connection with the 1997 merger of Ashtech with Magellan, Orbital
entered into a stockholders' agreement with certain substantial stockholders of
Ashtech. The Ashtech stockholders were granted certain rights with respect to
Magellan, including, among others, the right to designate two members of
Magellan's seven-member board of directors and to demand registration of their
Magellan common stock after the earlier of (1) 180 days after an initial public
offering of the common stock of Magellan or (2) December 31, 1999. Because an
initial public offering of common stock was not completed by December 31, 1999,
we are evaluating strategic alternatives relating to Magellan.
Orbital and former Ashtech stockholders own approximately 66% and 34%,
respectively, of Magellan.
SATELLITE SERVICES
In Orbital's satellite services sector, ORBCOMM, our ORBIMAGE affiliate and
our Radarsat International Inc. ("RSI") subsidiary are developing and providing
satellite-based services to address markets for global two-way data
communications and digital imagery of the Earth's surface. We have also begun to
pursue additional satellite-provided services opportunities in the markets for
automotive information services through
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our ORBNAV subsidiary. Our satellite services sector also includes an investment
in a development stage voice-based satellite communications company.
ORBCOMM Communications Services. The ORBCOMM System consists of global
space and ground segments designed to provide continuous low-cost monitoring,
tracking and messaging communications coverage over most of the Earth's surface.
ORBCOMM is currently providing commercial service primarily in the monitoring
and tracking applications. The system is intended to be a reliable,
cost-effective method of providing fixed asset monitoring, mobile asset tracking
and data messaging services to a broad range of industrial and commercial
customers around the world, enabling customers to collect data from multiple
locations, track assets on a global basis and transmit and receive messages
outside the coverage area of terrestrial services. It is designed to permit
subscribers to use inexpensive communicators to send and receive short messages,
high-priority alerts and other information, such as the location and condition
of automobiles, trucks, railcars, industrial equipment, shipping vessels and
other remote or mobile assets. We expect that the ability to send and receive
data and messages without the geographic limitations of existing terrestrial
communications systems will stimulate the growth of new markets for
satellite-based monitoring, tracking and messaging communications and will be
used to supplement terrestrial-based communications systems by providing
relatively low-cost wide area geographic coverage in areas those systems are
unable to reach.
The ORBCOMM System network currently has 33 small LEO satellites in
commercial service, a satellite control center that operates and positions the
satellites, fixed and mobile communicators used by subscribers to transmit
messages to and receive messages from the satellites, and regional ground
gateway systems that transmit and control the flow of data and message
communications and other information for the system.
In 1999, Orbital launched a fourth plane of seven satellites aboard a
Pegasus vehicle for ORBCOMM. Orbital and ORBCOMM have also entered into a
procurement agreement under which, as amended, we have agreed to build and
launch a minimum of 11 satellites on a fixed-price basis, with an option to
build and launch up to an additional 3 satellites.
Orbital developed the "ORBCOMM" concept in 1990, and in 1993 formed the
ORBCOMM partnership with Teleglobe Mobile for the design, development,
construction, integration, testing and operation of the ORBCOMM System. As of
December 31, 1999, Orbital's investments in and advances to ORBCOMM were
approximately $107,989,000. Effective January 1, 2000, we restructured the
partnership agreement with Teleglobe governing financing and ownership of
ORBCOMM. Teleglobe, through Teleglobe Mobile, is now the majority owner and sole
general partner of ORBCOMM with an interest of approximately 66% as of March 15,
2000. We are a limited partner holding a minority ownership interest of
approximately 34% with certain voting rights and no future funding obligations.
As part of the restructuring, we also arranged to settle deferred invoiced
amounts owed to us by ORBCOMM, which amounts totaled approximately $91,000,000
as of December 31, 1999. ORBCOMM paid us approximately $41,000,000 in January
2000, which was funded from an equity contribution made in ORBCOMM by Teleglobe.
Of the $41,000,000, we then reimbursed Teleglobe approximately $33,000,000 for
amounts it previously had advanced to us. In March 2000, we converted an invoice
for approximately $33,000,000 into a contribution to partnership interests in
ORBCOMM. The remaining amount of approximately $17,000,000 that ORBCOMM owes us
is due by June 2001. In addition, we agreed to file an application with the U.S.
Federal Communications Commission ("FCC") to transfer to ORBCOMM the licenses
held by OCC with respect to the ORBCOMM System when an aggregate amount of
$75,000,000 in additional capital contributions or similar equity investments is
made to ORBCOMM after January 1, 2000.
In accordance with the equity method of accounting, we recognize 100% of
the revenues earned and costs incurred on sales of products and services to
ORBCOMM. We also recognize as equity in earnings (losses) of affiliates our
proportionate share of ORBCOMM's profits based on our percentage of partnership
interest. However, as ORBCOMM is currently capitalizing all system construction
costs, including amounts paid to Orbital, until December 31, 1999, we eliminated
as equity in earnings (losses) of affiliates approximately 50%, our then-current
equity ownership in ORBCOMM, of our profits from sales to ORBCOMM.
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We believe that ORBCOMM will require significant additional funding in
2000. While it is not contractually obligated to do so, Teleglobe Mobile is
currently funding ORBCOMM's operations. Orbital has no future funding
obligations. We understand that ORBCOMM is currently in the process of exploring
financing alternatives to fund future capital expenditures and to fund operating
costs. Such alternatives include, but are not limited to, an initial public
offering of equity, additional capital contributions from its partners or other
strategic investors, other equity or debt transactions and other strategic
alternatives. There can be no assurance that any financing will be completed or
available on terms acceptable to ORBCOMM.
Orbital anticipates that the ORBCOMM System will continue to produce
substantial operating losses through 2000. There can be no assurance that an
adequate market will develop for ORBCOMM services, that ORBCOMM will achieve
profitable operations or that we will recover any of our investment in ORBCOMM.
ORBIMAGE Digital Imagery Services. ORBIMAGE operates, and is further
developing, a fleet of satellites that collect, process and distribute digital
imagery of the Earth's surface, atmosphere and weather conditions. ORBIMAGE's
imaging products and services are designed to provide customers with timely and
competitively priced information concerning, among other things, the location
and movement of military assets, urban growth, forestry and crop health, land
and ocean-based natural resources and weather patterns and wind conditions.
In April 1995, ORBIMAGE launched its first satellite, OrbView-1, which
provides to NASA dedicated weather-related imagery and meteorological products.
ORBIMAGE's second satellite, OrbView-2 (operated under a licensing agreement
with Orbital), commenced commercial service in 1997 and is used by ORBIMAGE to
deliver high-quality multi-spectral ocean imagery and land surface imagery to
government and commercial customers. ORBIMAGE expects to launch its first
one-meter high-resolution satellite, OrbView-4, in the first quarter of 2001,
with its second one-meter high-resolution satellite, OrbView-3, expected to be
launched in the second quarter of 2001. We believe that OrbView-4 will be the
world's first satellite with commercially available hyperspectral imaging
capability. During 1999, ORBIMAGE entered into agreements with commercial
distributors in Japan, Europe and Latin America to distribute high-resolution
imagery from the OrbView-3 and OrbView-4 satellites. Pursuant to a license
agreement between ORBIMAGE and MDA, ORBIMAGE has acquired from MDA the exclusive
worldwide rights to distribute and sell radar imagery from the RadarSat-2
satellite that is expected to be operational in 2002.
Under the procurement agreement between Orbital and ORBIMAGE, Orbital is
producing and launching the OrbView-3 and OrbView-4 satellites, and is
constructing the related ground segment on a fixed-price basis. Orbital also
provides ORBIMAGE with administrative services and technical support, generally
on a cost-reimbursable basis.
We own approximately 100% of ORBIMAGE's outstanding common stock and
approximately 58% of the total voting interest in ORBIMAGE (after giving effect
to the conversion of ORBIMAGE's convertible preferred stock), with the remainder
owned primarily by the preferred stockholders. As a result of certain rights
granted to the preferred stockholders, including the right to elect certain
directors and have such directors participate in significant management
decisions, we do not control the operational and financial affairs of ORBIMAGE.
In accordance with the equity method of accounting, we recognize 100% of the
revenues earned and costs incurred on sales of products and services to
ORBIMAGE. We also recognize as equity in earnings (losses) of affiliates our
proportionate share (based on our current common equity ownership) of ORBIMAGE's
net income available to common stockholders. To the extent ORBIMAGE capitalizes
its purchases from Orbital, we eliminate as equity in earnings (losses) of
affiliates our proportionate share (based on our current common equity
ownership) of profits from sales to ORBIMAGE.
As of December 31, 1999, our investments in and advances to ORBIMAGE were
$8,094,000. We have committed to make up to an additional $12,500,000 equity
investment in ORBIMAGE based on ORBIMAGE's cash requirements, which commitment
may increase up to $25,000,000 if there are significant delays in the launch of
the OrbView-4 or OrbView-3 satellites. We believe that ORBIMAGE will require
additional funding in 2000 beyond our committed amount. ORBIMAGE is also
currently in the process of exploring financing alternatives to fund future
capital expenditures and to fund operating costs. There can be
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no assurance that an adequate market will develop for ORBIMAGE's products and
services, that it will achieve profitable operations or that we will recover our
investment in ORBIMAGE.
Radarsat International. Our Canadian subsidiary, RSI, has the exclusive
license to market radar imagery from the Canadian Space Agency's RadarSat-1
satellite. RSI sells radar imagery to commercial, scientific and government
customers around the world.
ORBNAV Automotive Information Services. We established ORBNAV in early
1999 to develop, operate and market, directly or through joint ventures,
satellite-aided automotive guidance and related value-added information services
for the rental car, private passenger car, commercial delivery vehicle and
emergency vehicle markets. ORBNAV's initial joint venture with Hertz, Navigation
Solutions, is delivering and installing 50,000 satellite-based car navigation
systems that form the basis for the Hertz NeverLost rental car service. We have
agreed to invest up to $30,000,000 in Navigation Solutions in exchange for a 60%
non-controlling interest, while Hertz intends to invest up to $20,000,000 and
provide initial marketing services in exchange for a 40% interest in the joint
venture. Through December 31, 1999, Orbital and Hertz had invested $22,200,000
and $14,800,000, respectively.
CCI Voice Communications. We made a strategic equity investment in CCI
International, N.V. ("CCI"), a development stage company formed to develop,
construct and operate a constellation of satellites offering satellite-based
voice communications services in the world's equatorial regions. In connection
with our investment, we also entered into a satellite and launch vehicle
procurement contract. CCI needs a significant infusion of capital to complete
its contemplated constellation of satellites. In the third quarter of 1999, two
other start-up companies that had also been developing similar satellite
communications systems announced that they were experiencing significant
financial difficulties and filed for bankruptcy protection (and one such company
has since commenced liquidation). We believe that CCI's ability to raise the
needed capital is doubtful, and accordingly, in the third quarter of 1999, we
concluded that our investment in CCI was impaired. We recorded in the third
quarter a non-cash charge of $11,128,000 to write-off our remaining investment
in CCI.
* * *
Financial information about the company's products and services, domestic
and foreign operations and export sales is included in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the notes to
our consolidated financial statements, and is incorporated herein by reference.
COMPETITION
Orbital believes that competition for sales of its products and services is
based on performance and other technical features, price, reliability,
scheduling and customization.
The primary domestic competition for the Pegasus and Taurus launch vehicles
comes from the Athena launch vehicles developed by Lockheed Martin Corporation.
In addition, Pegasus may face competition in the future from launch systems
derived from U.S. government surplus ballistic missiles. The Israeli Shavit
vehicle and other potential foreign launch vehicles could also pose competitive
challenges to Pegasus. Competition for Taurus could come from surplus Titan II
launch vehicles, although a very limited inventory remains, and from various
Russian launch vehicles.
Competition to Pegasus and Taurus vehicles also exists in the form of
partial or secondary payload capacity on larger boosters, including the Ariane,
Atlas and Delta launch vehicles. Our primary competitors in the suborbital
launch vehicle product line are Lockheed Martin, Coleman Research Corporation
and Space Vector Corporation.
Our satellites and satellite subsystems products compete with products and
services produced or provided by government entities and numerous private
entities, including TRW Inc., Ball Aerospace and Technology Corporation,
Lockheed Martin, Boeing Corporation, Spectrum Astro, Inc., Matra Marconi Space,
Alenia Aerospazio and Alcatel. Our airborne and ground-based electronics, data
management systems, defense-
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oriented avionics products and software systems, aviation systems and space
sensors and instruments face competition from several established manufacturers,
including Smiths Industries, Lockheed Martin and Honeywell Inc. Our main
competitors in the area of satellite ground stations include Datron Systems
Inc., Matra Marconi Space and Raytheon Company. Our satellite access products
primarily face competition from Trimble Navigation Ltd., Garmin International,
Lowrance Electronics, Inc., Philips Automotive Electronics, Alpine Electronics
and Clarion Co., Ltd.
ORBCOMM may face competition from numerous existing and proposed
satellite-based and terrestrial systems providing data communications services.
ORBIMAGE may face competition from U.S. and foreign governmental entities and
private entities, including Space Imaging EOSAT and EarthWatch, Inc., that
provide or are seeking to provide satellite-based imagery products.
Many of our competitors are larger and have substantially greater resources
than we do. Furthermore, the possibility exists that other domestic or foreign
companies or governments, some with greater experience in the space industry and
greater financial resources than Orbital, will seek to produce products or
services that compete with our products or services. Any such foreign competitor
could benefit from subsidies from or other protective measures by its home
country.
RESEARCH AND DEVELOPMENT
We expect to continue to invest in product-related research and
development, to conceive and develop new products and services, to enhance
existing products and services and to seek customer and, where appropriate,
third-party strategic investments in these products and services. Our research
and development expenses, excluding direct customer-funded development, were
approximately $43,013,000, $49,384,000 and $33,140,000, respectively, for the
fiscal years ended December 31, 1999, 1998 and 1997.
PATENTS AND TRADEMARKS
We rely, in part, on patents, trade secrets and know-how to develop and
maintain our competitive position and technological advantage. We hold and have
applications pending for various U.S. and foreign patents relating to the
Pegasus vehicle, our satellites, certain of our GPS products, and other systems
and products. Certain of the trademarks and service marks used in connection
with our products and services have been registered with the U.S. Patent and
Trademark Office, the Canadian Intellectual Property Office and certain other
foreign trademark authorities.
COMPONENTS, RAW MATERIALS AND CARRIER AIRCRAFT
We purchase a significant percentage of our product components, including
rocket propulsion motors, structural assemblies, electronic equipment and
computer chips, from third parties. We also occasionally obtain from the U.S.
government parts and equipment that are used in the production of our products
or in the provision of our services. We have not experienced material difficulty
in obtaining product components or necessary parts and equipment and we believe
that alternative sources of supply would be available, although increased costs
and possible delays could be incurred in securing alternative sources of supply.
Our ability to launch our Pegasus vehicle depends on the availability of an
aircraft with the capability of carrying and launching such space launch
vehicle. We own the modified Lockheed L-1011 carrier aircraft that is used for
the Pegasus vehicle and will be used for the X-34 advanced launch vehicle. In
the event that the L-1011 carrier aircraft were to be unavailable, we would
experience significant delays, expenses and loss of revenues as a result of
having to acquire and modify a new carrier aircraft.
U.S. GOVERNMENT CONTRACTS
During 1999, 1998 and 1997, approximately 34%, 46% and 42%, respectively,
of our total annual revenues were derived from contracts with the U.S.
government and its agencies or from subcontracts with the U.S. government's
prime contractors. Most of our U.S. government contracts are funded
incrementally on a year-to-year basis. Changes in government policies,
priorities or funding levels through agency or program budget reductions by the
U.S. Congress or executive agencies or the imposition of budgetary constraints
could
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materially adversely affect our financial condition or results of operations.
Customers that accounted for 10% or more of our consolidated 1999 revenues were
NASA, DoD and the Canadian Space Agency.
The accuracy and appropriateness of our direct and indirect costs and
expenses under our contracts with the U.S. government are subject to extensive
regulation and audit by the Defense Contract Audit Agency or by other
appropriate agencies of the U.S. government. These agencies have the right to
challenge our cost estimates or allocations with respect to any such contract.
Additionally, a substantial portion of payments to Orbital under U.S. government
contracts are provisional payments that are subject to potential adjustment upon
audit by such agencies. We believe that any adjustments likely to result from
inquiries or audits of our contracts will not have a material adverse impact on
our financial condition or results of operations. Since Orbital's inception, we
have not experienced any material adjustments as a result of any such inquiries
or audits.
Orbital's major contracts with the U.S. government fall into three
categories: firm fixed-price contracts, fixed-price incentive fee contracts and
cost-plus-fee contracts. Under firm fixed-price contracts, work performed and
products shipped are paid for at a fixed price without adjustment for actual
costs incurred in connection with the contract. Therefore, we bear the risk of
loss due to increased cost, although some of this risk may be passed on to
subcontractors. Under fixed-price government contracts, we may receive progress
payments, generally in an amount equal to between 80% and 95% of monthly costs
and profits, or we may receive milestone payments upon the occurrence of certain
program achievements, with final payments occurring at project completion.
Fixed-price incentive fee contracts provide for sharing by Orbital and the
customer of unexpected costs incurred or savings realized within specified
limits, and may provide for adjustments in price depending on actual contract
performance other than costs. Costs in excess of the negotiated maximum
(ceiling) price and the risk of loss by reason of such excess costs are borne by
Orbital, although some of this risk may be passed on to subcontractors. Under a
cost-plus-fee contract, we recover our actual allowable costs incurred and
receive a fee consisting of a base amount that is fixed at the inception of the
contract and/or an award amount that is based on the U.S. government's
subjective evaluation of the contractor's performance in terms of the criteria
stated in the contract.
All our U.S. government contracts and, in general, our subcontracts with
the U.S. government's prime contractors provide that such contracts may be
terminated at will by the U.S. government or the prime contractor, respectively.
Furthermore, any of these contracts may become subject to a government-issued
stop work order under which we would be required to suspend production. In the
event of a termination at will, Orbital would normally be entitled to recognize
the purchase price for delivered items, reimbursement for allowable costs for
work in process and an allowance for reasonable profit thereon or adjustment for
loss if completion of performance would have resulted in a loss. From time to
time we experience contract suspensions and terminations.
REGULATION
Our ability to pursue our business activities is regulated by various
agencies and departments of the U.S. government and, in certain circumstances,
the governments of other countries. Commercial space launches require licenses
from the U.S. Department of Transportation ("DoT") and operation of our L-1011
aircraft requires licenses from certain agencies of the DoT, including the
Federal Aviation Administration. Construction, launch and operation of
commercial communications satellites, including the ORBCOMM communications
network and CCI's potential business, require licenses from the FCC and
frequently require the approval of international and individual country
regulatory authorities. ORBCOMM has received the necessary FCC regulatory
authority to operate its system. ORBCOMM's international licensees have obtained
or are responsible for obtaining the necessary international regulatory
licenses.
In addition, U.S.-based commercial remote imagery satellite systems such as
those developed by ORBIMAGE, require licenses from the U.S. Department of
Commerce ("DoC") and the FCC for the construction, launch and operation of
remote imaging satellites. ORBIMAGE has the necessary DoC licenses and its FCC
license to construct, launch and operate the OrbView-3 and OrbView-4 satellites.
ORBIMAGE has applied to DoC to amend its OrbView-4 license to permit the
commercial distribution of hyperspectral
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imagery from such satellite. The DoC has indicated that its approval may be
subject to certain limitations, such as delaying release of imagery or degrading
spatial resolution of imagery for commercial uses. The DoC has also informed us
that we will need to obtain a DoC license for the RadarSat-2 satellite, which
will be owned and operated by our Canadian subsidiary, MDA. The U.S. and
Canadian governments also have been negotiating the policy to govern RadarSat-2
operations and data use. If DoC were to impose restrictions on the commercial
uses of RadarSat-2, such restrictions could have an adverse effect on ORBIMAGE's
financial condition and results of operations. Exports of our products, services
and technical information frequently require licenses from the U.S. Department
of State or the DoC.
There can be no assurance that we will be successful in our efforts to
obtain necessary licenses or regulatory approvals. The inability of Orbital,
ORBCOMM or ORBIMAGE to secure or maintain any necessary licenses or approvals or
significant delays in obtaining such licenses or approvals could have a material
adverse effect on the financial condition or results of operations of Orbital.
BACKLOG
Orbital's contract backlog is attributable to its space and ground
infrastructure systems business. Our firm backlog at December 31, 1999 and 1998
was approximately $2,048,000,000 and $1,826,000,000, respectively. As of
December 31, 1999, approximately 20% of our firm backlog was with the U.S.
government and its agencies or from subcontracts with the U.S. government's
prime contractors. Firm backlog consists of aggregate contract values for firm
product orders, excluding the portion previously included in operating revenues
on the basis of percentage of completion accounting, and including government
contract orders not yet funded in the amounts of approximately $1,262,000,000
and $1,300,000,000 as of December 31, 1999 and 1998, respectively. Approximately
60% of total firm backlog is currently scheduled to be performed beyond 2000.
Firm backlog excludes unexercised contract options and undefinitized new
contracts having an aggregate potential contract value at December 31, 1999 of
approximately $2,712,000,000.
EMPLOYEES
As of December 31, 1999, Orbital had approximately 5,300 full-time
permanent employees, including a total of approximately 500 employees at ORBCOMM
and ORBIMAGE. Employees of MDA's space robotics division in Brampton, Ontario
are subject to collective bargaining agreements with the Canadian Auto Workers
Union and Spar Professional and Allied Technical Association. None of our other
employees are subject to collective bargaining agreements. We believe our
employee relations are good.
ITEM 2. PROPERTIES
Orbital owns or leases over 2,000,000 square feet of office, engineering
and manufacturing space in various locations throughout the world. In 1999, we
purchased approximately 21 acres of land adjacent to our Northern Virginia
corporate headquarters for future expansion of our space-related engineering,
manufacturing and operations facilities. We also conveyed approximately 28 acres
of land adjacent to our corporate headquarters in Northern Virginia to a third
party developer and we have entered into three lease agreements; two to commence
in 2000 and one to commence in 2001. In 2000, as leases on the current
facilities expire, we expect to relocate our satellite systems groups from
facilities in McLean, Virginia and Germantown, Maryland described below, to our
expanded Northern Virginia campus, currently under construction.
In 1993, Orbital entered into a 12-year lease agreement for approximately
100,000 square feet of office and engineering space in Dulles, Virginia, which
serves as its corporate headquarters. We own a 59,000 square-foot manufacturing
facility on land adjacent to the Dulles office facility that has office,
engineering and manufacturing space. This facility is being expanded by
approximately 64,000 square feet in connection with the consolidation of our
satellite systems group in Northern Virginia with construction scheduled for
completion in mid 2000. Orbital also leases approximately 76,000 square feet of
office, engineering and manufacturing space in McLean, Virginia; 400,000 square
feet of office, engineering and manufacturing space in Germantown, Maryland;
345,000 square feet of office, engineering and manufacturing space in Chandler,
Arizona; 292,000 square feet of office, engineering and manufacturing space in
Brampton, Ontario; 182,000
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square feet of office and engineering space in Richmond, British Columbia;
135,000 square feet of office, engineering and manufacturing space in Pomona,
California; 75,000 square feet of office, engineering and manufacturing space in
San Dimas, California; and 82,500 square feet of office, engineering and
manufacturing space in Santa Clara, California. We lease or own other smaller
facilities, offices or manufacturing space around the United States, in Canada
and in Russia. We believe that our existing facilities are adequate for our
near-term requirements and that such facilities, along with those to be
constructed, will be adequate for our medium-term requirements.
ITEM 3. LEGAL PROCEEDINGS
In connection with our announcement in February 1999 of the restatement of
our financial reports for the first three fiscal quarters of 1998, during the
first quarter of 1999, a number of class action lawsuits were filed in the U.S.
District Court for the Eastern District of Virginia (the "District Court")
against us, an officer and an officer/director, alleging violations of the
federal securities laws, on behalf of purchasers of our common stock during the
period from April 21, 1998 through February 16, 1999 and seeking monetary
damages. In the second quarter of 1999, the class action lawsuits were
consolidated into a single class action and an amended consolidated class action
was filed with the District Court. An additional class action complaint was
filed on behalf of purchasers of call options in the third quarter of 1999,
which was consolidated with the previous action. In connection with our
announcement in October 1999 of the restatement of the Company's financial
reports for fiscal years 1997, 1998 and the first two quarters of 1999, a class
action lawsuit was filed in the District Court on November 10, 1999 against the
company, an officer and an officer/director alleging violations of the federal
securities laws, on behalf of purchasers of our common stock and call options
during the period from April 22, 1997 through October 29, 1999. The District
Court granted the plaintiffs leave to file an amended complaint consolidating
the new action with the previously consolidated pending cases. The class has
been certified and the case is currently in the discovery process. While the
amounts to be claimed may be substantial, we believe that the allegations are
without merit and intend to defend vigorously against such allegations.
In July 1999, a class action complaint was filed by Veston W. Bush, Jr., on
behalf of a class comprised of purchasers and lessees of a high precision GPS
product manufactured by Magellan (as a successor to Ashtech), against Sokkia
Corporation and certain of its affiliates, Magellan and others in the Circuit
Court of Henry County, Alabama. The complaint alleges breach of contract and
warranty claims and seeks unspecified compensatory and punitive damages. We
believe that the allegations are without merit and intend to defend vigorously
against such allegations
In the first quarter of 2000, PT Media Citra Indostar ("PT-MCI"), an
Indonesian company, commenced arbitration proceedings against us seeking a
refund of $163,000,000 that PT-MCI asserts it paid in connection with its
purchase of the Indostar satellite constructed by CTA under a contract that was
assigned to us in connection with our CTA acquisition. Our claims against PT-MCI
for unpaid invoices in the approximate amount of $14,000,000 are also part of
the arbitration proceedings. We believe that PT-MCI's allegations are without
merit and intend to vigorously defend against the allegations. In addition,
under the terms of the CTA acquisition, we believe we are entitled to
indemnification from CTA for all or a part of any damages arising from the
PT-MCI litigation and that CTA retains liability for certain fraud claims being
made by PT-MCI.
We are currently arbitrating a claim by Thomas van der Heyden alleging that
Orbital is in actual or anticipatory breach of obligations allegedly imposed on
Orbital in a decision in a previous arbitration proceeding brought by Mr. van
der Heyden against CTA. Mr. van der Heyden claims that he is entitled to a sum
exceeding $30,000,000 from Orbital, as successor-in-interest to CTA. We believe
that the allegations in these proceedings are without merit and intend to
vigorously defend against the allegations. In addition, under the terms of the
CTA acquisition, we believe we are entitled to indemnification from CTA for all
or a part of any damages arising from this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter submitted to a vote of our security holders during the
fourth quarter of 1999.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of the
executive officers of Orbital as of March 1, 2000. All executive officers are
elected annually and serve at the discretion of the Board of Directors.
NAME AGE POSITION
- ---- --- --------
David W. Thompson.................... 45 Chairman of the Board and Chief Executive Officer
James R. Thompson.................... 63 Director, President and Chief Operating Officer
Jeffrey V. Pirone.................... 39 Executive Vice President and Chief Financial Officer
Michael D. Griffin................... 50 Executive Vice President and Chief Technical Officer
Leslie C. Seeman..................... 47 Executive Vice President, General Counsel and Secretary
Robert R. Lovell..................... 63 Executive Vice President and General Manager/Space
Systems Group
Ronald J. Grabe...................... 54 Executive Vice President and General Manager/Launch
Systems Group
Robert D. Strain..................... 43 Executive Vice President and General Manager/Electronics
and Sensor Systems Group
Daniel E. Friedmann.................. 43 Executive Vice President and General Manager/Systems
Integration and Software Group
John P. Huyett....................... 46 Executive Vice President and General Manager/Satellite
Access Products Group
Antonio L. Elias..................... 50 Senior Vice President/Advanced Programs Group
- ------------------------
David W. Thompson is a co-founder of Orbital and has been Chairman of the
Board and Chief Executive Officer of Orbital since 1982. From 1982 until October
1999, he also served as our President. Prior to founding Orbital, Mr. Thompson
was employed by Hughes Electronics Corporation as special assistant to the
President of its Missile Systems Group and by NASA at the Marshall Space Flight
Center as a project manager and engineer, and also worked on the Space Shuttle's
autopilot design at the Charles Stark Draper Laboratory. Mr. Thompson serves as
Chairman of ORBIMAGE and as a director of ORBCOMM. Mr. Thompson is a Fellow of
the American Institute of Aeronautics and Astronautics, the American
Astronautical Society and the Royal Aeronautical Society.
James R. Thompson (who is not related to David W. Thompson) has been
President and Chief Operating Officer since October 1999 and a director of the
company since 1992. From 1993 until October 1999, Mr. Thompson served as
Executive Vice President and General Manager/Launch Systems Group. Mr. Thompson
was Executive Vice President and Chief Technical Officer of Orbital from 1991 to
1993. He was Deputy Administrator of NASA from 1989 to 1991. From 1986 until
1989, Mr. Thompson was Director of NASA's Marshall Space Flight Center. Mr.
Thompson was Deputy Director for Technical Operations at Princeton University's
Plasma Physics Laboratory from 1983 through 1986. Before that, he had a 20-year
career with NASA at the Marshall Space Flight Center. He is a director of
Nichols Research Corp. and SPACEHAB Incorporated.
Jeffrey V. Pirone has been Executive Vice President and Chief Financial
Officer since 1998. From 1996 to 1998, Mr. Pirone served as Senior Vice
President and Chief Financial Officer, and from 1993 until 1996, Mr. Pirone
served as Vice President and Controller of Orbital. Mr. Pirone joined Orbital as
Controller in 1991, and prior to that was a Senior Manager at KPMG LLP. He is
also a director of ORBCOMM.
Michael D. Griffin has been Executive Vice President and Chief Technical
Officer since 1997. From 1996 to 1997, Dr. Griffin served as Executive Vice
President/Space Systems Group. Dr. Griffin joined Orbital in 1995 when he was
appointed Senior Vice President and Chief Technical Officer. From 1994 to 1995,
he was Senior Vice President for Program Development at Space Industries
International. From 1991 to 1994, he served as Chief Engineer of NASA and, from
1989 to 1991, was Deputy Director for Technology at the Strategic Defense
Initiative Organization.
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Leslie C. Seeman has been Executive Vice President and General Counsel of
Orbital since January 2000 and served as Senior Vice President and General
Counsel from 1993 to January 2000. From 1989 to 1993, she was Vice President and
General Counsel of Orbital, and from 1987 to 1989, Ms. Seeman was Assistant
General Counsel of Orbital. From 1984 to 1987, she was General Counsel of Source
Telecomputing Corporation, a telecommunications company. Prior to that, she was
an attorney at the law firm of Wilmer, Cutler and Pickering.
Robert R. Lovell has been Executive Vice President and General
Manager/Space Systems Group since 1997. From 1994 to 1997, he was Senior Vice
President for Special Projects at Orbital. Mr. Lovell previously served as
Executive Vice President and General Manager/Space Systems Group from 1993 to
1994. From 1990 to 1993, he was President/Space Systems Division of Orbital and,
from 1987 to 1989, he served as Vice President/Space Applications. From 1980 to
1987, Mr. Lovell was employed by NASA as Director of the Communications Division
in the Office of Space Science and Applications. Before that, he had an 18-year
career with NASA at the Lewis Research Center.
Ronald J. Grabe has been Executive Vice President and General
Manager/Launch Systems Group since October 1999. From 1996 to 1999, he was
Senior Vice President and Assistant General Manager of the Launch Systems Group,
and Senior Vice President of the Launch Systems Group since 1995. From 1994 to
1995, Mr. Grabe served as Vice President for Business Development in the Launch
Systems Group. From 1980 to 1993, Mr. Grabe was a NASA astronaut during which
time he commanded four Space Shuttle missions and was lead astronaut for
development of the International Space Station.
Robert D. Strain has been Executive Vice President and General
Manager/Electronics and Sensor Systems Group since 1996. From 1994 until 1996,
he was Vice President for Finance and Manufacturing at Orbital. Prior to that he
served in a variety of senior-level financial positions with Fairchild Space and
Defense Corporation, including Vice President of Finance, Treasurer and
Controller.
Daniel E. Friedmann has been Executive Vice President and General
Manager/Systems Integration and Software Group since 1996. He continues to serve
as President and Chief Executive Officer of Orbital's subsidiary, MDA, a
position he has held since 1995. From 1992 to 1995, he served as Executive Vice
President and Chief Operating Officer of MDA. Between 1979 and 1992, he held a
variety of positions at MDA, including serving as Vice President of various
divisions.
John P. Huyett has been Executive Vice President and General
Manager/Satellite Access Products since January 1, 1999. Mr. Huyett also serves
as President and Chief Executive Officer of Magellan. Mr. Huyett joined Magellan
as its Vice President and Chief Financial Officer in 1998. From 1993 through
1998, Mr. Huyett was the Vice President and Chief Financial Officer of Avant!
Corporation and its predecessor, Integrated Silicon Systems, a software company.
From 1985 through 1993, Mr. Huyett was a partner at KPMG LLP.
Antonio L. Elias has been Senior Vice President/Advanced Programs Group
since August 1997. From January 1996 until August 1997, Dr. Elias served as
Senior Vice President and Chief Technical Officer. From May 1993 through
December 1995 he was Senior Vice President for Advanced Projects and was Senior
Vice President/Space Systems Division from 1990 to April 1993. He was Vice
President/Engineering of Orbital from 1989 to 1990 and was Chief Engineer from
1986 to 1989. From 1980 to 1986, Dr. Elias was an Assistant Professor of
Aeronautics and Astronautics at Massachusetts Institute of Technology.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On March 31, 2000, there were 1,329 Orbital stockholders of record.
Our common stock began trading on the New York Stock Exchange ("NYSE") on
July 10, 1998 under the symbol ORB. Prior to that our common stock was traded on
the Nasdaq National Market under the symbol ORBI. The range of high and low
sales prices of Orbital common stock from 1997 through 1999, as reported on
Nasdaq or the NYSE, as applicable, was as follows:
1999 HIGH LOW
- ---- ---- ---
4th Quarter................................................. $19 1/4 $10 3/5
3rd Quarter................................................. $26 1/4 $16 1/4
2nd Quarter................................................. $29 3/4 $19 1/2
1st Quarter................................................. $45 1/3 $19 1/3
1998 HIGH LOW
- ---- ---- ---
4th Quarter................................................. $44 $19 1/2
3rd Quarter................................................. $39 $17
2nd Quarter................................................. $50 $32 1/4
1st Quarter................................................. $46 1/2 $29
1997 HIGH LOW
- ---- ---- ---
4th Quarter................................................. $30 3/4 $21
3rd Quarter................................................. $25 $15 7/8
2nd Quarter................................................. $18 $12 3/4
1st Quarter................................................. $19 1/4 $13 3/4
We have never paid any cash dividends on our common stock. We presently
intend to retain future earnings for working capital and product development
and, therefore, do not anticipate paying cash dividends on our common stock at
any time in the foreseeable future. In addition, we are prohibited from paying
cash dividends under our credit facility.
The transfer agent for our Common Stock is:
BankBoston, N.A.
c/o Equiserve
P.O. Box 8040
Boston, MA 02266-8040
Telephone: (781) 575-3170
www.Equiserve.com
The trustee for our 5% convertible subordinated notes due 2002 is:
Deutsche Bank AG, New York Branch
31 W. 52nd St.
New York, NY 10019
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
Management has determined to restate its previously issued consolidated
financial statements as of and for the years ended December 31, 1998, 1997, 1996
and 1995 with respect to certain matters described in Note 2A to our
consolidated financial statements. The following selected consolidated financial
data should be read in conjunction with the consolidated financial statements
and notes thereto included in this Annual Report. The consolidated operating
data and balance sheet data for the three-year period ended December 31, 1999
and the consolidated balance sheet data at December 31, 1999 and 1998 are
derived from and should be read in conjunction with our consolidated financial
statements and notes thereto included in this Annual Report. The consolidated
operating data and balance sheet data for the years ended December 31, 1996 and
1995 and the consolidated balance sheet data at December 31, 1997, 1996 and 1995
are derived from our consolidated financial statements not included or
incorporated by reference herein.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT SHARE DATA)
OPERATING DATA:
Revenues................................................... $ 874,911 $ 730,662 $ 546,008 $ 449,787 $ 359,840
Costs of goods sold........................................ 738,526 549,628 413,361 332,581 271,146
----------- ----------- ----------- ----------- -----------
Gross profit............................................... 136,385 181,034 132,647 117,206 88,694
Research and development expenses.......................... 43,013 49,384 33,140 23,068 28,558
Selling, general and administrative expenses............... 121,720 106,812 88,148 77,247 64,170
Amortization of goodwill................................... 13,274 9,713 3,852 3,134 3,221
Asset impairment charges................................... 17,027 2,479 -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from operations.............................. (58,649) 12,646 7,507 13,757 (7,255)
Net investment income (expense)............................ (22,914) (1,279) (990) (49) 1,131
Equity in earnings (losses) of affiliates.................. (99,550) (76,815) (25,094) (7,008) (644)
Non-controlling interests in earnings (losses) of
consolidated subsidiaries................................ 9,559 14,112 2,638 1,473 427
Gain on issuance of subsidiary equity...................... 62,282 -- 21,810 -- --
Acquisition expenses....................................... (1,561) -- (4,343) -- (3,441)
----------- ----------- ----------- ----------- -----------
Income (loss) before provision (benefit) for income taxes,
extraordinary items and cumulative effect of accounting
change................................................... (110,833) (51,336) 1,528 8,173 (9,782)
Provision (benefit) for income taxes....................... 11,104 5,216 12,933 211 (6,569)
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item and cumulative
effect of accounting change.............................. (121,937) (56,552) (11,405) 7,962 (3,213)
Extraordinary item -- gain on sale of assets, net of
taxes.................................................... -- -- -- 1,980 --
Cumulative effect of accounting change, net of taxes....... -- -- -- -- (2,377)
----------- ----------- ----------- ----------- -----------
Net income (loss).......................................... $ (121,937) $ (56,552) $ (11,405) $ 9,942 $ (5,590)
=========== =========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE(1):
Income (loss) before extraordinary items and cumulative
effect of accounting change.............................. $ (3.27) $ (1.59) $ (0.35) $ 0.27 $ (0.12)
Extraordinary item -- gain on sale of assets, net of
taxes.................................................... -- -- -- 0.07 --
Cumulative effect of accounting change..................... -- -- -- -- (0.09)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) PER COMMON SHARE.......................... $ (3.27) $ (1.59) $ (0.35) $ 0.34 $ (0.21)
=========== =========== =========== =========== ===========
Shares used in computing net income (loss) per common
share.................................................... 37,281,065 35,624,888 32,283,138 29,137,361 26,207,746
=========== =========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE, ASSUMING DILUTION(2):
Income (loss) before extraordinary items and cumulative
effect of accounting change.............................. $ (3.27) $ (1.59) $ (0.35) $ 0.30 $ (0.12)
Extraordinary item -- gain on sale of assets, net of
taxes.................................................... -- -- -- 0.04 --
Cumulative effect of accounting change..................... -- -- -- -- (0.09)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) PER COMMON SHARE, ASSUMING DILUTION....... $ (3.27) $ (1.59) $ (0.35) $ 0.34 $ (0.21)
=========== =========== =========== =========== ===========
Shares used in computing net income (loss) per common
share, assuming dilution................................. 37,281,065 35,624,888 32,283,138 31,616,119 26,207,746
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Cash and investments....................................... $ 109,154 $ 23,190 $ 15,126 $ 33,750 $ 35,030
Net working capital........................................ (39,030) 53,052 53,201 71,055 78,778
Total assets............................................... 1,092,912 895,192 777,885 509,613 472,900
Short-term borrowings...................................... 131,073 26,814 29,767 38,969 11,907
Long-term obligations, net................................. 239,672 181,281 200,194 35,326 96,990
Stockholders' equity....................................... 306,792 419,352 313,984 323,795 238,116
- ------------------------
(1) Net income (loss) per common share is calculated using the weighted average
number of shares outstanding during the periods.
(2) Net income (loss) per common share, assuming dilution, is calculated using
the weighted average number of shares and dilutive equivalent shares
outstanding during the periods, plus the dilutive effect of an assumed
conversion of our convertible subordinated notes.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
With the exception of historical information, the matters discussed below
under the headings "Recent Developments," "Results of Operations" and "Liquidity
and Capital Resources" and elsewhere in this Annual Report include
forward-looking statements that involve risks and uncertainties, many of which
are beyond our control. We wish to caution readers that a number of important
factors, including those identified below in "Outlook: Issues and
Uncertainties," may affect our actual results and may cause actual results to
differ materially from those anticipated or expected in any forward-looking
statement.
Our products and services are grouped into three business sectors: space
and ground infrastructure systems, satellite access products and satellite
services. Space and ground infrastructure systems include launch vehicles and
advanced programs, satellites and related space systems, electronics and sensor
systems and transportation management systems, and satellite ground systems,
space robotics, and mapping and land information services. Our satellite access
products sector consists of satellite-based navigation, positioning and
communications products. The satellite services sector includes satellite-based
mobile data communications services, satellite-based remote imaging services,
satellite-based automotive information services and an investment in a
development stage satellite-based voice communications company. This sector
includes our share of the income or losses of our unconsolidated affiliates,
ORBCOMM, ORBIMAGE, Navigation Solutions and CCI.
We are accounting for our investments in ORBCOMM, ORBIMAGE and Navigation
Solutions using the equity method of accounting. In accordance with the equity
method of accounting, we recognize as equity in earnings (losses) of affiliates
our proportionate share of their profits and losses based on our percentage of
common equity ownership or partnership interest. We also recognize as equity in
losses of affiliates our proportionate share of preferred dividends to other
investors in such entities. We also recognize 100% of the revenues earned and
costs incurred on sales of products and services to these entities. However, as
these companies are currently capitalizing all system construction costs,
including amounts paid to Orbital, we eliminate as equity in earnings (losses)
of affiliates our share of profits from these sales based on our percentage of
common equity ownership or partnership interest.
We are accounting for our investment in CCI using a modified equity method
of accounting whereby we recognize as equity in earnings (losses) of affiliates
all of CCI's losses even though we own less than 10% of CCI's common stock. We
do not recognize any revenues or related profits on sales of products and
services to CCI since we have provided substantially all CCI's funding. In the
third quarter of 1999, we wrote-off our remaining investment in CCI and,
accordingly, have ceased recognizing any losses attributable to CCI.
Certain of the 1998, 1997, 1996 and 1995 financial information has been
restated. See Notes 2A and 13 to the consolidated financial statements.
RECENT DEVELOPMENTS
During the fourth quarter of 1999, we recorded the following non-recurring
gains and charges:
Gain on Issuance of Subsidiary Stock. In December 1999, our wholly owned
subsidiary, MDA issued common stock to a group of minority investors, and
immediately provided a dividend to us for the gross amount of the proceeds from
the sale of $75,000,000. We recorded a gain on the issuance of such stock in the
fourth quarter of approximately $62,282,000 ($58,610,000 net of taxes, fees and
expenses).
Asset Impairments and Write Downs. In December 1999, we determined that
the carrying value of a specialized voice communication satellite system would
no longer be recoverable through the expected future sales of the related
products or services. In addition, a commercial airline navigation and
communication system experienced cancellation of the sole customer sales
contract in the fourth quarter of 1999. This cancellation reduced the
probability of recovering the cost of the related capitalized software and
inventory through future sales. The total amount of asset impairment charges and
write downs that we recognized in
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1999 with respect to all assets, including our investment in CCI, was
approximately $42,975,000 (and approximately $30,037,000 in the fourth quarter).
Costs of Proposed Acquisition. In 1999, we and Magellan entered into a
merger agreement with Lowrance Electronics, Inc., in which Magellan was to
acquire all the issued and outstanding capital stock of Lowrance. This proposed
transaction did not close and was terminated in December 1999. In connection
with this and other transactions, we expensed $1,561,000 of transaction-related
costs.
ORBCOMM. In January 2000, we and Teleglobe agreed to restructure the
ORBCOMM partnerships and to realign our respective ongoing ownership interests
for the purpose of governing and financing ORBCOMM's business, as follows:
- Teleglobe, through Teleglobe Mobile, is now the sole general partner with
exclusive responsibility for managing ORBCOMM's business. Orbital remains
a limited partner with limited protective rights and no future funding
obligations.
- ORBCOMM USA (which was previously controlled and consolidated by us) and
ORBCOMM International (which was previously controlled by Teleglobe) were
contributed to and merged into ORBCOMM.
- Our ownership interest in ORBCOMM was reset at approximately 36% on
January 1, 2000, with further adjustment based on our and Teleglobe's
continuing capital contributions to ORBCOMM pursuant to a prescribed
formula. At March 15, 2000, Orbital's ownership interest in ORBCOMM was
approximately 34%.
- ORBCOMM agreed to settle all deferred invoicing under its satellite
procurement contract with us, totaling approximately $91,000,000 at
December 31, 1999. Approximately $74,000,000 has been paid or otherwise
settled, with the remainder due by June 30, 2001.
- We agreed to file an application with the FCC to transfer to ORBCOMM the
licenses held by OCC with respect to the ORBCOMM System if an aggregate
amount of $75,000,000 in additional capital contributions or similar
equity investments is made to ORBCOMM after January 1, 2000.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
As noted above, certain of the 1998 and 1997 financial information
presented below has been restated. See Note 2A to the consolidated financial
statements.
REVENUES
Our consolidated revenues for the year ended December 31, 1999 were
$874,911,000 as compared to $730,662,000 for 1998 and $546,008,000 for 1997.
Consolidated revenues in 1999, 1998 and 1997 included approximately $97,069,000,
$125,602,000 and $88,067,000, respectively, from sales to our noncontrolled and
unconsolidated affiliates ORBCOMM, ORBIMAGE and Navigation Solutions.
Space and Ground Infrastructure Systems. Revenues from our space and
ground infrastructure systems sector totaled $750,945,000 in 1999, and
$628,236,000 and $490,961,000 in 1998 and 1997, respectively.
Revenues from launch vehicles and advanced programs decreased to
$157,032,000 in 1999, as compared to 1998 revenues of $179,591,000. Revenues in
1997 were $120,202,000. The decrease in 1999, after a large increase from 1997
to 1998 and in spite of increasing firm backlog for government-market satellite
launches, is due primarily to customer-induced launch schedule changes by our
government customers and slowed demand from our commercial customers. The
increase in revenues from 1997 to 1998 related primarily to revenues generated
on new Pegasus and Taurus contracts awarded in 1997.
Satellite and related space systems revenues increased to $257,431,000 in
1999, as compared to $227,042,000 in 1998 and $175,450,000 in 1997. The increase
in 1999 satellite and related space systems revenues is due, in part, to
revenues realized from a new commercial geosynchronous satellite contract
received in late 1998, offset, in part, by reduced revenues resulting from
estimated contract cost increases
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experienced on certain satellite contracts in the fourth quarter of 1999. The
increase in satellite revenues from 1997 to 1998 was primarily attributable to
the July 1997 acquisition of the space and communications businesses of CTA.
Revenues from electronics and sensor systems and transportation management
systems increased to $149,991,000 in 1999, from $125,758,000 in 1998. Revenues
were $117,064,000 in 1997. The increase in revenues in 1999 was primarily due to
new defense electronics contract awards in early 1999 as well as to an increase
in transportation management systems revenues. The 1999 increase in
transportation management systems revenues is primarily attributable to our
December 1998 acquisition of Raytheon Company's transportation management
systems business. The increase in revenues from 1997 to 1998 is due to delays
experienced in 1997 in certain deliveries in our transportation management
systems business.
Revenues from our satellite ground systems, space robotics, mapping and
land information services were $186,491,000 in 1999, as compared to $95,845,000
and $78,245,000 in 1998 and 1997, respectively. As discussed in the accompanying
consolidated financial statements, in May 1999, we acquired the space robotics
division of Spar ("Robotics"). The increase in 1999 is attributable to Robotics'
revenues, which are now consolidated in our financial statements and were
approximately $92,111,000 in 1999. The increase from 1997 to 1998 is primarily
attributable to revenues recognized for a new remote imaging system and for
international satellite ground systems and system upgrades. In addition, through
MDA, in 1999 we began providing land information through business-to-business
e-commerce products and services after acquiring a database operating license
from the Province of British Columbia. Our e-commerce initiatives contributed
approximately $21,293,000 in revenues in 1999.
Satellite Access Products. Revenues from sales of satellite-based
navigation, positioning and communications products increased slightly to
$108,539,000 in 1999, as compared to $101,667,000 in 1998 and $54,875,000 in
1997. The increase in 1999 is largely due to increased shipments of consumer
navigation products. The increase from 1997 to 1998 is largely a result of our
December 1997 acquisition of Ashtech. Revenues attributable to Ashtech products
were $44,433,000 in 1999 and $44,636,000 in 1998.
Satellite Services. Revenues for this sector totaled $15,427,000, $759,000
and $172,000 in 1999, 1998 and 1997, respectively. The increase in revenues this
year is primarily attributable to the acquisition of a controlling interest in
RSI in the first quarter of 1999. Our other businesses in this sector, such as
ORBCOMM and ORBIMAGE, are generally accounted for using the equity method of
accounting.
GROSS MARGINS
Gross profit margin depends on a number of factors, including the mix of
contract types and costs incurred thereon in relation to revenues recognized.
Costs of goods sold include the costs of personnel, materials, subcontracts and
overhead related to sales of products and to costs incurred under various
development and production contracts. Our consolidated gross profit for 1999 was
$136,385,000, as compared to $181,034,000 and $132,647,000 in 1998 and 1997,
respectively. Consolidated gross profit margins as a percentage of revenues were
approximately 16%, 25% and 24%, respectively, for the three years ended December
31, 1999, 1998 and 1997. Changes in gross margins are explained by business
sector below.
Space and Ground Infrastructure Systems. Gross margins from our space and
ground infrastructure systems sector were $93,250,000 (or 12% of sector
revenues), $153,320,000 (or 24% of sector revenues) and
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$117,820,000 (or 24% of sector revenues) in 1999, 1998 and 1997, respectively.
Revenues and gross profits by major product lines within this sector were as
follows:
REVENUES GROSS PROFIT
---------------------------------- ---------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------------- ---------------------------------
1998 1997 1998 1997
1999 (RESTATED) (RESTATED) 1999 (RESTATED) (RESTATED)
-------- ---------- ---------- ------- ---------- ----------
(IN THOUSANDS)
Launch vehicles and advanced programs.... $157,032 $179,591 $120,202 $ 8,572 $43,591 $25,115
Satellites and related space systems..... 257,431 227,042 175,450 9,557 50,052 43,928
Electronics and sensor systems and
transportation management systems...... 149,991 125,758 117,064 36,206 36,620 29,375
Satellite ground systems, space robotics,
mapping and land information
services............................... 186,491 95,845 78,245 38,915 23,057 19,402
The significant decrease in gross profits for this sector during 1999
relates primarily to (1) profit decreases resulting from estimated cost
increases on certain satellite and advanced space launch vehicle contracts
principally occurring in the fourth quarter of 1999, (2) a change in the mix of
satellite products sold (with an increasing contribution from lower margin
geosynchronous satellites that contain a significant amount of lower margin,
external subcontract effort) beginning in late 1998, (3) the write-down in 1999
of capitalized software costs and inventory relating to a commercial airline
navigation and communication system, and (4) lower margins for work performed on
contracts acquired in the Robotics acquisition in early 1999. Gross margins in
this sector were relatively level from 1997 to 1998. During the fourth quarter
of 1997, the company recognized contract costs of approximately $5,000,000
related to increases in estimates to complete certain space launch vehicle and
satellite contracts.
Gross margins for satellite ground systems, space robotics, mapping and
land information services generally decreased throughout the period, primarily
as a result of sales of lower margin land information e-commerce products and
services and an increase in the amount of lower margin, subcontract work on
several ground systems contracts. During 1998 and 1997, the company recognized
increases in gross margin of $1,902,000 and $2,647,000, respectively, related to
the write-off or expiration of certain Canadian development loans no longer
required or not expected to be repaid.
Satellite Access Products. Gross profit margins for satellite access
products were $37,984,000 (or 35% of sector revenues), $27,712,000 (or 27% of
sector revenues), and $15,038,000 (or 27% of sector revenues) for 1999, 1998 and
1997, respectively. The increase in gross margins in 1999 is primarily due to
increased inventory obsolescence charges taken in 1998, offset in part by higher
margins on precision products acquired from Ashtech. Gross margins in this
sector included only lower margin Magellan consumer product sales in 1997.
During 1998 and 1997, our Magellan subsidiary recognized approximately
$12,500,000 and $500,000, respectively, of charges for inventory obsolescence
relating to consumer navigation products.
Satellite Services. This sector had gross margins (losses) of $5,151,000
(or 33% of sector revenues), $2,000 (or less than 1% of sector revenues) and
$(211,000) in 1999, 1998 and 1997, respectively. The improvement in 1999 gross
margins is primarily attributable to consolidation of RSI's operations in 1999
as discussed above.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses represent Orbital's self-funded product
development activities, and exclude direct customer-funded development. Research
and development expenses for 1999, 1998 and 1997 were $43,013,000 (or 5% of
revenues), $49,384,000 (or 7% of revenues) and $33,140,000 (or 6% of revenues),
respectively. Research and development expenses relate primarily to the
development of new or improved satellite access products, improved launch
vehicles and new satellite initiatives. The significant increase in research and
development in 1998 is primarily attributable to research and development
spending in that year for satellite navigation products that were released in
1999 and transportation management systems.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the costs of marketing, advertising, promotional
and other selling expenses as well as the costs of our finance, legal,
administrative and general management functions. Selling, general and
administrative expenses were $121,720,000 (or 14% of revenues), $106,812,000 (or
15% of revenues) and $88,148,000 (or 16% of revenues) in 1999, 1998 and 1997,
respectively. In the fourth quarter of 1997, we recognized increases in
allowances for receivables related to a certain satellite construction contract
of approximately $3,000,000. The increase in the dollar amounts of selling,
general and administrative expenses throughout the period is due to significant
expansion of our business as a result of acquisitions of various product lines
and businesses.
ASSET IMPAIRMENTS AND WRITE DOWNS
In December 1999, we determined that the carrying value of a specialized
voice communication satellite system would no longer be recoverable through the
expected future sales of the related products or services. We recorded an asset
impairment charge with respect to this asset in the amount of $15,217,000 in the
fourth quarter of 1999.
In addition, a commercial airline navigation and communication system
experienced cancellation of the sole customer sales contract in the fourth
quarter of 1999. This cancellation reduced the probability of recovering the
cost of the related capitalized software and inventory through future sales. The
total carrying value of the software and inventory in the amount of $14,820,000
was recognized as a component of cost of goods sold in the fourth quarter of
1999.
GAIN ON ISSUANCE OF SUBSIDIARY STOCK
In December 1999, MDA issued common stock in a private placement, and
immediately provided a dividend to us of the $75,000,000 in gross proceeds,
resulting in a one-time gain of approximately $62,282,000 ($58,610,000 net of
taxes, fees and expenses).
NET INVESTMENT INCOME (EXPENSE)
Net investment income (expense) was ($22,914,000), ($1,279,000) and
($990,000) for 1999, 1998 and 1997, respectively. Investment income (expense)
includes interest earnings on short-term investments and realized gains and
losses on investments, net of interest expense. Interest expense, net of
interest capitalized, was $27,843,000 in 1999 and $8,886,000 and $2,894,000 in
1998 and 1997, respectively. Capitalized interest was $3,083,000, $11,638,000
and $7,257,000 in 1999, 1998 and 1997, respectively. Interest expense increased
in 1999 primarily due to an increase in debt outstanding and because we stopped
capitalizing interest on our investment in ORBCOMM as that affiliate began its
planned commercial operations.
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES
Equity in earnings (losses) of affiliates was ($99,550,000) in 1999 and was
($76,815,000) and ($25,094,000) in 1998 and 1997, respectively. These amounts
primarily include our proportionate share of the current period earnings and
losses of our noncontrolled and unconsolidated affiliates (ORBCOMM, ORBIMAGE,
CCI and Navigation Solutions), preferred dividends and beneficial conversion
rights to other investors in ORBIMAGE and the elimination of our proportionate
share of profits, when appropriate, on sales to these affiliates.
Equity losses increased in 1999 and 1998 as compared to 1997 primarily due
to an increase in ORBCOMM's and ORBIMAGE's losses. ORBCOMM's losses increased
due to (i) higher operating expenses relating to the rollout of global
commercial services, (ii) increased interest expense, and (iii) increased system
depreciation expense. ORBCOMM stopped capitalizing interest and began
depreciating its full satellite constellation in the fourth quarter of 1998.
ORBIMAGE's losses also increased during the period as a result of the
commencement of commercial services in 1997 and the subsequent increase in
operating costs in anticipation of the planned introduction of new services in
2001.
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NON-CONTROLLING INTERESTS IN (EARNINGS) LOSSES OF CONSOLIDATED SUBSIDIARIES
Non-controlling interests in (earnings) losses of consolidated subsidiaries
were $9,559,000, $14,112,000 and $2,638,000 in 1999, 1998 and 1997,
respectively. These amounts represent the non-controlling stockholders'
proportionate share of ORBCOMM USA's and Magellan's and, beginning in December
1999, MDA's, current period earnings and losses.
PROVISION FOR INCOME TAXES
We recorded an income tax provision of $11,104,000, $5,216,000 and
$12,933,000 in 1999, 1998 and 1997, respectively, primarily as a result of
foreign taxes attributable to our Canadian operations. The 1999 tax provision
included a one-time charge of $3,672,000 related to the sale of MDA's common
stock. The 1997 tax provision includes a deferred tax provision of approximately
$10,898,000 relating to the ORBIMAGE preferred stock transaction in 1997. At
December 31, 1999, we had provided a valuation allowance against our net
deferred tax assets of approximately $150,844,000. Valuation allowances are used
to reduce net deferred tax assets to the amount considered more likely than not
to be realized. Changes in estimates of future taxable income can materially
change the amount of such valuation allowances.
NET LOSS
Our consolidated net loss in 1999, 1998 and 1997 was $121,937,000,
$56,552,000 and $11,405,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our growth has required, and continues to require, substantial capital to
fund investments in affiliates, business acquisitions, expanding working capital
needs, new business initiatives, research and development and capital
expenditures. We have funded these requirements to date through cash generated
by operations, working capital, loan facilities, asset-based financings, joint
venture arrangements and private and public equity and debt offerings of Orbital
and its subsidiaries. Our liquidity has been constrained primarily as a result
of our inability to access capital markets pending completion of the restatement
of our financial statements. (See Note 2A to the consolidated financial
statements.) In addition, we agreed to a permanent reduction in the outstanding
amount under our primary credit facility in the fourth quarter of 1999 and we
cannot borrow additional funds under such facility.
We expect that our capital requirements for our operations for 2000 will be
provided by cash from operations combined with cash on hand. To satisfy our
additional capital requirements, including potential investments in ORBIMAGE and
required repayment of debt, management's plans include the possibility of
raising additional equity and/or debt capital, sales of certain assets and
restructuring or refinancing of our credit facility. Management expects that
such plans will generate sufficient additional liquidity to satisfy these
required obligations.
We also expect to pursue certain additional investments and/or acquisitions
during 2000. Such plans would likely require that we raise additional capital or
otherwise generate sufficient capital by sale of certain assets. No assurance
can be given that we will be successful in completing additional investments or
acquisitions or new equity or debt financings or asset sales.
Cash and investments were $109,154,000 and total debt obligations were
$370,745,000 at December 31, 1999. The outstanding debt is comprised primarily
of our $100,000,000 convertible 5% subordinated notes due in 2002, advances
under several credit facilities, secured and unsecured notes, and asset-based
financings. Cash and investments at December 31, 1999 included approximately
$17,041,000 restricted to support bank covenants and outstanding letters of
credit. Our current ratio was 0.9 and 1.2 at December 31, 1999 and 1998,
respectively. Our ratio of total debt less cash and investments to total debt
plus total stockholders' equity was approximately 38% at December 31, 1999 as
compared to 29% at December 31, 1998.
Our primary credit facility provides for total borrowings from an
international syndicate of banks of up to $165,000,000, all of which was drawn
and outstanding as of December 31, 1999 at a weighted average interest
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rate of 9.96%. These borrowings are collateralized by accounts receivable,
intellectual property and certain other assets, including the stock of our
wholly owned subsidiaries and MDA. The facility prohibits the payment of cash
dividends, contains certain covenants with respect to our working capital
levels, fixed charges ratio, leverage ratio and net worth, and expires in
December 2002. We amended this facility several times in 1999 to waive
noncompliance with certain financial covenants and to amend other covenants
(including with respect to net worth, leverage and fixed charges). We also
permanently reduced the total amount available under the facility from an
original $200,000,000 to the current level of $165,000,000. In April 2000, we
signed an amendment that waived noncompliance with certain covenants for all
periods prior to the amendment date, and established new covenant levels for
2000 for net worth, leverage (including senior leverage), fixed charges, capital
expenditures, and subsidiary debt. We also agreed with our banks to further
reduce the total amount that is available under the facility on August 1, 2000
by either (i) an additional $40,000,000 if we and the banks restructure the
facility by May 31, 2000 or (ii) by an additional $60,000,000 if we are
unsuccessful in restructuring the facility by that date. We are required to
apply toward this reduction 50% of the net cash proceeds that we receive from
any equity offering, asset sale or debt issuance by us or our domestic wholly
owned subsidiaries. In addition, we agreed to further reduce the facility to
$85,000,000 by July 2001.
We issued $46,000,000 of new debt in 1999 related to various business
acquisitions (See Note 6 to the consolidated financial statements). We also
issued additional equity at MDA for net proceeds of $73,432,000.
During 1999, we provided $44,500,000 in capital to ORBCOMM. Based on our
January agreement with Teleglobe, we are no longer obligated to provide
additional capital to ORBCOMM. (See Recent Developments). ORBCOMM will require
additional funding in 2000, and we understand that ORBCOMM and Teleglobe are
currently analyzing different capital raising and funding alternatives,
including continued capital contributions from Teleglobe and/or obtaining
additional equity participants.
In addition to our investment in ORBCOMM, in 1999 we invested approximately
$22,000,000 in Navigation Solutions, $47,866,000 in business and other asset
acquisitions and $55,648,000 in capital expenditures for various satellite,
launch vehicle and other infrastructure production, manufacturing and test
equipment, leasehold improvements and office equipment. Our operations provided
net cash of approximately $30,058,000 during 1999.
Finally, we had a contingent commitment to provide additional equity
financing to ORBIMAGE in the amount of up to $25,000,000 (which amount was
reduced in March 2000 to $12,500,000) based on ORBIMAGE's cash requirements. In
addition to our committed amount, ORBIMAGE will require additional funding in
2000 and is currently analyzing different capital raising and funding
alternatives, including drawing on Orbital's contingent commitment and/or
obtaining additional equity and debt capital.
We are expanding our offices and satellite-related engineering,
manufacturing and operations facilities adjacent to our Northern Virginia
corporate headquarters in order to consolidate certain operational facilities
and office space and provide for future growth. Construction has commenced and
is expected to continue into 2001. To finance the majority of this expansion, we
have negotiated a built-to-suit agreement with a developer for the office
expansion. We are actively pursuing third-party financing for the engineering,
manufacturing and operating facilities.
OUTLOOK: ISSUES AND UNCERTAINTIES
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor, in certain circumstances, for certain forward-looking statements made by
or on behalf of Orbital. Orbital and its representatives may from time to time
make written or verbal forward-looking statements, including statements
contained in our filings with the Securities and Exchange Commission and in the
report to stockholders. All statements that address operating performance,
events or developments that we expect or anticipate will occur in the future,
including statements relating to our sales and earnings growth, statements
expressing general optimism about future operating results, statements relating
to our liquidity and future financing plans and statements relating to our
belief about the outcome of pending litigation are forward-looking statements.
The forward-looking statements
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are and will be based on management's then-current views and assumptions
regarding future events and operating performance.
The following are some of the factors that could cause actual results to
differ materially from information contained in our forward-looking statements:
Most of the products we and our affiliates develop and manufacture are
technologically advanced and sometimes novel systems that must function under
demanding operating conditions and are subject to significant technological
change and innovation. We have experienced product failures or other operational
problems. In addition to any costs resulting from product warranties or required
remedial action, product failures may result in increased costs or loss of
revenues due to postponement or cancellation of subsequently scheduled
operations or product deliveries.
Our financial performance generally, as well as the recoverability of our
investments in ORBCOMM and ORBIMAGE and any other company in which we make a
strategic investment, and investments that we make in the development of new
technologies for new products or existing product enhancements, depend on
several factors including, among other things, the successful and timely funding
and implementation of innovative and novel technologies involving complex
systems in a cost-effective manner, the establishment and expansion of
commercial markets and customer acceptance, competition and such entities'
ability to raise necessary capital. If we conclude at any time that our
investments are not recoverable, we may be required to write off part or all of
such investments. In 1999, we wrote off our investment in CCI.
Historically, we have made strategic acquisitions of businesses, and we
routinely evaluate potential acquisition candidates that we believe would
enhance our business. We have also historically pursued strategic alliances
through joint ventures, and we routinely evaluate similar opportunities. Such
transactions commonly involve certain risks including, among others,
assimilating the acquired operations, technologies and personnel and maintaining
appropriate standards, controls, procedures and policies, entering markets in
which we have little or no direct prior experience, potential exposure to claims
and liabilities relating to the acquired company, potentially losing key
employees of acquired organizations, the diversion of management attention from
other ongoing business concerns and resolving potential disputes with joint
venture partners and/or other investors.
We have recently entered into certain transactions in which we have reduced
our ability to control the management and operations of certain subsidiaries and
affiliates. Our diminished ability to control such entities could result in
financial or operating decisions regarding such entities being made that are
contrary to Orbital's interests.
Our growth has required, and continues to require, substantial capital to
fund investments in affiliates, business acquisitions, expanding working capital
needs, new business initiatives, research and development and capital
expenditures. Recently, our liquidity has been constrained primarily as a result
of our inability to raise capital due to the pending completion of the
restatement of our financial statements. In addition, we agreed to a permanent
reduction in the outstanding amount under our primary credit facility in the
fourth quarter of 1999, and we cannot borrow additional funds under such
facility. To satisfy our capital requirements beyond our operations, including
required repayments under the credit facility, we will need to raise additional
equity and/or debt capital and we are considering sales of non-core assets. Our
inability to raise additional capital or to restructure our credit facility
could have a material adverse effect on our business.
At December 31, 1999, approximately 20% of our total firm contract backlog
was derived from contracts with the U.S. government and its agencies or from
subcontracts with prime contractors to the U.S. government. Most of our
government contracts are funded incrementally on a year-to-year basis. Changes
in government policies, priorities or funding levels through agency or program
budget reductions by the U.S. Congress or executive agencies could materially
adversely affect our financial condition or results of operations. Furthermore,
contracts with the U.S. government may be terminated or suspended by the U.S.
government at any time, with or without cause. Such contract suspensions or
terminations could result in unreimbursable expenses or charges or otherwise
adversely affect our business.
24
27
The accuracy and appropriateness of our direct and indirect costs and
expenses under our contracts with the U.S. government are subject to extensive
regulation and audit by the Defense Contract Audit Agency or by other
appropriate agencies of the U.S. government. These agencies have the right to
challenge our cost estimates or allocations with respect to any such contract. A
substantial portion of payments to us under U.S. government contracts are
provisional payments that are subject to potential adjustment upon audit by such
agencies.
The majority of our contracts, particularly for our space and ground
infrastructure systems, are long-term contracts. We recognize revenues on
long-term contracts using the percentage of completion method of accounting,
whereby revenue, and therefore profit, is recognized based on actual costs
incurred in relation to total estimated costs to complete the contract or based
on specific delivery terms and conditions. Revenue recognition and
profitability, if any, from a particular contract may be adversely affected to
the extent that original cost estimates, estimated costs to complete or
incentive or award fee estimates are revised, delivery schedules are delayed, or
progress under a contract is otherwise impeded.
The costs and other effects of pending or possible litigation or
governmental investigations could have an adverse effect on our business and
could divert the attention of management from ongoing business matters.
Virtually all our products and services face significant competition from
existing competitors, many of whom are larger and have substantially greater
resources than we do. Furthermore, the possibility exists that other domestic or
foreign companies or governments will seek to produce products or services that
compete with our products or services. A foreign competitor could benefit from
subsidies from, or other protective measures by, its home country.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company does not have any material exposure to interest rate changes,
commodity price changes, foreign currency fluctuation, or similar market risks,
although we do enter into forward exchange contracts to hedge against specific
foreign currency fluctuations, principally with respect to the Canadian dollar
and Japanese yen. At December 31, 1999, the majority of the company's long-term
debt consisted of its $100,000,000 convertible 5% subordinated notes due 2002.
The fair market value of these convertible securities fluctuates with the
company's stock price, and was $85,265,000 at December 31, 1999.
The company enters into forward exchange contracts in an effort to hedge
against foreign currency fluctuations on certain receivables and payables
denominated in foreign currencies. Accordingly, Orbital is subject to
off-balance sheet market risk for the possibility that future changes in market
prices may make the forward exchange contracts less valuable. The following
table summarizes at December 31, 1999, outstanding foreign exchange contracts to
sell (purchase) foreign currencies, along with current market values:
CURRENCIES CURRENT UNREALIZED
FOREIGN CURRENCY HEDGED HEDGED CONTRACT MARKET GAIN
(U.S. DOLLARS, IN THOUSANDS) AGAINST AMOUNT VALUE (LOSS)
---------------------------- ------------- -------- ------- ----------
Australian Dollars......................................... CD $ 155 $ 156 $ 1
European Currency Units.................................... PS 37 40 3
EURO....................................................... CD 1,070 1,154 84
Pounds Sterling............................................ CD (275) (284) (9)
Norwegian Kroner........................................... CD 687 713 26
U.S. Dollars............................................... CD 10,921 10,975 54
Japanese Yen............................................... US 41,177 38,412 (2,765)
- ---------------
CD -- Canadian Dollars
PS -- Pounds Sterling
US -- US Dollars
25
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Accountants.......................... 27
Consolidated Statements of Operations....................... 30
Consolidated Balance Sheets................................. 31
Consolidated Statements of Stockholders' Equity............. 32
Consolidated Statements of Cash Flows....................... 33
Notes to Consolidated Financial Statements.................. 34
26
29
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of Orbital Sciences Corporation:
In our opinion, based on our audit and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of operations, changes in stockholders' equity and cash flows present fairly, in
all material respects, the financial position of Orbital Sciences Corporation
and its subsidiaries at December 31, 1999, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We did not
audit the financial statements of Orbital Communications Corporation, a majority
owned subsidiary, which statements reflect total assets of $31,539,000 as of
December 31, 1999, and equity in net losses of affiliates of $69,914,000 and
total revenues of $2,126,000 for the year ended December 31, 1999. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Orbital Communications Corporation, is based solely on the
report of the other auditors. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit and the report of
other auditors provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
April 17, 2000
27
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Orbital Communications
Corporation:
We have audited the consolidated balance sheet of Orbital Communications
Corporation (the "Company") as of December 31, 1999, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Company as of December 31, 1998 and
for each of the two years in the period then ended, were audited by other
auditors whose report dated February 16, 1999, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above (not
presented separately herein) present fairly, in all material respects, the
financial position of Orbital Communications Corporation as of December 31,
1999, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States.
Arthur Andersen LLP
Vienna, Virginia
February 3, 2000
28
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Orbital Sciences Corporation:
We have audited the accompanying consolidated balance sheet of Orbital Sciences
Corporation and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Orbital Sciences
Corporation and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in note 2A, the accompanying consolidated balance sheet as of
December 31, 1998, and the consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the two-year period ended
December 31, 1998 have been restated.
KPMG LLP
Washington, D.C.
February 16, 1999, except as to note 2A
which is as of April 17, 2000
29
32
ORBITAL SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
(RESTATED) (RESTATED)
Revenues.............................................. $ 874,911 $ 730,662 $ 546,008
Costs of goods sold................................... 738,526 549,628 413,361
----------- ----------- -----------
Gross profit.......................................... 136,385 181,034 132,647
Research and development expenses..................... 43,013 49,384 33,140
Selling, general and administrative expenses.......... 121,720 106,812 88,148
Amortization of goodwill.............................. 13,274 9,713 3,852
Asset impairment charges.............................. 17,027 2,479 --
----------- ----------- -----------
Income (loss) from operations......................... (58,649) 12,646 7,507
Net investment income (expense), (net of interest
expense of $27,843, $8,886 and $2,894,
respectively)....................................... (22,914) (1,279) (990)
Equity in earnings (losses) of affiliates............. (99,550) (76,815) (25,094)
Non-controlling interests in (earnings) losses of
consolidated subsidiaries........................... 9,559 14,112 2,638
Gain on issuance of subsidiary equity................. 62,282 -- 21,810
Acquisition expenses.................................. (1,561) -- (4,343)
----------- ----------- -----------
Income (loss) before provision for income taxes....... (110,833) (51,336) 1,528
Provision for income taxes............................ 11,104 5,216 12,933
----------- ----------- -----------
Net loss.............................................. $ (121,937) $ (56,552) $ (11,405)
=========== =========== ===========
Net loss per common and dilutive share................ $ (3.27) $ (1.59) $ (0.35)
=========== =========== ===========
Shares used in computing net loss per common and
dilutive share...................................... 37,281,065 35,624,888 32,283,138
=========== =========== ===========
See accompanying notes to consolidated financial statements.
30
33
ORBITAL SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(RESTATED)
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 74,524 $ 15,268
Restricted cash and short-term investments, at
market................................................ 34,630 7,922
Receivables, net....................................... 295,315 215,110
Inventories, net....................................... 54,483 58,141
Deferred income taxes and other current assets......... 17,187 7,686
---------- ---------
Total current assets.............................. 476,139 304,127
---------- ---------
Property, plant and equipment, at cost, less accumulated
depreciation and amortization of $122,129 and $99,839,
respectively.............................................. 137,622 139,401
Investments in and advances to affiliates, net.............. 141,273 199,267
Goodwill, less accumulated amortization of $42,515 and
$28,744, respectively..................................... 278,309 227,351
Deferred income taxes and other assets, less accumulated
amortization of $2,520 in 1999............................ 59,569 25,046
---------- ---------
TOTAL ASSETS...................................... $1,092,912 $ 895,192
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term
obligations........................................... $ 131,073 $ 26,814
Accounts payable....................................... 83,566 39,095
Accrued expenses....................................... 138,613 108,488
Due to joint venture partner........................... 28,418 --
Deferred revenues...................................... 133,499 76,678
---------- ---------
Total current liabilities......................... 515,169 251,075
---------- ---------
Due to joint venture partner................................ -- 26,829
Long-term obligations, net of current portion............... 239,672 181,281
Other liabilities........................................... 16,208 3,007
---------- ---------
Total liabilities................................. 771,049 462,192
---------- ---------
Non-controlling interests in net assets of consolidated
subsidiaries.............................................. 15,071 13,648
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, par value $.01; 10,000,000 shares
authorized: none outstanding.......................... -- --
Common Stock, par value $.01; 80,000,000 shares
authorized, 37,400,814 and 37,018,256 shares
outstanding, respectively............................. 374 370
Additional paid-in capital............................. 497,923 490,540
Accumulated other comprehensive loss................... (5,159) (7,149)
Accumulated deficit.................................... (186,346) (64,409)
---------- ---------
Total stockholders' equity........................ 306,792 419,352
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,092,912 $ 895,192
========== =========
See accompanying notes to consolidated financial statements.
31
34
ORBITAL SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER RETAINED
------------------- PAID-IN- COMPREHENSIVE EARNINGS
SHARES AMOUNT CAPITAL LOSS (DEFICIT) TOTAL
---------- ------ ---------- ------------- ---------- ---------
Balance, December 31, 1996
(restated)............... 32,160,598 $322 $323,592 $(3,667) $ 3,548 $ 323,795
Shares issued to
employees and
directors............. 321,121 3 2,595 -- -- 2,598
Comprehensive income:
Net loss.............. -- -- -- -- (11,405) (11,405)
Translation
adjustment.......... -- -- -- (1,262) -- (1,262)
Unrealized gains on
short-term
investments......... -- -- -- 258 -- 258
---------
Total comprehensive
income (loss)......... (12,409)
---------- ---- -------- ------- ---------- ---------
Balance, December 31, 1997
(restated)............... 32,481,719 325 326,187 (4,671) (7,857) 313,984
Shares issued in equity
offering.............. 3,450,000 34 150,118 -- -- 150,152
Shares issued to
employees and
directors............. 1,086,537 11 14,235 -- -- 14,246
Comprehensive income:
Net loss.............. -- -- -- -- (56,552) (56,552)
Translation
adjustment.......... -- -- -- (2,282) -- (2,282)
Unrealized losses on
short-term
investments......... -- -- -- (196) -- (196)
---------
Total comprehensive
income (loss)......... (59,030)
---------- ---- -------- ------- ---------- ---------
Balance, December 31, 1998
(restated)............... 37,018,256 $370 490,540 (7,149) (64,409) 419,352
Shares issued to
employees and
directors............. 382,558 4 7,383 7,387
Comprehensive income:
Net loss.............. (121,937) (121,937)
Translation
adjustment.......... 1,990 1,990
---------
Total comprehensive
income (loss)......... (119,947)
---------- ---- -------- ------- ---------- ---------
Balance, December 31,
1999..................... 37,400,814 $374 $497,923 $(5,159) $ (186,346) $ 306,792
========== ==== ======== ======= ========== =========
See accompanying notes to consolidated financial statements.
32
35
ORBITAL SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(RESTATED) (RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (121,937) $ (56,552) $ (11,405)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization expenses........... 51,432 31,006 24,286
Amortization of prepaid financing costs.......... 2,227 265 267
Equity in losses of affiliates................... 99,550 76,815 25,094
Non-controlling interests in losses of
consolidated subsidiaries...................... (9,559) (14,112) (2,638)
Loss (gain) on sale of fixed assets and
investments and issuances of subsidiary
equity......................................... (32,221) (576) (21,810)
Deferred income taxes............................ (8,936) 3,822 11,650
Changes in assets and liabilities net of businesses
acquired:
(Increase) decrease in receivables............... 1,153 (27,014) (16,863)
(Increase) decrease in inventories............... 3,763 3,362 (26,602)
(Increase) decrease in other assets.............. (25,363) (9,002) (7,903)
Decrease in accounts payable and accrued
expenses....................................... 55,941 8,946 (17,144)
Increase (decrease) in deferred revenue.......... 14,928 (15,347) 35,338
Increase (decrease) in other liabilities......... (920) (1,305) (13,151)
----------- ----------- -----------
Net cash provided by (used in) operating
activities................................ 30,058 308 (20,881)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................ (55,648) (36,294) (37,200)
Payments for business combinations, net of cash
acquired......................................... (33,860) (22,751) (66,558)
Purchase of other assets............................ (14,006) -- --
Proceeds from sales of assets....................... -- -- 34,682
Net proceeds from sale of subsidiary equity......... 73,432 -- --
Purchases of available-for-sale investment
securities....................................... (10,912) (2,500) (25,328)
Sales of available-for-sale investment securities... -- -- 22,209
Maturities of available-for-sale investment
securities....................................... 9,025 2,409 6,631
Investments in and advances to affiliates........... (65,060) (101,700) (75,564)
----------- ----------- -----------
Net cash used in investing activities....... (97,029) (160,836) (141,128)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net of (repayments).......... 338 1,940 (3,700)
Principal payments on long-term obligations......... (125,813) (79,556) (20,237)
Net proceeds from issuances of long-term
obligations...................................... 241,342 63,000 163,078
Net proceeds from issuances of common stock......... 7,387 164,398 2,598
Advances from joint venture partner................. -- 21,829 --
----------- ----------- -----------
Net cash provided by financing activities... 123,254 171,611 141,739
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS......................................... 2,973 (2,206) (1,262)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... 59,256 8,877 (21,532)
CASH AND CASH EQUIVALENTS, beginning of period........ 15,268 6,391 27,923
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period.............. $ 74,524 $ 15,268 $ 6,391
=========== =========== ===========
See accompanying notes to consolidated financial statements.
33
36
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Orbital Sciences Corporation (together with its subsidiaries, "Orbital" or
the "company"), a Delaware corporation, is a space and information systems
company that designs, manufactures, operates and markets a broad range of
affordable space infrastructure systems, satellite access products and satellite
services, including satellites and other space systems, launch vehicles,
electronics and sensors, satellite ground systems and software, satellite-based
navigation and communications products, and satellite-delivered communications,
earth imaging and other information services.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Orbital, all
wholly and partially owned subsidiaries controlled by Orbital, and partnerships
in which Orbital directly or indirectly controls the general partner interests.
The consolidated financial statements do not include the accounts of affiliates
that the company does not control, including ORBCOMM, ORBIMAGE, Navigation
Solutions and CCI. All material transactions and accounts among consolidated
entities have been eliminated in consolidation.
PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of consolidated financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Management periodically assesses and evaluates the
sufficiency and/or deficiency of estimated liabilities recorded for various
programmatic risks and uncertainties. Actual results could differ from these
estimates.
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 financial statement presentation. All
financial amounts are stated in U.S. dollars unless otherwise indicated.
REVENUE RECOGNITION
Orbital recognizes revenues on long-term contracts using the
percentage-of-completion method of accounting. Accordingly, (i) revenues on
cost-plus-fee contracts are recognized to the extent of costs incurred plus a
proportionate amount of fee earned, and (ii) revenues on fixed-price contracts
are recognized based on costs incurred in relation to total estimated costs, or
based on specific delivery terms and conditions. To the extent that estimated
costs of completion are adjusted, revenue and profit recognized from a
particular contract will be affected in the period of the adjustment.
Anticipated contract losses are recognized as they become known. Fees under
certain long-term contracts may be increased or decreased in accordance with
cost or performance incentive provisions which measure actual performance
against established targets or other criteria. Such incentive fee awards or
penalties are included in revenues at the time the amounts can be determined
reasonably.
Revenues from sales of satellite access products and satellite services are
generally recognized when the product is shipped or the service is performed.
Revenues from the sale of satellite access products under agreements that
provide the customer with certain post-contract support or other services are
recorded in accordance with Statement of Position No. 97-2, "Software Revenue
Recognition," as amended ("SOP 97-2"). Revenues are recognized upon shipment of
the product when evidence of an arrangement exists, delivery has occurred, the
fee is fixed and determinable and collectibility is probable. When unspecified
and undelivered post-contract support obligations exist and the fair value of
such element cannot be determined, revenue is deferred and recognized over the
life of the agreement.
34
37
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
The company's comprehensive income (loss) is presented in the consolidated
statements of stockholders' equity. Other comprehensive income (loss) consists
primarily of foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities.
FOREIGN CURRENCY TRANSACTIONS
Orbital's operating entities conduct business in a number of countries and
deal in a number of foreign currencies. The financial results of foreign
operations are translated into U.S. dollars using year-end exchange rates for
assets and liabilities and using weighted average exchange rates for revenues,
expenses, gains and losses.
Gains and losses arising from the translation of the functional currency to
the U.S. dollar relating to foreign operations that are self-contained and
integrated within a particular country or economic environment are recognized as
a component of accumulated other comprehensive income (loss) in stockholders'
equity until there is a realized reduction in Orbital's net investment in the
foreign operation. Transaction gains and losses relating to foreign operations
that are a direct and integral component or extension of Orbital's domestic
operations, and therefore are dependent on the U.S. dollar, are reported
currently as a component of net income (loss).
Orbital enters into forward exchange contracts to hedge against foreign
currency fluctuations on certain receivables and payables. Gains and losses on
contracts to hedge specific foreign currency commitments are deferred and
accounted for as part of the underlying transaction.
RESEARCH AND DEVELOPMENT
Research and development expenses include self-funded product development
activities and exclude direct customer-funded development and are expensed as
incurred. Research and development expenses are allocated, when appropriate, to
U.S. government contracts under government-mandated cost accounting standards.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation and
amortization are provided using the straight-line method as follows:
Buildings................................ 18 to 20 years
Machinery, equipment, software and
intellectual property.................. 3 to 12 years
Satellite systems........................ 5 to 7 years
Shorter of estimated useful life or lease
Leasehold improvements................... term
RECOVERABILITY OF LONG-LIVED ASSETS
Orbital's policy is to review its long-lived assets, including goodwill,
investments in and advances to affiliates, self-constructed assets, internally
developed software and specialized equipment used to support specific
space-related products, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of the asset;
the amount of the impairment is measured as the difference between the asset's
estimated fair value and its book value. The Company recognized approximately
$17,027,000 and $2,479,000 of impairment charges in 1999 and 1998,
35
38
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
respectively. Given the inherent technical and commercial risks within the space
industry, it is possible that the company's current expectation that it will
recover the carrying amount of its long-lived assets from future operations may
change.
INCOME TAXES
The company recognizes income taxes, foreign and domestic, using the asset
and liability method. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a tax rate change on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment
date. Valuation allowances are used to reduce net deferred tax assets to the
amount considered more likely than not to be realized. Changes in estimates of
future taxable income can materially change the amount of such valuation
allowances.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires companies to (i) recognize as
expense the fair value of all stock-based awards on the date of grant, or (ii)
continue to apply the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issues to Employees" ("APB 25") and provide pro forma net
income (loss) and pro forma earnings (loss) per share disclosures for employee
stock option grants as if the fair-value-based method defined in SFAS 123 had
been applied. The company elected to continue to apply the provisions of APB 25
and provide the pro forma disclosure in accordance with the provisions of SFAS
123.
EARNINGS PER SHARE
Net income (loss) per common share is calculated using the weighted average
number of common shares outstanding during the periods. Net income (loss) per
common share assuming dilution is calculated using the weighted average number
of common shares and dilutive common equivalent shares outstanding during the
periods, plus the effects of an assumed conversion of the company's convertible
notes if dilutive, after giving effect to all net income (loss) adjustments that
would result from the assumed conversion.
In periods of net loss, the assumed conversion of convertible notes and
stock options are anti-dilutive. Assuming conversion of convertible notes and
the dilutive impact of outstanding stock options, diluted shares would have been
41,599,939 for 1999, 40,336,587 for 1998 and 33,980,747 for 1997.
CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Orbital considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Restricted cash consists of
compensating cash balances for contractual obligations. Investments in
securities that do not meet the definition of cash equivalents are classified as
short-term investments. Orbital classifies investments in debt and equity
securities as either available-for-sale or trading securities and, accordingly,
records such investments at fair value. Any temporary excess (deficiency) of
fair value over (under) the underlying cost of the available-for-sale securities
is excluded from current period earnings and is reported as a component of
accumulated other comprehensive income (loss) in stockholders' equity. Temporary
excess (deficiency) of fair value over (under) the underlying cost of trading
securities is included in net investment income.
36
39
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INVENTORIES
Inventories consist of components and raw materials inventory,
work-in-process inventory and finished goods inventory and are generally stated
at the lower of cost or net realizable value on a first-in, first-out ("FIFO")
or specific identification basis. Components and raw materials are purchased to
support future production efforts. Work-in-process inventory consists primarily
of (i) costs incurred under long-term fixed-price contracts accounted for using
the percentage-of-completion method of accounting applied on a units of delivery
basis, and (ii) partially assembled commercial products, and generally includes
direct production costs and certain allocated indirect costs (including an
allocation of general and administrative costs). Finished goods inventory
consists of fully assembled commercial products awaiting shipment.
SELF-CONSTRUCTED ASSETS AND INTERNALLY DEVELOPED SOFTWARE
The company self-constructs much of its ground and airborne support and
special test equipment used in the manufacture, production and delivery of many
of its space infrastructure products. Orbital capitalizes certain costs incurred
in constructing ground and airborne support and special test equipment and
satellite systems. Capitalized costs generally include direct construction costs
and certain allocated indirect costs, and exclude general and administrative and
research and development costs.
Orbital, pursuant to the requirements of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 86, "Accounting for the
Cost of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"),
capitalizes certain costs of developing product software once technological
feasibility has been established. Capitalized costs generally include direct
software coding costs and certain allocated indirect costs, and exclude general
and administrative and research and development costs.
INVESTMENTS IN AND ADVANCES TO AFFILIATES
The company uses the equity method of accounting for its investments in and
advances to affiliates in which the company has the ability to significantly
influence, but not control, the affiliates' operations. In accordance with the
equity method of accounting, the company's carrying amount of an investment in
an affiliate is initially recorded at cost and is increased to reflect its
proportionate share of the affiliate's income and is reduced to reflect its
proportionate share of the affiliate's losses based on the company's common
stock or partnership interest, including all preferred dividends to other
investors in such entities. For those investments for which Orbital has provided
substantially all of the investee's funding, the company uses a modified equity
method of accounting whereby 100% of the investee's current period losses are
recognized. Further, Orbital does not recognize revenues on sales to investees
for which Orbital has provided substantially all such investees' funding.
Orbital's investment is also increased to reflect contributions to, and
decreased to reflect distributions received from the affiliate. Any excess of
the amount of Orbital's investment over the amount of the underlying equity in
each affiliate's net assets is amortized in a manner similar to goodwill. The
company capitalizes interest costs on equity method investments when an
affiliate has significant assets under construction and has not yet commenced
planned principal operations. During 1999, 1998 and 1997, the company
capitalized interest on investments in and advances to affiliates of
approximately $372,000, $9,555,000 and $6,828,000, respectively. The company
uses the cost method of accounting for investments in which it has no
significant influence.
GOODWILL
The company amortizes goodwill related to business combinations on a
straight-line basis over its estimated useful life, generally 10 to 40 years.
Orbital periodically assesses and evaluates the recoverability of
37
40
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
such goodwill based on current facts and circumstances and the operational
performance of the related acquired businesses.
ISSUANCES OF SUBSIDIARY EQUITY
At times, the company may divest a portion or all of its ownership in its
subsidiaries through the issuance of additional subsidiary equity. The company
recognizes the difference between the carrying amount of its interest in the
subsidiary equity sold and the fair market value of the equity as a gain or loss
upon divestiture or issuance when the company believes the realization of the
gain or loss is assured. The company recognized gains on issuances of subsidiary
equity of $62,282,000 in 1999 and $21,810,000 in 1997. The 1999 gain related to
the sale of one-third of its equity interests in MacDonald, Dettwiler and
Associates Ltd. ("MDA"), a controlled and consolidated subsidiary. The 1997 gain
related to the issuance of additional equity by the company's controlled and
consolidated subsidiary, Magellan Corporation ("Magellan"), in connection with
its acquisition of Ashtech, Inc.
DEFERRED REVENUE
The company receives advances and program payments from customers in excess
of costs incurred on certain contracts, including contracts with the U.S.
government. These advances or program payments are classified as deferred
revenues. The company also defers revenues, as appropriate, in accordance with
SOP 97-2.
WARRANTIES
The company occasionally accepts warranty clauses in its commercial and
government contracts. In the event the company does not purchase insurance
coverage to protect itself in connection with such warranty clauses, the company
records a liability for estimated warranty claims when it determines that a
specific liability exists. The company at times provides limited warranties on
certain commercial products and accrues an estimate of expected warranty costs
based on historical experience.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (the "Commission")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in financial
statements. The company will adopt SAB 101 in 2000 and is currently evaluating
the effect such adoption will have on its results of operations.
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 which delays the effective date of
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires the
recognition of all derivatives as either assets or liabilities measured at fair
value and the disclosure of additional information regarding hedging activities.
The company will adopt SFAS 133 in 2001 and is currently evaluating the effect
such adoption will have on its results of operations.
2. RESTATEMENT MATTERS AND SPECIAL GAINS AND CHARGES
A. RESTATEMENT MATTERS
Management has determined to restate its previously issued consolidated
financial statements as of and for the years ended December 31, 1998, 1997, 1996
and 1995 with respect to its accounting treatment for the matters described
below. The following table summarizes the various adjustments by financial
statement line
38
41
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2A. RESTATEMENT MATTERS -- (CONTINUED)
items for 1998 and 1997. The net effect of the restatement of the 1996 and 1995
consolidated financial statements is presented in this table as an adjustment to
retained earnings in 1997. The impact of these and other matters on the
unaudited interim financial results for 1999 and 1998 are summarized in Note 13.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------- ---------------------------------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED ADJUSTMENTS RESTATED REPORTED ADJUSTMENTS RESTATED
------------- ----------- -------- ------------- ----------- --------
Revenues............... $734,277 $ (3,615)(c)(g) $730,662 $605,975 $(59,967)(c)(g) $546,008
Costs of goods sold.... 546,721 2,907(c)(g)(h)(j) 549,628 456,772 (43,411)(c)(g) 413,361
Research and
development
expenses............. 44,597 4,787(g) 49,384 26,355 6,785(g) 33,140
Selling, general and
administrative
expenses............. 109,727 (2,915)(g)(h) 106,812 89,502 (1,354)(c) 88,148
Goodwill
amortization......... 7,939 1,774(i) 9,713 3,852 -- 3,852
Asset impairment
charges.............. -- 2,479(k) 2,479 -- -- --
Net investment income
(expense)............ 2,567 (3,846)(d)(k) (1,279) 1,475 (2,465)(d) (990)
Equity in earnings
(losses) of
affiliates........... (45,092) (31,723)(a)(c)(e)(f)(g) (76,815) (26,034) (940)(a)(c)(e)(f) (25,094)
Non-controlling
interests in
(earnings) losses of
consolidated
subsidiaries......... 10,610 3,502(h)(i) 14,112 2,638 2,638
Gain on issuance of
subsidiary equity.... 4,793 (4,793)(b) -- 21,810 21,810
Acquisition expenses... -- -- -- (4,343) -- (4,343)
Provision for income
taxes................ 4,543 673(j) 5,216 2,035 10,898(c) 12,933
Net income (loss)...... (6,372) (56,552) 23,005 (11,405)
Net income (loss) per
common share, basic
and assuming
dilution............. (0.18) (1.59) 0.71 (0.35)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, 1998 DECEMBER 31, 1998
AS PREVIOUSLY REPORTED ADJUSTMENTS AS RESTATED
---------------------- ------------- -----------------
Receivables, net............................. $205,409 $ 9,701(c) $215,110
Inventories, net............................. 64,710 (6,569)(h) 58,141
Deferred income taxes and other current
assets..................................... 8,252 (566)(j) 7,686
Property, plant and equipment................ 157,075 (17,674)(d)(g) 139,401
Investments in and advances to affiliates.... 237,589 (38,322)(a)(b)(c)(d)(e)(f)(k) 199,267
Goodwill..................................... 228,624 (1,273)(i) 227,351
Deferred taxes and other assets.............. 35,393 (10,347)(c)(j) 25,046
Deferred revenues............................ 73,987 2,691(c)(f) 76,678
Due to joint venture partner................. -- 26,829(k) 26,829
Non-controlling interests in consolidated
subsidiaries............................... 17,150 (3,502)(h)(i) 13,648
Accumulated (earnings) deficit............... 26,888 (91,297) (64,409)
39
42
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2A. RESTATEMENT MATTERS -- (CONTINUED)
EQUITY METHOD ACCOUNTING RESTATEMENT ADJUSTMENTS
The company uses the equity method of accounting for its investments in
affiliates in which the company has the ability to significantly influence, but
not control, such affiliates' operations. Accordingly, Orbital uses the equity
method of accounting for its investments in ORBIMAGE, ORBCOMM and CCI.
(a) As a result of certain participating rights granted to holders of
convertible preferred stock of ORBIMAGE, Orbital significantly influences,
but does not control, ORBIMAGE even though it owns substantially all of
ORBIMAGE's outstanding common stock. The company's prior consolidated
financial statements reflected the company's application of the equity
method of accounting as it pertained to ORBIMAGE based on Orbital's
percentage share of ownership of ORBIMAGE calculated to give effect to the
assumed conversion of ORBIMAGE's outstanding convertible preferred stock
into ORBIMAGE common stock. As reflected in its restated consolidated
financial statements presented herein, the company applies the equity method
of accounting as it pertains to ORBIMAGE based on its ownership of
outstanding common stock without giving effect to the assumed conversion of
ORBIMAGE's outstanding convertible preferred stock. The effect of these
revisions is to increase equity in losses of affiliates in 1998 and 1997 by
$8,519,000 and $698,000, respectively.
In the first quarter of 1998, pursuant to rights granted under a 1997 stock
purchase agreement, ORBIMAGE's minority investors acquired 227,295 shares of
ORBIMAGE's convertible preferred stock for total consideration of
$22,729,500. ORBIMAGE's convertible preferred stock is convertible into
ORBIMAGE's common stock based on a per common share price that was less than
the fair value of ORBIMAGE's common stock when the additional preferred
shares were acquired in 1998. Previously, the company's financial statements
did not give effect to any beneficial conversion discount as an additional
net loss allocable to the company pursuant to the equity method of
accounting. As reflected in the restated consolidated financial statements
presented herein, Orbital calculates its equity in losses of affiliates
including the impact of the beneficial conversion. The effect of these
revisions is to increase equity in losses of affiliates in 1998 by
$13,695,000.
ORBIMAGE's preferred stockholders are entitled to receive a cumulative
dividend, payable either in cash or in additional shares of convertible
preferred stock. To date all dividends have been paid in additional shares
of convertible preferred stock. Previously, the company's consolidated
financial statements did not reflect additional net losses allocable to
Orbital as a result of ORBIMAGE's declaration of such "in-kind" dividends on
its convertible preferred stock. As reflected in the restated consolidated
financial statements presented herein, Orbital calculates its equity in
losses of affiliates taking into account such non-cash dividends at their
fair value. The effect of these revisions is to increase equity in losses of
affiliates in 1998 and 1997 by $7,324,000 and $2,808,000, respectively.
(b) Previously, the company's consolidated financial statements reflected
recognition of a gain in the second quarter of 1998 arising from ORBIMAGE's
issuance of warrants to purchase common stock. As reflected in the restated
consolidated financial statements presented herein, since the warrants have
not been exercised, the company has revised its accounting for this equity
issuance, resulting in the elimination of its previously reported gain on
issuance of affiliate equity by $4,793,000 in 1998.
(c) Previously, the company's consolidated financial statements reflected the
recognition of revenue related to the initial transfer of certain assets to
ORBIMAGE in 1997 and sales under a procurement agreement with CCI in 1998.
Additionally, the company did not previously reflect an increase in its
deferred tax liabilities related to the ORBIMAGE transaction. As reflected
in the restated consolidated financial statements presented herein, the
company has revised its accounting for these transactions and the tax impact
thereto, eliminating its reported revenues related to these sales to CCI of
$6,556,000 in 1998, and to ORBIMAGE of $58,539,000 in 1997. Operating income
was also reduced in 1998 and 1997 by
40
43
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2A. RESTATEMENT MATTERS -- (CONTINUED)
$596,000 and $14,469,000, respectively. The net impact of the adjustments on
equity in losses of affiliates was a decrease of $238,000 in 1998 and
$5,122,000 in 1997. Finally, the company's provision for income taxes was
increased as a result of this revision in 1997 by $10,898,000 to reflect
deferred tax liabilities related to the investment basis differences.
(d) Previously, the company's consolidated financial statements reflected the
company's capitalization of interest expense on various assets, including on
its equity investments in ORBIMAGE, ORBCOMM and CCI. As reflected in the
restated consolidated financial statements presented herein, Orbital has not
capitalized interest expense on its investment in ORBIMAGE and has revised
the capitalization of interest on certain other assets, including its equity
method investments in ORBCOMM and CCI. These revisions include the
compounding impact of interest, and the reduction of eligible investment
amounts for losses recognized for equity method investees. These revisions
had the effect of increasing interest expense in 1998 and 1997 by
$6,204,000, and $2,465,000, respectively.
(e) Previously, the company's consolidated financial statements did not reflect
amortization of the excess of the company's investment in ORBIMAGE over the
underlying share of the company's equity in ORBIMAGE. As reflected in the
restated consolidated financial statements presented herein, Orbital is
amortizing such excess over eight years. This revision had the effect of
increasing the company's equity in losses of affiliates by approximately
$355,000 and $237,000 in 1998 and 1997, respectively.
(f) Previously, the company's consolidated financial statements did not reflect
the amortization of previously deferred profits in connection with its sales
of both satellites and ground stations to ORBCOMM. As reflected in the
restated consolidated financial statements presented herein, Orbital is
amortizing a portion of such deferred profits over the estimated lives of
both the satellites and the ground stations. This revision had the effect of
increasing the company's equity in losses of affiliates by approximately
$1,298,000 and $439,000 in 1998 and 1997, respectively. This adjustment had
the impact of increasing accumulated deficit at January 1, 1997 by $439,000.
ASSET RESTATEMENT ADJUSTMENTS
(g) The company has historically capitalized certain costs associated with
certain product enhancements, internally developed software and certain
other costs. Previously, the company's consolidated financial statements
reflected such costs as capitalized assets. As reflected in the restated
consolidated financial statements presented herein, the company has expensed
all previously capitalized enhancement costs and certain other
non-capitalizable costs. These revisions resulted in an increase in research
and development expenses and costs of goods sold and an increase (decrease)
in revenues for 1998 of $4,787,000, $1,708,000 and $2,477,000, respectively,
and for 1997 of $6,785,000, $660,000 and ($1,428,000), respectively. These
adjustments also had the impact of decreasing selling, general and
administrative expenses by $2,631,000 and increasing equity in losses of
affiliates by $770,000 in 1998.
This adjustment had the impact of increasing accumulated deficit at January
1, 1997 by $5,740,000.
OTHER RESTATEMENT AND RECLASSIFICATION ADJUSTMENTS
(h) Previously, the company's consolidated financial statements did not reflect
a write-down in the book value of inventory at the company's Magellan
subsidiary related to certain obsolete consumer products. The adjustment to
record the write-down in inventory as reflected in the restated consolidated
financial statements presented herein, resulted in an increase to costs of
goods sold of approximately $4,670,000, an increase in selling, general and
administrative expenses of $324,000 and an increase in non-controlling
interests in (earnings) losses of consolidated subsidiaries of approximately
$2,988,000 in 1998.
41
44
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2A. RESTATEMENT MATTERS -- (CONTINUED)
(i) The company had previously amortized a portion of the goodwill arising from
the acquisition of Ashtech Inc. as a direct charge against non-controlling
interests. As reflected in the restated consolidated financial statements
presented herein, the company is amortizing such goodwill as a charge to
operations, resulting in an increase in goodwill amortization expense for
1998 of $1,202,000 and an increase in non-controlling interests of
$408,000.
(j) The company's consolidated balance sheet at December 31, 1998 includes a
net deferred tax asset of approximately $3,400,000 relating primarily to
Canadian investment tax credits carryforwards. The restated consolidated
financial statements include a revised calculation of this deferred tax
asset in 1998, resulting in an increase of costs of goods sold and
provision for income taxes in 1998 of $2,166,000 and $1,222,000,
respectively.
(k) The company's consolidated balance sheet as of December 31, 1998 reflected
$26,829,000 due to a joint venture partner as a reduction of advances to the
joint venture. The restated consolidated balance sheet as of December 31,
1998 has classified this amount as a long-term liability. During 1998, the
company reclassified a permanent impairment of $2,479,000 on a certain
investment from costs of goods sold to asset impairment charges.
As reflected in the restated consolidated financial statements, the company
has recorded certain other adjustments, the net effect of which is presented in
the table. None of these entries is significant individually or in the
aggregate.
B. SPECIAL GAINS AND CHARGES
During the fourth quarter of 1999, the company recorded the following,
non-recurring gains and charges:
Gain on Issuance of Subsidiary Equity. In December 1999, the company's
then wholly-owned subsidiary, MDA, issued common stock to a group of minority
investors, and immediately provided a dividend to the company for the gross
amount of the proceeds from the sale of $75,000,000. Pursuant to its policy with
respect to issuances of subsidiary equity, the company recorded a $62,282,000
gain on the sale of such stock in the fourth quarter (approximately $58,610,000
net of taxes). In connection with the transaction, MDA's new shareholders were
granted certain rights, including, among others, an option to purchase
additional MDA shares, or to cause a sale of MDA, in certain circumstances,
including (i) if an initial public offering of MDA does not occur on or before
June 22, 2002, or (ii) if certain bankruptcy events involving Orbital occur. In
addition, under certain circumstances, including clause (i) above, MDA's new
shareholders will have the right to exchange their MDA stock for common stock of
Orbital pursuant to a specified formula as set forth in an Exchange and
Registration Rights Agreement.
Asset Impairments and Write-downs. In December 1999, we determined that
the carrying value of a specialized voice communication satellite system would
no longer be recoverable through the expected future sales of the related
products or services. We recorded an asset impairment charge with respect to
this asset in the amount of $15,217,000 in the fourth quarter of 1999.
In addition, a commercial airline navigation and communication system
experienced cancellation of the sole customer sales contract in the fourth
quarter of 1999. This cancellation reduced the probability of recovering the
cost of the related capitalized software and inventory through future sales. The
total carrying value of the software and inventory in the amount of $14,820,000
was recognized as a component of cost of goods sold in the fourth quarter of
1999.
Acquisition Expenses. In March 1999, Orbital and Magellan Corporation, a
majority-owned and controlled subsidiary, entered into a merger agreement with a
consumer electronics company. This proposed
42
45
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2B. RESTATEMENT MATTERS -- (CONTINUED)
transaction did not close and was terminated in December 1999. In connection
with this and other planned acquisitions, the company incurred $1,561,000 of
acquisition expenses during 1999.
3. INDUSTRY SECTOR INFORMATION
Orbital designs, manufactures, operates and markets a broad range of
space-related products and services that are grouped into three sectors: space
and ground infrastructure systems, satellite access products and satellite
services. Space and ground infrastructure systems include launch vehicles and
advanced programs, satellites and related space systems, electronics and sensor
and transportation management systems, satellite ground systems and software and
mapping and land information services. Satellite access products include
satellite-based navigation, positioning and communications products. Satellite
services include satellite-based mobile data communications, satellite-based
remote imaging services, satellite-based automotive information systems and
satellite-based voice communications services.
Orbital reports industry sector information in conformance with Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 established standards
for reporting information about operating segments in financial statements and
requires selected information about operating segments. It also established
standards for disclosures about products, services and geographic areas.
Reportable segments within the space and ground infrastructure systems
sector have been determined generally based upon product lines. Certain
operating business units within this sector have been aggregated as they exhibit
similar long-term financial performance characteristics and do not meet the
quantitative thresholds. In 1999, the company recast the composition of its
reportable segments as a result of new reporting mechanisms and operating
decision making procedures. The corresponding segment information for the prior
years has been revised to conform to the 1999 presentation.
The following table presents operating information and identifiable assets
by reportable segment. Intersegment and intersector sales are accounted for
based on prices negotiated by the parties; there were no significant sales or
transfers between segments.
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(RESTATED) (RESTATED)
(In thousands)
Launch Vehicles and Advanced Programs
Revenues............................................... $ 157,032 $179,591 $120,202
Operating income (loss)................................ (8,452) 23,476 (1,251)
Identifiable assets.................................... 125,157 96,190 87,106
Capital expenditures................................... 13,665 8,270 7,670
Depreciation and amortization.......................... 7,130 5,370 2,755
Satellites and Related Space Systems
Revenues............................................... $ 257,431 $227,042 $175,450
Operating income (loss)................................ (13,517) 17,388 31,667
Identifiable assets.................................... 58,153 109,922 90,338
Capital expenditures................................... 7,481 4,499 4,408
Depreciation and amortization.......................... 5,066 4,835 4,980
43
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ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INDUSTRY SECTOR INFORMATION -- (CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(RESTATED) (RESTATED)
(In thousands)
Electronics and Sensor Systems and Transportation Management
Systems
Revenues............................................... $ 149,991 $125,758 $117,064
Operating income (loss)................................ (248) 11,312 8,814
Identifiable assets.................................... 114,765 109,907 72,211
Capital expenditures................................... 3,373 5,563 5,544
Depreciation and amortization.......................... 4,689 3,125 3,233
Satellite Ground Systems and Space Robotics, Mapping and
Land Information Services
Revenues............................................... $ 186,491 $ 95,845 $ 78,245
Operating income (loss)................................ 14,623 5,232 5,057
Equity in earnings (losses of affiliates).............. (182) -- --
Non-controlling interest in (earnings) losses of
consolidated subsidiaries............................ (171) -- --
Identifiable assets.................................... 213,301 67,422 56,727
Capital expenditures................................... 13,949 2,524 6,365
Depreciation and amortization.......................... 9,554 2,339 4,740
TOTAL SPACE AND GROUND INFRASTRUCTURE SYSTEMS:
Revenues............................................... $ 750,945 $628,236 $490,961
Operating income (loss)................................ (7,594) 57,408 44,287
Equity in earnings (losses of affiliates).............. (182) -- --
Non-controlling interest in (earnings) losses of
consolidated subsidiaries............................ (171) -- --
Identifiable assets.................................... 511,376 383,441 306,382
Capital expenditures................................... 38,468 20,856 23,987
Depreciation and amortization.......................... 26,439 15,669 15,708
SATELLITE ACCESS PRODUCTS:
Revenues............................................... $ 108,539 $101,667 $ 54,875
Operating income (loss)................................ (14,275) (29,703) (10,246)
Identifiable assets.................................... 92,939 112,584 143,800
Capital expenditures................................... 2,803 5,450 3,106
Depreciation and amortization.......................... 7,553 6,481 2,014
SATELLITE SERVICES:
Revenues............................................... $ 15,427 $ 759 $ 172
Operating income (loss)................................ (22,885) (3,839) (5,124)
Equity in earnings (losses) of affiliates.............. (99,368) (76,815) (25,094)
Non-controlling interest in (earnings) losses of
consolidated subsidiaries............................ 2,463 1,763 2,638
Identifiable assets.................................... 147,072 198,410 132,847
Capital expenditures................................... 4,157 4,493 5,002
Depreciation and amortization.......................... 96 -- 401
44
47
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INDUSTRY SECTOR INFORMATION -- (CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(RESTATED) (RESTATED)
(In thousands)
CORPORATE AND OTHER:
Operating income (loss)................................ $ (13,895) $(11,220) $(21,410)
Non-controlling interest in (earnings) losses of
consolidated subsidiaries............................ 7,267 12,349 --
Gain on issuance of subsidiary equity.................. 62,282 -- 21,810
Identifiable assets.................................... 341,525 200,757 194,856
Capital expenditures................................... 10,220 5,495 5,105
Depreciation and amortization.......................... 17,344 8,856 6,163
CONSOLIDATED:
Revenues............................................... $ 874,911 $730,662 $546,008
Operating income (loss)................................ (58,649) 12,646 7,507
Equity in earnings (losses) of affiliates.............. (99,550) (76,815) (25,094)
Non-controlling interest in earnings (losses) of
consolidated subsidiaries............................ 9,559 14,112 2,638
Gain on issuance of subsidiary equity.................. 62,282 -- 21,810
Identifiable assets.................................... 1,092,912 895,192 777,885
Capital expenditures................................... 55,648 36,294 37,200
Depreciation and amortization.......................... 51,432 31,006 24,286
DOMESTIC AND NON-U.S. OPERATIONS
The following table presents Orbital's revenues, operating income (loss)
and identifiable assets by major originating location:
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(RESTATED) (RESTATED)
(In thousands)
REVENUES:
United States.......................................... $ 690,987 $644,448 $465,177
Canada and Mexico...................................... 175,923 72,642 75,584
Other.................................................. 8,001 13,572 5,247
---------- -------- --------
Total............................................. $ 874,911 $730,662 $546,008
========== ======== ========
OPERATING INCOME (LOSS):
United States.......................................... $ (74,753) $ 11,939 $ 5,972
Canada and Mexico...................................... 15,725 2,277 1,465
Other.................................................. 379 (1,570) 70
---------- -------- --------
Total............................................. $ (58,649) $ 12,646 $ 7,507
========== ======== ========
IDENTIFIABLE ASSETS:
United States.......................................... $ 886,276 $833,054
Canada and Mexico...................................... 205,369 57,121
Other.................................................. 1,267 5,017
---------- --------
Total............................................. $1,092,912 $895,192
========== ========
45
48
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INDUSTRY SECTOR INFORMATION -- (CONTINUED)
EXPORT SALES AND MAJOR CUSTOMERS
Orbital's sales to geographic areas were as follows:
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- ---------- ----------
(RESTATED) (RESTATED)
(In thousands)
United States............................................... $558,606 $551,976 $387,074
Canada...................................................... 159,229 48,330 39,274
Southeast Asia.............................................. 69,983 28,976 35,688
Middle East and other....................................... 30,243 34,486 24,326
Far East.................................................... 30,003 39,196 32,875
Europe...................................................... 26,847 27,698 26,771
-------- -------- --------
Total............................................. $874,911 $730,662 $546,008
======== ======== ========
Approximately 34%, 46% and 42% of the company's revenues in 1999, 1998 and
1997, respectively, were generated under contracts with the U.S. government and
its agencies or under subcontracts with the U.S. government's prime contractors.
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES
ORBCOMM
In 1993, the company's subsidiary, Orbital Communications Corporation
("OCC"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), an affiliate of
Teleglobe Inc. ("Teleglobe"), formed a partnership, ORBCOMM, for the design,
development, construction, integration, testing and operation of a low-Earth
orbit satellite communications system (the "ORBCOMM System"). Through December
31, 1999, OCC and Teleglobe Mobile were both 50% general partners in ORBCOMM.
Additionally, through December 31, 1999, OCC was a 2% general partner in ORBCOMM
USA, L.P. ("ORBCOMM USA") and Teleglobe Mobile was a 2% general partner in
ORBCOMM International Partners, L.P. ("ORBCOMM International"), two partnerships
formed to market the ORBCOMM System. ORBCOMM was a 98% general partner in each
of the two marketing partnerships through December 31, 1999. These partnership
agreements were amended as of January 1, 2000, as discussed below.
Pursuant to the terms of the partnership agreements, until December 31,
1999, (i) OCC and Teleglobe Mobile shared equal responsibility for the
operational and financial affairs of ORBCOMM, (ii) OCC controlled and
consolidated the operational and financial affairs of ORBCOMM USA, and (iii)
Teleglobe Mobile controlled the operational and financial affairs of ORBCOMM
International. Since OCC was unable to control, but was able to exercise
significant influence over ORBCOMM's and ORBCOMM International's operational and
financial affairs, the company accounted for its investments in ORBCOMM and
ORBCOMM International using the equity method of accounting.
In January 2000, Orbital entered into an agreement with ORBCOMM, Teleglobe,
OCC, and Teleglobe Mobile pursuant to which:
- Teleglobe Mobile became ORBCOMM's sole general partner and majority
owner, with an interest of approximately 66% as of March 15, 2000;
- OCC remained as a limited partner to ORBCOMM, with a minority ownership
interest of approximately 34% as of March 15, 2000; and
46
49
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)
- Orbital received a payment plan from ORBCOMM to settle deferred invoice
amounts.
On January 26, 2000, each of OCC and Teleglobe Mobile contributed to
ORBCOMM its 2% direct participation interest in ORBCOMM USA and ORBCOMM
International, respectively. As a result of this contribution, these companies
ceased doing business as separate entities and ORBCOMM assumed their business
operations.
Orbital is the primary supplier to ORBCOMM of its communications
satellites, launch vehicles and certain of its satellite ground systems and
software. During 1999, 1998 and 1997, Orbital recorded sales to ORBCOMM of
approximately $44,302,000, $36,596,000 and $57,988,000, respectively.
During 1999, 1998 and 1997, Orbital deferred invoicing ORBCOMM for work
performed under satellite and launch procurement agreements. During 1999, 1998
and 1997, the company deferred invoicing ORBCOMM for approximately $37,000,000,
$33,000,000 and $21,000,000, respectively. During this period, approximately
$33,000,000 (including interest) of these amounts was advanced from an affiliate
of Teleglobe to Orbital. In January 2000, Orbital, Teleglobe and ORBCOMM entered
into an agreement to, among other things, settle the deferred invoicing and
related cash advances. ORBCOMM paid the company approximately $33,000,000 in
cash which was then used by the company to repay the advances from Teleglobe. In
addition, the company converted approximately $33,000,000 of its deferred
invoices into partnership interests of ORBCOMM. Finally, of the remaining
$25,000,000 owed to Orbital, one-third was paid in 2000 with the balance due by
June 2001.
At December 31, 1999 and 1998, Orbital's investments in and advances to
ORBCOMM was approximately $107,989,000 and $157,725,000, respectively. In
addition, ORBCOMM owes the company a total of $48,711,000, which is included in
receivables at December 31, 1999 (none at December 31, 1998). All 1998 invoices
were deferred and included in investments and advances to affiliates. In
addition, Orbital has provided certain administrative services to ORBCOMM on a
cost-reimbursable basis. During 1998 and 1997, Orbital was reimbursed
approximately $3,183,000 and $2,298,000, respectively, for such services.
At December 31, 1999 and 1998, ORBCOMM had approximately $389,812,000 and
$346,634,000 in total assets, $299,063,000 and $241,844,000 in total liabilities
and $90,749,000 and $104,790,000 of total partners' capital, respectively. The
difference between Orbital's investments in and advances to ORBCOMM and
Orbital's share of ORBCOMM's total partners' capital, is primarily attributable
to interest capitalized by Orbital with respect to its investment in ORBCOMM.
ORBCOMM recorded approximately $2,772,000, $1,262,000 and $527,000 in revenues
and $144,548,000, $69,628,000 and $31,436,000 in net losses for the years ended
December 31, 1999, 1998 and 1997, respectively.
ORBIMAGE
In 1997, the company's subsidiary, ORBIMAGE, completed a private placement
of preferred equity. Although Orbital owns substantially all of the common stock
of ORBIMAGE, Orbital is unable to control, but is able to exercise significant
influence over ORBIMAGE's operational and financial affairs. The company uses
the equity method of accounting for its ownership interest in ORBIMAGE. As of
December 31, 1999 and 1998, the company's investments in and advances to
ORBIMAGE were $8,094,000 and $27,891,000, respectively.
The company has an agreement with ORBIMAGE to purchase up to an additional
1,250,000 shares of ORBIMAGE's common stock for up to $12,500,000, which amount
may be increased up to $25,000,000 in the event of certain delays beyond January
2001 under the procurement agreement. This investment may be required over time
in $2,500,000 minimum increments if ORBIMAGE's cash balance falls below
$10,000,000.
47
50
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)
Orbital is the primary supplier to ORBIMAGE of imaging satellites, launch
services and satellite ground systems and software. During the years ended
December 31, 1999, 1998 and 1997, Orbital recorded sales to ORBIMAGE of
approximately $50,100,000, $89,006,000 and $30,079,000, respectively.
Additionally, Orbital provides certain administrative services to ORBIMAGE on a
cost-reimbursable basis. During 1999, 1998 and 1997, Orbital was reimbursed
approximately $1,513,000, $1,985,000 and $1,444,000, respectively, for such
administrative services. At December 31, 1999 and 1998, the company had total
receivables due from ORBIMAGE of approximately $10,899,000 and $18,725,000,
respectively.
At December 31, 1999 and 1998, ORBIMAGE had approximately $359,838,000 and
$308,078,000 in total assets, $253,604,000 and $195,625,000 in total liabilities
and $14,671,000 and $33,964,000 of total stockholders' equity, respectively.
ORBIMAGE recorded approximately $18,587,000, $11,663,000 and $2,062,000 in
revenues and $19,796,000, $26,538,000 and $6,890,000 in net losses available to
common shareholders for the years ended December 31, 1999, 1998 and 1997,
respectively.
NAVIGATION SOLUTIONS, LLC
During the second quarter of 1999, the company, through its wholly owned
subsidiary, Orbital Navigation Corporation, along with The Hertz Corporation
("Hertz") formed a joint venture, Navigation Solutions, L.L.C. ("Navigation
Solutions"). The company, through its Magellan subsidiary, sells automotive
navigation products to Navigation Solutions, which in turn collects fees from
Hertz' customers for use of these products. The company recognized revenues from
sales of products to Navigation Solutions of approximately $2,667,000, and
deferred approximately $37,085,000 of revenues pursuant to SOP 97-2 (which
revenues will be recognized ratably through 2004), and contributed capital to
Navigation Solutions of approximately $22,200,000 during 1999. As of December
31, 1999, the company had a 60% non-controlling interest in Navigation
Solutions, and currently accounts for its investment using the equity method of
accounting. At December 31, 1999, the company's investment in Navigation
Solutions was approximately $19,991,000. The company is committed to contribute
capital up to an aggregate of $30,000,000, to be contributed through the end of
2000.
CCI INTERNATIONAL, N.V.
In 1998, the company acquired an equity interest in, and entered into a
satellite procurement contract with, CCI, a start-up satellite voice
communications provider. The company had an investment in CCI of $9,942,000 at
December 31, 1998. The company currently owns 40% of CCI on a fully diluted
basis and uses the modified equity method of accounting to account for its
investment in CCI. However, the company has provided substantially all CCI's
funding, and accordingly, the company did not recognize any revenue in
connection with its satellite contract in 1999 or 1998.
CCI needs a significant infusion of capital to complete its contemplated
constellation of satellites. Two other unrelated start-up companies that had
also been developing similar satellite communications systems announced during
1999 that they were experiencing significant financial difficulties and filed
for bankruptcy protection in the third quarter of 1999. Orbital concluded in the
third quarter of 1999 that its investment in CCI was impaired and recorded a
non-cash charge of $11,128,000 during the third quarter to write off its
investment in CCI. This loss is included in equity in losses of affiliates in
the accompany statements of earnings.
OTHER INVESTMENTS
The company owns equity interests in several emerging companies. The
carrying value of these investments was approximately $5,198,000 and $2,609,000,
respectively, at December 31, 1999 and 1998.
48
51
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. BUSINESS COMBINATIONS AND ASSET ACQUISITIONS
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
In May 1999, the company, through its MDA subsidiary, acquired all the
assets and certain liabilities of the space robotics division of Toronto-based
Spar Aerospace Limited ("Robotics") for approximately $43,000,000. MDA paid half
of the purchase price in cash at closing and issued an unsecured 8% note, due
May 2000, for the remainder. The company has accounted for the acquisition using
the purchase method of accounting. The liabilities recorded exceeded the fair
value of tangible and identifiable intangible assets acquired resulting in
goodwill of approximately $56,000,000 which is being amortized on a
straight-line basis over 30 years.
RAYTHEON COMPANY
On December 31, 1998, the company acquired the transportation management
systems business of Raytheon Company for approximately $21,000,000 in cash. The
acquired business produces satellite-based automatic vehicle location systems
for public transit fleets. The company accounted for the acquisition using the
purchase method of accounting. The purchase price exceeded the fair value of the
net tangible and identifiable intangible assets acquired by approximately
$20,000,000, which is being amortized on a straight-line basis over 15 years.
ASHTECH INC.
On December 31, 1997, Orbital merged Magellan with Ashtech Inc.
("Ashtech"). To effect the merger, Orbital provided consideration of
approximately $80,000,000 to former Ashtech stockholders consisting of
$25,000,000 in cash and approximately 23,954,000 shares of Magellan common
stock. Since the merger, Orbital has owned a controlling interest of
approximately two-thirds of Magellan. The merger was accounted for using the
purchase method of accounting. The purchase price exceeded the fair value of the
net tangible and identifiable intangible assets acquired by approximately
$73,000,000, which is being amortized on a straight-line basis over 20 years. In
connection with the merger, Orbital entered into a stockholders' agreement with
certain stockholders of Ashtech. The Ashtech stockholders were granted certain
rights with respect to Magellan, including, among others, the right to designate
two members of Magellan's seven-member board of directors and to demand
registration of their Magellan common stock.
CTA INCORPORATED
On August 15, 1997, Orbital acquired substantially all the assets,
including all the stock of certain subsidiaries, and certain liabilities
relating to the satellite manufacturing and communications services businesses
of CTA Incorporated ("CTA"). As consideration, Orbital paid approximately
$13,000,000 in cash, and repaid $27,000,000 of outstanding debt related to the
acquired business. The company accounted for the acquisition using the purchase
method of accounting. The purchase price exceeded the fair value of the net
tangible and identifiable intangible assets acquired by approximately
$70,000,000, which is being amortized on a straight-line basis over 30 years.
During the five years following the closing, CTA will also be entitled to
receive (i) royalties from $500,000 to $3,000,000 for sales by the company of
certain geostationary satellites in excess of certain threshold sales, and (ii)
3% of cumulative revenues in excess of $50,000,000 earned during such period
from the acquired transportation management business of CTA. The company has not
been required to pay CTA any additional consideration under these provisions.
ROCKWELL INTERNATIONAL CORPORATION
In July 1997, Orbital acquired the assets and certain liabilities
associated with Rockwell International Corporation's ("Rockwell") automotive
navigation product line. Orbital paid approximately $3,550,000 in cash and
issued Rockwell a $4,350,000 unsecured note payable. The company accounted for
the acquisition
49
52
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. BUSINESS COMBINATIONS AND ASSET ACQUISITIONS -- (CONTINUED)
using the purchase method of accounting. The purchase price exceeded the fair
value of the net tangible and identifiable intangible assets acquired by
approximately $2,262,000, which is being amortized on a straight-line basis over
10 years.
The following unaudited, supplemental financial information presents the
consolidated results of operations, on a pro forma basis, as though the above
acquisitions were consummated on January 1, 1997:
DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ----------- -----------
(RESTATED) (RESTATED)
(In thousands except per share data)
Revenues............................................. $ 885,947 $836,344 $685,687
Net income (loss).................................... $(121,488) $(55,407) $(11,096)
Net income (loss) per common and dilutive share...... $ (3.26) $ (1.56) $ (0.34)
LICENSE AGREEMENT
In May 1999, MDA entered into a $37,000,000 long-term license agreement
with the British Columbia provincial government whereby MDA obtained the
exclusive rights to use certain government information databases (the "License
Agreement"). MDA intends to provide Internet-based services pursuant to the
License Agreement. MDA paid approximately $13,000,000 in cash and borrowed
approximately $7,000,000 under an existing line of credit and $17,000,000
pursuant to a loan due May 2000 to acquire the license. The cost of this license
is classified as an other long-term asset and is being amortized on a straight
line basis over its 10 year term.
6. BALANCE SHEET ACCOUNTS
RESTRICTED CASH AND SHORT-TERM INVESTMENTS
At December 31, 1999 and 1998, the company had approximately $17,041,000
and $5,257,000, respectively, of cash restricted to support bank covenants and
outstanding letters of credit.
Short-term investments consist of the following:
DECEMBER 31,
----------------
1999 1998
------- ------
(In thousands)
AVAILABLE-FOR-SALE SECURITIES:
Canadian mortgage bonds................................... $10,912 $ --
Certificate of deposit.................................... -- 2,665
TRADING SECURITIES:
Mutual funds at fair value................................ 6,677 --
------- ------
Total............................................. $17,589 $2,665
======= ======
At December 31, 1999, the gross unrealized gains and losses on short-term
trading securities were $1,087,000 and none, respectively. Amortized cost
approximated fair value for available-for-sale securities at December 31, 1999
and 1998. At December 31, 1998, $2,500,000 of short-term investments was
restricted for outstanding letters of credit.
50
53
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. BALANCE SHEET ACCOUNTS -- (CONTINUED)
INVENTORY
Inventories, net of allowances for obsolescence, consisted of the
following:
DECEMBER 31,
---------------------
1999 1998
-------- ----------
(RESTATED)
(In thousands)
Components and raw materials................................ $ 19,883 $14,488
Work-in-process............................................. 38,429 45,178
Finished goods.............................................. 10,651 6,690
Allowance for inventory obsolescence........................ (14,480) (8,215)
-------- -------
Total............................................. $ 54,483 $58,141
======== =======
Work-in-process inventory was reduced by contractual progress payments
received of $208,000 and $5,624,000 at December 31, 1999 and 1998, respectively.
RECEIVABLES
The components of receivables were as follows:
DECEMBER 31,
---------------------
1999 1998
-------- ----------
(RESTATED)
(In thousands)
Billed and billable......................................... $196,426 $111,322
Recoverable costs and accrued profit not billed............. 104,102 120,371
Retainages due upon contract completion..................... 13,707 4,987
Allowance for doubtful accounts............................. (18,920) (21,570)
-------- --------
Total............................................. $295,315 $215,110
======== ========
Approximately 71% of recoverable costs and accrued profit not billed and
retainages due upon contract completion at December 31, 1999 is due within one
year and will be billed on the basis of contract terms and delivery schedules.
At December 31, 1999 and 1998, $58,213,000 and $50,165,000, respectively, were
receivable from non-U.S. customers.
The accuracy and appropriateness of Orbital's direct and indirect costs and
expenses under its government contracts and, therefore, its receivables recorded
pursuant to such contracts, are subject to extensive regulation and audit by the
Defense Contract Audit Agency or by other appropriate agencies of the U.S.
government. These agencies have the right to challenge Orbital's cost estimates
or allocations with respect to any such contract. Additionally, a substantial
portion of the payments to the company under government contracts are
provisional payments that are subject to potential adjustment upon audit by such
agencies. In the opinion of management, any adjustments likely to result from
inquiries or audits of its contracts will not have a material adverse impact on
the company's financial condition or results of operations.
The company enters into forward exchange contracts in an effort to hedge
against foreign currency fluctuations on certain receivables and payables
denominated in foreign currencies. Accordingly, Orbital is subject to
off-balance sheet market risk for the possibility that future changes in market
prices may make the
51
54
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. BALANCE SHEET ACCOUNTS -- (CONTINUED)
forward exchange contracts less valuable. The following table summarizes at
December 31, 1999, outstanding foreign exchange contracts to sell (purchase)
foreign currencies, along with current market values:
CURRENCIES CURRENT UNREALIZED
HEDGED CONTRACT MARKET GAIN
FOREIGN CURRENCY HEDGED AGAINST AMOUNT VALUE (LOSS)
----------------------- ---------- -------- ------- ----------
(U.S. dollars, in thousands)
Australian Dollars............................ CD $ 155 $ 156 $ 1
European Currency Units....................... PS 37 40 3
EURO.......................................... CD 1,070 1,154 84
Pounds Sterling............................... CD (275) (284) (9)
Norwegian Kroner.............................. CD 687 713 26
U.S. Dollars.................................. CD 10,921 10,975 54
Japanese Yen.................................. US 41,177 38,412 (2,765)
- ------------------------
CD -- Canadian Dollars
PS -- Pounds Sterling
US -- US Dollars
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31,
----------------------
1999 1998
--------- ----------
(RESTATED)
(In thousands)
Land........................................................ $ 4,061 $ 4,123
Buildings and leasehold improvements........................ 33,355 21,557
Machinery and equipment..................................... 182,755 167,722
Assets under construction................................... 22,518 18,616
Software, intellectual property and technical drawings...... 17,062 27,222
Accumulated depreciation and amortization................... (122,129) (99,839)
--------- --------
Total............................................. $ 137,622 $139,401
========= ========
Interest expense of approximately $2,711,000, $1,705,000, and $429,000 was
capitalized during 1999, 1998 and 1997, respectively, as part of the historical
cost of land, buildings and equipment under construction.
52
55
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. BALANCE SHEET ACCOUNTS -- (CONTINUED)
ACCRUED EXPENSES
Accrued expenses consisted of the following:
DECEMBER 31,
---------------------
1999 1998
-------- ----------
(RESTATED)
(In thousands)
Payroll, payroll taxes and fringe benefits.................. $ 45,278 $ 39,289
Payable to subcontractors................................... 5,970 18,703
Accrued contract costs...................................... 40,106 32,118
Accrued financing and acquisition costs..................... 13,973 --
Accrued income taxes........................................ 12,493 --
Other accrued expenses...................................... 20,793 18,378
-------- --------
Total............................................. $138,613 $108,488
======== ========
7. DEBT OBLIGATIONS
The following table sets forth long-term obligations, excluding capital
lease obligations (See note 8):
DECEMBER 31,
-----------------------
DESCRIPTION: 1999 1998
- ------------ ------------ --------
(In thousands)
7.09% - 9.35% notes, principal and interest due monthly
1998-1999................................................. $ -- $ 3,098
8.25% bank note, principal and interest due monthly through
2001...................................................... -- 1,142
7.10% - 8.88% notes, principal and interest due monthly
through 2002.............................................. 27,326 24,428
8.41% note, principal and interest due monthly through
2004...................................................... 7,385 8,439
Non-interest bearing notes, principal and interest due
semi-annually through 2000................................ 2,100
6% note, principal and interest due semi-annually through
2000...................................................... 1,450 2,900
6.22% - 7.75% bank notes, principal and interest due monthly
through 2002.............................................. 21,569 1,823
8% note, due in 2000........................................ 22,976 --
12% note, interest due semi-annually, principal due through
2001...................................................... 13,333 20,000
9.96% credit facility, interest and principal due quarterly
through 2002.............................................. 165,000 36,000
5% convertible subordinated notes, interest due
semi-annually, principal due 2002......................... 100,000 100,000
--------- --------
361,139 197,830
LESS CURRENT PORTION........................................ (123,361) (19,236)
--------- --------
LONG-TERM PORTION........................................... $ 237,778 $178,594
========= ========
The 7.10% - 8.88% notes are collateralized by certain office, computer and
test equipment located at the company's Germantown, Maryland, Chandler, Arizona
and Dulles, Virginia facilities. The 8.41% note is collateralized by the
company's L-1011 aircraft. The 6% note due 2000 is unsecured.
The 6.22% - 7.125% bank notes due 2002 are collateralized by MDA's assets.
The related credit agreements for these and the 8% note due 2000 prohibit the
payment of cash dividends and contain certain covenants with respect to MDA's
leverage ratio, interest coverage and tangible net worth. MDA also has an unused
line of credit of $18,700,000 with an interest rate of 6.5% at December 31,
1999.
53
56
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT OBLIGATIONS -- (CONTINUED)
The company's 12% note restricts the payment of cash dividends and contains
certain covenants with respect to fixed charges ratio, leverage ratio and
tangible net worth, and includes certain cross-default provisions. This note was
unsecured at December 31, 1999, however, in January 2000 a portion of the
collateral for the primary credit facility was pledged for this note. In April
2000, Orbital and the noteholder signed an amendment that waived noncompliance
with certain financial covenants for all periods prior to the amendment date and
for 2000.
Orbital's primary credit facility from an international syndicate of nine
banks was amended in 1999, among other things, to decrease maximum borrowings to
$165,000,000 and require $10,000,000 be maintained in a segregated account until
the company's total liquidity drops below $10,000,000. The interest rate charged
under the facility is variable based on the prime rate or LIBOR. The
weighted-average interest rate on borrowings outstanding under this facility at
December 31, 1999 was 9.96%. Outstanding borrowings are collateralized by the
company's accounts receivable and certain other assets, including stock of
subsidiaries. The facility prohibits the payment of cash dividends and imposes
limits on capital expenditures. The facility also contains certain covenants
with respect to the company's working capital levels, fixed charge ratio,
leverage ratio and net worth, and expires in December 2002. The company amended
this facility several times in 1999 to waive noncompliance with certain
financial covenants and to amend others (including with respect to net worth,
leverage and fixed charges). In April 2000, Orbital and the banks signed an
amendment that waived Orbital's noncompliance with certain covenants for all
periods prior to the amendment date and established new covenant levels for 2000
net worth, leverage (including senior leverage), fixed charges, capital
expenditures and subsidiary debt. Orbital also agreed with its banks to further
reduce the total amount that is available under the facility on August 1, 2000
by either (i) an additional $40,000,000 if Orbital and the banks restructure the
facility by May 31, 2000 or (ii) by an additional $60,000,000 if Orbital is
unsuccessful in restructuring the facility by that date. Orbital is required to
apply toward this reduction 50% of the net cash proceeds that Orbital receives
from any equity offering, asset sale or debt issuance by Orbital or its domestic
wholly owned subsidiaries. In addition, Orbital agreed to further reduce the
facility to $85,000,000 by July 2001.
In September 1997, Orbital sold $100,000,000 of 5% convertible subordinated
notes due October 2002. The notes, which are non-callable for three years, are
convertible at the option of the holders into Orbital common stock at a
conversion price of $28.00 per share, subject to adjustment in certain events.
The fair value of Orbital's long-term obligations at December 31, 1999 and
1998 is estimated at approximately $85,625,000 and $127,830,000, respectively.
Fair value estimates are based on quoted market prices or on current rates
offered for debt of similar remaining maturities. Scheduled maturities of
long-term debt for each of the years in the five-year period ending December 31,
2004 and thereafter are $123,361,000, $19,089,000, $213,999,000, $1,961,000,
$2,545,000 and $184,000, respectively.
Magellan maintains its own short-term credit facility. At December 31, 1999
and 1998, approximately $6,345,000 and $6,008,000 was outstanding on this
facility at an average borrowing rate of 10.25% and 9.25%, respectively. These
borrowings are collateralized by Magellan's accounts receivable, inventory,
equipment and general intangibles.
In 1996, ORBCOMM issued $170,000,000 senior unsecured notes due 2004 (the
"ORBCOMM Notes") to institutional investors. The ORBCOMM Notes bear interest at
a fixed rate of 14% and provide for noteholder participation in future ORBCOMM
service revenues. The ORBCOMM Notes are fully and unconditionally guaranteed on
a joint and several basis by OCC and Teleglobe Mobile. The guarantee is non-
recourse to Orbital.
54
57
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
LEASES
Aggregate minimum rental commitments under non-cancelable operating and
capital leases (primarily for office space and equipment) at December 31, 1999
were as follows:
OPERATING CAPITAL
--------- -------
(In thousands)
2000........................................................ $ 20,257 $1,536
2001........................................................ 22,541 1,494
2002........................................................ 22,191 336
2003........................................................ 21,121 248
2004........................................................ 20,599 --
2005 and thereafter......................................... 169,760 --
-------- ------
$276,469 3,614
========
Less interest at 10%........................................ (353)
Less current portion........................................ (1,367)
------
Long-term portion........................................... $1,894
======
Rent expense for 1999, 1998 and 1997 was approximately $18,385,000,
$14,124,000 and $10,870,000, respectively.
OFF-BALANCE SHEET RISK
MDA is subject to off-balance sheet risk for a letter of credit facility of
$53,125,000 to cover commitments under letters of credit of which $27,865,000
remained available at December 31, 1999. MDA is also subject to off-balance
sheet risk for a letter-of-credit facility to cover foreign exchange
commitments. At December 31, 1999, $6,236,000 of letters of credit was secured
by this facility and $2,973,000 remained available. Management does not expect
any material losses as a result of these off-balance sheet agreements.
LITIGATION
In the first quarter of 1999, a number of class action lawsuits were filed
against the company alleging violations of the federal securities laws on behalf
of purchasers of the company's stock during the period from April 21, 1998
through February 16, 1999, and seeking monetary damages. An additional class
action complaint was filed in 1999 on behalf of purchasers of call options.
In the fourth quarter of 1999, in connection with the company's
announcement of the restatement of its financial statements for fiscal years
1997, 1998 and the first two quarters of 1999, a class action lawsuit was filed
against the company alleging violations of the federal securities laws, on
behalf of purchasers of the company's stock and call options during the period
from April 22, 1997 through October 29, 1999. While the amounts to be claimed
may be substantial, the company believes that the allegations are without merit
and intends to defend vigorously against such allegations.
In July 1999, a class action complaint was filed on behalf of a class
comprised of purchasers and lessees of a high precision GPS product manufactured
by Magellan (as a successor to Ashtech Inc.) against Sokkia Corporation and
certain of its affiliates, Magellan and others in the Circuit Court of Henry
County, Alabama. The complaint alleges breach of contract and warranty claims
and seeks unspecified compensatory and punitive damages. The company believes
that the allegations are without merit and intends to defend vigorously against
such allegations.
55
58
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
In the first quarter of 2000, PT Media Citra Indostar, an Indonesian
company ("PT-MCI"), commenced arbitration seeking a refund of $163,000,000 MCI
asserts it paid in connection with a communications satellite constructed by CTA
under a contract that was assigned to Orbital in connection with its acquisition
of CTA. MCI's allegations include fraud and multiple breaches of contract. The
company's claims against PT-MCI for unpaid invoices in the approximate amount of
$14,000,000 are also part of the arbitration proceedings. Orbital believes that
PT-MCI's allegations are without merit and intends to vigorously defend against
the allegations. In addition, under the terms of the CTA acquisition, Orbital
believes it is entitled to indemnification from CTA for all or a part of any
damages arising from the PT-MCI litigation and that CTA retains liability for
certain fraud claims being made by PT-MCI.
The company is currently arbitrating a claim brought by a claimant alleging
that the company is in actual or anticipatory breach of obligations allegedly
imposed on the company in a decision in a previous arbitration proceeding
brought by the claimant against CTA. The claimant claims that he is entitled to
a sum exceeding $30,000,000 from the company, as successor-in-interest to CTA.
Management believes that the allegations in these proceedings are without merit
and intends to vigorously defend against the allegations. In addition, under the
terms of the CTA acquisition, Orbital believes it is entitled to indemnification
from CTA for all or a part of any damages arising from this litigation.
The eventual outcome of the foregoing matters is uncertain and could have a
material adverse impact on the company's results of operations and financial
condition.
In addition, the company and its subsidiaries are parties to certain other
litigation or proceedings arising in the ordinary course of business. In the
opinion of management, the probability is remote that the outcome of any such
litigation or other proceedings will have a material adverse effect on our
results of operations or financial position.
9. INCOME TAXES
The provisions for income taxes consisted of the following:
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997
1999 (RESTATED) (RESTATED)
------- ---------- ----------
(In thousands)
CURRENT PROVISION:
U.S. Federal......................................... $ -- $ -- $ --
Foreign.............................................. 20,040 1,394 1,283
State................................................ -- -- --
DEFERRED PROVISION (BENEFIT):
U.S. Federal......................................... -- 10,898
Foreign.............................................. (8,936) 3,822 752
State................................................ -- -- --
------- ------ -------
Total........................................ $11,104 $5,216 $12,933
======= ====== =======
56
59
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES -- (CONTINUED)
The income tax provisions were different from those computed using the
statutory U.S. Federal income tax rate as set forth below:
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997
1999 (RESTATED) (RESTATED)
----- ---------- ----------
U.S. Federal statutory rate............................ (35.0)% (35.0)% 35.0%
Changes in valuation allowance......................... 51.1 53.4 815.2
Investments in affiliates and noncontrolling interests
in net assets of consolidated subsidiaries........... (2.2) 2.0 582.2
Intangible amortization................................ 3.3 4.7 91.4
Foreign income taxes in excess of statutory rate....... 3.7 2.2 60.3
Other, net............................................. (10.9) (17.1) (737.7)
----- ----- --------
Effective rate............................... 10.0% 10.2% 846.4%
===== ===== ========
The tax effects of significant temporary differences were as follows:
DECEMBER 31,
-------------------------
1998
1999 (RESTATED)
--------- ----------
(In thousands)
TAX ASSETS:
U.S. Federal and state net operating loss carryforward.... $ 152,205 $106,390
Non-deductible financial statement accruals............... 88,141 49,384
U.S. Federal and foreign tax credit carryforward.......... 4,499 8,771
Intangible assets......................................... 6,315 8,364
--------- --------
251,160 172,909
Valuation allowance....................................... (150,844) (94,185)
--------- --------
Tax assets, net........................................ $ 100,316 $ 78,724
========= ========
TAX LIABILITIES:
Excess deductions for tax reporting purposes.............. $ 54,107 $ 36,760
Excess tax depreciation................................... 19,959 27,216
Investments in subsidiaries/affiliates.................... 4,913 --
Percentage-of-completion accounting....................... 2,702 5,049
--------- --------
Tax liabilities........................................ $ 81,681 $ 69,025
========= ========
In 1999, 1998 and 1997 approximately $16,213,000, $8,300,000 and
$5,200,000, respectively, of income (loss) before provision for income taxes was
generated from foreign sources. At December 31, 1999, the company had U.S.
Federal net operating loss carryforwards (portions of which expire beginning in
2004) of approximately $390,500,000, and U.S. research and experimental tax
credit carryforwards of approximately $4,499,000. Such net operating loss
carryforwards and tax credits are subject to certain limitations and other
restrictions. Additionally, at December 31, 1999, approximately $43,000,000 of
net deferred tax assets will reduce goodwill and approximately $10,700,000 of
net deferred tax assets will increase equity to the extent such assets reduce
future taxable income. The increase in the valuation allowance of $56,659,000 is
primarily due to current year operating losses. There is a potential for
near-term reversal of the valuation allowance dependent on the future operating
results. Management currently believes that it is more likely than not that its
existing net deferred tax assets will be realized in the future.
57
60
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMON STOCK AND STOCK OPTION PLANS
In October 1998, the company adopted a stockholder rights plan in which
preferred stock purchase rights were granted as a dividend at the rate of one
right for each share of common stock to stockholders of record on November 13,
1998. The plan is designed to deter coercive or unfair takeover tactics. The
rights become exercisable only if a person or group in the future becomes the
beneficial owner of 15% or more of Orbital's common stock, or announces a tender
or exchange offer that would result in its ownership of 15% of more of the
company's common stock. The rights are generally redeemable by Orbital's Board
of Directors at a redemption price of $0.005 per right and expire on October 31,
2008.
Effective January 1, 1999, the company adopted an Employee Stock Purchase
Plan ("ESPP") for employees of the company (including its consolidated
subsidiaries). Under the ESPP, eligible employees may purchase up to 1,000,000
shares of Orbital's common stock, subject to certain limitations. The ESPP has
semi-annual offering periods beginning on January 1 and July 1 and allows
employees to purchase shares of stock at the lesser of 85% of the fair market
value of shares at either the beginning or the end of the offering period.
As of December 31, 1999, the company's 1997 Stock Option and Incentive
Plan, as amended in 1999 (the "1997 Plan"), provided for awards of up to
5,000,000 incentive or non-qualified stock options and shares of restricted
stock to employees, directors, consultants and advisors of the company and its
subsidiaries. Under the terms of the 1997 Plan, options may not be issued at
less than 100% of the fair market value of the company's common stock on the
date of grant. Options under the 1997 Plan vest at a rate set forth by the Board
of Directors in each individual option agreement, generally in one-third
increments over a three-year period following the date of grant. Options expire
no more than ten years following the grant date. The 1997 Plan provides for
automatic grants of non-qualified stock options to nonemployee directors of the
company. The company also has options outstanding that were issued pursuant to
two predecessor plans to the 1997 Plan as well as replacement options issued in
connection with certain acquisitions.
58
61
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED)
The following two tables summarize information regarding options under the
company's stock option plans for the last three years:
WEIGHTED
AVERAGE OUTSTANDING
NUMBER OF OPTION PRICE EXERCISE AND
ORBITAL OPTIONS SHARES PER SHARE PRICE EXERCISABLE
- --------------- ---------- ------------ -------- -----------
Outstanding at December 31, 1996............... 2,725,210 $1.82-$22.00 $13.10 1,324,316
Granted...................................... 1,908,650 13.50-24.00 17.29
Exercised.................................... (326,263) 1.82-18.81 10.43
Cancelled or expired......................... (300,306) 1.82-22.00 15.12
----------
Outstanding at December 31, 1997............... 4,007,291 1.84-24.00 15.16 1,549,185
Granted...................................... 2,236,700 18.38-38.44 32.49
Exercised.................................... (1,086,537) 1.76-20.75 13.39
Cancelled or expired......................... (713,898) 3.51-36.50 35.07
----------
Outstanding at December 31, 1998............... 4,443,556 3.51-38.44 21.09 1,548,218
Granted...................................... 2,070,400 12.50-43.31 25.88
Exercised.................................... (218,346) 3.51-24.00 13.50
Cancelled or expired......................... (282,888) 3.51-38.44 23.17
----------
Outstanding at December 31, 1999............... 6,012,722 $ 3.51-43.31 $22.66 2,602,819
========== ============ ====== =========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT DEC. 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE AT DEC. 31, 1999 EXERCISE PRICE
--------------- ---------------- ---------------- -------------- ---------------- --------------
$ 3.51-$16.88 2,034,510 5.96 $14.49 1,622,801 $14.25
$17.00-$22.62 2,335,956 8.74 $21.43 521,448 $19.38
$24.00-$43.31 1,642,256 8.66 $34.53 458,570 $32.48
------------- --------- ---- ------ --------- ------
$ 3.51-$43.31 6,012,722 7.78 $22.66 2,602,819 $18.49
============= ========= ==== ====== ========= ======
OCC adopted a stock option plan in 1992 (the "OCC Plan"). The OCC Plan
provides for grants of incentive and non-qualified stock options to purchase OCC
common stock to officers and employees of ORBCOMM and the company. Under the
terms of the OCC Plan, incentive stock options may not be granted at less than
100% of the fair market value, and non-qualified options may not be granted at
less than 85% of the fair market value of OCC common stock at the date of grant
as determined by OCC's Board of Directors. Options under the OCC Plan vest at a
rate set forth by the Board of Directors in each individual option agreement,
generally in one-fourth increments over a four-year period following the date of
grant. Certain provisions of the OCC Plan require OCC to repurchase, with cash
or promissory notes, the common stock acquired pursuant to the options. The cash
repurchase amount is restricted by the terms of the ORBCOMM Notes to an amount
not to exceed $1,000,000 in any one year. During 1999, 1998 and 1997, OCC
repurchased 9,700, 1,000 and 43,800 common shares, respectively, under this
provision.
59
62
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED)
The following two tables summarize information regarding options under the
OCC Plan for the last three years:
WEIGHTED
AVERAGE OUTSTANDING
NUMBER OF OPTION PRICE EXERCISE AND
OCC OPTIONS SHARES PER SHARE PRICE EXERCISABLE
- ----------- --------- ------------- -------- -----------
Outstanding at December 31, 1996....... 598,830 $ 1.50-$25.00 $ 9.40 393,903
Granted.............................. 284,500 26.50 26.50
Exercised............................ (20,900) 1.50-25.00 6.68
Cancelled or expired................. (112,600) 1.50-25.00 14.86
---------
Outstanding at December 31, 1997....... 749,830 1.50-26.50 15.22 415,804
Granted.............................. 305,300 26.50-39.75 32.37
Exercised............................ (32,600) 1.50-13.00 3.15
Cancelled or expired................. (17,700) 1.50-26.50 23.94
---------
Outstanding at December 31, 1998....... 1,004,830 1.50-39.75 20.40 520,864
Granted.............................. 36,000 39.75-43.67 43.34
Exercised............................ (35,000) 1.50-26.50 8.02
Cancelled or expired................. (287,825) 4.00-43.67 27.84
---------
Outstanding at December 31, 1999....... 718,005 $ 1.50-43.67 $19.18 531,739
========= ============= ====== =======
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT DEC. 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE AT DEC. 31, 1999 EXERCISE PRICE
--------------- ---------------- ---------------- -------------- ---------------- --------------
$ 1.50-$4.00 217,040 2.83 $ 2.41 217,040 $ 2.41
$ 5.25-$25.00 144,790 4.56 $14.44 139,165 $14.01
$ 26.50 235,500 7.83 $26.50 145,709 $26.50
$39.75-$43.67 120,675 8.48 $40.72 29,825 $39.75
------------- --------- ---- ------ --------- ------
$ 1.50-$43.67 718,005 5.77 $19.18 531,739 $14.14
============= ========= ==== ====== ========= ======
Magellan adopted a stock option plan in 1998 (the "1998 Magellan Plan").
The 1998 Magellan Plan authorizes the issuance of incentive or non-qualified
options to purchase up to 19,900,000 shares of Magellan common stock to Magellan
and Orbital employees, consultants or advisors. Stock options may not be granted
with an exercise price less than 85% of the fair market value of the common
stock at the date of grant as determined by Magellan's Board of Directors.
Options under the 1998 Magellan Plan vest at a rate set forth by the Board of
Directors in each individual option agreement, generally in one-third increments
over a three-year period following the date of the grant. Additionally, Magellan
options that were issued pursuant to an option plan adopted in 1996 are still
outstanding.
60
63
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED)
The following two tables summarize information regarding options under
Magellan's stock option plans for the last three years:
WEIGHTED OUTSTANDING
NUMBER OF OPTION PRICE AVERAGE AND
MAGELLAN OPTIONS SHARES PER SHARE EXERCISE PRICE EXERCISABLE
- ---------------- ---------- ------------ -------------- -----------
Outstanding at December 31, 1996...... 6,593,600 $ 1.10 $1.10 667,539
Granted............................. 1,717,500 1.10 1.10
Exercised........................... (103,909) 1.10 1.10
Cancelled or expired................ (1,427,531) 1.10 1.10
----------
Outstanding at December 31, 1997...... 6,779,660 1.10 1.10 2,528,097
Granted............................. 15,307,204 0.40 0.40
Exercised........................... (21,300) 0.40-1.10 0.98
Cancelled or expired................ (5,093,210) 0.40-1.10 1.03
----------
Outstanding at December 31, 1998...... 16,972,354 0.40-1.10 0.47 5,389,208
----------
Granted............................. 2,253,025 0.40-0.50 0.45
Exercised........................... (52,737) 0.40-1.10 0.46
Cancelled or expired................ (4,558,786) 0.40-1.10 0.45
----------
Outstanding at December 31, 1999...... 14,613,856 $0.40-1.10 $0.46 8,044,552
========== ========== ===== =========
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT DEC. 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE AT DEC., 31, 1999 EXERCISE PRICE
--------------- ---------------- ---------------- -------------- ----------------- --------------
$ 0.40-$0.40 12,527,529 6.92 $0.40 7,047,180 $0.40
$ 0.50-$1.10 2,086,327 8.10 $0.80 997,372 $1.10
------------ ---------- ---- ----- --------- -----
$ 0.40-$1.10 14,613,856 7.09 $0.46 8,044,552 $0.49
============ ========== ==== ===== ========= =====
In connection with Magellan's merger with Ashtech on December 31, 1997,
Magellan assumed Ashtech's option plan and issued replacement options that are
exercisable into Magellan common stock. At December 31, 1999, 580,780
non-qualified replacement options were outstanding, 530,202 of which were
exercisable, at prices ranging from $0.82 to $1.72. The weighted average
remaining contractual life on these outstanding options is 5.99 years.
MDA adopted a stock option plan in 1999 (the "1999 MDA Plan"). The 1999 MDA
Plan authorizes the issuance of options to purchase up to 6,000,000 shares of
MDA common stock to MDA and Orbital employees, consultants or advisors. Stock
options may not be granted with an exercise price less than the fair market
value of the common stock at the date of grant as determined by MDA's Board of
Directors. Options under the 1999 MDA Plan vest at a rate set forth by the Board
of Directors in each individual option agreement, generally in one-third
increments over a three-year period following the date of the grant. At December
31, 1999, 960,000 non-qualified options were outstanding, none of which were
exercisable, with an exercise price per share of $7.50. The weighted average
remaining contractual life is 6.92 years.
11. STOCK-BASED COMPENSATION
The company uses the Black-Scholes option pricing model to determine the
pro forma impact under SFAS 123 to the company's net income and earnings per
share. The model utilizes certain information, such as the interest rate on a
risk-free security maturing generally at the same time as the option being
valued, and requires certain assumptions, such as the expected amount of time an
option will be outstanding until it is
61
64
ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK-BASED COMPENSATION -- (CONTINUED)
exercised or it expires, to calculate the weighted average fair value per share
of stock options granted. This information and the assumptions used for 1999,
1998 and 1997 for all option plans is summarized as follows:
ADDITIONAL SHARES WEIGHTED AVERAGE
AVAILABLE AT RISK-FREE FAIR VALUE
DECEMBER 31, VOLATILITY INTEREST RATE PER SHARE AT GRANT DATE
------------------------------- ------------------ ------------------ ------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
--------- --------- ------- ---- ---- ---- ---- ---- ---- ------ ------ ------
Orbital Plans........ 277,085 271,619 218,868 58% 55% 54% 5.4% 5.8% 6.1% $25.88 $32.49 $17.29
OCC Plan............. 308,750 56,925 48,878 30% 30% 30% 5.6% 5.4% 6.1% $43.34 $32.37 $26.50
Magellan Plans....... 6,808,198 9,892,346 116,431 30% 30% 30% 5.1% 5.5% 5.9% $ 0.45 $ 0.40 $ 1.10
The assumed expected dividend yield was zero for all years for all option plans.
The assumed average expected life for all options for all years was 4.5 years.
Options granted under the MDA Plan in December 1999 are excluded because they
had no material impact on the pro forma calculation for 1999.
Had the company determined compensation expense in accordance with the
provisions of SFAS 123, based on the calculated fair value of stock options at
the grant date, the company's net loss and net loss per common and dilutive
share would have been ($141,428,000) and ($3.78), respectively, for the year
ended December 31, 1999; ($76,176,000) and ($2.14), respectively, for the year
ended December 31, 1998; and ($21,657,000) and ($0.67), respectively, for the
year ended December 31, 1997. Pro forma net income (loss) reflects only options
granted in 1999, 1998 and 1997 and, therefore, may not be representative of the
effects for future periods.
In 1996, the company issued 150,000 stock appreciation rights that vested
annually through 1998. Payment was dependent on appreciation of the company's
common stock over the vesting period. The company recorded approximately
$250,000 and $1,470,000, respectively, in compensation expense during 1998 and
1997 (none in 1999) with respect to these rights. Additional awards for 200,000
stock appreciation rights were granted in 1999 that did not result in any
additional compensation expense.
12. SUPPLEMENTAL DISCLOSURES
DEFINED CONTRIBUTION PLANS
At December 31, 1999, the company had several defined contribution plans
(the "Plans") generally covering all full-time employees in the U.S. and Canada.
Company contributions to the Plans are made based on certain plan provisions and
at the discretion of the Board of Directors, and were approximately $9,363,000,
$10,370,000, and $9,108,000 during 1999, 1998 and 1997, respectively.
CASH FLOWS
Cash payments for interest and income taxes were as follows:
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(In thousands)
Interest paid............................................ $18,458 $16,032 $10,059
Income taxes paid, net of refunds........................ 2,257 1,624 544
62
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ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Management has determined to restate its previously issued consolidated
financial statements for each of the quarters in 1998 and for the first three
quarters of 1999 with respect to its accounting treatment for the matters
described below. The following is a summary of selected quarterly financial data
for the previous two years:
QUARTER ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(In thousands, except share data)
1999, RESTATED
Revenues............................................ $200,171 $226,484 $228,994 $219,262
Gross profit........................................ 41,050 49,254 44,516 1,565
Income (loss) from operations....................... (439) 6,508 (1,773) (62,945)
Net loss............................................ (26,163) (26,071) (39,566) (30,137)
Net loss per common and dilutive share.............. (.70) (.70) (1.06) (.81)
1998, RESTATED
Revenues............................................ 186,027 181,926 187,028 175,681
Gross profit........................................ 50,970 43,547 46,089 40,428
Income (loss) from operations....................... 10,853 1,323 9,296 (8,826)
Net loss............................................ (19,331) (9,373) (2,226) (25,622)
Net loss per common and dilutive share.............. (.59) (.26) (.06) (.69)
1999, AS PREVIOUSLY REPORTED
Revenues............................................ 204,338 232,286 248,914 N/A
Gross profit........................................ 46,311 54,832 54,727 N/A
Income (loss) from operations....................... 3,636 12,504 11,182 N/A
Net loss............................................ (15,871) (10,149) (32,649) N/A
Net loss per common and dilutive share.............. (.43) (.27) (.87) N/A
1998, AS PREVIOUSLY REPORTED
Revenues............................................ 186,159 184,516 187,688 175,914
Gross profit........................................ 51,374 50,851 46,493 38,838
Income (loss) from operations....................... 13,365 8,251 9,292 (5,615)
Net income (loss)................................... 4,745 5,998 2,436 (19,551)
Net income (loss) per common share.................. 0.14 0.17 0.07 (0.53)
Net income (loss) per common share, assuming
dilution.......................................... 0.13 0.17 0.06 (0.53)
EQUITY METHOD ACCOUNTING RESTATEMENT ADJUSTMENTS
(a) As a result of certain participating rights granted to holders of
convertible preferred stock of ORBIMAGE, Orbital significantly influences,
but does not control, ORBIMAGE even though it owns substantially all of
ORBIMAGE's outstanding common stock. Prior to the third quarter of 1999, the
company's consolidated financial statements reflected the company's
application of the equity method of accounting as it pertained to ORBIMAGE
based on Orbital's percentage share of ownership of ORBIMAGE calculated to
give the effect to the assumed conversion of ORBIMAGE's outstanding
convertible preferred stock into ORBIMAGE common stock. As reflected in its
restated consolidated financial statements presented herein, the company
applies the equity method of accounting as it pertains to ORBIMAGE based on
its ownership of outstanding common stock without giving effect to the
assumed conversion of ORBIMAGE's outstanding convertible preferred stock.
The company has also
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ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) -- (CONTINUED)
adjusted the application of the equity method of accounting with respect to
its investment in CCI. The effect of these revisions is to increase
(decrease) equity in losses of affiliates as follows (in thousands):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 30
-------- ------- ------------ ------------
1999......................................... $2,386 $2,286 $ -- N/A
1998......................................... $6,429 $3,376 $325 $(1,611)
(b) In the first quarter of 1998, pursuant to rights granted under a 1997 stock
purchase agreement, ORBIMAGE's minority investors acquired 227,295 shares of
ORBIMAGE's convertible preferred stock for total consideration of
$22,729,500. ORBIMAGE's convertible preferred stock is convertible into
ORBIMAGE's common stock based on a per common share price of $4.17 that was
less than the fair value of ORBIMAGE's common stock when the additional
preferred shares were acquired in 1998. Previously, the company's
consolidated financial statements did not give effect to any beneficial
conversion discount as an additional net loss allocable to the company
pursuant to the equity method of accounting. As reflected in the restated
consolidated financial statements presented herein, Orbital calculates its
equity in losses of affiliates including the impact of the beneficial
conversion. The effect of these revisions is to increase equity in losses of
affiliates as follows (in thousands):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 30
-------- ------- ------------ ------------
1999......................................... $ 965 $1,329 $1,139 N/A
1998......................................... $10,989 $ 875 $ 898 $933
(c) ORBIMAGE's preferred stockholders are entitled to receive a cumulative
dividend, payable either in cash or in additional shares of convertible
preferred stock. To date, all dividends have been paid in additional shares
of convertible preferred stock. Prior to the third quarter of 1999, the
company's consolidated financial statements did not reflect additional net
losses allocable to Orbital as a result of ORBIMAGE's declaration of such
"in-kind" dividends on its convertible preferred stock. As reflected in its
restated consolidated financial statements presented herein, Orbital
calculates its equity in losses of affiliates taking into account such
non-cash dividends at their fair value. The effect of these revisions is to
increase equity in losses of affiliates as follows (in thousands):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 30
-------- ------- ------------ ------------
1999......................................... $2,063 $2,146 -- N/A
1998......................................... $1,438 $1,916 $1,957 $2,013
(d) Prior to the third quarter of 1999, the company's consolidated financial
statements reflected recognition of a gain in the second quarter of 1998
related to ORBIMAGE's issuance of warrants to purchase common stock. As
reflected in the restated consolidated financial statements presented
herein, since the warrants have not been exercised, the company has revised
its accounting for this equity issuance, resulting in the elimination of its
previously reported gain on issuance of affiliate equity by $4,793,000 in
the second quarter of 1998.
(e) Previously, the company's consolidated financial statements reflected the
recognition of revenue related to sales under a procurement agreement with
CCI in 1999 and 1998. As reflected in the restated consolidated financial
statements presented herein, the company has revised its accounting for
these sales,
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ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) -- (CONTINUED)
eliminating its reported revenues. The effect in the 1999 and 1998 quarters
was to decrease revenues and operating income as follows (in thousands):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ ------------
Revenues
1999....................................... $2,051 $ 616 $5,333 N/A
1998....................................... -- $3,031 $1,032 $2,493
Operating Income
1999....................................... $1,125 $ 124 $5,197 N/A
1998....................................... -- -- -- $ 596
(f) In the third quarter of 1999, the company transferred certain incurred
direct and indirect contract costs to its satellite contract with CCI
pursuant to a negotiated settlement with CCI. The company's restated 1999
quarterly consolidated financial statements do not reflect the transfer of
these costs to the CCI contract. The effect of this revision is to increase
revenues and decrease operating income and equity in losses of affiliates
by $3,351,000, $3,080,000 and 8,044,000, respectively, in the third quarter
of 1999.
(g) Prior to the third quarter of 1999, the company's consolidated financial
statements reflected the company's capitalization of interest expense on
various assets, including on its equity investments in ORBIMAGE, ORBCOMM and
CCI. As reflected in the restated consolidated financial statements
presented herein, Orbital has not capitalized interest expense on its
investment in ORBIMAGE and has revised the capitalization of interest on
certain other assets, including its equity method investments in ORBCOMM and
CCI. These revisions include the compounding impact of interest, and the
reduction of eligible investment amounts for losses recognized for equity
method investees. These revisions had the effect of increasing interest
expense as follows (in thousands):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 30
-------- ------- ------------ ------------
1999......................................... $2,310 $2,230 -- N/A
1998......................................... $2,324 $ 956 $1,220 $1,704
(h) Prior to the third quarter of 1999, the company's consolidated financial
statements did not reflect amortization of the excess of the company's
investment in ORBIMAGE over the underlying share of the company's equity in
that affiliate. As reflected in the restated consolidated financial
statements, Orbital is amortizing such excess over eight years. The effect
of this revision is to increase the company's equity in losses from
affiliates by $89,000 for each of the quarters in 1999 and 1998.
(i) Prior to the third quarter of 1999, the company's consolidated financial
statements did not reflect the amortization of previously deferred profits
in connection with its sales of both satellite and ground stations to
ORBCOMM. As reflected in the restated consolidated financial statements
presented herein, Orbital is amortizing a portion of such deferred profits
over the estimated lives of both the satellites and the ground stations.
This revision had the effect of increasing the company's equity in losses
of affiliates by $969,000 in the fourth quarter of 1998 and approximately
$110,000 for all remaining 1999 and 1998 quarters.
ASSET RESTATEMENT ADJUSTMENTS
(j) The company has historically capitalized and depreciated certain product
enhancements and costs associated with internally developed software and
certain other costs. Previously, the company's consolidated financial
statements reflected such costs as capitalized assets. As reflected in the
company's restated consolidated financial statements presented herein, the
company expensed all previously
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ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) -- (CONTINUED)
capitalized enhancement costs and certain non-capitalizable costs. These
revisions resulted in an increase (decrease) in operating income as follows (in
thousands):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 30
-------- ------- ------------ ------------
1999....................................... $3,421 $4,292 $3,868 N/A
1998....................................... $1,738 $ (774) $ (468) $3,373
This also resulted in an increase in equity in losses of affiliates of
$770,000 in the third quarter of 1998.
OTHER RESTATEMENT AND RECLASSIFICATION ADJUSTMENTS
(k) Previously, the company's consolidated financial statements did not reflect
a write-down in the book value of inventory at the company's Magellan
subsidiary related to certain obsolete consumer products. The adjustment to
record the write-down in inventory as reflected in the restated
consolidated financial statements presented herein resulted in an increase
to costs of goods sold of approximately $4,670,000, an increase in selling,
general and administrative expenses of $324,000 and an increase in
non-controlling interests of approximately $2,988,000 in the second quarter
of 1998.
(l) The company had previously amortized a portion of the goodwill arising from
the acquisition of Ashtech as a direct charge against non-controlling
interests. As reflected in the company's restated consolidated financial
statements, the company is amortizing such goodwill as a charge to
operations, resulting in an increase (decrease) in goodwill amortization
expense and an increase (decrease) in non-controlling interests as follows
(in thousands):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 30
-------- ------- ------------ ------------
1999
Goodwill amortization..................... $ (16) $ (16) $ (15) N/A
Non-controlling interests................. $(217) $(211) $(214) N/A
1998
Goodwill amortization..................... $ 300 $ 301 $ 300 $301
Non-controlling interests................. $ 102 $ 102 $ 102 $102
(m) In the second and third quarters of 1999, Magellan recognized revenues on
sales of automotive navigation products to Navigation Solutions when the
products were shipped and accepted by the customer. As reflected in the
company's restated consolidated financial statements, the company recognizes
revenues associated with these sales ratably over the term of the contract
because of the presence of certain undelivered and unspecified post-contract
support services. The effect of this revision is to decrease revenues,
operating profits and related non-controlling interests by $5,636,000,
$379,000 and $129,000, respectively, in the second quarter of 1999 and by
$18,055,000, $1,686,000 and $573,000, respectively, in the third quarter of
1999.
(n) The company's consolidated balance sheet at December 31, 1998 reflected a
net deferred tax asset of approximately $3,400,000 relating primarily to
Canadian investment tax credit carryforwards. The restated consolidated
financial statements include a revised calculation of this deferred tax
asset in 1998 by increasing costs of goods sold and provision for income
taxes by $542,000 and $306,000 in each of the four quarters of 1998.
(o) During the fourth quarter of 1998, the company reclassified a permanent
impairment of $2,479,000 on a certain investment from costs of goods sold
to asset impairment charges.
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ORBITAL SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) -- (CONTINUED)
The company has recorded certain other adjustments, the net effect of which
is not significant individually or in the aggregate.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") has served as our
independent auditors since May 10, 1999. Previously, KPMG LLP ("KPMG") served as
our independent auditors since 1989. On April 22, 1999, we, at the direction of
the Audit and Finance Committee of the Board of Directors, notified KPMG that we
had determined to change auditors. PricewaterhouseCoopers has been given full
authorization by us to speak with KPMG, and has done so. We have not restricted
KPMG from responding fully to such inquiries with respect to any matters.
KPMG issued an audit report, dated February 16, 1999 except as to Note 12
which was as of March 18, 1999, (the "Audit Report"), on the consolidated
financial statements of Orbital as of and for the fiscal years ended December
31, 1998 and December 31, 1997. The Audit Report did not contain any adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. As discussed below, however,
in a letter dated October 28, 1999, KPMG informed Orbital that such Audit
Report, together with its audit report for the fiscal year ended December 31,
1997, should no longer be relied upon.
As was reported in Orbital's Report on Form 8-K dated April 22, 1999 (the
"Form 8-K"), in connection with the audit of our 1998 consolidated financial
statements, KPMG proposed adjustments to our previously issued 1998 quarterly
financial statements and to the results for the 1998 fourth quarter as initially
prepared by us. The proposed adjustments were based on KPMG's interpretation of
specific accounting standards. While we believed that our own interpretation and
application of accounting standards had been reasonable under the circumstances,
after discussion with KPMG and the Audit and Finance Committee, we determined to
restate the previously issued 1998 unaudited quarterly financial statements in
the manner recommended by KPMG. We also agreed to adjust the results for the
fourth quarter of 1998 in the manner recommended by KPMG. Except as described
herein, for the year ended December 31, 1998, there were no disagreements with
KPMG on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of KPMG, would have caused KPMG to make reference to the
subject matter of the disagreements in connection with its report.
On April 14, 1999, KPMG advised us by letter that KPMG believed that there
were material weaknesses in our systems of internal controls relating to the
manner of recording adjustments to financial information submitted by
subsidiaries and operating divisions of Orbital. In particular, KPMG cited:
- adjustments made in the first and second quarters of 1998 to capitalize
certain product enhancement costs at our subsidiary, Magellan
Corporation, which appeared to KPMG to have been made outside Magellan's
system of internal accounting controls and which were not recorded in its
general ledger and were not included in closing consolidating entries for
such quarters;
- an adjustment made in the third quarter of 1998 to increase revenue
recognized pursuant to a contract at our subsidiary, MacDonald, Dettwiler
and Associates Ltd which was not reflected in its general ledger and
which was not included in closing consolidating entries in the third
quarter; and
- corporate adjustments made in closing consolidating entries to certain
long-term contract accounting at our operating divisions, which had the
effect of increasing revenues and profits on some of these contracts and
which KPMG believed did not properly consider all the information used by
the operating divisions.
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In its letter, KPMG further advised us that KPMG's Audit Report was not
affected by the material weakness conditions that it believed existed, and that
KPMG considered such material weaknesses in determining the nature, timing and
extent of its audit tests. Prior to the receipt of KPMG's letter, Orbital and
the Audit and Finance Committee had discussions with KPMG indicating
disagreement with KPMG's conclusions and had expressed to KPMG our view that the
adjustments in question were properly recorded by us after appropriate
consultation with the subsidiaries and operating divisions involved.
On May 13, 1999, we received a response from KPMG to our Form 8-K. In its
response, KPMG disagreed with our characterization of the nature of adjustments
that had been made to the 1998 unaudited quarterly financial statements, stating
that "KPMG believe(d) that the adjustments were not based solely on 'KPMG's
interpretation of the specific accounting standards."' KPMG further indicated
that, in its view, "the adjustments included: (a) adjustments required to
correct errors by the Company in recording certain transactions, which errors
caused the Company to record those transactions in a manner that was
inconsistent with generally accepted accounting principles; and (b) adjustments
required to correct the Company's incorrect application or incorrect
interpretation of specific generally accepted accounting principles."
KPMG also described the matters which led to these adjustments as follows:
"- During each of the four quarters of 1998, the Company capitalized an
aggregate of approximately $6.6 million of product enhancement costs at
its Magellan subsidiary based on an incorrect application of generally
accepted accounting principles.
- During the third quarter of 1998, the Company recognized approximately
$5.8 million in revenue on a contract at the Company's MacDonald
Dettwiler & Associates subsidiary based on an incorrect application of
generally accepted accounting principles.
- During the fourth quarter of 1998, the Company recognized approximately
$1.5 million of revenue with respect to a contract, the terms of which
was not finalized with the customer until after the conclusion of the
quarter.
- During the fourth quarter of 1998, the Company recognized approximately
$5.4 million of revenue with respect to certain of its long-term
contracts through incorrect reductions to cost estimates to complete
those contracts.
- During the fourth quarter of 1998, the Company recognized approximately
$3.8 million of revenue with respect to a certain contract based on an
incorrect application of generally accepted accounting principles.
- During the fourth quarter of 1998, the Company recognized approximately
$5.1 million of revenue relating to sales to an equity method investee
based on an incorrect application of generally accepted accounting
principles."
For each of the matters described above, KPMG proposed adjustments, all of
which were recorded by the Company, to reverse the amounts originally recorded
by the Company.
In addition, KPMG asserted that (i) the items referred to in KPMG's
material weakness letter had caused KPMG to expand significantly the scope of
its audit procedures, (ii) it had advised Orbital that it would stand for
reappointment as the company's principal accountants only if Orbital hired an
experienced chief accounting officer who would have the ultimate authority to
make accounting decisions at the company, (iii) it wished to discuss this
condition with Orbital's Audit and Finance Committee and (iv) its appointment
was terminated by Orbital prior to KPMG having such discussions with the full
Audit and Finance Committee.
On our Form 8-K dated May 14, 1999, we reported that we disagreed with a
number of the statements made by KPMG in its response letter. We reiterated our
belief that (i) our interpretation and application of accounting standards in
our quarterly financial statements as originally filed were reasonable, however,
we accepted KPMG's interpretation of complex accounting standards and agreed to
the restatement proposed by KPMG and (ii) KPMG's characterizations and
enumerations of fourth quarter adjustments in the course of
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the audit were unnecessary. We further stated, "Any audit involves adjustments
proposed by an auditor that are then discussed with its client. Based on
additional analyses of facts by the client and the auditor, the auditor may then
modify its proposed adjustments or not. That was the process engaged in by
Orbital and KPMG. What is significant is that (1) in Orbital's audited financial
statements, all adjustments finally proposed by KPMG were recorded by the
Company and (2) as indicated in KPMG's unqualified opinion, the Company's
financial statements for the year ended December 31, 1998 complied with GAAP and
contained all appropriate disclosures." We also reported that we continued to
disagree with KPMG's assertions with respect to alleged material weaknesses.
In October 1999, after questions were raised pertaining primarily to our
previous accounting for certain transactions related to our investments in
ORBIMAGE and CCI, the valuation of our subsidiary, Magellan, and certain other
matters, KPMG informed Orbital that KPMG's 1998 and 1997 audit reports should no
longer be relied upon. We announced that we would restate our financial
statements for the foregoing periods. In addition, we will restate our interim
financial statements for 1999.
KPMG has audited Orbital's restated consolidated financial statements as of
and for the years ended December 31, 1998 and 1997 and issued its report dated
February 16, 1999, except as to note 13 which is as of March 18, 1999, and Note
1A which is as of April 17, 2000. KPMG's opinion on the restated consolidated
financial statements of Orbital for the fiscal years ended December 31, 1998 and
1997 does not contain any adverse opinion or disclaimer of opinion and is not
qualified or modified as to uncertainty, audit scope or accounting principles.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in Item 4A above and
under the caption "Election of Directors -- Directors to be Elected at the 2000
Annual Meeting, -- Directors Whose Terms Expire in 2001 and -- Directors Whose
Terms Expire in 2002" and "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Proxy Statement to be filed pursuant to Regulation 14A on or
about April 20, 2000 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included under the captions
"Summary Compensation Table," "Option Grants in Last Fiscal Year," "Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values,"
"Indemnification Agreements," "Executive Employment Agreements" and "Information
Concerning the Board and Its Committees" of the Proxy Statement to be filed
pursuant to Regulation 14A on or about April 20, 2000 and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the caption
"Ownership of Common Stock" of the Proxy Statement to be filed pursuant to
Regulation 14A on or about April 20, 2000 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included under the caption
"Related Transactions" of the Proxy Statement to be filed pursuant to Regulation
14A on or about April 20, 2000 and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. The following financial statements, together
with the reports of PricewaterhouseCoopers LLP, KPMG LLP and Arthur Andersen LLP
are filed as a part of this report:
A. Reports of Independent Accountants
B. Consolidated Statements of Operations
C. Consolidated Balance Sheets
D. Consolidated Statements of Changes in Stockholders' Equity
E. Consolidated Statements of Cash Flows
F. Notes to Consolidated Financial Statements
2. Financial Statements of 50% Owned Subsidiary and Financial Statement
Schedules.
The financial statements of ORBCOMM Global, L.P. and Orbital Imaging
Corporation are transmitted with this report.
The following additional financial data are transmitted with this report
and should be read in conjunction with the consolidated financial statements
contained herein. Schedules other than those listed below have been omitted
because they are inapplicable or are not required.
Reports of Independent Accountants on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits. A complete listing of exhibits required is given in the
Exhibit Index that precedes the exhibits filed with this report.
(b) Reports on Form 8-K
(i) On November 1, 1999, we filed a Current Report on Form 8-K, dated
October 29, 1999, disclosing, under Item 5, that our previous independent
auditors, KPMG LLP, had informed the Corporation in a letter dated October
28, 1999 that KPMG's previously issued audit report dated February 16,
1999, except as to Note 12 which is as of March 18, 1999, should no longer
be relied upon.
(c) See Item 14(a)(3) of this report.
(d) See Item 14(a)(2) of this report.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 17, 2000 ORBITAL SCIENCES CORPORATION
By: /s/ DAVID W. THOMPSON
------------------------------------
David W. Thompson
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Dated: April 17, 2000
SIGNATURE: TITLE:
---------- ------
/s/ David W. Thompson Chairman of the Board, Principal Executive
- ------------------------------------------------ Officer and Director
DAVID W. THOMPSON
/s/ James R. Thompson President and Chief Operating Officer,
- ------------------------------------------------ Director
JAMES R. THOMPSON
/s/ Jeffrey V. Pirone Executive Vice President and Chief Financial
- ------------------------------------------------ Officer
JEFFREY V. PIRONE
/s/ Hollis M. Thompson Vice President and Controller
- ------------------------------------------------
HOLLIS M. THOMPSON
/s/ Fred C. Alcorn Director
- ------------------------------------------------
FRED C. ALCORN
/s/ Kelly H. Burke Director
- ------------------------------------------------
KELLY H. BURKE
/s/ Bruce W. Ferguson Director
- ------------------------------------------------
BRUCE W. FERGUSON
/s/ Daniel J. Fink Director
- ------------------------------------------------
DANIEL J. FINK
/s/ Lennard A. Fisk Director
- ------------------------------------------------
LENNARD A. FISK
/s/ Jack L. Kerrebrock Director
- ------------------------------------------------
JACK L. KERREBROCK
/s/ Douglas S. Luke Director
- ------------------------------------------------
DOUGLAS S. LUKE
/s/ John L. McLucas Director
- ------------------------------------------------
JOHN L. MCLUCAS
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SIGNATURE: TITLE:
---------- ------
/s/ Janice I. Obuchowski Director
- ------------------------------------------------
JANICE I. OBUCHOWSKI
/s/ Frank L. Salizzoni Director
- ------------------------------------------------
FRANK L. SALIZZONI
/s/ Harrison H. Schmitt Director
- ------------------------------------------------
HARRISON H. SCHMITT
Director
- ------------------------------------------------
SCOTT L. WEBSTER
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
ORBCOMM Global, L.P.:
We have audited the accompanying consolidated balance sheet of ORBCOMM
Global, L.P. (the "Company") as of December 31, 1999, and the related
consolidated statements of operations and comprehensive loss, partners' capital
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of the Company as of December 31, 1998 and for each of the two years
in the period then ended, were audited by other auditors whose report dated
March 30, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ORBCOMM
Global, L.P. as of December 31, 1999, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Vienna, VA
February 3, 2000
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INDEPENDENT AUDITORS' REPORT
The Partners
ORBCOMM Global, L.P.:
We have audited the accompanying consolidated balance sheets of ORBCOMM
Global, L.P. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations and comprehensive loss, partners' capital,
and cash flows for each of the years in the two-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ORBCOMM
Global, L.P. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Washington, DC
March 30, 1999
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ORBCOMM GLOBAL, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
--------------------
1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,722 $ 3,799
Investments............................................... 0 390
Accounts receivable....................................... 1,264 0
Inventory................................................. 15,964 6,688
Prepaid expenses and other current assets................. 5,171 248
-------- --------
Total Current Assets.............................. 31,121 11,125
Mobile Communications Satellite System and other property,
plant and equipment, net.................................. 346,042 327,946
Other assets, net........................................... 5,543 4,690
Investments in and advances to affiliates................... 6,722 2,483
Goodwill, net............................................... 384 390
-------- --------
TOTAL ASSETS...................................... $389,812 $346,634
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 0 $ 1,190
Accounts payable and accrued liabilities.................. 20,030 19,255
Accounts payable and accrued liabilities -- Orbital
Sciences Corporation................................... 107,513 50,800
-------- --------
Total Current Liabilities......................... 127,543 71,245
Revenue participation accrued interest...................... 1,520 599
Long-term debt.............................................. 170,000 170,000
-------- --------
Total Liabilities................................. 299,063 241,844
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile Partners................................. 70,079 56,520
Orbital Communications Corporation........................ 20,670 48,270
-------- --------
Total Partners' Capital........................... 90,749 104,790
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $389,812 $346,634
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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ORBCOMM GLOBAL, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- -------- --------
REVENUES:
Service and product sales............................... $ 2,772 $ 1,262 $ 527
EXPENSES:
Cost of product sales................................... 3,186 1,242 517
Engineering expenses.................................... 25,492 17,007 8,160
Marketing, administrative and other expenses............ 43,051 34,961 12,070
--------- -------- --------
Total expenses.................................. 71,729 53,210 20,747
--------- -------- --------
LOSS FROM OPERATIONS BEFORE DEPRECIATION AND
AMORTIZATION............................................ (68,957) (51,948) (20,220)
Depreciation............................................ 47,035 11,048 7,348
Goodwill amortization................................... 42 0 0
--------- -------- --------
LOSS FROM OPERATIONS...................................... (116,034) (62,996) (27,568)
OTHER INCOME AND EXPENSES:
Interest income......................................... 335 914 5,378
Interest expense and other financial charges............ (25,866) (2,814) (833)
Equity in net losses of affiliates...................... (2,983) (4,732) (8,413)
--------- -------- --------
NET LOSS.................................................. (144,548) (69,628) (31,436)
OTHER COMPREHENSIVE INCOME (LOSS):
Reclassification adjustments for net holding gains on
sales of investments................................. 0 0 (88)
Currency translation adjustments........................ 348 0 0
--------- -------- --------
COMPREHENSIVE LOSS........................................ $(144,200) $(69,628) $(31,524)
========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
76
79
ORBCOMM GLOBAL, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $(144,548) $(69,628) $(31,436)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Items not affecting cash:
Depreciation......................................... 47,035 11,048 7,348
Goodwill amortization................................ 42 0 0
Amortization of financing fees....................... 1,042 837 833
Equity in net losses of affiliates................... 2,983 4,732 8,413
--------- -------- --------
SUB-TOTAL............................................... (93,446) (53,011) (14,842)
Net changes in non-cash working capital items:
Increase in accounts receivable...................... (1,264) 0 0
Increase in inventory................................ (9,276) (4,528) (409)
Increase (decrease) in prepaid expenses and other
current assets..................................... (4,923) 1,683 (661)
Increase in accounts payable and accrued
liabilities........................................ 4,224 2,095 3,510
Increase in revenue participation accrued interest... 921 585 14
--------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES.............. (103,764) (53,176) (12,388)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................... (11,867) (45,915) (84,241)
Increase in investments in and advances to affiliates... (6,874) (2,105) (16,689)
Purchase of investments................................. 0 (7,228) (47,125)
Proceeds from sale of investments....................... 390 29,594 120,893
Other................................................... (36) (390) 0
--------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES.............. (18,387) (26,044) (27,162)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt............................. (1,190) (1,087) (992)
Partners' contributions................................. 130,159 68,000 0
Financing fees paid and other........................... (1,895) 0 (222)
--------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES...................................... 127,074 66,913 (1,214)
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 4,923 (12,307) (40,764)
CASH AND CASH EQUIVALENTS:
Beginning of period..................................... 3,799 16,106 56,870
--------- -------- --------
CASH AND CASH EQUIVALENTS:
End of period........................................... $ 8,722 $ 3,799 $ 16,106
========= ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid........................................... $ 23,860 $ 23,965 $ 24,060
========= ======== ========
Non-cash capital expenditures and increase in accounts
payable and accrued liabilities -- Orbital Sciences
Corporation.......................................... $ 53,264 $ 29,700 $ 16,452
========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
77
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ORBCOMM GLOBAL, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
TELEGLOBE MOBILE PARTNERS ORBITAL COMMUNICATIONS CORPORATION
------------------------------------ ------------------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
PARTNER'S COMPREHENSIVE PARTNER'S COMPREHENSIVE
CAPITAL INCOME TOTAL CAPITAL INCOME TOTAL TOTAL
--------- ------------- -------- --------- ------------- -------- ---------
PARTNERS' CAPITAL, DECEMBER 31, 1996.... $ 73,552 $ 44 $ 73,596 $ 64,302 $ 44 $ 64,346 $ 137,942
Net loss.............................. (15,718) 0 (15,718) (15,718) 0 (15,718) (31,436)
Reclassification adjustments for net
holding gains on sales of
investments included in net loss.... 0 (44) (44) 0 (44) (44) (88)
-------- ---- -------- -------- ---- -------- ---------
PARTNERS' CAPITAL, DECEMBER 31, 1997.... 57,834 0 57,834 48,584 0 48,584 106,418
Capital contributions................. 33,500 0 33,500 34,500 0 34,500 68,000
Net loss.............................. (34,814) 0 (34,814) (34,814) 0 (34,814) (69,628)
-------- ---- -------- -------- ---- -------- ---------
PARTNERS' CAPITAL, DECEMBER 31, 1998.... 56,520 0 56,520 48,270 0 48,270 104,790
Capital contributions................. 85,659 0 85,659 44,500 0 44,500 130,159
Net loss.............................. (72,274) 0 (72,274) (72,274) 0 (72,274) (144,548)
Share of ORBCOMM Japan Ltd.'s currency
translation adjustment.............. 0 174 174 0 174 174 348
-------- ---- -------- -------- ---- -------- ---------
PARTNERS' CAPITAL, DECEMBER 31, 1999.... $ 69,905 $174 $ 70,079 $ 20,496 $174 $ 20,670 $ 90,749
======== ==== ======== ======== ==== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
78
81
ORBCOMM GLOBAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Organization
In 1993, Teleglobe Mobile Partners ("Teleglobe Mobile"), a partnership
established by affiliates of Teleglobe Inc. ("Teleglobe"), and Orbital
Communications Corporation ("Orbital Communications"), a majority owned
subsidiary of Orbital Sciences Corporation ("Orbital"), formed ORBCOMM Global,
L.P. ("ORBCOMM" or the "Company"), a Delaware limited partnership. Orbital
Communications and Teleglobe Mobile also formed two marketing partnerships,
ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners, L.P.
("ORBCOMM International"), to market services using the ORBCOMM low-Earth orbit
satellite-based data communication system (the "ORBCOMM System") in the United
States and internationally, respectively. In 1995, the Company became a general
and limited partner in ORBCOMM USA with a 98% participation interest and Orbital
Communications' direct partnership interest was reduced to 2% and Teleglobe
Mobile's direct partnership interest was eliminated entirely. Simultaneously,
the Company became a general and limited partner in ORBCOMM International with a
98% participation interest and Teleglobe Mobile's direct partnership interest
was reduced to 2% and Orbital Communications' direct partnership interest was
eliminated entirely. In January 2000, ORBCOMM USA and ORBCOMM International
ceased doing business as separate entities and ORBCOMM assumed their business
operations (see note 13).
In February 1999, the Company formed ORBCOMM Investment Corporation, a
Delaware corporation, as an unrestricted subsidiary for the purpose of making
strategic investments in existing and prospective international service
licensees, other service distributors and various third parties. In April 1999,
the Company and ORBCOMM Enterprises Corporation, a Delaware corporation and
wholly owned subsidiary of the Company, formed ORBCOMM Enterprises, L.P., a
Delaware limited partnership ("ORBCOMM Enterprises"), as an unrestricted
subsidiary of the Company for the purpose of marketing and distributing the
Company's monitoring, tracking and messaging services to customers and
developing applications with respect thereto.
The ORBCOMM System Description
ORBCOMM was formed to develop, construct, operate and market the ORBCOMM
System. The space assets currently consist of a constellation of 35 in-orbit
satellites, 26 of which were in commercial service at December 31, 1999. The
ground and control assets consist of gateways strategically located throughout
the world and the facilities to monitor and manage all network elements. In
addition, ORBCOMM operates a network control center, which is designed to
support the full constellation of ORBCOMM System satellites. The subscriber
assets consist of various models of subscriber units, some of which are intended
for general use, while others are designed to support specific applications.
Regulatory Status
Construction and operation of communications satellites in the United
States requires licenses from the Federal Communications Commission (the "FCC").
Orbital Communications has been granted full operational authority for the
ORBCOMM System by the FCC. Similar licenses are required from foreign regulatory
authorities to permit ORBCOMM System services to be offered outside the United
States. Primary responsibility for obtaining licenses outside the United States
resides with entities who become international licensees. In January 2000,
Orbital Communications agreed to transfer to ORBCOMM the FCC licenses held by
Orbital Communications with respect to the ORBCOMM System upon the occurrence of
certain events (see note 13).
79
82
ORBCOMM GLOBAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) NATURE OF OPERATIONS -- (CONTINUED)
Risks and Uncertainties
The Company's operations are subject to certain risks and uncertainties
that are inherent in satellite communication companies. The Company expects to
have continuing losses for the next several quarters and is dependent upon
additional financing to fund operations, complete construction of additional
system capacity and to further develop its marketing infrastructure. While it is
not contractually required to do so, Teleglobe, through Teleglobe Mobile, is
currently funding the Company's operations. The Company expects to fund its
capital requirements through, among other sources, additional contributions or
loans from Teleglobe or another partner, other equity or debt financings in the
public or private markets or operating lease arrangements, or some combination
thereof.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company emerged from its development stage in the fourth quarter of
1999. The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting in conformity with accounting principles
generally accepted in the United States. These statements include the accounts
of the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, as
well as disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost, determined on the specific
identification basis, or market and primarily represents subscriber units
available for sale to customers.
Depreciation and Recoverability of Long-Lived Assets
The Company depreciates its operational assets over the estimated economic
useful life using the straight-line method as follows:
Space Segment Assets: generally 8 years
Ground Segment Assets: 3 to 10 years
Other Property, Plant and Equipment: generally 5 years
The Company's policy is to review its long-lived assets, including its
Mobile Communications Satellite System, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company recognizes impairment losses when the sum of the
expected future cash flows is less than the carrying amount of the assets. With
regard to satellites, the Company
80
83
ORBCOMM GLOBAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
recognizes impairment losses on a satellite-by-satellite basis. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Given the inherent technical and commercial risks within the space
communications industry, it is possible that the Company's current estimate for
recovery of the carrying amount of its assets may change.
Other Assets
Other assets principally consist of deferred debt issuance costs. These
costs are amortized over the term of the related debt and such amortization is
reported as a component of interest expense and other financial charges.
Investments in Affiliates
The Company uses the equity method of accounting for its investments in and
earnings of affiliates in which the Company has the ability to exercise
significant influence over, but does not control, such affiliates' operations.
In accordance with the equity method of accounting, the Company's carrying
amount of an investment in an affiliate is initially recorded at cost, and is
increased to reflect its share of the affiliate's income and reduced to reflect
its share of the affiliate's losses. The Company's investment is also increased
to reflect contributions to, and decreased to reflect distributions received
from, the affiliate. Investments in which the Company does not have the ability
to exercise significant influence over operating and financial policies are
accounted for under the cost method of accounting.
Prior to the merger in January 2000 described in note 13 and pursuant to
the terms of the relevant partnership agreements: (i) Teleglobe Mobile
controlled the operational and financial affairs of ORBCOMM International; and
(ii) Orbital Communications controlled the operational and financial affairs of
ORBCOMM USA. Since the Company was unable to control, but was able to exercise
significant influence over, ORBCOMM International's and ORBCOMM USA's operating
and financial policies, the Company accounted for its investments in ORBCOMM
International and ORBCOMM USA using the equity method of accounting.
Each year, the Company reviews the underlying value of its investments by
comparing their carrying amount to their net recoverable amount. The
determination of the net recoverable amount consists of evaluating forecasted
income and cash flows. Any permanent impairment of such value would be written
off to expense.
Goodwill
In 1998, the Company acquired the assets of Dolphin Software Systems, Inc.
("Dolphin"). Goodwill, which represents the excess of costs over the fair value
of identifiable assets acquired from Dolphin, is amortized on a straight-line
basis over 10 years.
Each year, the Company reviews the underlying value of its goodwill by
comparing its carrying amount to its net recoverable amount. The determination
of the net recoverable amount consists of evaluating forecasted income and cash
flows. Any permanent impairment of such value would be written off to expense.
Partners' Capital
As of December 31, 1999, Teleglobe Mobile and Orbital Communications were
both general and limited partners in the Company and each partner's limited and
general partner accounts were combined into one
81
84
ORBCOMM GLOBAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
single capital account and presented as such in the consolidated balance sheets
and consolidated statements of partners' capital. Subsequent to year end, the
Company's partnership agreement was amended (see note 13).
Revenue Recognition
Revenues from product sales are generally recognized when products are
shipped or when customers have accepted the products, depending on contractual
terms. Service revenues are generally recognized when services are rendered.
License fees from service license or similar agreements are generally accounted
for as deferred revenues and recognized ratably over the term of the agreements.
Foreign Currency Translation
The Company has determined the functional currency of its Canadian
subsidiary, Dolphin Software Services ULC ("DSS"), to be the U.S. dollar.
Consequently, DSS's financial statements are remeasured into U.S. dollars on the
following basis:
-- monetary assets and liabilities are remeasured at the current exchange
rate;
-- all non-monetary items that reflect prices from past transactions are
remeasured using historical exchange rates, while all non-monetary items
that reflect prices from current transactions are remeasured using the
current exchange rate; and
-- revenues and expenses are remeasured at the average exchange rates
prevailing at the time the transactions occurred, except those expenses
related to non-monetary items, which are remeasured at historical
exchange rates.
Exchange gains/losses resulting from the remeasurement process are reported
on the consolidated statements of operations under "Interest expense and other
financial charges."
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
by the Company within the accompanying consolidated financial statements.
Stock Based Compensation
ORBCOMM and its subsidiary, Dolphin Information Services, Inc. ("DIS"),
account for stock-based compensation in accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), which requires companies to (i) recognize as expense the fair value
of all stock-based awards on the date of grant, or (ii) continue to apply the
provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB 25") and provide pro forma net income (loss) data for
employee stock option grants as if the fair-value-based method as defined in
SFAS No. 123 had been applied. ORBCOMM and DIS elected to continue to apply the
provisions of APB 25 and to provide the pro forma disclosure in accordance with
the provisions of SFAS No. 123.
Segment Information
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), establishes
standards for reporting financial information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about
82
85
ORBCOMM GLOBAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
products and services, geographic areas and major customers. The Company's
revenues are primarily derived from customers in the United States. The
Company's operations for 1999 and 1998 constitute a single segment.
Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components.
Comprehensive loss consists of net loss, net holding gains on sale of
investments and currency translation adjustments and is presented in the
consolidated statements of operations and comprehensive loss. SFAS No. 130
requires only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of operations.
Prior years' consolidated financial statements have been reclassified to conform
with the requirements of SFAS No. 130.
Reclassification of Prior Years' Balances
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform with the current year presentation.
(3) INVESTMENTS
As of December 31, 1998, the Company had $390,000 of investments classified
as "held-to-maturity" U.S. Treasury notes that matured within one year (none as
of December 31, 1999). The fair value of these investments approximated carrying
value.
(4) MOBILE COMMUNICATIONS SATELLITE SYSTEM AND OTHER PROPERTY, PLANT AND
EQUIPMENT
The Mobile Communications Satellite System and other Property, Plant and
Equipment consist of the following assets:
DECEMBER 31,
(IN THOUSANDS)
-----------------------
1999 1998
-------- --------
Space Segment Assets................................. $350,771 $289,414
Ground Segment Assets................................ 50,064 51,141
Other Property, Plant and Equipment.................. 16,841 11,985
-------- --------
Total................................................ 417,676 352,540
Less accumulated depreciation........................ (71,634) (24,594)
-------- --------
Total, net........................................... $346,042 $327,946
======== ========
During construction of the Mobile Communications Satellite System, the
Company is capitalizing substantially all construction costs. The Company also
is capitalizing the portion of the engineering direct labor costs that relates
to hardware and system design and development and coding of the software
products that enhance the operation of the Mobile Communications Satellite
System. For the years ended December 31, 1999, 1998, and 1997, $559,000,
$5,041,000 and $4,641,000, respectively, of such costs have been capitalized.
For the years ended December 31, 1998 and 1997, total interest costs were
$24,550,000 and $24,060,000, respectively, of which $22,573,000 and $24,060,000
have been capitalized as a part of the historical cost of the Mobile
Communications Satellite System. For the year ended December 31, 1999, total
interest costs were $24,784,000, none of which was capitalized. Capitalization
of engineering expenses was
83
86
ORBCOMM GLOBAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) MOBILE COMMUNICATIONS SATELLITE SYSTEM AND OTHER PROPERTY, PLANT AND
EQUIPMENT -- (CONTINUED)
lower in 1999 versus 1998 and 1997 as a result of the November 1998 launch of
full commercial service of the ORBCOMM System in the United States and Canada,
at which time the Company also stopped capitalizing interest costs related to
the ORBCOMM System.
(5) LONG-TERM DEBT
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 aggregate principal amount of 14% Senior Notes due 2004 with
Revenue Participation Interest (the "Old Notes"). All of the Old Notes were
exchanged for an equal principal amount of registered 14% Series B Senior Notes
due 2004 with Revenue Participation Interest (the "Notes"). Revenue
Participation Interest represents an aggregate amount equal to 5% of ORBCOMM
System revenues generated from August 1996 and is payable on the Old Notes and
the Notes on each interest payment date subject to certain covenant
restrictions. The Notes are fully and unconditionally guaranteed on a joint and
several basis by Teleglobe Mobile and Orbital Communications, and were
guaranteed by ORBCOMM USA and ORBCOMM International prior to the merger
described in note 13. The guarantees are non-recourse to the shareholders and/or
partners of the guarantors, limited only to the extent necessary for each such
guarantee not to constitute a fraudulent conveyance under applicable law. The
Indenture governing the Notes contains certain financial covenants providing
for, among other things, limitations on payments and cash transfers between the
credit parties and Teleglobe and Orbital, limitations on transactions between
ORBCOMM and its affiliates, limitations on the incurrence of additional
indebtedness and restrictions on the sale of ORBCOMM's assets. The Indenture
also imposes limitations governing the conduct of ORBCOMM's business and creates
restrictions relating to ORBCOMM's investment activities. In management's
opinion, there have been no events which would cause ORBCOMM to be out of
compliance with any of the covenants set forth in the Indenture.
On the closing of the Old Notes, ORBCOMM used $44,800,000 of the net
proceeds from the sale of the Old Notes to purchase a portfolio of U.S.
Government securities to provide for payment in full of interest on the Old
Notes and the Notes through August 15, 1998. All of this investment portfolio
was used to pay semi-annual interest that was due on the Notes in 1997 and 1998.
The Company also had a $5,000,000 secured note with a financial institution
of which $1,190,000 was outstanding as the current portion of long-term debt as
of December 31, 1998 (none as of December 31, 1999). The note bore interest at a
rate of 9.2% per annum, was secured by equipment located at certain of the U.S.
gateway Earth stations and the network control center and was guaranteed by
Orbital.
(6) RELATED PARTY TRANSACTIONS
The Company paid Orbital $537,000, $5,641,000 and $41,843,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Payments were made for
work performed pursuant to the ORBCOMM System Design, Development, and
Operations Agreement, the ORBCOMM System Procurement Agreement (the "Procurement
Agreement") and the Administrative Services Agreement (for provision of ongoing
administrative support to the Company). Additionally, as of December 31, 1999,
Orbital had deferred invoicing $91,300,000 under the Company's 1995 and 1999
procurement agreements with Orbital ($50,800,000 was deferred under the 1995
procurement agreement as of December 31, 1998). As of December 31, 1999, the
Company also accrued an additional $16,213,000 under the 1995 procurement
agreement. In January 2000, the Company agreed to repayment terms for the
deferred invoicing amounts (see note 13).
In May 1999, ORBCOMM USA transferred approximately $700,000 of its product
development assets associated with the marketing and distribution of the
Company's monitoring, tracking and messaging services
84
87
ORBCOMM GLOBAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) RELATED PARTY TRANSACTIONS -- (CONTINUED)
and associated applications to ORBCOMM Enterprises, an entity formed by the
Company to distribute value-added products and services using the ORBCOMM
System.
The Company paid ORBCOMM Canada Inc., a majority owned subsidiary of
Teleglobe, $494,000 and $216,300 for the years ended December 31, 1999 and 1998,
respectively, pursuant to a consulting agreement dated March 18, 1998, in
consideration for services provided by employees of ORBCOMM Canada.
The Company sold an aggregate of $1,212,000, $1,008,000 and $487,000 of
products to ORBCOMM USA and ORBCOMM International for the years ended December
31, 1999, 1998 and 1997, respectively.
Effective January 1, 1999, the Company commenced allocating to ORBCOMM USA
and ORBCOMM International their respective share of expenses incurred by the
Company on behalf of ORBCOMM USA and ORBCOMM International. For the year ended
December 31, 1999, the Company allocated to ORBCOMM USA and ORBCOMM
International $8,944,000 of expenses (none for the years ended December 31, 1998
and 1997).
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, investments,
receivables, prepaid expenses and accounts payable and accrued liabilities
approximates fair value since all such instruments are short-term in nature.
Fair value for the Company's long-term debt is determined based on quoted market
rates. The table below compares the carrying and the fair value of the Company's
long-term debt as of December 31, 1999 and 1998.
DECEMBER 31, 1999 DECEMBER 31, 1998
(IN THOUSANDS) (IN THOUSANDS)
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Long-term debt.............................. $170,000 $115,600 $170,000 $175,100
(8) STOCK OPTION PLAN
During the second quarter of 1999, the Company and ORBCOMM Corporation, a
Delaware corporation and wholly owned subsidiary of the Company (the
"Corporation"), adopted The Amended and Restated 1999 Equity Plan of ORBCOMM
Corporation and ORBCOMM Global, L.P. (the "Equity Plan"). The Equity Plan
provides for grants of incentive or non-qualified stock options to purchase
common stock of the Corporation to officers, employees, consultants and
independent directors of the Corporation and its affiliates and to officers,
employees and consultants of the Company. Under the terms of the Equity Plan,
incentive or non-qualified stock options may not be granted at less than 100% of
the fair market value at the date of grant. The options vest at a rate set forth
in each individual option agreement, generally in full three years from the date
of grant, subject to acceleration under certain conditions.
In 1999, options to acquire 709,325 shares of the Corporation's common
stock were granted under the Equity Plan, of which 65,375 were subsequently
cancelled as of December 31, 1999. All of these options have been granted at an
exercise price of $14.97, which price represented the fair market value of the
Corporation's common stock on the date of grant. As of December 31, 1999, none
of these options were exercisable and the weighted average remaining contractual
life of these options was 9.67 years.
In 1998, DIS adopted the Dolphin Information Services, Inc. 1998 Stock
Option Plan (the "DIS Plan"). The DIS Plan provides for grants of incentive or
non-qualified stock options to purchase DIS common stock to officers, employees
and outside directors of DIS, the Company and their respective affiliates. Under
the terms of the DIS Plan, incentive stock options may not be granted at less
than 100% of the fair market value of DIS
85
88
ORBCOMM GLOBAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) STOCK OPTION PLAN -- (CONTINUED)
common stock at the date of grant and non-qualified stock options may not be
granted at less than 85% of the fair market value of DIS common stock at the
date of grant. The options vest at a rate set forth in each individual option
agreement, generally in full three years from the date of grant, subject to
acceleration under certain conditions.
The following table summarizes information regarding options under the DIS
Plan:
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------- ------------
Granted..................................................... 1,372,500 $0.08
Cancelled................................................... (135,000) $0.08
---------
Outstanding as of December 31, 1998......................... 1,237,500 $0.08
Granted..................................................... 278,000 $1.00
---------
Outstanding as of December 31, 1999......................... 1,515,500 $0.08-$1.00
=========
As of December 31, 1999 and 1998, all stock options had been granted at the
fair market value of DIS's common stock on the date of grant and none were
exercisable. The weighted average remaining contractual life of the outstanding
stock options was 8.98 years and 9.75 years as of December 31, 1999 and 1998,
respectively.
(9) STOCK BASED COMPENSATION
The Company uses the Black-Scholes option-pricing model to determine the
pro forma impact of stock option grants under SFAS No. 123 on the Company's net
loss. The model uses certain information, such as the interest rate on a
risk-free security maturing generally at the same time as the option being
valued, and requires certain assumptions, such as the expected amount of time an
option will be outstanding until it is exercised or it expires, to calculate the
weighted-average fair value per share of stock options granted.
This information and the assumptions used for 1999 and 1998 for the Equity
Plan and the DIS Plan are summarized as follows:
WEIGHTED-AVERAGE
FAIR VALUE
ADDITIONAL SHARES PER SHARE AT GRANT RISK-FREE
AVAILABLE AS OF DECEMBER 31, DATE INTEREST RATE
----------------------------- ------------------ ---------------
1999 1998 1999 1998 1999 1998
----------- ----------- ------ ----- ---- ----
ORBCOMM............................. 856,050 N/A $14.97 N/A 5.61% N/A
DIS................................. 1,484,500 1,762,500 $ 0.25 $0.08 5.61% 4.22%
The assumed volatility, dividend yield and average expected life was 30%,
zero percent and 4.5 years, respectively, for both plans for the year ended
December 31, 1999 and was 30%, zero percent and 4.5 years, respectively, for the
DIS Plan for the year ended December 31, 1998.
Had the Company determined compensation cost based on the fair value at the
grant date for the stock options in accordance with the fair value method
prescribed by SFAS No. 123, the Company's net loss would have been $144,795,000
and $69,628,000 for the years ended December 31, 1999 and 1998, respectively.
(10) EMPLOYEE SAVINGS PLAN
The Company maintains the ORBCOMM Retirement Savings Plan (the "Plan"),
which is a 401(k) profit sharing plan. All U.S. employees who are scheduled to
work 1,000 hours in a consecutive 12-month
86
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ORBCOMM GLOBAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) EMPLOYEE SAVINGS PLAN -- (CONTINUED)
period are eligible to participate in the Plan on their dates of employment.
Employees may contribute 15% of eligible compensation to the Plan and the
Company matches 100% of the amount contributed by each employee up to 4% of such
compensation. In addition, the Plan contains a discretionary contribution
component, pursuant to which the Company may make an additional annual
contribution to the Plan. As of December 31, 1999, Company contributions vested
over a five-year period from the employee's date of employment. Subsequent to
year end 1999, the vesting period was shortened to three years.
Company contributions (both the Company match and the annual discretionary
contribution) for the years ended December 31, 1999, 1998 and 1997 were
$1,227,000, $1,127,000 and $765,000, respectively.
(11) COMMITMENTS AND CONTINGENCIES
1999 Procurement Agreement
In 1999, the Company entered into a procurement agreement with Orbital, as
amended, under which the Company will purchase, among other things, 11
additional satellites, two satellite propulsion rings and two separate Pegasus
launch vehicles at a total cost not to exceed $93,000,000. The Company's
remaining obligation under this agreement is approximately $77,000,000.
Lease Commitments
The Company leases facilities and equipment under agreements classified as
operating leases. Rental expense for 1999, 1998 and 1997 amounted to $2,227,000,
$2,074,000 and $951,000, respectively, of which $815,000, $939,000 and $825,000,
respectively, represents rental expense charged to the Company by Orbital as
part of the Administrative Services Agreement. The future minimum rental
payments under non-cancelable operating leases are as follows:
PERIODS IN THOUSANDS
------- ------------
2000........................................................ $2,179
2001........................................................ 2,202
2002........................................................ 2,096
2003........................................................ 919
2004........................................................ 526
Thereafter.................................................. 0
------
Total minimum lease commitments........................... $7,922
======
Contingencies
From time to time, the Company is involved in claims from licensees or
potential licensees. In management's opinion, there will be no material adverse
impact on the financial condition or results of operations of the Company as a
result of such claims.
87
90
ORBCOMM GLOBAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS)
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- -------- ---------
1999
Total revenues........................... $ 514 $ 550 $ 719 $ 989 $ 2,772
Operating expenses (including
depreciation).......................... 25,030 30,588 30,044 33,144 118,806
-------- -------- -------- -------- ---------
Loss from operations..................... (24,516) (30,038) (29,325) (32,155) (116,034)
Interest income (expense), net........... (6,403) (6,580) (6,331) (6,217) (25,531)
Equity in net income (losses) of
affiliates............................. (2,857) 2,348 (1,388) (1,086) (2,983)
-------- -------- -------- -------- ---------
Net loss................................. $(33,776) $(34,270) $(37,044) $(39,458) $(144,548)
======== ======== ======== ======== =========
1998
Total revenues........................... $ 220 $ 507 $ 197 $ 338 $ 1,262
Operating expenses (including
depreciation).......................... 9,076 16,507 18,739 19,936 64,258
-------- -------- -------- -------- ---------
Loss from operations..................... (8,856) (16,000) (18,542) (19,598) (62,996)
Interest income (expense), net........... 218 143 120 (2,381) (1,900)
Equity in net losses of affiliates....... (2,008) (1,225) (818) (681) (4,732)
-------- -------- -------- -------- ---------
Net loss................................. $(10,646) $(17,082) $(19,240) $(22,660) $ (69,628)
======== ======== ======== ======== =========
(13) SUBSEQUENT EVENTS
Effective as of January 1, 2000, ORBCOMM entered into an agreement with
Teleglobe, Orbital, Teleglobe Mobile and Orbital Communications pursuant to
which:
- Teleglobe Mobile became the Company's sole general partner and majority
owner, with an interest of approximately 64% as of January 1, 2000;
- Orbital Communications remained a limited partner, with a minority
ownership interest of approximately 36% as of January 1, 2000;
- the Company made arrangements to settle $91,300,000 of deferred invoiced
amounts owed to Orbital; and
- Teleglobe agreed to sell to the Company the business of ORBCOMM Canada,
ORBCOMM's international licensee for Canada, and Orbital agreed to sell
to the Company the assets of its GEMtrac division, which ORBCOMM has
operated since March 1999.
Additionally, Orbital Communications agreed to file an application with the
FCC to transfer to the Company the FCC licenses held by Orbital Communications
with respect to the ORBCOMM System if an aggregate of $75,000,000 in additional
capital contributions or similar equity investments has been made to the Company
by any entity after January 1, 2000.
On January 26, 2000, each of Orbital Communications and Teleglobe Mobile
contributed to the Company its 2% direct participation interest in ORBCOMM USA
and ORBCOMM International, respectively (the "Merger"). As a result of the
Merger, these companies ceased doing business as separate entities and the
Company assumed their business operations.
The $91,300,000 of deferred invoiced amounts have been or will be settled
as follows:
- On January 26, 2000, ORBCOMM paid $41,460,000 to Orbital. The funds for
this payment came from an equity contribution made in ORBCOMM on that
date by Teleglobe Mobile.
88
91
ORBCOMM GLOBAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) SUBSEQUENT EVENTS -- (CONTINUED)
- In March 2000, Orbital is to invoice ORBCOMM $33,082,000 and
simultaneously assign such invoice to Orbital Communications. Orbital
Communications will request ORBCOMM to convert the full amount of this
invoice into a contribution to Orbital Communications' partnership
interests in ORBCOMM.
- The remaining $16,758,000, together with accrued interest, is to be paid
by ORBCOMM to Orbital 50% on each of March 31, 2001 and June 30, 2001.
89
92
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders
Orbital Imaging Corporation
In our opinion, the accompanying balance sheet as of December 31, 1999 and
the related statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of Orbital
Imaging Corporation and its subsidiary at December 31, 1999, and the results of
their operations and their cash flows for the year then ended conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
March 24, 2000
McLean, Virginia
90
93
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Orbital Imaging Corporation:
We have audited the accompanying balance sheet of Orbital Imaging
Corporation ("ORBIMAGE") as of December 31, 1998, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 1998. These financial statements are the
responsibility of ORBIMAGE's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Orbital Imaging Corporation
as of December 31, 1998, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
As discussed in Note 3, the accompanying balance sheet as of December 31,
1998 and the consolidated statements of operations, stockholders' equity and
cash flows for the year then ended have been restated.
KPMG LLP
Washington, D.C.
January 22, 1999, except for the second paragraph of
Note 3 which is as of March 23, 2000
91
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ORBITAL IMAGING CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------
1998 1999
---------- --------
(RESTATED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 25,082 $ 4,855
Available-for-sale securities, at fair value.............. 34,401 32,407
Restricted held-to-maturity securities, at amortized
cost................................................... 16,724 12,932
Receivables and other current assets, net of allowances of
$165 and $80, respectively............................. 2,291 5,525
-------- --------
Total current assets.............................. 78,498 55,719
Restricted held-to-maturity securities, at amortized cost... 8,201 --
Property, plant and equipment, at cost, less accumulated
depreciation of $7,630 and $10,841, respectively.......... 15,956 31,937
Satellites and related rights, at cost, less accumulated
depreciation and amortization of $22,367 and $30,973,
respectively.............................................. 196,709 261,622
Other assets................................................ 8,714 10,560
-------- --------
TOTAL ASSETS...................................... $308,078 $359,838
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 16,879 $ 14,341
Current portion of deferred revenue....................... 8,522 9,277
Deferred tax liabilities.................................. 580 --
-------- --------
Total current liabilities......................... 25,981 23,618
Senior notes................................................ 142,622 214,575
Deferred revenue, net of current portion.................... 23,698 15,334
Deferred tax liabilities.................................... 3,216 77
Capitalized lease obligation, net of current portion........ 108 --
-------- --------
TOTAL LIABILITIES................................. 195,625 253,604
Preferred stock subject to repurchase, par value $0.01;
10,000,000 shares authorized; Series A 12% cumulative
convertible, 2,000,000 shares authorized, 687,576 and
772,561 shares issued and outstanding, respectively
(liquidation value of $70,133 and $78,801,
respectively)............................................. 78,489 91,563
STOCKHOLDERS' EQUITY:
Common stock, par value $0.01; 75,000,000 shares
authorized; 25,214,000 shares issued and outstanding... 252 252
Additional paid-in-capital................................ 86,782 87,285
Accumulated deficit....................................... (53,070) (72,866)
-------- --------
Total stockholders' equity........................ 33,964 14,671
-------- --------
TOTAL............................................. $308,078 $359,838
======== ========
See accompanying notes to consolidated financial statements.
92
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ORBITAL IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
(RESTATED)
Revenues.............................................. $ 2,062 $ 11,663 $ 18,587
Direct expenses....................................... 6,312 15,215 21,212
----------- ----------- -----------
Gross loss............................................ (4,250) (3,552) (2,625)
Selling, general and administrative expenses.......... 2,845 7,328 10,362
----------- ----------- -----------
Loss from operations.................................. (7,095) (10,880) (12,987)
Interest income, net of interest expense of $4,790 and
$1,684 in 1998 and 1999, respectively............... 1,261 1,915 2,636
----------- ----------- -----------
Loss before benefit for income taxes.................. (5,834) (8,965) (10,351)
Benefit for income taxes.............................. (1,752) (3,286) (3,629)
----------- ----------- -----------
Net loss.............................................. $ (4,082) $ (5,679) $ (6,722)
=========== =========== ===========
Loss per common share -- basic and diluted(1)......... $ (0.42) $ (1.05) $ (0.79)
Loss available to common stockholders................. $ (6,890) $ (26,538) $ (19,796)
Weighted average shares outstanding -- basic and
diluted(1).......................................... 16,431,854 25,214,000 25,214,000
- ---------------
(1) All potentially dilutive securities, such as preferred stock subject to
repurchase, warrants and stock options, are antidilutive for each year
presented.
See accompanying notes to consolidated financial statements.
93
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ORBITAL IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------ ---------- ----------- -------
BALANCE AS OF DECEMBER 31, 1996............ -- $ -- $45,921 $(19,642) $26,279
Shares issued to Orbital................... 25,200,000 252 31,066 -- 31,318
Shares issued to director.................. 14,000 -- 50 -- 50
Preferred stock dividends.................. -- -- -- (2,808) (2,808)
Tax-sharing charge......................... -- -- (1,752) -- (1,752)
Net loss................................... -- -- -- (4,082) (4,082)
---------- ---- ------- -------- -------
BALANCE AS OF DECEMBER 31, 1997............ 25,214,000 252 75,285 (26,532) 49,005
Common stock warrants issued, net.......... -- -- 7,594 -- 7,594
Deemed dividends on issuance of preferred
stock subject to repurchase.............. -- -- -- (9,975) (9,975)
Issuance of compensatory stock options..... -- -- 323 -- 323
Preferred stock dividends.................. -- -- -- (10,884) (10,884)
Capital contributed........................ -- -- 3,580 -- 3,580
Net loss................................... -- -- -- (5,679) (5,679)
---------- ---- ------- -------- -------
BALANCE AS OF DECEMBER 31, 1998
(RESTATED)............................... 25,214,000 252 86,782 (53,070) 33,964
Issuance of stock options.................. -- -- 413 -- 413
Capital contributed........................ -- -- 90 -- 90
Preferred stock dividends.................. -- -- -- (13,074) (13,074)
Net loss................................... -- -- -- (6,722) (6,722)
---------- ---- ------- -------- -------
BALANCE AS OF DECEMBER 31, 1999............ 25,214,000 $252 $87,285 $(72,866) $14,671
========== ==== ======= ======== =======
See accompanying notes to consolidated financial statements.
94
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ORBITAL IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- ---------- --------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (4,082) $ (5,679) $ (6,722)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED IN)
PROVIDED BY OPERATING ACTIVITIES:
Depreciation, amortization and other................... 5,541 12,857 14,258
Deferred tax benefit................................... (1,752) (3,286) (3,629)
CHANGES IN ASSETS AND LIABILITIES:
Increase in receivables and other current assets....... (84) (700) (4,502)
(Increase) decrease in other assets.................... 371 (532) 357
Increase (decrease) in accounts payable and accrued
expenses............................................. 4,335 12,370 (2,686)
Increase (decrease) in deferred revenue................ 2,005 (5,172) (7,609)
--------- --------- --------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES...................................... 6,334 9,858 (10,533)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (49,029) (108,533) (92,388)
Purchases of restricted held-to-maturity securities....... -- (32,185) (7,306)
Purchases of available-for-sale securities................ (115,751) (119,783) (53,698)
Maturities of restricted held-to-maturity securities...... -- 7,568 19,691
Maturities of available-for-sale securities............... 102,442 60,905 38,362
Sales of available-for-sale securities.................... 1,972 35,818 17,671
Payment for business acquisition.......................... -- (5,000) --
--------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (60,366) (161,210) (77,668)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term obligations....... -- 136,682 68,082
Repayment of capitalized lease obligation................. -- -- (108)
Net proceeds from issuance of common stock warrants....... -- 7,594 --
Net proceeds from issuance of preferred stock subject to
repurchase............................................. 33,547 21,275 --
Net proceeds from issuance of common stock................ 31,368 -- --
--------- --------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 64,915 165,551 67,974
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 10,883 14,199 (20,227)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ -- 10,883 25,082
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 10,883 $ 25,082 $ 4,855
========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ -- $ 9,009 $ 20,582
========= ========= ========
NON-CASH ITEMS:
Preferred stock dividends................................. $ 2,808 $ 10,884 $ 13,074
Deemed dividend on issuance of preferred stock subject to
repurchase............................................. -- 9,975 --
Capital contributed -- tax basis adjustment............... -- 3,580 90
Capitalized compensatory stock options.................... -- 119 174
Capitalized lease obligation.............................. -- 223 --
See accompanying notes to consolidated financial statements.
95
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ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) RELATIONSHIP WITH ORBITAL
In 1991, the ORBIMAGE operating division of Orbital Sciences Corporation
("Orbital") was established to manage the development of remote imaging
satellites which would collect, process and distribute digital imagery of land
areas, oceans and the atmosphere. In 1992, Orbital Imaging Corporation
("ORBIMAGE") was incorporated in Delaware as a wholly owned subsidiary of
Orbital. On May 8, 1997 and July 3, 1997, ORBIMAGE issued preferred stock to
private investors to fund a significant portion of the remaining costs of
existing projects (the "Private Placement"). Orbital also purchased additional
common stock, bringing its total common equity investment to approximately $91.5
million. Also on May 8, 1997, ORBIMAGE executed certain contracts with Orbital
whereby all assets and liabilities of Orbital's operating division, ORBIMAGE,
were sold to ORBIMAGE at the historical cost. Accordingly, the accompanying
financial statements incorporate the historical accounts and operations of the
operating division prior to May 8, 1997, as predecessor financial statements of
ORBIMAGE.
ORBIMAGE has four contracts with Orbital: (i) the ORBIMAGE System
Procurement Agreement dated November 18, 1996, as amended (the "System
Procurement Agreement"), (ii) the OrbView-2 License Agreement dated May 8, 1997
(the "OrbView-2 License"), (iii) the Amended and Restated Administrative
Services Agreement dated May 8, 1997 (the "Administrative Services Agreement"),
and (iv) the Stock Purchase Agreement dated October 26, 1999, as amended (the
"Stock Purchase Agreement").
Under the System Procurement Agreement, ORBIMAGE purchased (i) the
OrbView-1 satellite, (ii) an exclusive license entitling ORBIMAGE to all of the
economic rights and benefits of the OrbView-2 satellite, (iii) the OrbView-3
satellite and launch service, (iv) the OrbView-4 satellite and launch service
and (v) the ground system assets used to command and control the satellites as
well as receive and process imagery. Pursuant to the System Procurement
Agreement through December 31, 1999, ORBIMAGE has committed to purchase various
satellites, rights and ground systems for approximately $279.9 million, net of
$31.0 million which will be funded by the U.S. Air Force through a contract with
Orbital. ORBIMAGE incurred costs of approximately $47.6 million, $94.3 million
and $33.0 million for the years ended December 31, 1997, 1998 and 1999,
respectively, under the System Procurement Agreement. As of December 31, 1999,
ORBIMAGE has remaining commitments under the System Procurement Agreement of
$22.4 million, net of $31.0 million, which will be funded by the U.S. Air Force
through a contract with Orbital. In March 2000, the System Procurement Agreement
was amended to increase the cost of the OrbView-3 and OrbView-4 satellites by
$14 million. In exchange for permitting ORBIMAGE to pay this cost increase in
the form of post-launch, on-orbit incentives, the Stock Purchase Agreement was
amended to reduce Orbital's stock purchase commitment to $12.5 million from
$25.0 million.
Under the OrbView-2 License Agreement, Orbital has granted an exclusive
worldwide license to ORBIMAGE to use and sell OrbView-2 imagery. Pursuant to the
terms of the OrbView-2 License Agreement, Orbital has assigned to ORBIMAGE all
amounts that are due or become due to Orbital under a contract Orbital has with
NASA to deliver OrbView-2 imagery, and ORBIMAGE has sole responsibility for
operating and controlling the satellite.
Under the Administrative Services Agreement, ORBIMAGE is reimbursing
Orbital for management, accounting, legal, financial services, office space and
other administrative services, as well as certain direct and indirect operating
services provided by Orbital. ORBIMAGE incurred costs of approximately $3.2
million, $2.7 million and $2.1 million for the years ended December 31, 1997,
1998 and 1999, respectively, under the Administrative Services Agreement. The
term of the Administrative Services Agreement is expected to terminate on or
before December 31, 2001.
Under the Stock Purchase Agreement, Orbital was originally required to
purchase up to 2,500,000 shares of common stock for a price of $10 per share in
minimum $5.0 million increments whenever ORBIMAGE's aggregate balance of cash,
cash equivalents and available-for-sale securities falls below $10.0 million. In
96
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ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) RELATIONSHIP WITH ORBITAL -- (CONTINUED)
March 2000, in connection with the March 2000 amendment to the System
Procurement Agreement, the Stock Purchase Agreement was amended to reduce the
number of shares required to be purchased by Orbital to 1,250,000 from 2,500,000
shares, although that number may increase in the event of certain delays in the
launch of OrbView-4.
ORBIMAGE has also entered into an agreement with Orbital and MacDonald,
Dettwiler and Associates Ltd. ("MDA"), a Canadian subsidiary of Orbital, under
which ORBIMAGE has acquired the exclusive worldwide distribution rights for the
RadarSat-2 satellite imagery (the "RadarSat-2 License"). Under the RadarSat-2
License, MDA will own and operate the RadarSat-2 satellite, and MDA will provide
operations, data reception, processing, archiving and distribution services to
ORBIMAGE. ORBIMAGE's acquisition of the RadarSat-2 License will cost $60.0
million, of which $30.0 million was paid in 1999. Approximately $140.0 million
of RadarSat-2's $200 million estimated total cost will be funded by the Canadian
Space Agency through a contract with Orbital and MDA. The remaining payments
will not exceed $15.0 million in 2001; $10.0 million in 2002; and $5.0 million
upon the successful on-orbit checkout of RadarSat-2.
Amounts due to Orbital of $9.2 million and $0.6 million as of December 31,
1998 and 1999, respectively, were included in accounts payable and accrued
expenses.
For the year ended December 31, 1999, ORBIMAGE recorded revenue of $0.5
million on contracts with Orbital.
Two ORBIMAGE directors are also directors of Orbital, and one of ORBIMAGE's
officers is also an employee of Orbital.
(2) NATURE OF OPERATIONS
The OrbView-1 satellite was launched in 1995 and provides severe weather
and atmospheric images, including global lightning information and measurements
used in analyzing atmospheric temperature information. The OrbView-2 satellite
was launched on August 1, 1997, and completed its on-orbit checkout in October
1997. ORBIMAGE recognized revenues related to the OrbView-2 satellite of $1.3
million, $9.1 million and $10.5 million for the years ended December 31, 1997,
1998 and 1999, respectively. The OrbView-4 satellite is currently scheduled to
be launched in the first quarter of 2001 and will provide one-meter panchromatic
and four-meter multispectral imagery of the Earth. The OrbView-3 satellite will
provide one-meter panchromatic, four-meter multispectral and eight-meter
hyperspectral imagery of the Earth and is currently expected to be launched in
the second quarter of 2001. The imagery provided by both OrbView-3 and OrbView-4
will have a broad range of applications for U.S. and foreign national security
and many commercial and scientific markets. In 1998, ORBIMAGE acquired the
RadarSat License. RadarSat-2 will provide high-resolution commercial radar
imaging and is currently expected to be launched in the fourth quarter of 2002.
(3) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
In consultation with its new independent auditors retained in July 1999,
the valuation of the warrants issued on February 25, 1998 in connection with the
senior notes (Note 12) was restated from $9.0 million to $7.9 million based on
an independent third party valuation, which resulted in reducing the debt
discount and additional paid in capital. The Series A Preferred Stock sold on
February 25, 1998 was deemed to have a
97
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ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
beneficial conversion feature totaling $10.0 million as a result of the
difference between the common stock fair value based on an independent third
party valuation and the conversion price of the preferred stock. This difference
is a deemed dividend to the holders of the preferred stock. The preferred stock
dividends paid in shares during 1998 were also deemed to have a beneficial
conversion feature as a result of the difference between the conversion price of
the preferred stock and the underlying value of the common stock. Additionally,
the stock options issued to employees during 1998 were deemed to be compensatory
based on the difference between the exercise price and the common stock fair
value based on an independent third party valuation. As a result of these
changes, ORBIMAGE's loss before income taxes, benefit for income taxes, net
loss, preferred stock dividends, loss available to common stockholders and loss
per common share basic and diluted were restated as follows for the year ended
December 31, 1998 (in thousands, except per share data):
ORIGINALLY REPORTED:
Loss before income taxes.................................. $ (8,831)
Benefit for income taxes.................................. (3,312)
--------
Net loss.................................................. (5,519)
Preferred stock dividends................................. (7,324)
--------
Loss available to common stockholders..................... $(12,843)
========
Loss per common share -- basic and diluted (1)............ $ (0.51)
========
RESTATED:
Loss before income taxes.................................. $ (8,965)
Benefit for income taxes.................................. (3,286)
--------
Net loss.................................................. (5,679)
Preferred stock dividends................................. (20,859)
--------
Loss available to common stockholders..................... $(26,538)
========
Loss per common share -- basic and diluted (1)............ $ (1.05)
========
-------------------------------
(1) All potentially dilutive securities, such as preferred stock
subject to repurchase, warrants and stock options, are
antidilutive for each year presented.
Principles of Consolidation
The consolidated financial statements include the accounts of ORBIMAGE and,
in 1999, its wholly owned subsidiary. All material intercompany transactions and
accounts have been eliminated in consolidation.
Revenue Recognition
ORBIMAGE's principal source of revenue is the sale of satellite imagery to
customers, value-added resellers and distributors. Such sales often require
ORBIMAGE to provide imagery over the term of a multi-year sales contract.
Accordingly, ORBIMAGE recognizes revenues on imagery contracts on a
straight-line basis over the delivery term of the contract. Deferred revenue
represents receipts in advance of the delivery of imagery.
ORBIMAGE recognizes revenue on the contracts to construct OrbView-3 and
OrbView-4 distributor ground stations using the percentage-of-completion method
of accounting. Revenue on these contracts is recognized based on costs incurred
in relation to total estimated costs. To the extent that estimated costs of
98
101
ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
completion are adjusted, revenue and profit recognized from a particular
contract will be affected in the period of the adjustment. Anticipated contract
losses are recognized as they become known.
Services Provided by Orbital
A substantial part of ORBIMAGE's administrative services, including legal,
accounting, human resources and purchasing is provided to ORBIMAGE at cost by
Orbital. Such costs include both specifically identifiable services and certain
pooled costs allocated by Orbital based on ORBIMAGE's proportional use. ORBIMAGE
believes that the cost of these services, as provided for in the accompanying
statements of operations, approximates the cost of similar services if obtained
directly by ORBIMAGE.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123") requires companies to recognize as expense
the fair value of all stock-based awards on the date of grant, or (ii) continue
to apply the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and provide pro forma net
income (loss) disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS 123 had been
applied.
ORBIMAGE has elected to continue to apply the provision of APB 25 and
provide the pro forma disclosure provisions of SFAS 123 (see Note 16).
Compensation expense is recognized over the vesting period for stock option
grants to employees that have market values in excess of the strike price. To
the extent that ORBIMAGE grants stock options to non-employee consultants or
advisors, ORBIMAGE records costs equal to the fair value of the options granted
as of the measurement date as determined using a Black-Scholes model.
Cash and Cash Equivalents
ORBIMAGE considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Securities
Management determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when ORBIMAGE has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization and accretion are
included in interest income. The held-to-maturity securities are restricted by
provisions of the senior notes. (See Note 12.)
Securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. The amortized cost of available-for-sale
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Amortization, accretion, and realized gains and losses are included
in interest income. The cost of securities sold is based on the specific
identification method.
Securities with original maturities of more than three months, but not more
than one year, are classified as current assets. Securities with original
maturities of more than one year are classified as long-term assets.
99
102
ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Financial Instruments
The carrying amounts for ORBIMAGE's cash and cash equivalents, receivables,
accounts payable and accrued expenses approximate fair value. The fair values
for securities (see Note 8) and senior notes (see Note 12) are based on quoted
market prices.
Two foreign distributors have issued letters of credit to ORBIMAGE as
credit enhancements for the construction of regional distributor ground
stations. One letter of credit has a face value of $13.5 million and expires on
January 31, 2001 and the other letter of credit has a face value of $4.0 million
and expires on May 4, 2001. The face values for the letters of credit
approximate fair value.
ORBIMAGE does not have any derivative financial instruments as of December
31, 1999, and believes that the interest rate risk associated with its senior
notes and the market risk associated with its securities are not material to the
results of operations of ORBIMAGE. The available-for-sale securities subject
ORBIMAGE's financial position to interest rate risk.
Satellites and Related Rights and Property, Plant and Equipment
ORBIMAGE is purchasing the OrbView-1, OrbView-3 and OrbView-4 satellites,
the OrbView-2 License and the ground system assets pursuant to the System
Procurement Agreement. ORBIMAGE is purchasing the RadarSat-2 License pursuant to
a separate agreement with Orbital and MDA. ORBIMAGE is constructing the ORBIMAGE
digital catalogue, a digital imagery catalogue and processing system, to support
OrbView-2, OrbView-3 and OrbView-4 imagery processing and distribution. ORBIMAGE
capitalizes certain direct and indirect costs incurred in the construction of
the ORBIMAGE digital catalogue. Amortization of the capitalized costs begins
when the assets are placed in service.
ORBIMAGE capitalizes interest costs in connection with the construction of
satellites, related ground system assets, and the ORBIMAGE digital catalogue.
The capitalized interest is recorded as part of the historical cost of the asset
to which it relates and will be amortized over the asset's useful life when
placed in service. For the years ended December 31, 1998 and 1999, capitalized
interest totaled $10.9 million and $23.7 million, respectively. No interest was
capitalized for the year ended December 31, 1997.
Depreciation and amortization are provided using the straight-line method
as follows:
Ground system assets 8 years
Furniture and equipment 3 to 5 years
OrbView-1 3 years
OrbView-2 7 1/2 years
Leasehold improvements Shorter of estimated useful life of
lease or lease term
Income Taxes
ORBIMAGE recognizes income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
100
103
ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) BUSINESS ACQUISITION
In 1998, ORBIMAGE acquired substantially all of the assets of TRIFID
Corporation ("TRIFID") for $5.0 million. The acquisition was accounted for using
the purchase method of accounting and resulted in excess of purchase price over
net assets acquired of approximately $3.0 million, which is being amortized on a
straight-line basis over ten years. The financial results of TRIFID have been
included in ORBIMAGE's results since April 30, 1998.
The following unaudited supplemental financial information presents
ORBIMAGE's results of operations for the years ended December 31, 1997 and 1998,
on a pro forma basis, as though the TRIFID acquisition were consummated on
January 1, 1997 (in thousands, except share data):
YEARS ENDED
DECEMBER 31,
--------------------
1997 1998
------- ----------
(RESTATED)
Revenues................................................. $ 5,531 $12,486
Net loss................................................. (4,213) (5,681)
Loss per common share -- basic and diluted (1)........... $ (0.43) $ (1.05)
-------------------------------
(1) All potentially dilutive securities, such as preferred stock
subject to repurchase, warrants and stock options, are
antidilutive for each year presented.
(5) EMPLOYEE BENEFIT PLAN
In February 1998, the FASB issued Statement No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, that supersedes the disclosure
requirements of Statement No. 87, Employers' Accounting for Pensions, and
Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions. ORBIMAGE adopted Statement No. 132 effective January 1, 1998. Adoption
of the new benefits disclosure rules did not impact ORBIMAGE's financial
position, results of operations or cash flows.
ORBIMAGE's employees participate in the Orbital Imaging Corporation
Retirement Savings Plan, as amended, a defined contribution plan (the "Plan") in
accordance with Section 401(k) of the Internal Revenue Code of 1986, as amended.
ORBIMAGE's contributions to the Plan are made based on certain plan provisions
and at the discretion of the Board of Directors. For the years ended December
31, 1997, 1998 and 1999, ORBIMAGE's contribution expense was $44,000, $0.3
million and $0.5 million, respectively. ORBIMAGE's contribution to the Plan for
the years ended December 31, 1998 and 1999 includes contributions to accounts of
employees who joined ORBIMAGE as part of the TRIFID acquisition. (See Note 4.)
(6) COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, ORBIMAGE adopted Statement of Financial Accounting
Standard ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of SFAS No. 130 had no impact on
ORBIMAGE's net loss or stockholders' equity. For the years ended December 31,
1997, 1998 and 1999, there were no material differences between net loss as
reported and comprehensive income (loss).
101
104
ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LOSS PER COMMON SHARE
The computations of basic and diluted loss per common share for the years
ended December 31, 1997, 1998 and 1999 were as follows (in thousands, except
share data):
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
(RESTATED)
Numerator for basic and diluted loss per
common share:
Net loss.................................... $ (4,082) $ (5,679) $ (6,722)
Preferred stock dividends................... (2,808) (20,859) (13,074)
----------- ----------- -----------
Loss available to common stockholders......... $ (6,890) $ (26,538) $ (19,796)
=========== =========== ===========
Denominator for basic and diluted loss per
common share -- weighted average shares
(1)......................................... 16,431,854 25,214,000 25,214,000
Loss per common share -- basic and diluted
(1)...................................... $ (0.42) $ (1.05) $ (0.79)
=========== =========== ===========
-------------------------
(1) All potentially dilutive securities, such as preferred stock
subject to repurchase, warrants and stock options, are
antidilutive for each year presented.
(8) SECURITIES
As of December 31, 1998 and 1999, ORBIMAGE had available-for-sale
securities invested primarily in commercial paper with an amortized cost basis
of $34.4 million and $32.4 million, respectively. There were no differences
between the amortized cost basis of the available-for-sale securities and their
fair values. As of December 31, 1999, the available-for-sale securities had
maturities less than one year.
As of December 31, 1998 and 1999, ORBIMAGE had held-to-maturity securities
invested in U.S. Treasury securities with fair values of $25.1 million and $12.9
million, respectively and amortized cost bases of $24.9 million and $12.9
million, respectively, resulting in unrealized gains of $0.2 million and $0,
respectively. These securities are pledged as security for repayment of interest
on the senior notes. As of December 31, 1999, the held-to-maturity securities
had maturities less than one year.
Included in cash and cash equivalents was $24.0 million and $2.4 million of
commercial paper as of December 31, 1998 and 1999, respectively.
(9) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 1998 and 1999 consisted of
the following (in thousands):
DECEMBER 31,
------------------
1998 1999
------- --------
Land..................................................... $ 213 $ 213
Ground system assets..................................... 21,450 38,189
Furniture and equipment.................................. 1,293 2,569
Leasehold improvements................................... 630 1,807
Accumulated depreciation and amortization................ (7,630) (10,841)
------- --------
Total.......................................... $15,956 $ 31,937
======= ========
102
105
ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) PROPERTY, PLANT AND EQUIPMENT -- (CONTINUED)
Depreciation and amortization totaled $1.7 million, $2.5 million and $3.2
million for the years ended December 31, 1997, 1998 and 1999, respectively.
(10) SATELLITES AND RELATED RIGHTS
Satellites and related rights as of December 31, 1998 and 1999 consisted of
the following (in thousands):
DECEMBER 31,
-------------------
1998 1999
-------- --------
In service:
OrbView-1............................................. $ 12,327 $ 12,327
Accumulated depreciation.............................. (12,327) (12,327)
-------- --------
OrbView-2 License..................................... 64,543 64,543
Accumulated amortization.............................. (10,040) (18,646)
-------- --------
54,503 45,897
Satellites and rights in process........................ 142,206 215,725
-------- --------
Total......................................... $196,709 $261,622
======== ========
Satellite depreciation and amortization totaled $3.9 million, $9.4 million
and $8.6 million for the years ended December 31, 1997, 1998 and 1999,
respectively.
(11) INCOME TAXES
ORBIMAGE's losses for income tax purposes for the period from January 1,
1997 through May 7, 1997 (during which ORBIMAGE was an operating division, and
was included in the consolidated tax return, of Orbital) were significantly
greater than pre-tax financial statement losses, primarily due to expense
associated with satellites and related rights deducted currently for income tax
purposes. Prior to May 8, 1997, ORBIMAGE had a tax-sharing arrangement with
Orbital under which tax deductions for satellites and related rights, and the
associated net operating loss carryforwards, remained with Orbital. As a result,
ORBIMAGE recorded a tax-sharing charge of $1.8 million for the year ended
December 31, 1997, as a direct charge to additional paid-in capital.
103
106
ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) INCOME TAXES -- (CONTINUED)
The benefit for income taxes for the years ended December 31, 1997, 1998
and 1999 consisted of the following (in thousands):
YEARS ENDED DECEMBER 31,
------------------------
1997 1998 1999
------ ------ ------
(RESTATED)
Current benefit:
U.S. Federal.............................................. $ -- $ -- $ --
State..................................................... -- -- --
------ ------ ------
Total current benefit............................. -- -- --
Deferred benefit:
U.S. Federal.............................................. 1,533 2,979 3,460
State..................................................... 219 307 169
------ ------ ------
Total deferred benefit............................ 1,752 3,286 3,629
------ ------ ------
Total benefit for income taxes.................... $1,752 $3,286 $3,629
====== ====== ======
The income tax benefit for the years ended December 31, 1997, 1998 and 1999
were different from those computed using the statutory U.S. Federal income tax
rate as follows:
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998 1999
----- ----- -----
(RESTATED)
U.S. Federal statutory rate................................. (34.0)% (34.0)% (34.0)%
State income taxes.......................................... -- (2.3) (1.7)
Other....................................................... 4.0 (0.4) 0.6
----- ----- -----
Effective rate.............................................. (30.0)% (36.7)% (35.1)%
===== ===== =====
The tax effects of significant temporary differences as of December 31,
1998 and 1999 were as follows (in thousands):
DECEMBER 31,
--------------------
1998 1999
---------- -------
(RESTATED)
Deferred tax assets:
Differences in revenue recognition........................ $12,162 $ 8,866
Net operating loss carryforward........................... 5,878 9,726
Other..................................................... 172 830
------- -------
Deferred tax assets......................................... 18,212 19,422
Deferred tax liabilities:
Differences in the tax treatment of satellites and related
rights................................................. 22,008 19,499
------- -------
Net deferred tax liability.................................. $ 3,796 $ 77
======= =======
As of December 31, 1999, ORBIMAGE had net operating loss carryforwards
totaling $27.3 million, which expire beginning the year ending December 31,
2012.
104
107
ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) SENIOR NOTES
General
On February 25, 1998, ORBIMAGE issued 150,000 units consisting of senior
notes and 1,312,746 warrants for common stock, raising net proceeds of
approximately $144.6 million. The gross proceeds of the units offering of $150.0
million were allocated: $142.1 million to the senior notes and $7.9 million to
the value of the warrants recorded as a debt discount. On April 22, 1999,
ORBIMAGE completed an add-on debt offering raising net proceeds of approximately
$68.1 million. The debt discount and issuance costs are amortized using the
interest method as an adjustment to interest expense over the term of the senior
notes resulting in an effective yield of approximately 13.4%. As of December 31,
1999, the senior notes had a fair value of $155.3 million as estimated by quoted
market prices.
Interest
Interest on the senior notes accrues at a rate of 11 5/8% per annum and is
payable semi-annually in arrears on March 1 and September 1. ORBIMAGE purchased
U.S. Treasury securities in an amount sufficient to pay the interest on the
senior notes through March 1, 2000. As of December 31, 1999, held- to-maturity
securities restricted for the payment of interest on the senior notes totaled
$12.9 million. On March 1, 2000, restricted held-to-maturity securities and the
related accrued interest were used to pay the semi-annual interest due on the
senior notes of $13.0 million.
Mandatory Redemption
The senior notes mature on March 1, 2005. ORBIMAGE will not be required to
make mandatory redemption or sinking fund payments with respect to the senior
notes. However, ORBIMAGE may be obligated, under certain circumstances, to make
an offer to purchase: (i) all outstanding senior notes at a redemption price of
101% of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages (if any) to the date of purchase, upon a change of control,
and (ii) outstanding senior notes with a portion of the net proceeds of certain
asset sales at a redemption price of 100% of the principal amount thereof, plus
accrued and unpaid interest and liquidated damages (if any) to the date of the
purchase.
Covenants
The indenture for the senior notes restricts, among other things,
ORBIMAGE's ability to pay dividends.
105
108
ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) LEASE COMMITMENTS
Aggregate minimum rental commitments under non-cancelable operating and
capital leases (primarily for office space and equipment) as of December 31,
1999 were as follows (in thousands):
OPERATING CAPITAL
--------- -------
2000........................................................ $ 223 $ 115
2001........................................................ 212 --
2002........................................................ 211 --
2003........................................................ 199 --
2004........................................................ 211 --
Thereafter.................................................. 952 --
------ -----
$2,008 115
======
Less: interest at 12%....................................... (7)
Less: current portion....................................... (108)
-----
Total....................................................... $ --
=====
(14) PREFERRED STOCK SUBJECT TO REPURCHASE
ORBIMAGE has authorized 10,000,000 shares of $0.01 par value preferred
stock, of which: (a) 2,000,000 shares of the Series A preferred stock have been
authorized, of which 772,561 shares were issued and outstanding as of December
31, 1999; (b) 2,000,000 shares of the Series B preferred stock have been
authorized, none of which have been issued and (c) 2,000,000 shares of the
Series C preferred stock have been authorized, none of which have been issued.
Dividends
The Series A preferred stock is assigned a stated value of $100 per share
and is entitled to a cumulative dividend of 12% per annum payable semi-annually
on May 1 and November 1 of each year, in cash or, in lieu thereof, payable
in-kind in shares of Series A preferred stock on the basis of 120 shares of
Series A preferred stock for each 1,000 shares of Series A preferred stock
outstanding. To date, all dividends have been paid in-kind. As of December 31,
1999, cumulative preferred stock dividends in arrears totaled 15,451 shares.
Upon mandatory conversion prior to the fourth anniversary of the issuance of any
Series A preferred stock, a Series A holder shall also receive the dividends
with respect to the Series A preferred stock that would have accrued from the
date of the mandatory conversion to the fourth anniversary of the initial
issuance of the Series A preferred stock.
Ranking
Series A holders have certain preferences upon dividend distributions,
distributions upon liquidation or distributions upon merger, consolidation or
sale of assets over the holders of Series B preferred stock (if and when
issued), Series C preferred stock (if and when issued), the common holders and
any other class of stock ranking junior to the Series A preferred stock.
Voting Rights
Each Series A holder is entitled to such number (rounded to the nearest
whole number) of votes as such Series A holder would be entitled if such Series
A holder had converted its Series A preferred stock into shares of common stock.
106
109
ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) PREFERRED STOCK SUBJECT TO REPURCHASE -- (CONTINUED)
Conversion Rights
The Series A holders have the option, at any time, or from time to time, to
convert their Series A preferred stock into fully paid and non-assessable shares
of common stock. The number of shares of common stock issued upon such
conversion will be determined by multiplying each Series A holder's number of
Series A preferred stock by a fraction, the numerator of which is the Series A
preferred stock Stated Value and the denominator of which is a conversion price,
subject to anti-dilutive adjustments. The per share conversion price is
currently $4.17. The Series A preferred stock shall be automatically converted
into shares of common stock upon the earliest to occur of any one of the
following events:
-- the closing, under certain circumstances, of a public offering of the
common stock;
-- the culmination of a 180-day period in which the average price of the
common stock exceeds a certain level relative to the conversion price or
-- the proposed sale of no less than 70% of the common stock on a fully
diluted basis.
Change of Control
Although not redeemable at the option of the holders, ORBIMAGE has certain
obligations to our Series A holders upon a "change of control" as deemed in the
stock purchase agreement. If a change of control occurs before the latest of:
-- the successful on-orbit checkout of OrbView-3,
-- the closing of an initial public offering that meets certain criteria,
or
-- the end of a 180-day period in which the average price of the common
stock exceeds a certain level relative to the conversion price of the
Series A preferred stock,
then ORBIMAGE must offer to purchase, subject to the rights of the holders of
the senior notes, all outstanding shares of Series A preferred stock for a
purchase price of 101% of the liquidation amount of the stock. If the change of
control occurs before the fourth anniversary of the initial 1997 sale of the
Series A preferred stock, then ORBIMAGE must also pay each Series A holder an
amount equal to the dividends that would have accrued on such holder's shares of
Series A preferred stock from the date of the change of control through the
fourth anniversary of the initial 1997 sale of the Series A preferred stock.
107
110
ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) PREFERRED STOCK SUBJECT TO REPURCHASE -- (CONTINUED)
The activity in the preferred stock subject to repurchase was as follows
for the years ended December 31, 1997, 1998 and 1999 (dollars in thousands):
SHARES AMOUNT
------- -------
BALANCE AS OF DECEMBER 31, 1996............................. -- $ --
Shares issued in private offering, net.................... 372,705 33,547
Preferred stock dividends paid in shares.................. 20,182 2,018
Accrual of preferred stock dividends...................... -- 790
------- -------
BALANCE AS OF DECEMBER 31, 1997............................. 392,887 36,355
Shares issued in private offerings, net................... 227,295 21,275
Deemed dividend on issuance of preferred stock subject to
repurchase............................................. -- 9,975
Preferred stock dividends paid in shares.................. 67,394 8,906
Accrual of preferred stock dividends...................... -- 1,978
------- -------
BALANCE AS OF DECEMBER 31, 1998 (RESTATED).................. 687,576 78,489
Preferred stock dividends paid in shares.................. 84,985 10,758
Accrual of preferred stock dividends...................... -- 2,316
------- -------
BALANCE AS OF DECEMBER 31, 1999............................. 772,561 $91,563
======= =======
(15) COMMON STOCK WARRANTS
In connection with the units offering on February 25, 1998, ORBIMAGE issued
150,000 warrants, which entitle the holders to acquire 1,312,746 shares of
ORBIMAGE's common stock. The exercise price is $0.01 per share and as of
December 31, 1999, the warrants are exercisable. Each warrant entitles the
holder to buy 8.75164 shares of common stock. The warrants expire on March 1,
2005.
(16) STOCK OPTION PLAN
Through ORBIMAGE's stock option plan, as amended (the "Plan"), ORBIMAGE may
issue to its employees, Orbital's employees, consultants or advisors incentive
or non-qualified options to purchase up to 4,800,000 shares of ORBIMAGE's common
stock. Under the Plan, stock options may not be granted with an exercise price
less than 85% of the stock's fair market value at the date of the grant as
determined by the Board of Directors. ORBIMAGE's options generally vest in
one-third increments over a three-year period.
108
111
ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) STOCK OPTION PLAN -- (CONTINUED)
The following table summarizes the activity relating to the Plan for the
years ended December 31, 1997, 1998 and 1999:
WEIGHTED OUTSTANDING
NUMBER OF OPTION PRICE AVERAGE AND
SHARES PER SHARE EXERCISE PRICE EXERCISABLE
--------- ------------ -------------- -----------
OUTSTANDING AS OF DECEMBER 31, 1996........... 1,408,000 $ 3.60 $3.60 352,000
Granted..................................... 498,000 4.17 4.17
Exercised................................... (14,000) 3.60 3.60
Canceled or expired......................... (8,000) 3.60 3.60
--------- ------------ ----- ---------
OUTSTANDING AS OF DECEMBER 31, 1997........... 1,884,000 3.60 - 4.17 3.75 707,250
Granted..................................... 761,500 4.17 - 5.10 4.55
Exercised................................... -- -- --
Canceled or expired......................... (9,000) 4.17 - 5.10 4.69
--------- ------------ ----- ---------
OUTSTANDING AS OF DECEMBER 31, 1998........... 2,636,500 3.60 - 5.10 3.98 1,181,451
Granted..................................... 786,323 6.25 6.25
Exercised................................... -- -- --
Canceled or expired......................... (129,251) 4.17 - 6.25 4.92
--------- ------------ ----- ---------
OUTSTANDING AS OF DECEMBER 31, 1999........... 3,293,572 $3.60 - 6.25 $4.48 1,916,611
========= ============ ===== =========
As of December 31, 1999, the weighted average remaining contractual life of
the options outstanding was 7.8 years.
Had ORBIMAGE determined compensation expense based on the fair value at the
grant date for its stock options in accordance with the fair value method
prescribed by SFAS 123, ORBIMAGE's pro forma net loss and pro forma basic loss
per common share would have been approximately $4.4 million and $0.44,
respectively, for the year ended December 31, 1997; $6.3 million (restated) and
$1.08 (restated), respectively, for the year ended December 31, 1998; and $7.7
million and $0.82, respectively, for the year ended December 31, 1999. Pro forma
diluted loss per common share for the years ended December 31, 1997, 1998 and
1999 would be the same as the pro forma basic loss per share shown above since
all potentially dilutive securities are antidilutive. Pro forma net loss as
stated above is not necessarily representative of the effects of reported net
income (loss) for future years due to, among other things, the vesting period of
the stock options and the fair value of the additional stock options in future
years.
ORBIMAGE used the Black-Scholes options pricing model for the year ended
December 31, 1999 for options issued to employees and directors to determine the
pro forma impact to its net loss. For the years ended December 31, 1997 and
1998, ORBIMAGE used the minimum value method, which does not consider
volatility. Both models utilize certain information, such as the interest rate
on a risk-free security maturing generally at the same time as the option being
valued, and requires certain assumptions, such as the expected amount of time an
option will be outstanding until it is exercised or it expires, to calculate the
weighted-
109
112
ORBITAL IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) STOCK OPTION PLAN -- (CONTINUED)
average fair value per share of stock options granted. The assumptions used to
determine the pro forma impact for the years ended December 31, 1997, 1998 and
1999 were as follows:
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
Volatility......................................... 0.0% 0.0% 30.0%
Dividend yield..................................... 0.0% 0.0% 0.0%
Risk-free interest rate............................ 6.0% 5.5% 6.6%
Expected average life.............................. 4.5 years 6.0 years 6.0 years
Weighted average exercise price per share.......... $3.75 $3.98 $4.48
The fair value of the options granted to employees and directors during the
years ended December 31, 1997, 1998 and 1999 were estimated at $0.97 per share,
$1.26 per share and $2.69 per share, respectively. Compensation expense
recognized during each of the years ended December 31, 1998 and 1999 on stock
options granted to employees and directors was $0.2 million. There was no
compensation expense recognized during the year ended December 31, 1997 on stock
options granted to employees and directors.
On February 14, 2000, ORBIMAGE granted 412,347 options to purchase shares
of common stock to employees, directors and consultants. The stock options were
granted with an exercise price of $7.25 and generally vest in one-third
increments over a three-year period. ORBIMAGE will expense the value of the
2,000 compensatory options that were issued to consultants over the three-year
vesting period of the options.
(17) SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes reporting standards for a company's operating segments and related
disclosures about its products, services, geographic areas and major customers.
ORBIMAGE adopted SFAS No. 131 effective January 1, 1998. SFAS No. 131 requires
comparative segment information; however, ORBIMAGE operated as a single segment
for the years ended December 31, 1997, 1998 and 1999.
ORBIMAGE recognized revenues related to contracts with the National
Aeronautics and Space Administration of approximately $2.0 million, $9.6 million
and $9.4 million for the years ended December 31, 1997, 1998 and 1999,
respectively, representing approximately 95%, 82% and 51%, respectively, of
total revenues recognized during those years.
110
113
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Orbital Sciences Corporation:
Our audit of the consolidated financial statements referred to in our report
dated April 17, 2000 appearing in this Annual Report on Form 10-K also included
an audit of the financial statement schedule as of and for the year ended
December 31, 1999 as listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
April 17, 2000
111
114
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Orbital Sciences Corporation:
Under date of February 16, 1999, except as to note 2A, which is as of April 17,
2000, we reported on the consolidated balance sheet of Orbital Sciences
Corporation and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1998, included in
the Company's 1999 annual report on Form 10-K. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule as of December 31, 1998 and
for each of the years in the two-year period then ended in the Company's 1999
Form 10-K. This consolidated financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule as of December
31, 1998 and for each of the years in the two-year period then ended, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
The accompanying consolidated financial statement schedule as of December 31,
1998, and for each of the years in the two-year period ended December 31, 1998
has been restated.
KPMG LLP
Washington, DC
February 16, 1999, except as to note 2A,
which is as of April 17, 2000
112
115
ORBITAL SCIENCES CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------- --------------- ------------------------------------ ------------- -------------
ADDITIONS
------------------------------------
CHARGED/
BALANCE AT CHARGED TO COSTS CREDITED TO BALANCE AT
DESCRIPTION START OF PERIOD AND EXPENSES OTHER ACCOUNTS(1) DEDUCTIONS(2) END OF PERIOD
- ----------- --------------- ---------------- ----------------- ------------- -------------
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful
accounts................ $ 1,368 $ 709 $16,550 $ (550) $ 18,077
Allowance for obsolete
inventory............... 5,098 1,527 4,902 (627) 10,900
Allowance for unrecoverable
investments............. 1,100 729 3,057 -- 4,886
Deferred income tax
valuation reserve....... 54,432 12,457 -- -- 66,889
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful
accounts................ $18,077 $ 4,635 $ 794 $ (1,936) $ 21,570
Allowance for obsolete
inventory............... 10,900 6,023 4,161 (12,869) 8,215
Allowance for unrecoverable
investments............. 4,886 552 (1,100) -- 4,338
Deferred income tax
valuation reserve....... 66,889 27,296 -- -- 94,185
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful
accounts................ $21,570 $ 3,733 -- $ (6,383) $ 18,920
Allowance for obsolete
inventory............... 8,215 7,969 -- (1,704) 14,480
Allowance for unrecoverable
investments............. 4,338 -- -- (4,338) --
Deferred income tax
valuation reserve....... 94,185 56,659 -- -- 150,844
- ---------------
(1) Amounts charged/credited to other accounts represent valuation and
qualifying accounts recorded pursuant to purchase business combinations as
described in Note 4 to the consolidated financial statements incorporated by
reference elsewhere herein, and certain other reclassifications.
(2) Deduction for revaluation of allowance account.
113
116
EXHIBIT INDEX
The following exhibits are filed as part of this report. Where such filing
is made by incorporation by reference to a previously filed statement or report,
such statement or report is identified in parentheses.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 Restated Certificate of Incorporation (incorporated by
reference to Exhibit 4.1 to the company's Registration
Statement on Form S-3 (File Number 333-08769) filed and
effective on July 25, 1996).
3.2 By-Laws of the company, as amended on July 27, 1995
(incorporated by reference to Exhibit 3 to the company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995).
3.3 Certificate of Amendment to Restated Certificate of
Incorporation, dated April 29, 1997 (incorporated by
reference to Exhibit 3.3 to the company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998).
3.4 Certificate of Designation, Preferences and Rights of Series
B Junior Participating Preferred Stock, dated November 2,
1998 (incorporated by reference to Exhibit 2 to the
company's Report on Form 8-A filed on November 2, 1998).
4.1 Form of Certificate of Common Stock (incorporated by
reference to Exhibit 4.1 to the company's Registration
Statement on Form S-1 (File Number 33-33453) filed on
February 9, 1990 and effective on April 24, 1990).
4.2 Indenture dated as of September 16, 1997 between the company
and Deutsche Bank AG, New York Branch, as Trustee
(incorporated by reference to Exhibit 4.1 to the company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
4.3 First Supplemental Indenture dated as of December 15, 1997
between the company and Deutsche Bank AG, New York Branch,
as Trustee (incorporated by reference to Exhibit 4.4 to the
company's Registration Statement on Form S-3 (File Number
333-42271) filed on December 15, 1997 and effective on March
12, 1998).
4.4 Form of 5% Convertible Subordinated Note (incorporated by
reference to Exhibit 4.5 to the company's Registration
Statement on Form S-3 (File Number 333-42271) filed on
December 15, 1997 and effective on March 12, 1998).
4.5 Registration Rights Agreement dated as of September 16, 1997
among the company and Deutsche Morgan Grenfell Inc. and J.P.
Morgan Securities Inc. (incorporated by reference to Exhibit
4.6 to the company's Registration Statement on Form S-3
(File Number 333-42271) filed on December 15, 1997 and
effective on March 12, 1998).
4.6 Rights Agreement dated as of October 22, 1998 between the
company and BankBoston N.A., as Rights Agent (incorporated
by reference to Exhibit 1 to the company's Report on Form
8-A filed on November 2, 1998).
4.7 Form of Rights Certificate (incorporated by reference to
Exhibit 3 to the company's Report on Form 8-A filed on
November 2, 1998).
4.8 Registration Rights Agreement dated as of January 15, 2000
by and between the company and Morgan Guaranty Trust Company
of New York, as Administrative Agent (transmitted herewith).
4.9 Form of Warrant dated as of January 15, 2000 (transmitted
herewith).
10.1 Third Amended and Restated Credit Agreement (the "Credit
Agreement"), dated as of December 21, 1998, among the
company, Magellan Corporation, the Banks listed therein,
Morgan Guaranty Trust Company of New York, as Administrative
Agent and Collateral Agent (incorporated by reference to
Exhibit 10.1 to the company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
114
117
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.1.1 Amendment No. 1, dated as of March 25, 1999, to the Credit
Agreement, dated as of December 21, 1998 among the company
and Morgan Guaranty Trust Company of New York, as
Administrative Agent (incorporated by reference to Exhibit
10.1.1 to the company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999).
10.1.2 Amendment No. 2, dated as of May 26, 1999, to the Credit
Agreement, dated as of December 21, 1998, among the company
and Morgan Guaranty Trust Company of New York as
Administrative Agent (incorporated by reference to Exhibit
10.1.2 to the company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999).
10.1.3 Amendment No. 3, dated as of July 26, 1999, to the Credit
Agreement, dated as of December 21, 1998, among the company
and Morgan Guaranty Trust Company of New York as
Administrative Agent (incorporated by reference to Exhibit
10.1.3 to the company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999.
10.1.4 Intentionally omitted.
10.1.5 Amendment No. 5, dated as of September 30, 1999, to the
Credit Agreement, dated as of December 21, 1998, among the
company and Morgan Guaranty Trust Company of New York as
Administrative Agent (incorporated by reference to Exhibit
10.26 to the company's Current Report on Form 8-K filed on
January 7, 2000).
10.1.6 Amendment No. 6, dated as of December 21, 1999, to the
Credit Agreement, dated as of December 21, 1998, among the
company and Morgan Guaranty Trust Company of New York as
Administrative Agent (incorporated by reference to Exhibit
10.27 to the company's Current Report on Form 8-K filed on
January 7, 2000).
10.1.7 Amendment No. 7, dated as of February 16, 2000, to the
Credit Agreement, dated as of December 21, 1998, among the
company and Morgan Guaranty Trust Company of New York as
Administrative Agent (transmitted herewith).
10.1.8 Amendment No. 8, dated as of April 13, 2000, to the Credit
Agreement, dated as of December 21, 1998, among the company
and Morgan Guaranty Trust Company of New York as
Administrative Agent (transmitted herewith).
10.2 Note Agreement, dated as of June 14, 1995 between the
company and The Northwestern Mutual Life Insurance Company
(the "NWML Note Agreement") (incorporated by reference to
Exhibit 4.7.1 to the company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995).
10.2.1 First Amendment to the NWML Note Agreement, dated as of June
30, 1995, between the company and The Northwestern Mutual
Life Insurance Company (incorporated by reference to the
company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995).
10.2.2 Second Amendment to the NWML Note Agreement, dated as of
March 15, 1996 (incorporated by reference to Exhibit 10.2.2
to the company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.2.3 Third Amendment to NWML Note Agreement, dated as of July 13,
1996 (incorporated by reference to Exhibit 10.2 to the
company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).
10.2.4 Fourth Amendment to NWML Note Agreement, dated as of March
31, 1997 (incorporated by reference to Exhibit 10.2.4 to the
company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997).
10.2.5 Fifth Amendment to NWML Note Agreement, dated as of December
23, 1997 (incorporated by reference to Exhibit 10.2.5 to the
company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
115
118
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.2.6 Sixth Amendment to NWML Note Agreement, dated as of August
14, 1998 (incorporated by reference to Exhibit 10.2.6 to the
company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998).
10.2.7 Seventh Amendment to NWML Note Agreement, dated as of May
27, 1999 (incorporated by reference to Exhibit 10.2.7 to the
company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999).
10.2.8 Eighth Amendment to NWML Note Agreement, dated as of
December 20, 1999 (incorporated by reference to Exhibit
10.30 to the company's Current Report on Form 8-K filed on
January 7, 2000).
10.2.9 Ninth Amendment to NWML Note Agreement, dated as of January
31, 2000 (transmitted herewith).
10.2.10 Tenth Amendment and Extension of Waiver to NWML Note
Agreement, dated as of February 22, 2000 (transmitted
herewith).
10.2.11 Eleventh Amendment to NWML Note Agreement, dated as of April
12, 2000 (transmitted herewith).
10.3 Subsidiary Guaranty Agreement, dated as of January 31, 2000
(transmitted herewith).
10.4 Second Amended and Restated Security Agreement, dated as of
November 30, 1999, among the company, Morgan Guaranty Trust
Company of New York, as Collateral Agent, and Bank of
America, N.A., as Designated Lockbox Bank (incorporated by
reference to Exhibit 10.28 to the company's Current Report
on Form 8-K filed on January 7, 2000).
10.5 MacDonald, Dettwiler and Associates Ltd. 1999 Stock Option
Plan (transmitted herewith)*
10.6 Orbital Sciences Corporation 1990 Stock Option Plan,
restated as of April 27, 1995 (incorporated by reference to
Exhibit 10.5.1 to the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995).*
10.7 Orbital Sciences Corporation 1990 Stock Option Plan for
Non-Employee Directors, restated as of April 27, 1995
(incorporated by reference 10.7 to Exhibit 10.5.2 to the
company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995).*
10.8 Orbital Communications Corporation Restated 1992 Stock
Option Plan, restated as of September 12, 1995 (incorporated
by reference to Exhibit 10.8 to the company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).*
10.8.1 Amendment to Orbital Communications Corporation Restated
1992 Stock Option Plan, dated February 5, 1997 (incorporated
by reference to Exhibit 10.8.1 to the company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996).*
10.9 Orbital Sciences Corporation 1995 Deferred Compensation Plan
(incorporated by reference to Exhibit 10.9 to the company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).*
10.10 Magellan Corporation 1996 Stock Option Plan (incorporated by
reference to Exhibit 10.3 to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996).*
10.11 Orbital Imaging Corporation 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.11 to the company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).*
10.12 Performance Share Agreement dated July 21, 1999 between the
company and Mr. D. W. Thompson (incorporated by reference to
Exhibit 10.12.3 to the company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999).*
10.12.1 Performance Share Agreement between the company and James R.
Thompson dated July 21, 1999 (incorporated by reference to
Exhibit 10.12.4 to the company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999).*
116
119
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.12.2 Performance Share Agreement between the company and Jeffrey
V. Pirone dated July 21, 1999 (incorporated by reference to
Exhibit 10.12.5 to the company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999).*
10.16 Amended and Restated Agreement of Limited Partnership of
ORBCOMM Global, L.P., dated as of January 1, 2000, between
OCC and Teleglobe Mobile Partners (incorporated by reference
to Exhibit 3.2 to ORBCOMM Global L.P.'s Current Report on
8-K, filed on February 2, 2000)
10.18 Orbital Sciences Corporation 1997 Stock Option and Incentive
Plan, as amended (transmitted herewith).*
10.19 Promissory Note dated June 27, 1997 from the company payable
to the order of General Electric Capital Corporation
("GECC") (incorporated by reference to Exhibit 10.19 to the
company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
10.20 Aircraft Security Agreement dated as of June 27, 1997 from
the company to GECC (incorporated by reference to Exhibit
10.20 to the company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997).
10.21 1998 Magellan Stock Option Plan (incorporated by reference
to Exhibit 10.21 to the company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998).*
10.22 Letter Agreement between the company and Robert Lovell dated
July 28, 1997 (incorporated by reference to Exhibit 10.22 to
the company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998).*
10.23 Form of 1998 Indemnification Agreement (incorporated by
reference to Exhibit 10.23 to the company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998).*
10.24 Form of 1998 Executive Employment Agreement (incorporated by
reference to Exhibit 10.24 to the company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998).*
10.25 Asset Acquisition Agreement dated as of March 18, 1999
between MacDonald, Dettwiler and Associates Ltd. and Spar
Aerospace Limited (incorporated by reference to Exhibit 10.1
to the company's Report on Form 8-K/A dated May 7, 1999).
10.26 Promissory Note dated May 7, 1999 from MacDonald, Dettwiler
Space and Advanced Robotics Ltd. in favor of Spar
(incorporated by reference to Exhibit 10.2 to the company's
Report on Form 8-K/A dated May 7, 1999).
10.27 Guaranty dated May 7, 1999 from Orbital Sciences Corporation
and MDA in favor of Spar (incorporated by reference to
Exhibit 10.3 to the company's Report on Form 8-K/A dated May
7, 1999).
10.28 Exchange and Registration Agreement, dated as of December
22, 1999, among the company and the investors identified
therein (incorporated by reference to Exhibit 10.25 to the
company's Current Report on Form 8-K filed on January 7,
2000).
10.29 Pledge Agreement, dated as of November 30, 1999, among the
company and Morgan Guaranty Trust Company of New York, as
Collateral Agent (incorporated by reference to Exhibit 10.29
to the company's Current Report on Form 8-K filed on January
7, 2000).
16 Letter from KPMG LLP (transmitted herewith).
21 Subsidiaries of the Company (transmitted herewith).
23.1 Consent of PricewaterhouseCoopers LLP (transmitted
herewith).
23.2.1 Consent of KPMG LLP (transmitted herewith).
23.2.2 Consent of KPMG LLP (transmitted herewith).
23.2.3 Consent of KPMG LLP (transmitted herewith).
23.3 Consent of Arthur Andersen LLP (transmitted herewith).
117
120
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
27 Financial Data Schedule for year ended December 31, 1999
(such schedule is furnished for the information of the
Securities and Exchange Commission and is not to be deemed
"filed" as part of the Form 10-K, or otherwise subject to
the liabilities of Section 18 of the Securities Exchange Act
of 1934) (transmitted herewith).
- ---------------
* Management Contract or Compensatory Plan or Arrangement.
118