<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended
JUNE 30, 2000
ORBITAL SCIENCES CORPORATION
Commission file number 0-18287
DELAWARE 06-1209561
------------------------------------ -----------------------------
(State of Incorporation) (IRS Identification number)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166 (703) 406-5000
------------------------------------ -----------------------------
(Address of principal executive (Telephone number)
offices)
The registrant has (1) 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, and
(2) has been subject to such filing requirements for the past 90 days.
As of August 9, 2000, 37,534,833 shares of the registrant's common stock were
outstanding.
<PAGE> 2
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------------- ----------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 26,482 $ 74,524
Restricted cash and short-term investments, at market 23,022 34,630
Receivables, net 216,376 295,315
Inventories, net 64,081 54,483
Deferred income taxes and other current assets 25,101 17,187
---------------- ----------------
TOTAL CURRENT ASSETS 355,062 476,139
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation
and amortization of $132,862 and $122,129, respectively 154,710 137,622
158,808 141,273
INVESTMENTS IN AND ADVANCES TO AFFILIATES
GOODWILL, less accumulated amortization of $49,653 and $42,515, respectively 312,725 278,309
DEFERRED INCOME TAXES AND OTHER ASSETS 57,930 59,569
---------------- ----------------
TOTAL ASSETS $1,039,235 $1,092,912
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term obligations $ 91,109 $ 131,073
Accounts payable 82,859 83,566
Accrued expenses 123,066 138,613
Due to joint venture partner -- 28,418
Deferred revenues 150,636 133,499
---------------- ----------------
TOTAL CURRENT LIABILITIES 447,670 515,169
LONG-TERM OBLIGATIONS, net of current portion 300,301 239,672
OTHER LIABILITIES 17,196 16,208
---------------- ----------------
TOTAL LIABILITIES 765,167 771,049
NON-CONTROLLING INTERESTS IN NET ASSETS OF CONSOLIDATED SUBSIDIARIES 22,111 15,071
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, 37,404,149 and
37,400,814 shares outstanding, respectively 374 374
Additional paid-in capital 513,393 497,923
Accumulated other comprehensive loss (6,811) (5,159)
Accumulated deficit (254,999) (186,346)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 251,957 306,792
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,039,235 $ 1,092,912
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
---------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
REVENUES $ 231,475 $ 226,484
Costs of goods sold 187,492 177,230
-------------- ---------------
GROSS PROFIT 43,983 49,254
Research and development expenses 7,999 10,622
Selling, general and administrative expenses 33,473 28,891
Amortization of goodwill 3,696 3,233
-------------- ---------------
INCOME (LOSS) FROM OPERATIONS (1,185) 6,508
Net investment income (expense) (7,660) (5,409)
Equity in earnings (losses) of affiliates (20,304) (27,334)
Non-controlling interests in (earnings) losses of
consolidated subsidiaries 308 2,192
Litigation settlement (11,500) --
-------------- ---------------
LOSS BEFORE PROVISION FOR INCOME TAXES (40,341) (24,043)
Provision for income taxes 1,788 2,028
-------------- ---------------
NET LOSS $ (42,129) $ (26,071)
============== ===============
NET LOSS PER COMMON AND DILUTIVE SHARE $ (1.13) $ (0.70)
============== ===============
Shares used in computing net loss per common and dilutive share 37,409,264 37,196,970
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
REVENUES $ 455,016 $ 426,656
Costs of goods sold 369,145 336,351
-------------- ---------------
GROSS PROFIT 85,871 90,305
Research and development expenses 16,088 20,703
Selling, general and administrative expenses 61,605 57,434
Amortization of goodwill 7,296 6,099
-------------- ---------------
INCOME FROM OPERATIONS 882 6,069
Net investment income (expense) (12,109) (8,707)
Equity in earnings (losses) of affiliates (44,422) (51,723)
Non-controlling interests in (earnings) losses of
consolidated subsidiaries 1,557 5,453
Litigation settlement (11,500) --
-------------- ---------------
LOSS BEFORE PROVISION FOR INCOME TAXES (65,592) (48,908)
Provision for income taxes 3,061 3,326
-------------- ---------------
NET LOSS $ (68,653) $ (52,234)
============== ===============
NET LOSS PER COMMON AND DILUTIVE SHARE $ (1.84) $ (1.41)
============== ===============
Shares used in computing net loss per common and dilutive share 37,408,382 37,167,662
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (68,653) $ (52,234)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization expenses 24,253 22,434
Amortization of prepaid financing costs 2,640 1,297
Equity in losses of affiliates 44,422 51,723
Non-controlling interests in losses of consolidated subsidiaries (1,557) (5,453)
Loss on sale of fixed assets and investments 1,031 --
CHANGES IN ASSETS AND LIABILITIES, NET OF BUSINESSES ACQUIRED:
(Increase) decrease in current assets 26,572 (26,914)
Increase (decrease) in non-current assets (706) (7,271)
Increase (decrease) in current liabilities 618 42,260
Increase (decrease) in non-current liabilities 988 (3,606)
-------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,608 22,236
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (21,409) (24,914)
Payment for business combinations, net of cash acquired (31,400) (22,501)
Purchase of other assets -- (14,006)
Purchases of available-for-sale investment securities (2,044) --
Sales of available-for-sale investment securities 10,932 --
Maturities of available-for-sale investment securities 1,348 --
Investments in and advances to affiliates, net (3,025) (45,533)
-------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (45,598) (106,954)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (repayments) (639) (1,176)
Principal payments on long-term obligations (43,170) (55,090)
Net proceeds from issuances of long-term obligations 39,209 156,000
Repayments to joint venture partner (28,418) (4,918)
Net proceeds from issuances of common stock -- 2,480
-------------- ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (33,018) 97,296
-------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 966 1,302
-------------- ---------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (48,042) 13,880
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 74,524 15,268
-------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 26,482 $ 29,148
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited interim financial
information reflects all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation thereof. Certain information and footnote
disclosure normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to instructions, rules and regulations prescribed by the Securities and Exchange
Commission (the "Commission"). The company believes that the disclosures
provided herein are adequate to make the information presented not misleading
when these unaudited interim condensed consolidated financial statements are
read in conjunction with the company's Annual Report on Form 10-K for the year
ended December 31, 1999. Orbital's consolidated results of operations include
the results of operations of its subsidiaries, including but not limited to MDA
Holdings Corporation and MacDonald, Dettwiler and Associates Ltd. ("MDA"), which
are separate and distinct entities in all respects. Operating results for the
three -and six-month periods ended June 30, 2000 are not necessarily indicative
of the results expected for the full year. Orbital Sciences Corporation,
together with its subsidiaries, is hereafter referred to as "Orbital" or the
"company."
(2) PREPARATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The preparation of condensed 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 the 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 operational and business risks and uncertainties. Actual results
could differ from these estimates.
Certain reclassifications have been made to the 1999 financial statements and
footnote disclosures to conform to the 2000 financial statement presentation.
All financial amounts are stated in U.S. dollars unless otherwise indicated.
(3) 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 or specific identification
basis, net of allowances for estimated obsolescence.
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
6
<PAGE> 7
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). Work-in-process inventory
has been reduced by contractual progress payments received. Finished goods
inventory consists of fully assembled commercial products available for sale.
(4) 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
systems and transportation management systems, and 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,
satellite-based remote imaging services, satellite-based automotive information
systems and other satellite-based 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.
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 certain
quantitative thresholds. At December 31, 1999, the company recast the
composition of its reportable segments as a result of new reporting mechanisms
and operating decision-making procedures. The corresponding quarterly segment
information for 1999 has been reclassified to conform to the 2000 presentation.
The following table presents operating information for the three and six months
ended June 30, 2000 and 1999 and identifiable assets at June 30, 2000 and
December 31, 1999 by reportable segment. Intersegment and intersector sales are
accounted for based on prices negotiated by the parties. In the second quarter
of 2000, certain receivables from ORBCOMM that had in the past been included in
launch vehicles and advanced programs, satellites and related space systems,
electronics and sensor systems and transportation management systems and
satellite access products were reclassified to investment in and advances to
ORBCOMM which is reflected in the satellite services sector (see note 7). There
were no other significant sales or transfers between segments.
7
<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- ------------------------------
(In thousands)
2000 1999 2000 1999
---- ---- ---- ----
LAUNCH VEHICLES AND ADVANCED PROGRAMS:
<S> <C> <C> <C> <C>
Revenues $ 37,493 $ 36,098 $ 72,393 $ 79,509
Operating income (loss) 3,346 536 6,877 3,201
Identifiable assets (1) 109,898 125,157 109,898 125,157
Capital expenditures 644 3,184 1,270 6,277
Depreciation and amortization 1,563 1,734 3,159 3,542
SATELLITES AND RELATED SPACE SYSTEMS:
Revenues $ 64,088 $ 73,734 $ 131,488 $ 136,900
Operating income (loss) (5,066) 9,709 (4,997) 17,888
Identifiable assets (1) 51,754 58,153 51,754 58,153
Capital expenditures 2,663 3,068 4,147 5,235
Depreciation and amortization 1,515 1,287 3,014 3,008
ELECTRONICS AND SENSOR SYSTEMS AND TRANSPORTATION
MANAGEMENT SYSTEMS:
Revenues $ 43,143 $ 36,804 $ 78,540 $ 72,617
Operating income (loss) 2,265 (378) 4,115 (595)
Identifiable assets (1) 104,045 114,765 104,045 114,765
Capital expenditures 1,204 612 1,608 858
Depreciation and amortization 1,055 1,104 2,138 1,133
SATELLITE GROUND SYSTEMS, SPACE ROBOTICS, MAPPING
AND LAND INFORMATION SERVICES:
Revenues $ 57,318 $ 48,554 $ 115,397 $ 77,245
Operating income (loss) 3,261 3,696 6,329 7,308
Equity in earnings (losses) of affiliates (115) -- (205) --
Identifiable assets (1) 249,025 213,301 249,025 213,301
Capital expenditures 2,568 839 3,991 3,216
Depreciation and amortization 4,722 1,917 6,899 2,405
TOTAL SPACE AND GROUND INFRASTRUCTURE SYSTEMS:
Revenues $ 202,042 $ 195,190 $ 397,818 $ 366,271
Operating income (loss) 3,806 13,563 12,324 27,802
Equity in earnings (losses) of affiliates (115) -- (205) --
Identifiable assets (1) 514,722 511,376 514,722 511,376
Capital expenditures 7,079 7,703 11,016 15,586
Depreciation and amortization 8,855 6,042 15,210 10,088
SATELLITE ACCESS PRODUCTS:
Revenues $ 25,667 $ 26,775 $ 50,357 $ 53,769
Operating income (loss) (1,950) (2,143) (5,503) (6,891)
Identifiable assets (1) 106,627 92,939 106,627 92,939
Capital expenditures 777 671 1,077 1,371
Depreciation and amortization 1,577 1,889 3,305 3,885
SATELLITE SERVICES:
Revenues $ 3,766 $ 4,519 $ 6,841 $ 6,616
Operating income (loss) 499 (1,553) 403 (7,405)
Equity in earnings (losses) of affiliates (20,189) (27,334) (44,217) (51,723)
Identifiable assets (1) 169,063 147,072 169,063 147,072
Capital expenditures 549 1,516 604 1,540
Depreciation and amortization 301 346 615
485
CORPORATE AND OTHER:
Operating income (loss) $ (3,540) $ (3,359) $ (6,342) $ (7,437)
Non-controlling interest in (earnings) losses of consolidated
subsidiaries 308 2,192 1,557 5,453
Identifiable assets (1) 248,823 341,525 248,823 341,525
Capital expenditures 2,448 5,308 8,712 6,417
Depreciation and amortization 1,479 3,977 5,123 7,976
</TABLE>
8
<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C>
CONSOLIDATED:
Revenues $ 231,475 $ 226,484 $ 455,016 $ 426,656
Operating income (loss) (1,185) 6,508 882 6,069
Equity in earnings (losses) of affiliates (20,304) (27,334) (44,422) (51,723)
Non-controlling interest in (earnings) losses of consolidated
subsidiaries 308 2,192 1,557 5,453
Identifiable assets (1) 1,039,235 1,092,912 1,039,235 1,092,912
Capital expenditures 10,853 15,198 21,409 24,914
Depreciation and amortization 12,212 12,254 24,253 22,434
</TABLE>
(1) Identifiable assets are as of June 30, 2000 and December 31, 1999.
(5) 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 and common equivalent shares outstanding during the periods, plus the
effects of an assumed conversion of the company's convertible notes, after
giving effect to all net income adjustments that would result from the assumed
conversion.
In periods of net loss, the assumed conversion of convertible notes and stock
options is anti-dilutive. Accordingly, fully diluted per-share losses are the
same as basic losses per share disclosed on the accompanying statements of
operations. If the company had reported net income for the three and six months
ended June 30, 2000, the number of shares used in calculating diluted earnings
per share would have been 41,053,655 and 41,157,887, respectively, and
41,544,655 and 41,733,440 respectively, for the three and six months ended June
30, 1999.
(6) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) and associated differences are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Differences between net loss, as
reported, and comprehensive
loss: $(42,129) $(26,071) $(68,653) $(52,234)
Net loss, as reported
Translation adjustments (636) 840 (1,249) 1,165
Unrealized losses on investments (403) -- (403) --
----- -- ----- --
Comprehensive loss $(43,168) $(25,231) $(70,305) $(51,069)
========= ========= ========= =========
Accumulated differences
between net loss, as
reported, and comprehensive
loss:
Beginning of period $(5,772) $(6,824) $(5,159) $(7,149)
Translation adjustments (636) 840 (1,249) 1,165
Unrealized losses on investments (403) -- (403) --
----- -- ----- --
End of period $(6,811) $(5,984) $(6,811) $(5,984)
======== ======== ======== ========
</TABLE>
9
<PAGE> 10
(7) INVESTMENTS IN AND ADVANCES TO 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 Global, L.P. ("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, through 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 (the "Omnibus 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 67% as of June 30, 2000;
- OCC remained as a limited partner of ORBCOMM, with a minority ownership
interest of approximately 33% as of June 30, 2000; and
- Orbital received a payment plan from ORBCOMM to settle deferred invoice
amounts.
As a result of the Omnibus Agreement and the related reduction in the company's
ownership interest in ORBCOMM, the company's share of ORBCOMM's total capital
exceeded the book value of Orbital's investment in ORBCOMM. Accordingly, Orbital
recorded a $15,367,000 increase in additional paid-in capital in the first half
of 2000 as a result of this transaction. A deferred tax obligation of $7,790,000
was established with a corresponding reduction in the deferred tax valuation
allowance.
As part of the Omnibus Agreement, on January 26, 2000, OCC and Teleglobe Mobile
each contributed its 2% direct participation interest in ORBCOMM USA and ORBCOMM
International, respectively, to ORBCOMM. As a result of this contribution, these
companies ceased doing business as separate entities and ORBCOMM assumed their
business operations. Consequently, Orbital no longer consolidates ORBCOMM USA's
financial statements. The contribution of ORBCOMM USA to ORBCOMM resulted in a
decrease in Orbital's investments
10
<PAGE> 11
in affiliates of $9,008,000 and non-cash changes to balance sheet accounts as
follows (in thousands):
<TABLE>
<S> <C>
Decrease in accounts receivable and other current assets $ (742)
Decrease in accounts payable and other accrued liabilities 414
Decrease in due to affiliates 17,992
Increase in non controlling interest in net assets of consolidated subsidiary (8,656)
----------
Net $ 9,008
==========
</TABLE>
Through December 31, 1999, the company had deferred invoicing ORBCOMM for
approximately $91,000,000. Additionally, approximately $33,000,000 (including
interest) of these amounts was advanced from an affiliate of Teleglobe to
Orbital. As part of the Omnibus Agreement, Orbital, Teleglobe and ORBCOMM
agreed, among other things, to settle the deferred invoicing and related cash
advances. In January 2000, 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, in March 2000, Orbital converted approximately $33,000,000 of its
deferred invoices into partnership interests of ORBCOMM. Also, in January 2000,
the company converted $2,962,000 of invoices due to Orbital from ORBCOMM
pursuant to an administrative services agreement into an equity contribution to
ORBCOMM. Finally, of the remaining $25,000,000 owed to Orbital, ORBCOMM paid
one-third of the balance in the first quarter of 2000.
In August 2000, Teleglobe informed ORBCOMM that it was no longer in a position
to continue to provide equity capital to ORBCOMM. At that time, Teleglobe agreed
with ORBCOMM on limited interim debt financing that will provide ORBCOMM with
$17,000,000 in additional cash to support near-term operations. An affiliate of
Teleglobe will provide a portion of this financing in the form of a secured loan
and will provide the remainder in a form to be subsequently determined by
Teleglobe. In August 2000, ORBCOMM approved and began to implement a revised
business plan that included, among other actions, a reduction in workforce and a
restructured marketing plan. Due to the limited amount of funds available to
ORBCOMM, ORBCOMM announced that it is highly unlikely that it will make the
interest payment scheduled to be paid on August 15, 2000 on its $170,000,000 of
outstanding Senior Notes (the "Notes"). If the interest is not ultimately paid
by September 14, 2000 or the Notes are not successfully restructured by that
time, ORBCOMM would be in default under the terms of the indenture governing the
Notes. At that time, bondholders representing at least 25% of the total amount
of the Notes can declare the principal and all accrued interest on the Notes as
currently due. Teleglobe Mobile and OCC are guarantors of the Notes. ORBCOMM
also announced it is continuing to seek additional equity investors to join
ORBCOMM's existing partners, and it is exploring restructuring its Notes. There
can be no assurance that ORBCOMM will successfully raise additional capital,
restructure the Notes and/or reorganize its business. ORBCOMM has been advised
by its independent public accountants that if ORBCOMM's future funding situation
is not resolved prior to the completion of their audit of ORBCOMM's financial
statements for the year ending December 31, 2000, the audit report on those
financial statements will be modified for that contingency and will include a
going concern qualification.
11
<PAGE> 12
At June 30, 2000 and December 31, 1999, Orbital's investments in and advances
to ORBCOMM totalled $132,787,000 and $107,989,000, respectively. At December 31,
1999, receivables in the accompanying balance sheet included $48,711,000 owed by
ORBCOMM to Orbital under the ORBCOMM system procurement agreements. At June 30,
2000, ORBCOMM receivables totalling $64,074,000 have been classified as
investments in and advances to ORBCOMM. Effective June 2000, the company ceased
recognizing revenue on the ORBCOMM system procurement agreements. Should ORBCOMM
be unsuccessful in its efforts to restructure the Notes, raise additional
capital and/or reorganize its business, an impairment of Orbital's investments
in and advances to ORBCOMM would likely result.
(8) INVESTMENTS IN AND ADVANCES TO ORBIMAGE
During the second quarter of 2000, Orbital agreed to advance in January 2001,
$20,000,000 to ORBIMAGE from amounts previously paid by ORBIMAGE under its
procurement agreement with Orbital. Orbital will be entitled to reinvoice
ORBIMAGE for this amount nine months after the launch of Orb View-4 or six
months after the launch of Orb View-3, whichever occurs first, but not earlier
than November 30, 2001. Concurrently, Orbital agreed to broker a renegotiation
of ORBIMAGE's license agreement for RadarSat-2 satellite distribution rights
with the company's MDA subsidiary which may result in a reduction in the license
fee owed by ORBIMAGE to MDA in exchange for a reduction in ORBIMAGE's current
worldwide exclusive distribution territory for RadarSat-2. If such an agreement
is consummated, Orbital's obligation to advance $20,000,000 as described above
would terminate.
Equity in earnings (losses) of affiliates includes Orbital's 100% share of
ORBIMAGE's losses, including preferred stock dividends, totaling $1,896,000 and
$8,054,000, for the second quarter of 2000 and first half of 2000, respectively.
In consideration for the agreement described in the preceding paragraph, the
company's stock purchase agreement that committed Orbital to provide additional
equity financing to ORBIMAGE was terminated by mutual agreement. Presently the
company has no intention to provide further equity funding to ORBIMAGE.
Accordingly, during the second quarter, Orbital's investment balance was reduced
to zero, and absent a future change in Orbital's funding obligations, Orbital
will not recognize additional equity losses in future periods from its
investment in ORBIMAGE. Had the company continued to recognize equity accounting
losses for ORBIMAGE, an additional $4,817,000 loss would have been recorded in
the second quarter of 2000. Orbital's share of future income from ORBIMAGE, if
any, will not be recognized until such income exceeds previously unrecognized
losses.
(9) BUSINESS COMBINATIONS
In April 2000, MDA acquired certain of the assets and liabilities of the
DataQuick Products division of Acxiom Corporation for approximately $56,000,000.
MDA paid $31,400,000 of the purchase price in cash at closing, with the
remaining amount due in October 2000. MDA accounted for the acquisition using
the purchase method of accounting. The purchase price exceeded the fair value of
the net tangible assets and identifiable intangible assets by approximately
$43,400,000, which is being amortized on a straight-line basis over twenty
years.
12
<PAGE> 13
(10) DEBT OBLIGATIONS
Orbital has a credit facility with an international syndicate of nine banks.
This credit facility contains certain financial and operating covenants and is
secured by accounts receivable, intellectual property and certain other assets,
including the stock of Orbital's wholly-owned subsidiaries. The credit facility
prohibits the payment of cash dividends, contains certain covenants with respect
to the company's working capital levels, fixed charges ratio, leverage ratio and
net worth, and expires in December 2002. Orbital amended this facility several
times in 2000 to waive noncompliance with certain financial covenants and to
amend other covenants, including net worth, leverage (including senior
leverage), fixed charges, capital expenditures, and subsidiary debt and to
reduce the credit limit of the facility. Orbital also agreed with its banks to
further reduce the total amount that is available under the facility from
$165,000,000 at June 30, 2000 to $125,000,000 on or prior to August 1, 2000 and
to further reduce the amount of the facility to $85,000,000 by July 2001. In
July 2000, Orbital and the banks agreed to defer the requirement to reduce the
amount of the facility on August 1, 2000 until December 31, 2000. Orbital is
required to apply toward the facility reduction 55% of the net cash proceeds
that it may receive from any equity offering, asset sale or debt issuance by it
or its domestic wholly-owned subsidiaries. Orbital may reborrow, however, up to
5% of any funds applied toward such reduction. Orbital's bank group's consent
may be necessary in connection with the restructuring of ORBCOMM's Notes, an
ORBCOMM financing or reorganization of its business. (See Note 7)
The company's 12% note payable 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. 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. In June 2000, the company made a scheduled payment of principal on the
note reducing the outstanding balance from $13,333,000 to approximately
$6,666,000. The company has agreed to prepay the remaining principal amount,
which is due June 2001, on or prior to October 31, 2000. In the event the
company does not prepay at that time, the interest rate on the balance of the
note will be adjusted and applied retroactively so that interest would increase
to 13% for the period June 1 through August 31, 2000 and to 14% from September
1, 2000 until it is repaid.
In April 2000, MDA entered into a revised credit facility with its commercial
bank. The revised facility increased total availability to approximately
$130,000,000 and includes certain operational and financial covenants including
certain restrictions on the payment of dividends. The facility is non-recourse
to Orbital.
(11) COMMITMENTS AND CONTINGENCIES
In July 2000, the company reached an agreement to settle the outstanding
consolidated class-action lawsuit filed on May 28, 1999 in the U.S. District
Court for the Eastern District of Virginia against the company, an officer and
an officer/director alleging violations of federal securities laws, on behalf of
purchasers of the company's stock and call options during the period
13
<PAGE> 14
from April 27, 1997 through October 29, 1999. The settlement agreement provides
for the plaintiffs to receive a cash payment of $11,000,000 to be made by the
company's insurance carrier, and warrants to be issued by the company having an
aggregate fair value of $11,500,000 that are exercisable for the company's
common stock at a ten percent discount to the market price at the time the
settlement is approved by the court. The company expects final documentation and
court appproval to occur before year-end 2000. Consequently, an expense and
liability of $11,500,000 have been recorded in the second quarter of 2000.
In the first quarter of 2000, PT Media Citra Indostar, an Indonesian company
("PT-MCI"), commenced arbitration seeking a refund of $163,000,000 PT-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 1997
acquisition of CTA. PT-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 such 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.
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.
In August 2000, the company was notified by a customer of its intent to
terminate a transportation management systems contract alleging default on the
part of the company. Orbital is taking actions which it believes should satisfy
the customer and, in any event, believes that the financial exposure to the
company, if any, will not be material.
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.
(12) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" which amends SFAS No. 133
to 1) expand the scope of the "normal sales and normal purchases" exception; 2)
introduce the benchmark rate of interest rate that may
14
<PAGE> 15
be hedged; 3) permit a recognized foreign currency denominated asset to be
hedged, and; 4) allow certain intercompany derivatives that are offset net to be
designated as hedging instruments. The company does not anticipate that SFAS No.
138 will have a material impact on its financial statements.
In December 1999, the Commission issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements" to provide guidance
regarding the recognition, presentation and disclosure of revenue in the
financial statements. The company does not anticipate that the adoption of SAB
101 will have a material impact on its financial statements.
In April 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation; Interpretation of APB
Opinion No. 25" ("FIN 44"). The company is currently evaluating the
provisions of FIN 44.
(13) SUBSEQUENT EVENT
In July 2000, MDA completed an initial public offering on the Toronto Stock
Exchange of 6,600,000 shares of common stock (including shares issued pursuant
to the underwriters' overallotment option), raising gross proceeds of
approximately $37,500,000 for itself, $18,800,000 for Orbital and $5,600,000 for
other selling shareholders. Orbital made payments in July to reduce its primary
credit facility by $8,000,000 with the proceeds raised from the MDA public
offering. As a result of the public offering, Orbital's ownership interest in
MDA has declined to approximately 54%.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
With the exception of historical information, certain statements included in
this discussion relating to capital requirements, growth, liquidity, new
business, operational performance, schedules, sources and uses of funds,
financing plans, and the performance of our affiliates, Orbital Imaging
Corporation ("ORBIMAGE") and ORBCOMM Global L.P. ("ORBCOMM"), are
forward-looking statements that involve known and unknown risks, uncertainties
and other factors that may cause our actual results, performance, achievements
or investments to differ materially from any future results, performance,
achievements, or investments expressed or implied by such forward-looking
statements. Such factors include: general and economic business conditions,
launch results, product performance, risks associated with government contracts,
market acceptance of consumer products, the introduction of products and
services by competitors, risks associated with acquired businesses, availability
of required capital, market acceptance of new products and technologies, risks
associated with long-term contracts, lack of control over certain subsidiaries
and affiliates, the effects of pending or possible litigation or government
investigations and other factors more fully described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Outlook: Issues and Uncertainties" included in our Annual Report on Form 10-K
for the year ended December 31, 1999.
Our products and services are grouped into three business sectors: space and
ground infrastructure systems, satellite access products and satellite services.
The space and ground infrastructure systems sector consists of several
reportable segments, including 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. Satellite
services include the following services conducted by our affiliates, ORBCOMM,
ORBIMAGE and CCI International NV ("CCI") and our subsidiaries Radarsat
International Inc. ("RSI") and Orbital Navigation Corporation ("ORBNAV"):
satellite-based two-way mobile data communications services, remote imaging
services, satellite-based automotive information services and satellite-based
voice communications services. We do not control the operational or financial
affairs of ORBCOMM, ORBIMAGE and CCI and consequently their financial results
are not consolidated with our results.
RECENT DEVELOPMENTS
In July 2000, Orbital's Canadian subsidiary, MacDonald, Dettwiler and Associates
Ltd. ("MDA"), completed an initial public offering of 6,600,000 common shares on
the Toronto Stock Exchange, raising total proceeds of approximately $62,000,000
for MDA and its selling shareholders. See--Liquidity and Capital Resources.
16
<PAGE> 17
As discussed below, in August 2000, ORBCOMM announced that it had adopted a
revised business strategy and that it would receive limited interim debt
financing from an affiliate of Teleglobe Inc. to support near-term operations.
While continuing to seek additional third party investors, ORBCOMM also
announced that it is highly unlikely that it will make its scheduled August 2000
interest payment on its outstanding senior unsecured notes and is exploring
restructuring the notes.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000
AND 1999
REVENUES. Our consolidated revenues for the three-month periods ended June 30,
2000 and 1999 were $231,475,000 and $226,484,000, respectively. Our consolidated
revenues for the six-month periods ended June 30, 2000 and 1999 were
$455,016,000 and $426,656,000, respectively. Revenues for the three months ended
June 30, 2000 and 1999 include sales to non-controlled and unconsolidated
affiliates of $13,527,000 and $26,717,000, respectively. Revenues for the six
months ended June 30, 2000 and 1999 include sales to non-controlled and
unconsolidated affiliates of $40,124,000 and $63,044,000, respectively.
Space and Ground Infrastructure Systems. Revenues from our space and ground
infrastructure systems sector totaled $202,042,000 and $195,190,000 for the
three months ended June 30, 2000 and 1999, respectively. Revenues from our space
and ground infrastructure systems sector totaled $397,818,000 and $366,271,000
for the six months ended June 30, 2000 and 1999, respectively.
Revenues from our launch vehicles and advanced programs increased to $37,493,000
in the second quarter of 2000, from $36,098,000 in the second quarter of 1999.
This increase in revenues is primarily attributable to higher revenues from our
X-34 rocket program. Revenues for the first half of 2000 were $72,393,000 as
compared to $79,509,000 for the same period last year. The decrease in
year-to-date revenues in 2000 as compared to last year is primarily attributable
to customer-induced launch schedule changes by our government customers and
reduced demand from our commercial customers. Additionally, effective June 2000,
we ceased recognizing revenue on the launch services component of the ORBCOMM
system procurement agreements.
Revenues from satellites and related space systems were $64,088,000 for the
quarter ended June 30, 2000 and $73,734,000 for the second quarter of 1999.
Revenues for the first half of 2000 were $131,488,000 as compared to
$136,900,000 for the same period last year. The decline in revenues from 1999 to
2000 is primarily due to a decrease in revenues recognized in 2000 for the
ORBIMAGE satellite contract and a commercial geosynchronous satellite contract
won in late 1998. Additionally, effective June 2000, we ceased recognizing
revenue on the satellite construction component of the ORBCOMM system
procurement agreements.
Revenues from electronics and sensor systems and transportation management
systems increased to $43,143,000 for the second quarter of 2000 from $36,804,000
in the second quarter of 1999. Revenues for the first half of 2000 were
$78,540,000 as compared to $72,617,000 for the same
17
<PAGE> 18
period last year. The increase in revenues this year is primarily attributable
to a growth in revenues from transportation management systems.
Revenues from satellite ground systems, space robotics and mapping and land
information services increased to $57,318,000 in the second quarter of 2000 as
compared to $48,554,000 in the second quarter of 1999. Revenues for the first
half of 2000 were $115,397,000 as compared to $77,245,000 for the same period
last year. The revenue growth in 2000 as compared to 1999 is attributable to the
acquisitions of the DataQuick Products division of Acxiom Corporation
("DataQuick") in April 2000 and the space robotics division of Spar Aerospace
Ltd. (completed in May 1999), in addition to orders received in late 1999 for
several satellite ground systems and system upgrades.
Satellite Access Products. Revenues from sales of satellite-based navigation,
positioning and communications products in the second quarter of 2000 were
$25,667,000 as compared to $26,775,000 for the second quarter of 1999. Revenues
for the first half of 2000 were $50,357,000 as compared to $53,769,000 for the
same period last year. The decrease in sector revenues is primarily attributable
to reduced sales of high-precision industrial navigation and positioning
products.
Satellite Services. Revenues from satellite services totaled $3,766,000 and
$4,519,000 in the second quarters of 2000 and 1999, respectively. Revenues for
the first half of 2000 were $6,841,000 as compared to $6,616,000 for the same
period last year. Revenues in 2000 and 1999 include those generated by our
consolidated subsidiary, RSI. In 1999, sector revenues also included ORBCOMM's
domestic operation, ORBCOMM USA, L.P. ("ORBCOMM USA"), which we consolidated in
1999. Effective January 1, 2000, we no longer consolidate ORBCOMM USA's results
of operations.
GROSS PROFIT/COSTS OF GOODS SOLD. Costs of goods sold include the costs of
personnel, materials, subcontracts and overhead related to commercial products
and under various development and production contracts. Gross profit depends on
a number of factors, including the mix of contract types and costs incurred
thereon in relation to estimated costs. Our consolidated gross profit for the
second quarter of 2000 was $43,983,000 (19% of revenues) as compared to
$49,254,000 (22% of revenues) for the second quarter of 1999. Our gross margins
for the first half of 2000 were $85,871,000 (19% of revenues) as compared to
$90,305,000 (21% of revenues) for the first half of 1999.
Space and Ground Infrastructure Systems. Gross profit from our space and ground
infrastructure systems totaled $32,841,000 (16% of sector revenues) and
$37,376,000 (19% of sector revenues) for the quarters ended June 30, 2000 and
1999, respectively. Gross profit totaled $65,569,000 (16% of sector revenues)
and $70,582,000 (19% of sector revenues) for the six months ended June 30, 2000
and 1999, respectively.
Gross margins for our space and ground infrastructure product lines were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C> <C> <C>
Launch vehicles and advanced programs 25% 12% 23% 14%
Satellites and related space systems 0% 20% 4% 18%
Electronics and sensor systems and
transportation management systems 23% 25% 24% 26%
Satellite ground systems, space
robotics, mapping and land
information services 24% 19% 21% 21%
</TABLE>
The improved gross margin for launch vehicles in 2000 was primarily due to
completing work in 1999 on certain less profitable space and suborbital launch
vehicle contracts. The gross margin for satellites and related space systems was
approximately zero in the second quarter 2000. The decrease in satellite gross
margins in 2000 is primarily due to cost growth on the ORBIMAGE satellite
construction contract and a commercial geosynchronous satellite contract won in
late 1998. These contracts contain a significant amount of lower margin,
external subcontract effort, as well as substantial non-recurring engineering
costs incurred in developing these products to meet a range of specific customer
requirements. The slight decrease in gross margins in 2000 for electronics and
sensor systems and transportation management systems is due to an increase in
lower margin, subcontract work on several contracts, and to lower margins on
certain international defense contracts and transportation management systems
contracts. The increase in gross margins for ground systems, space robotics and
mapping and land information services in the second quarter of 2000 is primarily
due to the margins contributed by new business activities including recent
business acquisitions.
Satellite Access Products. Gross profit for our satellite access products sector
was $9,621,000 and $18,084,000 for the second quarter and first half of 2000,
respectively, as compared to $10,350,000 and $18,842,000 for the second quarter
and first half of 1999, respectively. Gross margins for satellite access
products decreased slightly to 37% of revenues for the second quarter of 2000 as
compared to 39% for the second quarter of 1999. Gross margins increased slightly
to 36% for the first half of 2000 as compared to 35% for the first half of 1999.
Satellite Services. Our satellite services sector had a gross profit of
$1,521,000 during the second quarter of 2000, which was consistent with a gross
profit of $1,527,000 for the second quarter of 1999. Gross profit for this
sector was $2,219,000 for the first half of 2000 as compared to $880,000 for the
first half of 1999. The first quarter of 1999 included negative gross margin
associated with an experimental satellite service that was discontinued later in
1999. Substantially all of the positive gross profit in this sector is generated
by RSI.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses represent
self-funded product development activities, and exclude direct customer-funded
development. Research and development expenses during the three months ended
June 30, 2000 and 1999 were $7,999,000 (3% of revenues) and $10,622,000 (5% of
revenues), respectively. Research and development expenses during the six-month
periods ended June 30, 2000 and 1999 were $16,088,000 (4% of revenues) and
$20,703,000 (5% 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 systems.
19
<PAGE> 20
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 for the three months ended June 30, 2000 and 1999 were
$33,473,000 (14% of revenues) and $28,891,000 (13% of revenues), respectively.
Selling, general and administrative expenses for the six months ended June 30,
2000 and 1999 were $61,605,000 (13% of revenues) and $57,434,000 (13% of
revenues), respectively. The increase in such expenses this year is primarily
attributable to the acquisitions of DataQuick and Spar Aerospace and higher
corporate general and administrative expenses.
NET INVESTMENT INCOME (EXPENSE). Interest expense, net of investment income and
net of interest capitalized, was $7,660,000 and $5,409,000 for the three months
ended June 30, 2000 and 1999, respectively, and $12,109,000 and $8,707,000 for
the six months ended June 30, 2000 and 1999, respectively. Interest expense net
of interest capitalized was $9,183,000 and $6,400,000 for the three months ended
June 30, 2000 and 1999, respectively, and $15,221,000 and $10,521,000 for the
six months ended June 30, 2000 and 1999, respectively. Interest capitalized
totaled $658,000 and $817,000 in the second quarter of 2000 and 1999,
respectively, and $1,124,000 and $1,596,000 for the first half of 2000 and 1999,
respectively. Investment income was $1,523,000 and $991,000 for the three months
ended June 30, 2000 and 1999, respectively, and $3,112,000 and $1,814,000 for
the six months ended June 30, 2000 and 1999, respectively. Investment income
includes interest earnings on short-term investments and realized gains and
losses on investments.
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES. Equity in losses of affiliates for
the three months ended June 30, 2000 and 1999 were $20,304,000 and $27,334,000,
respectively, and $44,422,000 and $51,723,000 for the six months ended June 30,
2000 and 1999, respectively. These amounts primarily represent (i) elimination
of proportionate profits or losses on sales of infrastructure products to
ORBCOMM and ORBIMAGE, (ii) our proportionate share of ORBCOMM's, ORBIMAGE's and
Navigation Solutions LLC's current period earnings and losses, and (iii)
preferred dividends and beneficial conversion rights to other investors in
ORBIMAGE.
Equity in earnings (losses) of affiliates includes Orbital's 100% share of
ORBIMAGE's losses including preferred stock dividends, totaling $1,896,000 and
$8,054,000, for the second quarter of 2000 and first half of 2000, respectively.
In June 2000, our stock purchase agreement that committed us to provide
additional equity financing to ORBIMAGE was terminated by mutual agreement.
Presently, we have no intention to provide further equity funding to ORBIMAGE.
Accordingly, Orbital's investment balance was reduced to zero in the second
quarter 2000, and absent a future change in Orbital's funding obligations,
Orbital will not recognize additional equity losses in future periods from its
investment in ORBIMAGE. Had we continued to recognize equity accounting losses
for ORBIMAGE, an additional $4,817,000 loss would have been recorded in the
second quarter of 2000. Orbital's share of future income from ORBIMAGE, if any,
will not be recognized until such income exceeds previously unrecognized losses.
20
<PAGE> 21
Our proportionate share of ORBCOMM's losses declined in the first and second
quarters of 2000 due to a reduction in our ownership interest in ORBCOMM from
50% in 1999 to approximately 33% in the second quarter of 2000. In the second
quarter of 2000, ORBCOMM recorded a provision to write down inventory. Our pro
rata share of this write down was $3,335,000. ORBCOMM's overall losses could
increase significantly in future periods if ORBCOMM is unable to raise
additional capital or successfully restructure its debt (see note 7 to the
accompanying financial statements).
NON-CONTROLLING INTERESTS IN (EARNINGS) LOSSES OF CONSOLIDATED SUBSIDIARIES.
Non-controlling interests in (earnings) losses of consolidated subsidiaries for
the three months ended June 30, 2000 and 1999 were $308,000 and $2,192,000,
respectively, and $1,557,000 and $5,453,000 for the six months ended June 30,
2000 and 1999, respectively. These amounts primarily represent non-controlling
stockholders' proportionate share of Magellan's losses and MDA's earnings for
the three and six months ended June 30, 2000. For the three and six months ended
June 30, 1999, these amounts were primarily non-controlling stockholders'
proportionate share of Magellan's and ORBCOMM USA's losses.
LITIGATION SETTLEMENT. A litigation settlement loss of $11,500,000 was recorded
in the second quarter of 2000 as a result of a settlement agreement reached in
July 2000 related to the consolidated shareholder class action lawsuit. The
settlement provides for the plaintiffs to receive a cash payment of $11,000,000
to be made by the company's insurance carrier and warrants issued by the company
having an aggregate fair value of $11,500,000.
PROVISION FOR INCOME TAXES. We recorded an income tax provision of $1,788,000
and $2,028,000 for the three-month periods ended June 30, 2000 and 1999,
respectively, and $3,061,000 and $3,326,000 for the six-month periods ended June
30, 2000 and 1999. The provision in all periods was entirely due to foreign
taxes attributable to our Canadian operations. Our interim income tax provision
is based on an estimate of our full-year provision. Estimated provisions
recorded during interim periods may be periodically revised, if necessary, to
reflect current estimates.
NET LOSS. Our consolidated net loss for the three months ended June 30, 2000 and
1999 was $42,129,000 and $26,071,000, respectively, and $68,653,000 and
$52,234,000 for the six months ended June 30, 2000 and 1999.
21
<PAGE> 22
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. Recently, we have been unable to access the capital
markets and we cannot borrow additional funds under our primary credit facility.
Accordingly, our liquidity has been constrained.
To date in 2000, our capital requirements for operations have been provided
primarily by cash from operations combined with cash on hand, and we expect this
to continue for the remainder of the year. To satisfy our additional capital
requirements, including the required repayment of debt, management's plans
include sales of certain assets, the possibility of raising additional equity
and/or debt capital, and restructuring or refinancing 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 business acquisitions during 2000 and in the
future. Such plans would likely require that we raise additional capital or
otherwise generate sufficient capital by selling certain assets. No assurance
can be given that we will be successful in completing additional investments or
business acquisitions, in completing new equity or debt financings or asset
sales, or in restructuring or refinancing our credit facility.
Cash and investments were $49,504,000 and total debt obligations were
$391,410,000 at June 30, 2000. Orbital's outstanding debt includes 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 June 30, 2000 included approximately
$14,413,000 restricted to support bank covenants and outstanding letters of
credit. Our current ratio was 79% at June 30, 2000. Our ratio of total debt less
cash and investments to total debt plus total stockholders' equity was
approximately 53% at June 30, 2000.
Our primary credit facility previously provided for total borrowings from an
international syndicate of banks of up to $165,000,000, all of which was drawn
and outstanding as of June 30, 2000 at a weighted average interest rate of
10.21%. The credit facility has been permanently reduced to $157,000,000, which
is the total amount currently outstanding. These borrowings are collateralized
by accounts receivable, intellectual property and certain other assets,
including the stock of our wholly owned subsidiaries, which includes MDA
Holdings Corporation, the holder of all shares of MDA that we beneficially own.
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 this year to waive noncompliance with certain financial covenants and to
amend other covenants, including 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 from $165,000,000 at June 30, 2000 to $125,000,000
22
<PAGE> 23
on or prior to August 1, 2000 and to further reduce the amount of the facility
to $85,000,000 by July 2001. In July 2000, we agreed with our banks to defer the
requirement to reduce the amount of the facility on August 1, 2000 until
December 31, 2000. We are required to apply toward this reduction 55% 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. We may reborrow,
however, up to 5% of any funds applied toward such reduction.
In June 2000, we made a scheduled payment of principal on the 12% note payable
reducing the outstanding balance from $13,333,000 to approximately $6,666,000.
We have agreed to prepay the remaining principal amount, which is due June 2001,
on or prior to October 31, 2000. In the event the company does not prepay at
that time, the interest rate on the balance of the note will be adjusted and
applied retroactively so that interest would increase to 13% for the period June
1 through August 31, 2000 and to 14% from September 1, 2000 until it is repaid.
In August 2000, Teleglobe Inc. ("Teleglobe") informed ORBCOMM that it was no
longer in a position to continue to provide equity capital to ORBCOMM. At that
time, Teleglobe agreed with ORBCOMM on limited interim debt financing that will
provide ORBCOMM with $17,000,000 in additional cash to support near-term
operations. An affiliate of Teleglobe will provide a portion of this financing
in the form of a secured loan and will provide the remainder in a form to be
subsequently determined by Teleglobe. In August 2000, ORBCOMM approved and began
to implement a revised business plan that included, among other actions, a
reduction in workforce and a restructured marketing plan. Due to the limited
amount of funds available to ORBCOMM, ORBCOMM announced that it is highly
unlikely that it will make the interest payment scheduled to be paid on August
15, 2000 on its $170,000,000 of outstanding Senior Notes (the "Notes"). If the
interest is not ultimately paid by September 14, 2000 or the Notes are not
successfully restructured by that time, ORBCOMM would be in default under the
terms of the indenture governing the Notes. At that time, bondholders
representing at least 25% of the total amount of the Notes can declare the
principal and all accrued interest on the Notes as currently due. Teleglobe
Mobile Partners and our subsidiary, Orbital Communications Corporation, are
guarantors of the Notes. ORBCOMM also announced it is continuing to seek
additional equity investors to join ORBCOMM's existing partners, and it is
exploring restructuring its Notes. There can be no assurance that ORBCOMM will
successfully raise additional capital, restructure the Notes and/or reorganize
its business.ORBCOMM has been advised by its independent public accountants that
if ORBCOMM's future funding situation is not resolved prior to the completion of
their audit of ORBCOMM's financial statements for the year ending December 31,
2000, the audit report on those financial statements will be modified for that
contingency and will include a going concern qualification. At June 30, 2000,
Orbital's investments in and advances to ORBCOMM totalled $132,787,000(including
approximately $64,000,000 in receivables that have been reclassified as
investments in and advances to ORBCOMM). Should ORBCOMM be unsuccessful in its
efforts to restructure the Notes, raise additional capital and/or reorganize its
business, an impairment of Orbital's investments in and advances to ORBCOMM
would likely result.
We invested approximately $21,409,000 in capital expenditures for various
satellites, launch vehicle and other infrastructure production, manufacturing
and test equipment, buildings and leasehold improvements and office equipment in
the first half of 2000. Our operations provided net cash of $29,608,000 during
the six months ended June 30, 2000.
23
<PAGE> 24
During the second quarter of 2000, we agreed to advance in January 2001,
$20,000,000 to ORBIMAGE from amounts previously paid by ORBIMAGE under its
procurement agreement with us. Orbital will be entitled to reinvoice ORBIMAGE
for this amount nine months after the launch of Orb View-4 or six months after
the launch of Orb View-3, whichever occurs first, but not earlier than November
30, 2001. Concurrently, we agreed to broker a renegotiation of ORBIMAGE's
license agreement for RadarSat-2 satellite distribution rights with MDA, which
may result in a reduction in the license fee owed by ORBIMAGE to MDA in exchange
for a reduction in ORBIMAGE's current worldwide exclusive distribution territory
for RadarSat-2. If such an agreement is consummated, our obligation to advance
$20,000,000 as described above would terminate. Also in June 2000, our stock
purchase agreement whereby we had committed to provide additional equity
financing to ORBIMAGE was terminated by mutual agreement.
In April 2000, our MDA subsidiary acquired certain of the assets and liabilities
of DataQuick for approximately $56,000,000. MDA paid $31,400,000 of the purchase
price in cash at closing, with the remaining amount due in October 2000. Also in
April 2000, MDA increased its primary credit facility to $130,000,000, which is
secured by assets, including stock of its subsidiaries.
In July 2000, MDA completed an initial public offering on the Toronto Stock
Exchange of 6,600,000 shares of common stock (including shares issued pursuant
to the underwriters' overallotment option), raising gross proceeds of
approximately $37,500,000 for itself, $18,800,000 for Orbital and $5,600,000 for
other selling shareholders. Orbital made payments in July to reduce its primary
credit facility by $8,000,000 with the proceeds from Orbital's sale of MDA
shares. Also, as a result of the public offering, Orbital's ownership interest
in MDA has declined to approximately 54%.
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. Two buildings and our new high bay have
been completed with the remaining construction 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.
ITEM 3. 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 June 30, 2000, the majority of the
24
<PAGE> 25
company's long-term debt consisted of its $100,000,000 5% convertible
subordinated notes, due 2002. The fair market value of these convertible
securities fluctuates with the company's stock price, and was $68,000,000 at
June 30, 2000.
25
<PAGE> 26
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2000, the company reached an agreement to settle the
outstanding consolidated class-action lawsuit filed on May 28, 1999
in the U.S. District Court for the Eastern District of Virginia
against the company, an officer and an officer/director alleging
violations of the federal securities laws, on behalf of purchasers
of the company's stock and call options during the period from April
21, 1998 through February 16, 1999. The settlement agreement
provides for the plaintiffs to receive a cash payment of $11,000,000
million to be made by the company's insurance carrierand warrants to
be issued by the company having an aggregate value of $11,500,000
that are exercisable into the company's common stock at a ten
percent discount to the market price at the time the settlement is
approved by the court. The company expects final documentation and
court approval to occur before year end.
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 would
have a material adverse effect on our results of operations or
financial positions.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY- HOLDERS
(a) The annual meeting of stockholders of the Company was
held on June 1, 2000.
(b) Not applicable.
(c) (i) Election of four directors, each serving for a
three-year term ending in 2003:
26
<PAGE> 27
Douglas S. Luke
Votes: For : 32,318,773
Withheld: 768,786
Harrison H. Schmitt
Votes: For: 32,361,378
Withheld: 726,182
James R. Thompson
Votes: For: 32,460,065
Withheld: 627,494
Scott L. Webster
Votes: For: 32,474,320
Withheld: 613,240
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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. Not applicable.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORBITAL SCIENCES CORPORATION
DATED: August 11, 2000 By: /s/ David W. Thompson
--------------------------------------
David W. Thompson
Chief Executive Officer
DATED: August 11, 2000 By: /s/ Hollis M. Thompson
--------------------------------------
Hollis M. Thompson
Vice President, Corporate Controller
(Chief Accounting Officer)
28
<PAGE> 29
EXHIBIT INDEX
The following exhibit is filed as part of this report.
Exhibit No. Description
10.1 Amendment No. 9, dated as of May 31, 2000, to the Third
Amended and Restated Credit and Reimbursement
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 Amendment No. 10, dated as of June 7, 2000, to the
Third Amended and Restated Credit and Reimbursement
Agreement, dated as of December 21, 1998 among the
company and Morgan Guaranty Trust Company of New York,
as Administrative Agent. (transmitted herewith).
10.3 Amendment No. 11, dated as of July 31, 2000, to the
Third Amended and Restated Credit and Reimbursement
Agreement, dated as of December 21, 1998 among the
company and Morgan Guaranty Trust Company of New York,
as Administrative Agent. (transmitted herewith).
10.4 Bank Agreement between MacDonald, Dettwiler and
Associates Ltd. and Royal Bank of Canada dated April
20, 2000. (transmitted herewith).
10.5 Revised MacDonald Dettwiler and Associates Ltd. 1999
Stock Option and Incentive Plan. (transmitted
herewith).
27 Financial Data Schedule (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-Q, or
otherwise subject to the liabilities of Section 18 of the
Securities Exchange Act of 1934) (transmitted herewith).
29
