Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
ANNUAL REPORT ON
FORM 10-K
For the fiscal year ended December 31, 1999
COMMISSION FILE NUMBER 0-18287
------------------------
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)
------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
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
- ------------------------
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.
3
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
1
4
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.
2
5
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
3
6
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.
4
7
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
5
8
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.
6
9
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
7
10
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-
8
11
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
9
12
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
10
13
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
11
14
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.
12
15
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.
13
16
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.
14
17
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
15
18
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.
16
19
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
17
20
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
18
21
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
19
22
$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.
20
23
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.
21
24
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
22
25
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
23
26
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 recei