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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 1-14279
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ORBITAL SCIENCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 06-1209561
(STATE OF INCORPORATION OF REGISTRANT) (I.R.S. EMPLOYER I.D. NO.)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(703) 406-5000
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01
(LISTED ON THE NEW YORK STOCK EXCHANGE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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, 2001 was approximately $120,411,788.
As of April 10, 2001, 37,746,634 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement dated April 16,
2001 are incorporated by reference in Part III of this Report.
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TABLE OF CONTENTS
ITEM PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
Item 4A Executive Officers of the Registrant........................ 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 24
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 59
Item 11. Executive Compensation...................................... 59
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 59
Item 13. Certain Relationships and Related Transactions.............. 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 60
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Pegasus is a registered trademark and service mark of Orbital Sciences
Corporation; Taurus is a registered trademark of Orbital Sciences Corporation;
Orbital is a trademark of Orbital Sciences Corporation; OrbView and ORBIMAGE are
registered service marks of Orbital Imaging Corporation; and ORBCOMM is a
registered service mark of ORBCOMM Global L.P.
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PART I
ITEM 1. BUSINESS
BACKGROUND
Orbital Sciences Corporation, together with its subsidiaries ("Orbital" or
the "company"), is a leading space technology systems company that designs,
manufactures, operates and markets a broad range of space-related products and
services. Our products and services include:
- launch vehicles and advanced programs,
- satellites and related space systems,
- electronics and sensor systems, and
- space robotics, satellite ground systems, and mapping and land
information products and services.
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 lightweight rockets, small satellites 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, including 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 navigation and communications devices.
During 2000, we adopted a strategy intended to focus on our core space
technology businesses, primarily involving our satellites, launch vehicles and
related space systems. Part of this strategy involves the sale of certain
non-core assets. In October 2000, we sold our Fairchild Defense electronics
business unit ("Fairchild") for approximately $100 million. In July 2000, our
Canadian subsidiary, MacDonald, Dettwiler and Associates Ltd. ("MDA"), completed
an initial public offering on the Toronto Stock Exchange, raising gross proceeds
for itself of approximately $37,500,000 and $18,800,000 for Orbital. On April
12, 2001, our wholly owned subsidiary, MDA Holdings Corporation ("MDA
Holdings"), which holds our shares in MDA, entered into an agreement with a
group of Canadian institutional and private equity investors to sell 12,350,000
MDA shares at approximately $9.00 per share. The agreement is subject to
customary closing conditions, including the receipt of regulatory approvals, and
the parties expect to close the sale by mid-May 2001. Certain of the purchasers
also have an option to acquire MDA Holdings' remaining 5,650,000 shares of MDA
by May 31, 2001.
We recently adopted a formal plan to dispose of our subsidiary, Magellan
Corporation ("Magellan"), which designs, produces, distributes, sells and
licenses Global Positioning System ("GPS")-based satellite access products, and
our investment in Navigation Solutions LLC ("NavSol"), a joint venture engaged
in satellite-aided automotive guidance and related value-added information
services. We are continuing to explore the disposition of other non-core assets.
We also have developed and funded several space-based services businesses,
primarily through the following joint ventures:
- Orbital Imaging Corporation ("ORBIMAGE"), which develops and operates
commercial remote imaging satellites, and
- ORBCOMM Global L.P. ("ORBCOMM"), which operates a low-Earth orbit
satellite communications system designed to serve the global market for
two-way data communications.
ORBCOMM and ORBIMAGE have both recently experienced serious financial
difficulties. ORBCOMM filed for protection under Chapter 11 of the U.S.
Bankruptcy Code in September 2000. On April 12, 2001, ORBCOMM, Teleglobe Holding
Corporation ("Teleglobe Holdings"), ORBCOMM's creditors committee, our
subsidiary, Orbital Communications Corporation ("OCC"), and we signed a
preliminary non-binding term sheet providing for a sale of ORBCOMM's assets to a
newly formed consortium called International Licensees, LLC and for a
comprehensive liquidating plan of reorganization for
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ORBCOMM. There can be no assurance that the sale will be consummated, and if it
is not, we expect that ORBCOMM's Chapter 11 reorganization proceeding would be
converted to a Chapter 7 liquidation proceeding.
In March 2001, ORBIMAGE defaulted on the interest payment obligations under
its $225,000,000 11 5/8% Senior Notes due 2005. This debt is non-recourse to us.
ORBIMAGE management currently estimates that ORBIMAGE has sufficient resources
to meet its capital and operating requirements through May 2001. ORBIMAGE is
seeking to restructure the Senior Notes and to obtain additional capital from
third parties as well as its existing shareholders. There can be no assurance
that such capital will be available on a timely basis or at all.
DESCRIPTION OF ORBITAL'S PRODUCTS AND SERVICES
Our products and services include launch vehicles and advanced programs,
satellites and related space systems, electronics and sensor systems, and space
robotics, satellite ground systems, and mapping and land information products
and services, and are described more fully below. Our overall business is not
seasonal to any significant extent. Customers that accounted for 10% or more of
our consolidated 2000 revenues were the National Aeronautics and Space
Administration ("NASA"), the U.S. Department of Defense ("DoD") and the Canadian
Space Agency.
LAUNCH VEHICLES AND ADVANCED PROGRAMS. We developed and produce the
Pegasus and Taurus space launch vehicles that place small satellites into
low-Earth orbit, and in 2000, we completed development of and successfully
launched our first Minotaur space launch vehicle. 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 30 missions, including two successful
launches in 2000, one of which represented the first equatorial mission of a
small-class commercial space launch vehicle. The Taurus has performed a total of
five launches, including one successful mission in 2000 for the U.S. Department
of Energy. Pegasus and Taurus customers have included various U.S. and
international government and commercial customers. We perform Minotaur missions,
including the first two launches in 2000, under a contract with the U.S. Air
Force.
Orbital's space launch technology has also been the basis for several other
space and suborbital programs, including supporting efforts to develop
technologies that could be applied to reusable launch vehicles, hypersonic
aircraft, and missile defense systems.
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. During 2000,
the U.S. Navy awarded us a contract for the Supersonic Sea-Skimming Target
Missile, which broadens the scope of our target launch vehicle products from
ballistic missiles to supersonic, low-altitude, air-breathing cruise missiles.
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 106 suborbital missions.
SATELLITES AND RELATED SPACE SYSTEMS. We design and manufacture small and
medium-class satellites to be used in low-Earth orbit and in geosynchronous
orbit. Since 1982, we, including two predecessor companies, have built and
delivered 88 satellites for various commercial and governmental customers for a
wide range of communications, broadcasting, remote imaging, scientific and
military missions. In March 2001, the BSAT-2a satellite, based on our smaller
geosynchronous orbit satellite platforms and the first of a pair of
direct-to-home
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digital television broadcasting satellites that we are building for Japan's
Broadcasting Satellite System Corporation, was successfully launched aboard an
Ariane 5 rocket.
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, DoD, the Naval Research
Laboratory and the U.S. Department of Energy.
ELECTRONICS AND SENSOR SYSTEMS. We design, develop and manufacture
sophisticated sensors and analytical instruments for space, defense and
industrial applications. Our instruments have successfully operated in space
measuring ozone concentrations around the world. We also developed and produced
an atmospheric monitoring system that was successfully activated in February
2001 aboard the International Space Station. We provide sensors performing
similar functions for U.S. and British Navy nuclear submarines, and we are
developing sensors for the DoD for use in the detection of chemical and
biological weapons. In addition, we manufacture and market sensors that analyze
gas properties for commercial customers in the petrochemical, natural gas,
chemical, pharmaceutical, steel and other industries.
Our transportation management systems division develops and produces fleet
management systems using satellite-based automatic vehicle location systems that
have been used primarily for metropolitan mass transit operators in the U.S.
During 2000, we entered the international market with a major transportation
management systems contract award in Singapore. Our transportation management
systems combine GPS vehicle tracking technology with local area wireless and
terrestrial communications to help transit agencies manage public bus and light
rail systems. Major customers for our transportation management systems include
the metropolitan mass transit authorities in Chicago, Houston, Denver, Oakland,
Philadelphia, Baltimore, Washington, DC, 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.
Prior to the sale of Fairchild in October 2000, we developed and
manufactured defense electronics products, including advanced avionics and data
management systems for aircraft flight operations and ground support
applications for U.S. and foreign military customers. We sold this business unit
to a U.S. subsidiary of Smiths Industries plc for approximately $100,000,000.
SPACE ROBOTICS, SATELLITE GROUND SYSTEMS, AND MAPPING AND LAND INFORMATION
PRODUCTS AND SERVICES. Our space robotics, satellite ground systems, and mapping
and land information products and services segment is conducted through our
Vancouver, Canada-based MDA subsidiary. Through MDA Holdings, we owned
18,000,000 common shares, or 52% of MDA, at December 31, 2000, but as discussed
above, MDA Holdings recently entered into an agreement to sell our remaining
interest in MDA.
MDA provides mission-critical information systems for space applications,
natural resource and land management, automated aeronautical information and air
traffic control systems and other command and control systems for military and
civilian purposes. MDA has built a majority of the world's non-military imaging
satellite ground stations, many of which are designed to receive and process
data from major civil and commercial earth observation satellites currently in
operation. Under a contract with the Canadian Space Agency, MDA is developing,
constructing and will operate the Radarsat-2 high-resolution radar satellite,
expected to be launched in 2003. MDA also designs, manufactures, markets and
supports robotics systems primarily used on Space Shuttle missions and on the
International Space Station. Since its first use in 1981, MDA's principal
robotics product, the Shuttle Remote Manipulator System, or Canadarm, has
performed successfully on 55 Space Shuttle missions involving satellite
deployment and retrieval, Space Station assembly and other tasks.
Over the last three years, MDA has leveraged its information systems
capabilities to become an integrated land information products supplier,
providing electronic access to land-related databases to support land purchase
and related financing transactions, various other land-related information, and
satellite and aircraft-based mapping services. MDA's BC OnLine operation is an
advanced, online land information business providing businesses and individuals
with access to government database information that is critical
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for real estate and other transactions. In April 2000, MDA acquired the
DataQuick Products division of Acxiom Corporation in order to expand into the
U.S. market for real property information used by the real estate, mortgage and
title insurance industries. The aggregate purchase price was approximately
$56,000,000 paid in cash. In November 2000, MDA acquired all the assets of
Atlantic Technologies LLC, a Huntsville, Alabama-based supplier of mapping and
data services, for $8,500,000 in cash, and up to $6,000,000 in MDA shares to be
issued over three years subject to specified conditions. In July 2000, MDA was
selected by the British government's Land Registry and Improvement and
Development Agency to provide a sophisticated e-commerce system for electronic
delivery of comprehensive land ownership information for England and Wales.
As previously noted, on April 12, 2001, our wholly owned subsidiary, MDA
Holdings, entered into an agreement with a group of Canadian institutional and
private equity investors to sell 12,350,000 MDA shares for approximately $9.00
per share. The parties expect this sale to close by mid-May 2001. Certain of the
purchasers also have an option to acquire MDA Holdings' remaining MDA shares by
May 31, 2001. Upon the closing of the initial sale, our existing agreements with
MDA's other major shareholders, which, among other things, granted them a right,
under certain circumstances, to exchange their MDA stock for common stock of
Orbital pursuant to a specified formula, will terminate.
SATELLITE SERVICES. We have also participated in satellite-based
communications and remote imaging services, primarily through joint ventures
that we account for on an equity method basis.
ORBIMAGE Digital Imagery Services. ORBIMAGE is a provider of global
space-based imagery, and currently operates two 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 direct access to 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.
ORBIMAGE's principal satellite, OrbView-2 (operated under a licensing
agreement with us), commenced commercial service in 1997 and is used by ORBIMAGE
to deliver high-quality multispectral ocean imagery and land surface imagery to
various scientific, government and commercial customers. ORBIMAGE expects to
launch its first one-meter high-resolution satellite, OrbView-4, in the summer
of 2001, with its second one-meter high resolution satellite, OrbView-3, planned
to be launched in the first quarter of 2002. We believe that OrbView-4 will be
the world's first satellite with commercially available hyperspectral imaging
capability.
Under a 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. In addition, MDA is a supplier to ORBIMAGE of
ORBIMAGE's regional ground stations. Pursuant to a license agreement, ORBIMAGE
also will be MDA's exclusive U.S. distributor of Radarsat-2 data when the
Radarsat-2 satellite is launched. ORBIMAGE is currently MDA's U.S. distributor
of Radarsat-1 data. In the third quarter of 2000, as a result of ORBIMAGE's
financial difficulties discussed below, we ceased recognizing revenues on the
ORBIMAGE system procurement contract. We are, however, currently continuing to
work under the procurement agreement to complete the production and launch of
the satellites.
We own approximately 100% of ORBIMAGE's outstanding common stock and
approximately 54% of the voting interest in ORBIMAGE (after giving effect to the
conversion of ORBIMAGE's convertible preferred stock), with the remainder of the
voting interests 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 March 2001, ORBIMAGE defaulted on its interest payment obligations under
its $225,000,000 11 5/8% Senior Notes due 2005. ORBIMAGE management currently
estimates that ORBIMAGE has sufficient
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resources to meet its capital and operating requirements through May 2001.
ORBIMAGE is seeking to restructure the Senior Notes and to obtain additional
capital from third parties as well as its existing shareholders. We cannot be
assured that such capital will be available on a timely basis or at all.
ORBCOMM Communications Services. The ORBCOMM System consists of a network
of 33 small LEO satellites in commercial service and ground segments designed to
provide continuous low-cost monitoring, tracking and messaging communications
coverage over most of the Earth's surface. ORBCOMM provides commercial data
communications 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.
In September 2000, ORBCOMM and its subsidiaries commenced reorganization
proceedings under Chapter 11 of the U.S. Bankruptcy Code. On April 12, 2001,
ORBCOMM, Teleglobe Holding Corporation, ORBCOMM's creditors committee, OCC and
we signed a preliminary non-binding term sheet providing for a sale of ORBCOMM's
assets to a newly formed consortium called International Licensees, LLC and for
a comprehensive plan of reorganization for ORBCOMM. Under the liquidating plan
of reorganization, we would contribute shares of our common stock having a
market value of $6,500,000 (subject to a floor price of $3.75 per share and a
ceiling price of $6.50 per share); OCC would transfer its Federal Communications
Commission licenses relating to the ORBCOMM System; and we would release claims
against ORBCOMM and receive releases from the ORBCOMM estate, including releases
of potential preference claims of the ORBCOMM estate, and a release of OCC from
the holders of at least a majority in principal amount of ORBCOMM's senior
notes. We would also receive a substantial equity interest in the successor
ORBCOMM entity. There can be no assurance that the sale and reorganization plan
will be consummated, and if it is not, we expect that ORBCOMM's Chapter 11
reorganization proceeding would be converted to a Chapter 7 liquidation
proceeding.
DISCONTINUED OPERATIONS
As a result of our recent adoption of a formal plan to dispose of Magellan
and our investment in NavSol, our satellite access products line is now
accounted for as discontinued operations.
Magellan's product line consists of GPS-enabled navigation and positioning
products for consumer markets as well as similar products that are used for
professional and other high-precision industrial applications. During 2000,
Magellan produced approximately 400,000 access product units. Its consumer
products are marketed to recreational marine and general aviation customers and
outdoor recreation users such as campers, hunters and hikers. Certain of
Magellan's satellite guidance devices combine GPS and wireless data
communications functions. Magellan has also entered the market for GPS-based car
navigation products with its automotive navigation system, which uses satellite
signals to provide electronic map guidance to individual motorists.
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, and improves
performance and accuracy.
Through a wholly owned subsidiary, we indirectly hold a 60% interest in
NavSol, our satellite-based automotive information services joint venture with
The Hertz Corporation. NavSol has installed 40,000 Magellan-supplied
satellite-based car navigation systems that form the basis for the Hertz
NeverLost rental car service.
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Magellan's financial results are no longer included in our operational
results and our equity interest in NavSol is no longer included in our earnings
(losses) of affiliates for the year ended December 31, 2000 and prior years.
Both operations are now reflected as a component of discontinued operations.
* * *
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
the company's 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
("Lockheed Martin"). In addition, the Israeli Shavit vehicle and other potential
foreign launch vehicles could also pose competitive challenges to Pegasus.
Competition for Taurus could come 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, L-3 Communications and Space Vector
Corporation.
Our satellites and spacecraft subsystems products compete with products
produced or provided by government entities and numerous private entities,
including TRW Inc., Ball Aerospace and Technology Corporation ("Ball
Aerospace"), Lockheed Martin, Boeing Corporation ("Boeing"), Spectrum Astro,
Inc., EADS/Astrium, Alenia Aerospazio and Alcatel. Our sensors and instruments
face competition from several established manufacturers, including Lockheed
Martin, Ball Aerospace and ITT Industries, as well as from NASA, and various
universities and research institutes. Our primary competition in transportation
management systems is Siemens Corporation. MDA's information products face
competition from First American Title Insurance Company, NationsData.com Inc.
and Transamerica Intellitech. Major competitors in its information systems
product lines include Raytheon Company, Lockheed Martin and Boeing.
Many of our competitors are larger and have substantially greater resources
than we do. Furthermore, it is possible 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 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 $17,355,000, $25,021,000
and $28,790,000 for the fiscal years ended December 31, 2000, 1999 and 1998,
respectively.
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, 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.
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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 alternatives to our existing sources of supply are 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. 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 2000, 1999 and 1998, approximately 34%, 39% and 46% 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 materially adversely affect our
financial condition or results of operations.
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 for convenience 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 for convenience, contractors should be
entitled to receive the purchase price for delivered items, reimbursement for
allowable costs for work in process and an allowance for reasonable profit
thereon or adjustment for
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loss if completion of performance would have resulted in a loss. From time to
time we experience contract suspensions and terminations.
In March 2001, NASA terminated for convenience our X-34 research and
development contract. Although we are seeking to recover from NASA a significant
portion of our costs associated with the X-34 program, including costs
associated with modifications we made to our L-1011 aircraft to accommodate the
X-34, as well as other termination and settlement costs, we cannot be assured
that such recovery will occur on a timely basis, if at all.
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 and operation of our L-1011 aircraft
requires licenses from certain agencies of the DoT, including the Federal
Aviation Administration.
There can be no assurance that we will be successful in our efforts to
obtain necessary licenses or regulatory approvals. The inability of Orbital 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
Our firm backlog at December 31, 2000, was approximately $900,000,000. 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. Total backlog was approximately $4,200,000,000 at December 31, 2000.
Total backlog includes firm backlog in addition to unexercised options,
undefinitized orders, certain outstanding bids, indefinite quantity contracts,
and the projected revenue stream related to an exclusive government license.
Firm and total backlog at December 31, 2000 does not give effect to new orders
received or contract terminations that occurred since that date.
EMPLOYEES
As of March 1, 2001, Orbital had approximately 4,200 full-time permanent
employees. Certain employees of MDA's Ontario-based space robotics division 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.
BUSINESS CONSIDERATIONS
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. All statements other than those of historical facts
included in this Annual Report on Form 10-K, including those related to the
company's financial outlook, liquidity, goals, business strategy, projected
plans and objectives of management for future operating results, are
forward-looking statements. Such "forward-looking statements" involve unknown
risks and uncertainties that may cause the actual results, performance or
achievements of the company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements 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:
Our cash flow from operations in 2001 is expected to be insufficient to
cover our capital requirements, operating requirements and debt service, and we
expect to incur a net loss in 2001 before considering gains or losses from any
asset sales. To meet our capital and operating requirements, we are seeking to
sell certain non-
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core assets, such as our interests in MDA, Magellan and NavSol, as discussed
above, and to restructure business operations. We believe that the foregoing
should facilitate our ability to raise additional capital from outside sources,
but there can be no assurance that we will successfully implement this strategy.
We need to pay down a significant portion of debt by June 30, 2001 in order to
comply with certain covenants under our primary debt facilities. Our inability
to raise additional capital during the second quarter of 2001 could have a
material adverse effect on our business. Given these uncertainties, and in view
of our failure to close the foregoing asset sales by mid-April 2001, our
independent auditors have concluded there exists substantial doubt as to our
ability to continue as a going concern, and accordingly, have included "going
concern" uncertainty paragraph in their report on our December 31, 2000
consolidated financial statements.
It is customary for commercial and international contracts to require the
contractor to post performance bonds or letters of credit pending completion of
work, or to provide other assurances with respect to the contractor's financial
condition. This is the case with several of our existing contracts. Due to our
liquidity constraints, we may be unable to comply with such requirements under
existing contracts or pending contract awards; in such circumstances, the
customer may be entitled to terminate its contract with us without penalty. In
addition, we may be constrained in our ability to bid on contracts with these
requirements.
Government contracting rules typically require a contracting officer to
make a determination of financial responsibility prior to awarding a new
contract. The U.S. government may also seek assurances that a contractor's
financial condition will not impair its continued performance under contracts.
Our liquidity constraints and financial condition may impact our ability to win
new U.S. government contracts or the government's determination to exercise
options under existing contracts.
The majority of our contracts 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.
Most of the products we 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, 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 2000, we wrote off our
investment in ORBCOMM. In 2001, we were required to cease development and
production of the X-34 reusable launch vehicle, which we had been developing
pursuant to a research and development contract that NASA terminated for
convenience.
In March 2001, ORBIMAGE defaulted on its interest payment obligations under
its outstanding public debt. The debt is non-recourse to Orbital. ORBIMAGE
management currently estimates that ORBIMAGE has sufficient resources to meet
its capital and operating requirements through May 2001. ORBIMAGE is seeking to
restructure its outstanding debt and to obtain additional capital from third
parties as well as its existing shareholders. There can be no assurance that
such capital will be available on a timely basis or at all.
At December 31, 2000, a significant portion of our total firm contract
backlog was attributable to 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
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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. In March 2001, NASA terminated for convenience
our X-34 research and development contract. Although we are seeking to recover
from NASA a significant portion of our costs associated with such termination
for convenience, there can be no assurance that we will be successful in
recovering all our costs on a timely basis, if at all.
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 creditors committee of ORBCOMM has notified us that they believe
ORBCOMM's bankruptcy estate is entitled to recover approximately $57,000,000 in
allegedly preferential payments that we received in connection with the sale of
satellites and launch services to ORBCOMM during the one-year period preceding
ORBCOMM's bankruptcy filing. The creditors committee has also asserted that the
ORBCOMM estate is entitled to recover approximately $900,000 in allegedly
preferential payments received by MDA. We believe that all such claims are
without merit and that we have adequate defenses to all such claims. As
previously discussed, the current proposed ORBCOMM liquidating plan of
reorganization, if implemented, would include a release of the foregoing claims.
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.
Orbital (not including MDA) leases approximately 1,500,000 square feet of
office, engineering and manufacturing space, which exceeds our current
operational needs. We sublease approximately 125,000 square feet to ORBCOMM, and
we have an agreement with ORBIMAGE pursuant to which ORBIMAGE is required to
reimburse us for use of our facilities. ORBIMAGE is in default on its rent
payments, and there can be no assurance that ORBCOMM and ORBIMAGE will be able
to pay us their rent on a timely basis, or at all. Our inability to sublease
significant portions of our facilities on commercially reasonable terms could
have a material adverse impact on our financial condition.
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.
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ITEM 2. PROPERTIES
We lease almost 2,000,000 square feet of office, engineering and
manufacturing space in various locations, primarily in the United States and
Canada, as summarized in the table below:
BUSINESS UNIT PRINCIPAL LOCATION(S)
- ------------- ---------------------
Corporate Headquarters....................... Dulles, Virginia
Launch Systems and Advanced Programs......... Dulles, Virginia; Chandler, Arizona
Satellite and Related Space Systems.......... Dulles, Virginia; Germantown, Maryland
(currently being consolidated into Dulles
location); Greenbelt, Maryland
Electronics and Sensor Systems............... Pomona, California; Columbia, Maryland
MDA.......................................... Richmond, British Columbia; Brampton,
Ontario; San Diego, California; Huntsville,
Alabama
We also own a 125,000 square foot state-of-the-art satellite manufacturing
facility that houses our satellite manufacturing, assembly and testing
activities, in Dulles, Virginia. This facility, and our leasehold interest in
our corporate headquarters, have been pledged as collateral under our primary
credit facility.
We believe that our existing facilities are adequate for our requirements.
ITEM 3. LEGAL PROCEEDINGS
PT Media Citra Indostar ("MCI") and Orbital are involved in an arbitration
proceeding pursuant to which MCI is seeking to recover $163,000,000 in
connection with the Indostar satellite constructed by CTA Incorporated ("CTA")
under a contract that was assigned to Orbital in connection with our CTA
acquisition. In this proceeding, we are also seeking to recover $14,000,000 for
amounts still owed to Orbital in connection with the project. The parties are
currently engaged in discovery and a hearing on the merits is scheduled to
commence in February 2002. 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 MCI litigation and that CTA retains liability for
certain fraud claims being made by MCI.
Orbital is also arbitrating a claim filed by Thomas van der Heyden alleging
that Orbital is in actual or anticipatory breach of obligations allegedly
imposed on Orbital in a judgment in a previous action 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. 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 van
der Heyden litigation.
We believe that the allegations in the legal proceedings described above
are without merit and intend to vigorously defend against the allegations.
In March 2001, MDA and certain of its executive officers, as well as the
Province of British Columbia and various provincial government officials, were
named in a lawsuit brought by Infowest Services Inc. alleging various
conspiracies among MDA and others, breach of contract, abuse of government power
and other related allegations in connection with the BC Online procurement
during 1997 to 1999. The lawsuit seeks over $80,000,000 in damages. MDA believes
that these claims are without merit and intends to vigorously defend against the
allegations.
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 2000.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of the
executive officers of Orbital as of March 1, 2001. All executive officers are
elected annually and serve at the discretion of the Board of Directors.
NAME AGE POSITION
- ---- --- --------
David W. Thompson.................................. 46 Chairman of the Board and Chief Executive
Officer
James R. Thompson.................................. 64 Director, President and Chief Operating
Officer, Acting General Manager/Space
Systems Group
Garrett E. Pierce.................................. 56 Director, Executive Vice President and
Chief Financial Officer
Leslie C. Seeman................................... 48 Executive Vice President, General Counsel
and Secretary
Ronald J. Grabe.................................... 55 Executive Vice President and General
Manager/ Launch Systems Group
Michael D. Griffin................................. 51 Executive Vice President and Chief
Technical Officer, and Acting President,
Magellan
Robert D. Strain................................... 44 Executive Vice President and General
Manager/ Electronics and Sensor Systems
Group
Antonio L. Elias................................... 51 Senior Vice President, Advanced Programs
Group
Daniel E. Friedmann................................ 44 President, MDA
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 the Board of both ORBIMAGE and MDA. 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 MDA,
Nichols Research Corp. and SPACEHAB Incorporated.
Garrett E. Pierce has been Executive Vice President and Chief Financial
Officer since August 2000 and a director of the Company since August 2000. From
1996 until July 2000, he was Executive Vice President and Chief Financial
Officer of Sensormatic Electronics Corp., where he was also named Chief
Administrative Officer in July 1998. From 1993 to 1996, Mr. Pierce was the
Executive Vice President and Chief Financial Officer of California Microwave,
Inc., a leading supplier of microwave, radio frequency, and satellite systems
and products for communications and wireless networks. From 1980 to 1993, Mr.
Pierce was with Materials Research Corporation, a leading provider of thin film
equipment and high purity materials to the semiconductor, telecommunications and
media storage industries, where he progressed from Chief Financial Officer to
President and Chief Executive Officer. Materials Research Corporation was
acquired by Sony Corporation as
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a whollyowned subsidiary in 1989. From 1972 to 1980, Mr. Pierce held various
management positions with AlliedSignal.
Michael D. Griffin has been Executive Vice President and Chief Technical
Officer since 1997, and has served as acting President of Magellan since July
2000. 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.
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.
Ronald J. Grabe has been Executive Vice President and General
Manager/Launch Systems Group since 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
flew 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 and Transportation Management 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.
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.
Daniel E. Friedmann has been President and Chief Executive Officer of MDA
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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On March 20, 2001, there were 1,315 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 1998 through 2000, as reported on
Nasdaq or the NYSE, as applicable, was as follows:
2000 HIGH LOW
- ---- ---- ---
4th Quarter................................................. $ 9 $ 3 11/16
3rd Quarter................................................. $15 1/2 $ 7 5/8
2nd Quarter................................................. $15 5/16 $11
1st Quarter................................................. $19 1/2 $12 13/16
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
We have never paid any cash dividends on our common stock, nor do we
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:
The First National Bank of Boston
c/o Equiserve
P.O. Box 8040
Boston, MA 02266-8040
Telephone: (781) 575-3170
www.equiserve.com
The trustee for our 5% convertible subordinated notes due 2002 is:
Deutsche Bank AG, New York Branch
31 W. 52nd St.
New York, NY 10019
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto
included in this Annual Report on Form 10-K. The consolidated operating data for
the three-year period ended December 31, 2000 and the consolidated balance sheet
data at December 31, 2000 and 1999 are derived from and should be read in
conjunction with our consolidated financial statements and notes thereto
included in this Annual Report on Form 10-K. The consolidated operating data for
the years ended December 31, 1997 and 1996 and the consolidated balance sheet
data at December 31, 1998, 1997 and 1996 are derived from our consolidated
financial statements not included or incorporated by reference herein. Certain
information has been reclassified for the discontinued operations discussed in
Note 2 to the consolidated financial statements.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
OPERATING DATA:
Revenues..................................... $ 725,669 $ 766,372 $ 628,995 $ 491,133 $ 385,200
Costs of goods sold.......................... 640,531 667,970 475,953 373,524 285,527
---------- ---------- ---------- ---------- ----------
Gross profit................................. 85,138 98,402 153,042 117,609 99,673
Operating expenses........................... 211,429 141,649 110,691 99,860 83,666
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................ (126,291) (43,247) 42,351 17,749 16,007
Equity in earnings (losses) of affiliates.... (121,482) (97,190) (76,815) (25,094) (7,008)
Other income, net............................ 35,340 46,412 3,312 23,537 1,804
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for income
taxes, discontinued operations............. (212,433) (94,025) (31,152) 16,192 10,803
Provision for income taxes................... 15,791 11,104 5,216 12,933 1,831
---------- ---------- ---------- ---------- ----------
Income (loss) before discontinued
operations................................. (228,224) (105,129) (36,368) 3,259 8,972
Income (loss) from discontinued operations... (49,966) (16,808) (20,184) (14,664) 970
---------- ---------- ---------- ---------- ----------
Net income (loss)............................ $ (278,190) $ (121,937) $ (56,552) $ (11,405) $ 9,942
========== ========== ========== ========== ==========
INCOME (LOSS) PER COMMON SHARE(1):
Income (loss) before discontinued
operations................................. $ (6.09) $ (2.82) $ (1.02) $ 0.10 $ 0.31
---------- ---------- ---------- ---------- ----------
Net income (loss)............................ $ (7.42) $ (3.27) $ (1.59) $ (0.35) $ 0.34
---------- ---------- ---------- ---------- ----------
Shares used in computing per share amounts... 37,467,520 37,281,065 35,624,888 32,283,138 29,137,361
BALANCE SHEET DATA:
Cash and investments......................... $ 79,655 $ 109,058 $ 23,064 $ 8,918 $ 33,441
Net working capital.......................... (169,233) (39,031) (53,053) 53,203 60,275
Total assets................................. 763,258 1,054,525 855,079 714,576 479,512
Short-term borrowings........................ 137,227 131,066 26,294 29,317 38,969
Long-term obligations, net................... 165,717 239,664 180,626 198,394 33,076
Stockholders' equity......................... 44,151 306,792 419,352 313,984 323,795
- ---------------
(1) Income (loss) per common share is calculated using the weighted average
number of shares outstanding during the periods. 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. Per share amounts assuming dilution for 1996 through 2000 are the
same as the per share amounts shown in this table.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
With the exception of historical information, the matters discussed below
under the headings "Recent Developments," "Results of Operations," "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 above in "Item 1 -- Business
Considerations," may affect our actual results and may cause actual results to
differ materially from those anticipated or expected in any forward-looking
statement.
We have adopted a strategy intended to focus on our core space technology
business units. This strategy includes the disposition of certain non-core
assets. Subsequent to December 31, 2000, we adopted a formal plan to dispose of
Magellan Corporation ("Magellan"), which designs, produces, distributes, sells
and licenses satellite access products, and our investment in Navigation
Solutions LLC ("NavSol"), a joint venture engaged in satellite-aided automotive
guidance and related value-added information services. Accordingly, Magellan's
financial results are no longer included in our operational results and our
equity interest in NavSol is no longer included in our earnings (losses) of
affiliates for the year ended December 31, 2000 and prior years, but are now
reported as "Discontinued Operations." For the year ended December 31, 2000, we
recorded a $49,966,000 loss from discontinued operations, including an estimated
$33,053,000 loss on the planned disposition of Magellan's and NavSol's net
assets.
We own substantially all the common stock of Orbital Imaging Corporation
("ORBIMAGE"). We exercise significant influence over ORBIMAGE's operational and
financial affairs, but we do not control such affairs. We use the equity method
of accounting for our ownership interest in ORBIMAGE. We also accounted for our
investment in ORBCOMM Global L.P. ("ORBCOMM") using the equity method of
accounting through the second quarter of 2000. We held an approximately 32%
limited partnership interest in ORBCOMM as of December 31, 2000.
We recognized 100% of the revenues earned and costs incurred on sales of
products and services to ORBCOMM and ORBIMAGE. We eliminated our share of
profits from these sales to the extent these entities were capitalizing system
construction costs. As a result of the weakened financial condition of ORBCOMM
and ORBIMAGE, however, we stopped recognizing revenues on sales to ORBCOMM and
ORBIMAGE effective June and July 2000, respectively.
In September 2000, ORBCOMM and its subsidiaries commenced a reorganization
proceeding under Chapter 11 of the U.S. Federal Bankruptcy Code. Accordingly, we
recorded non-cash charges totaling $113,123,000 in 2000 to fully write off our
investment in ORBCOMM and to write down ORBCOMM-related receivables and related
inventories. Although management believes at this time that these write-offs are
sufficient to cover our current exposure, such reserves do not include any
additional charges to Orbital that might result should any disputes, litigation
or unforeseen contingencies related to ORBCOMM arise.
RECENT DEVELOPMENTS
X-34 Program
Since 1996, we have been developing, constructing and testing several X-34
reusable rocketplanes under a contract with the National Aeronautics and Space
Administration ("NASA"). NASA terminated this contract for convenience in March
2001. We determined that our estimated future cash flows from X-34 related
plant, property and equipment would not be sufficient to recover the recorded
cost. Accordingly, we recorded an asset impairment charge of $15,911,000 in the
fourth quarter of 2000 to write down X-34 related property, plant and equipment
to their estimated realizable values. We also recorded a $3,400,000 provision
for potentially uncollectible accounts receivable (recorded as selling, general
and administrative expense). While we are seeking to recover from NASA a
significant portion of our costs associated with the X-34 contract, there can be
no assurance that such a recovery will occur on a timely basis, if at all.
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Sale of MDA Shares
On April 12, 2001, our wholly owned subsidiary, MDA Holdings Inc. ("MDA
Holdings"), which holds our shares in MacDonald, Dettwiler and Associates Ltd.
("MDA"), entered into an agreement with a group of Canadian institutional and
private equity investors to sell 12,350,000 shares for approximately $9.00 per
share before fees and expenses. The agreement is subject to customary closing
conditions, including the receipt of regulatory approvals, and the parties
expect to close the sale by mid-May 2001. Certain of the purchasers also have an
option to acquire MDA Holdings' remaining 5,650,000 shares of MDA by May 31,
2001.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Our products and services are grouped into four reportable segments: (i)
launch vehicles and advanced programs, (ii) satellites and related space
systems, (iii) electronics and sensor systems, and (iv) space robotics,
satellite ground systems, and mapping and land information products and
services. All other activities of the company are reported in corporate and
other.
As noted previously, for all periods, the financial information for
Magellan and NavSol has been reflected as discontinued operations.
REVENUES
Our consolidated revenues for the year ended December 31, 2000 were
$725,669,000 as compared to $766,372,000 for 1999 and $628,995,000 for 1998.
Consolidated revenues in 2000, 1999 and 1998 included approximately $32,909,000,
$97,069,000 and $125,602,000, respectively, from sales to ORBCOMM and ORBIMAGE.
The following table summarizes revenues from our business segments:
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Launch Vehicles and Advanced Programs(1)........... $119,588 $157,032 $179,591
Satellites and Related Space Systems(2)............ 206,339 257,431 227,042
Electronics and Sensor Systems(3).................. 146,387 149,991 125,758
Space Robotics, Satellite Ground Systems, and
Mapping and Land Information Products and
Services(4)...................................... 253,230 199,792 95,845
Corporate and Other................................ 125 2,126 759
-------- -------- --------
TOTAL.............................................. $725,669 $766,372 $628,995
======== ======== ========
- ---------------
(1) Revenues from launch vehicles and advanced programs decreased significantly
from 1999 to 2000 primarily due to the suspension of revenue recognition
under the company's procurement agreements with ORBCOMM and ORBIMAGE, as
discussed previously. Additionally, revenues from the X-34 program declined
in 2000 due to a decrease in the percentage of the contract completed in
2000 as compared to 1999.
The decrease in revenues from 1998 to 1999 related primarily to
customer-induced launch schedule delays by our government customers and
slowed demand from our commercial customers.
(2) Revenues from satellites and related space systems decreased significantly
from 1999 to 2000 primarily due to the suspension of revenue recognition
under the company's procurement agreements with ORBCOMM and ORBIMAGE and the
cancellation of a major satellite construction contract in the fourth
quarter of 1999 by a Canadian customer because of difficulties in obtaining
the necessary U.S. government export authorizations. Additionally, revenues
from a commercial geosynchronous satellite contract declined in 2000 due to
a decrease in the percentage of the contract completed in 2000 as compared
to 1999.
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The increase in satellite revenues from 1998 to 1999 was due, in part, to
revenues recognized from a commercial geosynchronous satellite contract on
which work commenced in 1999, offset, in part, by reduced revenues resulting
from estimated contract cost increases on certain satellite contracts in
1999.
(3) Revenues from electronics and sensor systems decreased in 2000 as compared
to 1999 primarily due to the sale of our Fairchild Defense electronics
business unit ("Fairchild") in October 2000. The decrease in revenues was
largely offset by an increase in transportation management systems revenues
under existing and new contracts.
The increase in electronics and sensor systems revenues from 1998 to 1999
was primarily due to defense electronics contract awards in early 1999, as
well as to an increase in transportation management systems revenues
primarily as a result of the December 1998 acquisition of Raytheon Company's
("Raytheon") transportation management systems business.
(4) Revenues from space robotics, satellite ground systems, and mapping and land
information products and services increased significantly from 1999 to 2000
primarily as a result of MDA's acquisition of the DataQuick Products
division of Acxiom Corporation ("DataQuick") in April 2000, a full year of
revenues attributable to our space robotics business and the BC OnLine
license, both of which were acquired in May 1999, and orders received in
late 1999 for several satellite ground systems and system upgrades.
The increase in revenues in space robotics, satellite ground systems, and
mapping and land information products and services in 1999 as compared to
1998 was attributable to the acquisition of our space robotics product line
in 1999, which accounted for $92,111,000 of the 1999 revenues for this
segment.
GROSS PROFIT/COSTS OF GOODS SOLD
Gross profits and margins depend 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 commercial products and to costs incurred under various
development and production contracts. Gross profits and margins by business
segment were as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
2000 1999 1998
------------------ ----------------- ------------------
GROSS % OF GROSS % OF GROSS % OF
PROFIT REVENUE PROFIT REVENUE PROFIT REVENUE
-------- ------- ------- ------- -------- -------
(IN THOUSANDS)
Launch Vehicles and Advanced
Programs(1)............................ $ 24,994 21% $ 8,572 5% $ 43,591 24%
Satellites and Related Space
Systems(2)............................. (26,707) (13) 9,557 4 50,052 22
Electronics and Sensor Systems(3)........ 29,840 20 36,206 24 36,620 29
Space Robotics, Satellite Ground Systems,
and Mapping and Land Information
Products and Services(4)............... 56,886 22 44,161 22 23,057 24
Corporate and Other...................... 125 -- (94) -- (278) --
-------- --- ------- -- -------- --
TOTAL.................................... $ 85,138 12% $98,402 13% $153,042 24%
======== === ======= == ======== ==
- ---------------
(1) Gross margins for launch vehicles and advanced programs increased
significantly from 1999 to 2000 primarily due to more efficient execution of
several launch vehicle contracts, improved margins on the X-34 contract and
a $2,600,000 settlement on the closeout of a contract with NASA relating to
one of our early launch vehicle products. In addition, 1999 gross margins
were negatively impacted by a $14,820,000 write-down in 1999 to costs of
goods sold relating to certain software and inventory produced under a
contract that was cancelled in 1999. Gross margins for this segment
decreased between 1998 and 1999 primarily due to the write-down described
above, as well as cost increases on certain advanced launch vehicle
contracts principally occurring in the fourth quarter of 1999.
(2) Gross margins for satellites and related space systems decreased
significantly from 1999 to 2000 primarily due to significant cost growth on
a large number of our satellite construction programs. The cost growth is
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primarily associated with schedule delays resulting from non-recurring
design and production activities on geosynchronous and remote sensing
satellite construction contracts. The estimated costs to complete these
programs exceed the applicable contract values and, accordingly, we recorded
provisions in 2000 with respect to the anticipated losses. As these
contracts are in a loss position, they will not contribute to gross margins
in 2001. Profit margins in this product line decreased significantly from
1998 to 1999 primarily as a result of a change in the mix of satellite
contracts to include lower margin geosynchronous satellite contracts and
cost growth on certain other satellite contracts.
(3) Gross margins for electronics and sensor systems decreased from 1999 to 2000
primarily due to the sale of our higher margin Fairchild unit in October
2000, as well as to lower margins attributable to cost growth on certain
transportation management system contracts. In addition, we recorded a
provision for costs related to the termination of a transportation
management systems contract in the third quarter of 2000, which also
contributed to the decline in gross margins for this business segment.
Profit margins in this product line decreased from 1998 to 1999 primarily as
a result of a change in the mix of contracts following the December 1998
acquisition of Raytheon's transportation management systems product line.
(4) Gross margins for space robotics, satellite ground systems, and mapping and
land information products and services increased slightly from 1999 to 2000,
primarily due to the April 2000 acquisition of DataQuick, which is a higher
margin land information products business, offset in part by lower margin
work on space robotics contracts and on several ground system contracts.
Gross margins for this product line decreased from 1998 to 1999 primarily as
a result of sales of lower margin land information products and services and
an increase in the amount of lower margin subcontract work on several ground
systems contracts.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses include our self-funded product
development activities and exclude direct customer-funded development. Research
and development expenses for 2000, 1999 and 1998 were $17,355,000 (2% of
revenues) $25,021,000 (3% of revenues) and $28,790,000 (5% of revenues),
respectively. Research and development expenses relate primarily to the
development of improved launch vehicles and new satellite and robotics systems.
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 $112,811,000 (16% of
revenues), $92,171,000 (12% of revenues) and $73,562,000 (12% of revenues) in
2000, 1999 and 1998, respectively. The increase in selling, general and
administrative expenses in 2000 was primarily attributable to an accrual in 2000
for projected facility sublease losses, provisions for X-34 and ORBIMAGE-related
receivables, expenses associated with MDA's acquisition activity and higher
professional services fees. The increase in selling, general and administrative
expenses in 1999 as compared to 1998 is attributable to the expansion of our
business and the acquisition of product lines and businesses.
PROVISION FOR DOUBTFUL ORBCOMM ACCOUNTS
As a result of ORBCOMM's Chapter 11 filing, we recorded a $53,713,000
charge to write down ORBCOMM receivables to their estimated realizable value.
ASSET IMPAIRMENTS
As noted previously, we recorded an asset impairment charge of $15,911,000
in the fourth quarter of 2000 to write down X-34-related property, plant and
equipment to their estimated realizable values.
In December 1999, we determined that the carrying value of a specialized
voice communications satellite system that we constructed and launched would no
longer be recoverable through the expected future sales of
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the related products or services. We recorded a $15,217,000 asset impairment
charge with respect to this asset in the fourth quarter of 1999.
INTEREST EXPENSE
Interest cost, before deducting capitalized interest, was $30,355,000,
$25,896,000 and $17,585,000 for 2000, 1999 and 1998, respectively. We
capitalized interest costs totaling $1,846,000, $3,083,000 and $11,638,000 in
2000, 1999 and 1998, respectively. Interest expense increased in 2000 as a
result of higher average borrowings and higher interest rates. Interest expense
increased in 1999 from 1998 primarily due to an increase in debt outstanding and
a decision to stop capitalizing interest on our investment in ORBCOMM when it
began commercial operations at the end of 1998.
INTEREST INCOME AND OTHER, NET
Interest income and other, net, includes interest earnings on short-term
investments and realized gains and losses on investments. Interest income and
other, net was $5,887,000, $4,693,000 and $7,497,000 for 2000, 1999 and 1998,
respectively.
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES
Equity in earnings (losses) of affiliates were as follows:
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- -------- --------
(IN THOUSANDS)
ORBCOMM(1)........................................ $ (92,723) $(73,560) $(34,827)
ORBIMAGE(2)....................................... (28,223) (5,614) (40,550)
CCI and other(3).................................. 536 (18,016) (1,438)
--------- -------- --------
$(121,482) $(97,190) $(76,815)
========= ======== ========
- ---------------
(1) In the second half of 2000, we wrote off our remaining $56,852,000
investment in ORBCOMM. ORBCOMM's losses increased in 1999 as compared to
1998 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.
We eliminated our proportionate share of profits on sales to ORBCOMM based
on our partnership interest.
(2) Equity in earnings (losses) of affiliates includes Orbital's 100% share of
ORBIMAGE's losses, including preferred stock dividends. In the first half of
2000, we recognized equity losses totaling $8,094,000 until our investment
balance was reduced to zero. We then suspended recognition of additional
ORBIMAGE losses when we determined that we would not provide additional
equity funding to ORBIMAGE. During the first quarter of 2001, as a result
industry and market conditions we reconsidered our intentions regarding
potential future investments of additional capital to ORBIMAGE. As a result,
we commenced recognizing ORBIMAGE's losses in the fourth quarter of 2000,
including $16,038,000 of ORBIMAGE's losses not previously recognized through
December 31, 2000. We also eliminate our 100% share of profits on sales to
ORBIMAGE.
(3) In 1998, we acquired an equity interest in, and entered into a satellite
procurement contract with, CCI International, N.V. ("CCI"), a start-up
satellite voice communications provider. We had an investment in CCI of
$9,942,000 at December 31, 1998. We provided substantially all of CCI's
funding in 1998. Accordingly, we did not recognize any revenue in connection
with our satellite contract with CCI and we recognized all of CCI's losses.
We concluded in 1999 that our investment in CCI was impaired and recorded a
non-cash charge of $11,128,000 in 1999 to write off our investment in CCI.
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MINORITY INTERESTS
Minority interests in (earnings) losses of consolidated subsidiaries were
($3,244,000) $2,250,000 and $1,762,000 in 2000, 1999 and 1998, respectively.
Substantially all of the minority interest charge in 2000 is attributable to the
minority stockholders' proportionate share of MDA's net income for 2000. MDA was
a wholly owned subsidiary until late December 1999. Substantially all of the
minority interest in 1999 and 1998 is attributable to the minority shareholders'
proportionate share of the losses of an ORBCOMM-related partnership that we
consolidated in 1999 and 1998.
LITIGATION SETTLEMENT
In July 2000, we reached an agreement to settle the outstanding
class-action lawsuit filed in 1999 alleging violations of federal securities
laws. The settlement agreement provides for the plaintiffs to receive a cash
payment of $11,000,000 to be made by our insurance carrier, and warrants to be
issued by us in 2001, which had an aggregate fair value of $11,500,000 as of the
settlement date. Accordingly, we accrued a litigation settlement provision of
$11,500,000 in the second quarter of 2000.
GAINS ON SALES OF ASSETS AND SUBSIDIARY EQUITY
On October 30, 2000, we sold Fairchild for approximately $100,000,000 in
cash and realized a $41,982,000 gain.
In July 2000, MDA completed an initial public offering on the Toronto Stock
Exchange of 6,600,000 shares of common stock, raising gross proceeds of
approximately $37,500,000 for itself, $18,800,000 for Orbital and $5,600,000 for
other selling shareholders. We recorded a $30,724,000 gain on this transaction.
In December 1999, MDA issued common stock in a private placement and
immediately provided to us a dividend of $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).
PROVISION FOR INCOME TAXES
We recorded income tax provisions of $15,791,000, $11,104,000 and
$5,216,000 in 2000, 1999 and 1998, respectively. In 2000, due to the continuing
losses from operations and consideration of anticipated future results, it was
determined that a full valuation allowance should be recorded against the U.S.
deferred tax assets, resulting in an expense of $9,886,000. The remaining 2000
provision and the 1999 provision were due to foreign taxes attributable to our
Canadian operations, as well as a tax charge of $3,672,000 associated with the
sale of MDA's common stock in 1999. As of December 31, 2000, we had provided a
$214,063,000 valuation allowance against our net deferred tax assets. 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.
DISCONTINUED OPERATIONS
In the first quarter of 2001, the company adopted a formal plan to dispose
of Magellan and our investment in NavSol. Accordingly, a $49,966,000 loss from
discontinued operations was recorded in 2000, including an estimated $33,053,000
loss on the planned disposition of Magellan's and NavSol's net assets. The loss
on the disposal includes $4,500,000 for projected operating losses through the
end of the second quarter of 2001, by which time we expect to have completed the
disposition.
LIQUIDITY AND CAPITAL RESOURCES
During 2000, we funded our capital requirements for operations through cash
from operations combined with cash on hand and the proceeds from the disposition
of certain of our MDA shares and Fairchild. Our liquidity has been, and
continues to be, constrained and we anticipate that in 2001 cash flow from
operations will be insufficient to cover our capital requirements, operating
requirements and debt service. To meet our capital and operating requirements,
we have entered into an agreement to sell 12,350,000 of our MDA shares,
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at approximately $9.00 per share. The agreement is subject to customary closing
conditions, including receipt of regulatory approvals, and the parties expect to
close the sale by mid-May 2001. Certain of the purchasers also have an option to
acquire MDA Holdings' remaining 5,650,000 shares of MDA by May 31, 2001.
Further, we are negotiating to sell our interests in Magellan and NavSol, which
we consider to be non-core assets. Management's plans also include restructuring
business operations, which, combined with the above-described asset sales should
facilitate our ability to raise additional equity capital and refinance our
debt. We also intend to explore sales of additional non-core assets. Management
expects that this strategy will generate sufficient additional liquidity to
satisfy our obligations; however, no assurance can be given that we will be
successful in achieving such goal. Our ability to continue as a going concern is
contingent upon our success in implementing the foregoing strategy on a timely
basis, and we are accordingly focusing our near-term efforts on executing
certain asset sales and restructuring our business operations.
During the years ended December 31, 2000, 1999 and 1998, we incurred net
losses of ($278,190,000), ($121,937,000) and ($56,552,000), respectively. The
company expects to incur a net loss in 2001 before considering gains or losses
from any asset sales. As of December 31, 2000, we had $70,958,000 of
unrestricted cash and short-term investments. Our accumulated deficit was
$464,536,000 as of December 31, 2000. Current liabilities exceed current assets
by $169,233,000 at December 31, 2000.
We invested $39,687,000 in capital expenditures for various satellites,
launch vehicles and other infrastructure production, manufacturing and test
equipment, buildings and leasehold improvements and office equipment in 2000.
During 2000, our continuing operations provided net cash of $35,986,000 and net
cash used to fund discontinued operations was $6,530,000.
Cash and investments were $79,655,000 and total debt obligations were
$302,944,000 at December 31, 2000. Orbital's outstanding debt at December 31,
2000 included $100,000,000 convertible 5% subordinated notes due 2002,
$115,000,000 outstanding under our primary credit facility (the "Primary
Facility") which is discussed below, $8,145,000 of short-term debt of Magellan
that was guaranteed by us, $54,562,000 borrowed by MDA under its credit facility
which is non-recourse to us, $6,666,000 outstanding under our secured note with
The Northwestern Mutual Life Insurance Company, and other unsecured notes and
asset-based financings. Cash and investments at December 31, 2000 included
approximately $8,697,000 restricted to support bank covenants and outstanding
letters of credit. Our current ratio (defined as current assets divided by
current liabilities) was .65 and .92 at December 31, 2000 and 1999,
respectively. Our ratio of total debt less cash and investments to total debt
plus total stockholders' equity was approximately 64% at December 31, 2000 as
compared to 43% at December 31, 1999.
Our Primary Facility is with an international syndicate of banks and
provided for total borrowings of $115,000,000, all of which was drawn and
outstanding as of December 31, 2000, at a weighted average interest rate of
10.56%. The Primary Facility had mandatory prepayment requirements to reduce the
total amount outstanding. We satisfied these requirements in 2000 when we paid
down $8,000,000 with proceeds from the sale of MDA shares in the third quarter
of 2000 and $46,000,000 with proceeds from the sale of Fairchild in the fourth
quarter of 2000.
On February 23, 2001, we entered into a $30,000,000 364-day loan (the
"Secondary Facility") with this bank syndicate. At that same time, we amended
and restated the Primary Facility (the "Amended and Restated Primary Facility")
in order to, among other things, modify the prepayment terms, expand the
collateral provided to the banks and change the expiration date from December
2002 to July 2002. Our borrowings are now collateralized by accounts receivable,
intellectual property, inventory, equipment, real estate and certain other
assets, including the stock of the company's wholly owned subsidiaries, which
include MDA Holdings, the holder of all shares of MDA that we beneficially own.
The Amended and Restated Primary Facility and the Secondary Facility prohibit
the payment of cash dividends and the making of investments, and contain certain
covenants with respect to our working capital levels, operating cash flows,
leverage and net worth. During the first quarter of 2001, we defaulted under
several financial covenants dealing with minimum consolidated net worth,
consolidated leverage and senior leverage under both the Amended and Restated
Primary Facility and the Secondary Facility. These defaults were waived by the
bank group in amendments signed in April 2001.
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The Amended and Restated Primary Facility and the Secondary Facility
require that we reduce outstanding balances under the facilities in connection
with debt issuances, equity issuances or asset sales consummated by us. We must
apply 100% of the first $50,000,000 of net cash proceeds from any asset sale,
43.75% of the next $80,000,000 and 70% thereafter to pay down amounts owing
under the Secondary Facility first, and then the Amended and Restated Primary
Facility. In addition, we must apply 100% of net cash proceeds from any debt
issuances and 55% of the net cash proceeds of any equity issuance by us to pay
down the facilities. We will default under the leverage covenant in both the
Secondary Facility and the Amended and Restated Primary Facility unless we
complete asset sales by June 30, 2001 that raise sufficient proceeds to pay down
a significant portion of debt.
In June 2000, we made a scheduled payment of principal on our 12% note
payable to Northwestern Mutual Life Insurance Company, reducing the outstanding
balance from $13,333,000 to approximately $6,666,000. The remaining balance
matures in June 2001. We also agreed that the interest rate on the balance of
the note would be retroactively increased if we did not prepay the note. We have
not prepaid the note and, accordingly, at December 31, 2000, the interest rate
on this note increased to 15%. In January 2001, we also agreed to make pro rata
payments under this note at the time payments are made to our lenders under the
Amended and Restated Primary Facility in connection with asset sales, equity
issuances or debt issuances.
In August 2000, Magellan amended its credit facility with Silicon Valley
Bank. In connection with the amendment, we guaranteed payment of amounts owed by
Magellan. In the first quarter of 2001, we paid Silicon Valley Bank $1,100,000
under the guarantee in order to avoid a default by Magellan on its tangible net
worth covenant.
MDA has a credit facility with a syndicate of six banks, which is
non-recourse to us. The facility provides for total availability of
approximately $126,650,000 (of which approximately $54,445,000 was outstanding
at December 31, 2000) and contains certain operational and financial covenants
including certain restrictions on the payment of dividends. The total available
amount includes a program-specific letter of credit facility of $33,325,000.
In July 2000, MDA completed an initial public offering on the Toronto Stock
Exchange of 6,600,000 shares of common stock, raising gross proceeds of
approximately $37,500,000 for itself, $18,800,000 for us and $5,600,000 for
other selling shareholders. Our ownership interest in MDA declined to
approximately 52% as of December 31, 2000 as a result of the public offering.
In October 2000, we sold Fairchild for approximately $100,000,000. In
addition to paying down $46,000,000 on our Primary Facility as described above,
we repaid approximately $15,000,000 of debt that had been secured by assets of
Fairchild, and have used the balance to fund general operations.
During the second quarter of 2000, we agreed to temporarily refund
$20,000,000 to ORBIMAGE in January 2001 from amounts previously paid by ORBIMAGE
under its procurement agreement with us, provided, however, that such obligation
would be terminated if we were to successfully broker a renegotiation of
ORBIMAGE's license agreement for worldwide RadarSat-2 satellite distribution
rights with MDA. The existing RadarSat-2 agreement was terminated in February
2001 and replaced by a new agreement between MDA and ORBIMAGE for exclusive U.S.
Radarsat-2 distribution rights. We believe that as a result, our obligation to
temporarily refund $20,000,000 was extinguished. Notwithstanding the
renegotiation of the license agreement, ORBIMAGE has notified us of its position
that the $20,000,000 refund is now due and payable, which we dispute. The
parties are in discussion to resolve this matter. Under the new RadarSat-2
license agreement, $10,000,000 will be due from ORBIMAGE in 2002. We have agreed
to purchase up to $10,000,000 of receivables from ORBIMAGE in 2002, subject to
certain conditions, if ORBIMAGE is unable to make its 2002 payments to MDA.
ORBIMAGE management currently estimates that ORBIMAGE has sufficient
resources to meet its capital and operating requirements through May 2001. In
March 2001, due to a delay in the OrbView-4 launch, we paid $1,000,000 to
ORBIMAGE as partial payment of a $2,500,000 launch delay penalty that is
otherwise due in May 2001. ORBIMAGE is seeking to restructure its outstanding
debt, which is non-recourse to us, and to obtain additional capital from third
parties as well as its existing shareholders. There can be no
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assurance that such capital will be available on a timely basis or at all. As a
result of ORBIMAGE's weakened financial condition, we ceased recognizing
revenues on the ORBIMAGE system procurement contract during the third quarter of
2000.
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, 2000, 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 $45,500,000 at December 31, 2000.
The company has a deferred compensation plan for senior managers and
executive officers, with a total liability balance of $5,959,000 at December 31,
2000, based on the market value of the investments elected by the plan
participants. This liability is subject to fluctuation based upon the market
value of underlying securities.
The company enters into forward exchange contracts in an effort to hedge
against foreign currency fluctuations on certain receivables and payables
denominated in foreign currencies. Accordingly, Orbital is subject to
off-balance sheet market risk for the possibility that future changes in market
prices may make the forward exchange contracts less valuable. The following
table summarizes at December 31, 2000, outstanding foreign exchange contracts to
sell (purchase) foreign currencies, along with current market values:
CURRENCIES CURRENT UNREALIZED
HEDGED CONTRACT MARKET GAIN
FOREIGN CURRENCY HEDGED AGAINST AMOUNT VALUE (LOSS)
----------------------- ---------- -------- ------- ----------
(U.S. DOLLARS, IN THOUSANDS)
EURO...................................... CD $ 1,137 $ 1,170 $ 33
Pounds Sterling........................... CD 232 237 5
Norwegian Kroner.......................... CD 350 355 5
U.S. Dollars.............................. CD (8,821) (8,788) 33
Italian Lire.............................. CD (36) (34) (2)
Japanese Yen.............................. US 14,659 13,763 (896)
- ---------------
CD -- Canadian Dollars
US -- U.S. Dollars
ITEM 509. INTERESTED PARTIES
We have agreed to indemnify and hold KPMG LLP ("KPMG") harmless against and
from any and all legal costs and expenses incurred by KPMG in successful defense
of any legal action or proceeding that arises as a result of KPMG's consent to
the incorporation by reference of its audit report on the company's, ORBIMAGE's
and ORBCOMM's past financial statements incorporated by reference into any
applicable registration statement.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Accountants.......................... 26
Consolidated Statements of Operations....................... 28
Consolidated Balance Sheets................................. 29
Consolidated Statements of Stockholders' Equity............. 30
Consolidated Statements of Cash Flows....................... 31
Notes to Consolidated Financial Statements.................. 32
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REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Stockholders of Orbital Sciences Corporation:
In our opinion, based on our audits and the reports of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, changes in stockholders' equity and cash flows present fairly, in
all material respects, the financial position of Orbital Sciences Corporation
and its subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the financial
statements as of December 31, 2000 of ORBCOMM Global L.P., an equity affiliate,
which statements reflect total assets of $11,895,000 as of December 31, 2000,
and net losses of $543,227,000, and total revenues of $7,797,000 for the year
ended December 31, 2000. We did not audit the December 31, 1999 financial
statements of Orbital Communications Corporation, a majority owned subsidiary,
which statements reflect total assets of $31,539,000 as of December 31, 1999,
and equity in net losses of affiliates of $69,914,000, and total revenues of
$2,126,000 for the year ended December 31, 1999. Those statements were audited
by other auditors whose reports thereon have been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for
ORBCOMM Global L.P., for the year ended December 31, 2000 and as it relates to
the amounts included for Orbital Communications Corporation for the year ended
December 31, 1999, is based solely on the reports of the other auditors. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for the opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net working capital deficit that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters, including efforts to consummate certain sales of
assets, among which is the agreement to sell all or a portion of its shares in
MacDonald, Dettwiler and Associates Ltd., are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We have audited the adjustments described in Note 2 to the consolidated
financial statements that were applied to reclassify the 1998 consolidated
financial statements for the impact of discontinued operations. In our opinion,
such adjustments are appropriate and have been properly applied to the 1998
financial statements.
/S/ PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
April 16, 2001
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Orbital Sciences Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Orbital Sciences Corporation and
subsidiaries for the year ended December 31, 1998, before the reclassification
to reflect Magellan Corporation as a discontinued operation as described in Note
2 to the consolidated financial statements. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements, before the
reclassification to reflect Magellan Corporation as a discontinued operation as
described in Note 2 to the consolidated financial statements, referred to above
present fairly, in all material respects, the results of operations and cash
flows of Orbital Sciences Corporation and subsidiaries for the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Washington, D.C.
February 16, 1999, except as to note 3A
which is as of April 17, 2000
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ORBITAL SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
REVENUES............................................... $ 725,669 $ 766,372 $ 628,995
Costs of goods sold.................................... 640,531 667,970 475,953
---------- ---------- ----------
GROSS PROFIT........................................... 85,138 98,402 153,042
Research and development expenses...................... 17,355 25,021 28,790
Selling, general and administrative expenses........... 112,811 92,171 73,562
Amortization of goodwill............................... 11,639 9,240 5,860
Provision for doubtful ORBCOMM accounts................ 53,713 -- --
Asset impairment charges............................... 15,911 15,217 2,479
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS.......................... (126,291) (43,247) 42,351
Interest expense, net of amounts capitalized........... (28,509) (22,813) (5,947)
Interest income and other, net......................... 5,887 4,693 7,497
Equity in losses of affiliates......................... (121,482) (97,190) (76,815)
Litigation settlement.................................. (11,500) -- --
Gains on sales of assets and subsidiary equity......... 72,706 62,282 --
Minority interests..................................... (3,244) 2,250 1,762
---------- ---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES AND DISCONTINUED
OPERATIONS........................................... (212,433) (94,025) (31,152)
Provision for income taxes............................. 15,791 11,104 5,216
---------- ---------- ----------
NET LOSS FROM CONTINUING OPERATIONS.................... (228,224) (105,129) (36,368)
Discontinued operations:
Loss from operations................................. (16,913) (16,808) (20,184)
Loss on disposal..................................... (33,053) -- --
---------- ---------- ----------
Loss from discontinued operations...................... (49,966) (16,808) (20,184)
---------- ---------- ----------
NET LOSS............................................... $ (278,190) $ (121,937) $ (56,552)
========== ========== ==========
LOSS PER COMMON AND DILUTIVE SHARE: