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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended
JUNE 30, 2001
ORBITAL SCIENCES CORPORATION
Commission file number 1-14279
-------------------------------
DELAWARE 06-1209561
------------------------------------------ ---------------------------------
(State of Incorporation) (IRS Identification number)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166 (703) 406-5000
------------------------------------------ ---------------------------------
(Address of principal executive offices) (Telephone number)
The registrant has (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past 90 days.
As of August 10, 2001, 38,559,902 shares of the registrant's common stock were
outstanding.
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PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
---------------- ----------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 51,119 $ 44,931
Restricted cash and short-term investments, at market 3,096 6,973
Receivables, net 130,251 94,307
Inventories, net 67,302 58,730
Net current assets of discontinued operations 29,769 --
Deferred income taxes and other current assets 5,346 5,314
---------------- ----------------
TOTAL CURRENT ASSETS 286,883 210,255
---------------- ----------------
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS, NET 52,288 118,825
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation
and amortization of $85,534 and $83,746, respectively 93,612 95,317
GOODWILL, less accumulated amortization of $36,720 and $33,708, respectively 112,882 115,894
DEFERRED INCOME TAXES AND OTHER ASSETS 7,930 8,262
---------------- ----------------
TOTAL ASSETS $ 553,595 $ 548,553
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term obligations $ 62,271 $ 134,796
Accounts payable and accrued expenses 174,004 157,116
Net current liabilities of discontinued operations -- 15,885
Deferred revenues 57,983 71,694
---------------- ----------------
TOTAL CURRENT LIABILITIES 294,258 379,491
---------------- ----------------
LONG-TERM OBLIGATIONS, net of current portion 105,896 108,291
RECOGNIZED LOSSES IN EXCESS OF INVESTMENT IN AFFILIATE 35,129 16,038
OTHER LIABILITIES 2,003 582
---------------- ----------------
TOTAL LIABILITIES 437,286 504,402
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01; 10,000,000 shares authorized,
none outstanding -- --
Common Stock, par value $.01; 80,000,000 shares authorized, 38,042,312 and
37,729,476 shares outstanding, respectively 380 377
Additional paid-in capital 517,159 515,462
Accumulated other comprehensive income (loss) 18,300 (7,152)
Accumulated deficit (419,530) (464,536)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 116,309 44,151
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 553,595 $ 548,553
================ ================
See accompanying notes to condensed consolidated financial statements.
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ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE QUARTER ENDED
JUNE 30,
---------------------------------
2001 2000
-------------- ---------------
REVENUES $ 118,648 $ 144,750
Costs of goods sold 109,345 125,710
-------------- ---------------
GROSS PROFIT 9,303 19,040
Research and development expenses 2,931 2,655
Selling, general and administrative expenses 12,501 19,182
Amortization of goodwill 1,550 1,589
-------------- ---------------
LOSS FROM OPERATIONS (7,679) (4,386)
Other income, net 539 1,535
Interest expense, net of capitalized interest (6,808) (6,264)
Equity in losses of affiliates (10,230) (19,907)
Litigation settlement -- (11,500)
-------------- ---------------
LOSS FROM CONTINUING OPERATIONS (24,178) (40,522)
Income (loss) from discontinued operations 90,749 (1,607)
-------------- ---------------
NET INCOME (LOSS) $ 66,571 $ (42,129)
============== ===============
NET INCOME (LOSS) PER COMMON AND DILUTIVE SHARE:
Loss from continuing operations $ (0.64) $ (1.09)
Income (loss) from discontinued operations 2.39 (0.04)
-------------- ---------------
Net income (loss) $ 1.75 $ (1.13)
============== ===============
Shares used in computing per share amounts 37,941,317 37,409,264
============== ===============
See accompanying notes to condensed consolidated financial statements.
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ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------------
2001 2000
-------------- ---------------
REVENUES $ 220,673 $ 282,519
Costs of goods sold 198,826 241,428
-------------- ---------------
GROSS PROFIT 21,847 41,091
Research and development expenses 4,841 5,967
Selling, general and administrative expenses 25,626 34,545
Amortization of goodwill 3,235 3,238
-------------- ---------------
LOSS FROM OPERATIONS (11,855) (2,659)
Other income, net 980 2,418
Interest expense, net of capitalized interest (15,831) (9,502)
Equity in losses of affiliates (19,995) (43,251)
Litigation settlement -- (11,500)
-------------- ---------------
LOSS FROM CONTINUING OPERATIONS (46,701) (64,494)
Income (loss) from discontinued operations 91,707 (4,159)
-------------- ---------------
NET INCOME (LOSS) $ 45,006 $ (68,653)
============== ===============
NET INCOME (LOSS) PER COMMON AND DILUTIVE SHARE:
Loss from continuing operations $ (1.23) $ (1.73)
Income (loss) from discontinued operations 2.42 (0.11)
-------------- ---------------
Net income (loss) $ 1.19 $ (1.84)
============== ===============
Shares used in computing per share amounts 37,843,923 37,408,382
============== ===============
See accompanying notes to condensed consolidated financial statements.
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ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------------
2001 2000
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 45,006 $ (68,653)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
(Income) loss from discontinued operations (91,707) 4,159
Depreciation and amortization expenses 11,725 13,434
Equity in losses of affiliates 19,995 43,251
Other 2,907 2,992
Changes in assets and liabilities (40,012) 23,574
-------------- ---------------
Net cash provided by (used in) continuing operations (52,086) 18,757
Net cash provided by (used in) discontinued operations (5,978) 24,609
-------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (58,064) 43,366
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,765) (21,409)
Payments for business combination, net of cash acquired -- (31,400)
Net proceeds from sales of subsidiary equity 146,640 --
Purchases of available-for-sale investment securities, net -- (696)
Sales of available-for-sale investment securities 8,397 10,932
Investments in and advances to affiliates, net 720 (3,025)
-------------- ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 141,992 (45,598)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (repayments) (749) (639)
Principal payments on long-term obligations (109,991) (43,170)
Net proceeds from issuances of long-term obligations 31,299 39,209
Repayment to joint venture partner -- (28,418)
Net proceeds from issuances of common stock 1,701 --
-------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES (77,740) (33,018)
-------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS -- 966
-------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,188 (34,284)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 44,931 53,250
-------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51,119 $ 18,966
============== ===============
See accompanying notes to condensed consolidated financial statements.
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ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
(UNAUDITED)
(1) BASIS OF PRESENTATION AND LIQUIDITY
Orbital Sciences Corporation (together with its subsidiaries, "Orbital" or the
"company"), a Delaware corporation, is a space technology company that
designs, manufactures, operates and markets a broad range of affordable space
systems, including launch vehicles, satellites and related space systems and
sensors and electronics systems.
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business.
However, the company reported losses from operations for the past several
years and had a net working capital deficit at December 31, 2000 and June 30,
2001. The company completed the sales of certain non-core assets, as discussed
in Note 3, primarily to provide liquidity for operations for the remainder of
2001. The financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should the company be unable to continue as a going concern.
The company incurred net losses from continuing operations for the quarter and
six months ended June 30, 2001, and expects to incur a net loss for the year
ending December 31, 2001 before considering gains or losses from asset sales.
As of June 30, 2001, the company had $51.1 million of unrestricted cash and
cash equivalents and current liabilities exceeded current assets by $7.4
million. The company's accumulated deficit was $419.5 million as of June 30,
2001.
The company's liquidity has been, and continues to be, constrained. To meet
the company's capital and operating requirements, the company sold its
interests in three businesses in 2001, as discussed in Note 3, and has entered
into a definitive agreement to sell another of its operating divisions.
Management's plans also include restructuring business operations by
consolidating operations and related systems and, if appropriate, through
reducing the company's work force and otherwise lowering expenses. The company
also intends to raise additional debt and/or equity capital and refinance
existing debt obligations. The company has commenced initial efforts to
replace the company's current senior credit facility. The company may also
consider the sale of additional non-core assets. Management expects this
strategy will generate sufficient liquidity to satisfy the company's
obligations; however, the company's ability to continue as a going concern is
contingent upon the company's successful implementation of the foregoing
strategy on a timely basis.
In the opinion of management, the accompanying unaudited interim financial
information reflects all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation on a going concern basis. Certain
information and footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
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United States have been condensed or omitted pursuant to instructions, rules
and regulations prescribed by the Securities and Exchange Commission (the
"Commission"). The company believes that the disclosures provided herein are
adequate to make the information presented not misleading when these unaudited
interim condensed consolidated financial statements are read in conjunction
with the audited consolidated financial statements contained in the company's
Annual Report on Form 10-K/A for the year ended December 31, 2000.
Operating results for the quarter ended June 30, 2001 are not necessarily
indicative of the results expected for the full year.
(2) PREPARATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions, including estimates of anticipated contract costs
and revenues utilized in the earnings recognition process, that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
Management periodically assesses and evaluates the sufficiency and/or
deficiency of estimated liabilities recorded for various operational and
business risks and uncertainties. Actual results could differ from these
estimates.
Certain reclassifications have been made to the 2000 financial statements and
footnote disclosures to conform to the 2001 financial statement presentation.
All financial amounts are stated in U.S. dollars unless otherwise indicated.
(3) DISCONTINUED OPERATIONS
In the second quarter of 2001, Orbital's wholly owned subsidiary, MDA Holdings
Corporation ("MDA Holdings"), sold 16.35 million of its MacDonald Dettwiler
and Associates Ltd. ("MDA") shares in three transactions for $150.3 million
before transaction fees and expenses, and the company recorded a $97.5 million
gain. As a result, the company's ownership interest in MDA declined from
approximately 52% prior to the sales to approximately 5% as of June 30, 2001.
The remaining 1.65 million shares of MDA were sold on July 17, 2001 for $18.9
million before transaction fees and expenses. MDA's assets and liabilities as
of December 31, 2000, and the results of operations related to MDA for the
current and all prior periods presented, including the gain on sales of MDA
shares in the second quarter of 2001, have been reported in the accompanying
financial statements as discontinued operations. At June 30, 2001, the
company's remaining 5% interest in MDA was classified as an investment
accounted for using the cost method of accounting and is reported in "net
current assets of discontinued operations" in the accompanying balance sheet
at a fair value of $22.9 million. Fair value was determined using the $20.98
per share Canadian dollars ($13.86 U.S. dollars) closing price on June 29,
2001 of MDA's common stock, which is traded on the Toronto Stock Exchange. An
unrealized gain of $18.7 million was included in comprehensive income in the
second quarter of 2001. This
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unrealized gain will be reversed in the third quarter of 2001 and a realized
gain of approximately $13.8 million will be reported on this transaction.
On July 13, 2001, subsidiaries of Thales, S.A. acquired the company's majority
owned subsidiary Magellan Corporation ("Magellan") and purchased the company's
60% ownership interest in Navigation Solutions LLC ("NavSol") for $70 million.
At closing, after allocation to Magellan's minority stockholders of $4.5
million of the proceeds, the company received gross proceeds before
transaction fees and expenses of $65.5 million. The assets and liabilities and
results of operations related to these businesses have been reported in the
accompanying financial statements as discontinued operations for the current
and all prior periods presented. The company had recorded a $33.0 million
accrual in the fourth quarter of 2000 for the estimated loss on disposal of
Magellan, including a provision of $4.5 million for the estimated losses from
operations during the 2001 phase-out period. Magellan's and NavSol's actual
losses for the phase-out period exceeded the original estimates by $3.2
million, resulting in an additional loss provision in the second quarter of
2001. The fees and expenses associated with closing the sale of Magellan and
NavSol exceeded the original estimates resulting in an additional loss on the
sale of these businesses of $5.0 million recorded in the second quarter of
2001.
The following table presents the components of income (loss) from discontinued
operations:
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ---------------------------
2001 2000 2001 2000
---- ---- ---- ----
(IN THOUSANDS)
Income (loss) from operations:
Magellan and NavSol $(3,166) $(2,783) $(3,166) $(6,745)
MDA 1,428 1,176 2,218 2,586
------- ------- ------- -------
(1,738) (1,607) (948) (4,159)
------- ------- ------- -------
Gain (loss) on disposal:
Magellan and NavSol (5,004) -- (5,004) --
MDA 97,491 -- 97,659 --
------- ------- ------- -------
92,487 -- 92,655 --
------- ------- ------- -------
Income (loss) from discontinued operations $90,749 $(1,607) $91,707 $(4,159)
======= ======= ======= =======
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The carrying values of assets and liabilities of discontinued operations are
as follows:
AS OF JUNE 30, 2001 AS OF DECEMBER 31, 2000
---------------------------------- -----------------------------------
MAGELLAN MAGELLAN
AND AND
MDA NAVSOL TOTAL MDA NAVSOL TOTAL
------------ --------- ------- -------- -------- --------
(IN THOUSANDS)
Current assets (liabilities), net....... $ 22,871 $ 6,898 $ 29,769 $(25,097) $ 9,212 $ (15,885)
----------- ----------- ---------- ---------- ----------- -----------
Non-current assets, net:
Investment in affiliates............. - 18,977 18,977 2,327 20,312 22,639
Property, plant and equipment, net... - 4,743 4,743 33,396 5,692 39,088
Goodwill and other, net.............. - 28,568 28,568 29,127 27,971 57,098
----------- ----------- ---------- ---------- ----------- -----------
Net non-current assets.................. - 52,288 52,288 64,850 53,975 118,825
----------- ----------- ---------- ---------- ----------- -----------
Net assets of discontinued operations .. $ 22,871 $ 59,186 $ 82,057 $ 39,753 $ 63,187 $ 102,940
=========== =========== ========== ========== =========== ===========
The following summarizes the operating results of discontinued operations for
the quarter and six months ended June 30, 2001 and 2000:
QUARTER ENDED SIX MONTHS ENDED
------------------------------------- ---------------------------------------
MAGELLAN MAGELLAN
AND AND
MDA(a) NAVSOL TOTAL MDA(a) NAVSOL TOTAL
---------- ----------- ----------- ------------ ------------ --------
(IN THOUSANDS)
JUNE 30, 2001
Revenues............ $47,504 $20,708 $68,212 $120,142 $ 43,900 $164,042
Net income (loss)... 1,428 (5,512)(b) (4,084) 2,218 (7,639)(b) (5,421)
JUNE 30, 2000
Revenues............ $61,058 $25,667 $86,725 $122,140 $ 50,357 $172,497
Net income (loss)... 1,176 (2,783) (1,607) 2,586 (6,745) (4,159)
(a) MDA's results are for the two and five months ended May 31, 2001, the date
after which MDA was no longer consolidated.
(b) As noted above, a $4.5 million accrual was made in the fourth quarter of
2000 for estimated losses from operations during the 2001 phase-out
period. Magellan's and NavSol's actual losses for the phase-out period
exceeded the original estimates by $3.2 million, resulting in an
additional loss provision in the second quarter of 2001.
The company reclassified its consolidated statement of operations for the
quarter and six months ended June 30, 2000 and cash flows for the six months
ended June 30, 2000 to reflect the results of operations and cash flows
related to Magellan, NavSol and MDA as discontinued operations.
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(4) INVENTORIES
Inventories consist of components and raw materials inventory, work-in-process
inventory and finished goods inventory and are generally stated at the lower
of cost or net realizable value on a first-in, first-out or specific
identification basis, net of allowances for estimated obsolescence.
Components and raw materials are purchased to support future production
efforts. Work-in-process inventory consists primarily of (i) costs incurred
under long-term fixed-price contracts accounted for using the completed
contract method of accounting and using the percentage-of-completion method of
accounting applied on a units of delivery basis, and (ii) partially assembled
commercial products. Work-in-process inventory generally includes direct
production costs and certain allocated indirect costs.
(5) INDUSTRY SEGMENT INFORMATION
Orbital designs, manufactures, operates and markets a broad range of
space-related products and services that are grouped into three reportable
segments: (i) launch vehicles and advanced programs, (ii) satellites and
related space systems, and (iii) sensors and electronics systems. Reportable
segments are generally organized based upon product lines. All other
activities of the company are reported in the corporate and other segment,
which includes certain general and administrative expenses of corporate
finance, legal, administrative and general management functions. The company's
investment in, as well as its share of the income or loss of ORBCOMM Global,
L.P. ("ORBCOMM") (for 2000) and Orbital Imaging Corporation ("ORBIMAGE") are
also included in corporate and other.
In 2001, the company recast the composition of certain reportable segments as
a result of a new reporting approach and as a result of Magellan, NavSol and
MDA being reported as discontinued operations. In addition, goodwill and other
intangible assets and the related amortization expense were transferred from
corporate and other to the applicable business segments as of January 1, 2001.
The corresponding segment information as of December 31, 2000 and for the
quarter and six months ended June 30, 2000 has been revised to conform to the
new presentation.
The following table presents operating information for the quarter and six
months ended June 30, 2001 and 2000 and identifiable assets at June 30, 2001
and December 31, 2000 by reportable segment. Intersegment sales are generally
negotiated and accounted for under terms and conditions that are similar to
other commercial and government contracts. There were no significant sales or
transfers between segments.
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QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ----------------------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
LAUNCH VEHICLES AND ADVANCED PROGRAMS:
Revenues $ 36,275 $ 40,489 $ 66,116 $ 76,768
Operating income (loss) 7,512 4,762 7,047 8,046
Identifiable assets 125,805 115,297 125,805 115,297
Capital expenditures 210 644 678 1,270
Depreciation and amortization 1,972 1,563 3,897 3,159
SATELLITES AND RELATED SPACE SYSTEMS:
Revenues $ 57,799 $ 69,729 $109,469 $137,753
Operating income (loss) (13,081) (3,162) (14,912) (3,913)
Identifiable assets 173,523 144,224 173,523 144,224
Capital expenditures 2,417 2,663 4,052 4,147
Depreciation and amortization 2,324 1,515 4,458 3,014
SENSORS AND ELECTRONICS SYSTEMS:
Revenues $ 25,245 $ 43,796 $ 47,315 $ 80,365
Operating income (loss) 857 1,670 1,269 3,025
Identifiable assets 73,794 70,374 73,794 70,374
Capital expenditures 138 1,204 349 1,608
Depreciation and amortization 733 1,055 1,486 2,138
CORPORATE AND OTHER:
Revenues $ (671) $ (9,264) $ (2,227) $(12,367)
Operating income (loss) (2,967) (7,656) (5,259) (9,817)
Equity in losses of affiliates (10,230) (19,907) (19,995) (43,251)
Identifiable assets 180,473 218,658 180,473 218,658
Capital expenditures 4,079 6,342 8,686 14,384
Depreciation and amortization 922 1,479 1,884 5,123
CONSOLIDATED:
Revenues $118,648 $144,750 $220,673 $282,519
Operating income (loss) (7,679) (4,386) (11,855) (2,659)
Equity in losses of affiliates (10,230) (19,907) (19,995) (43,251)
Identifiable assets 553,595 548,553 553,595 548,553
Capital expenditures 6,844 10,853 13,765 21,409
Depreciation and amortization 5,951 5,612 11,725 13,434
(6) EARNINGS PER SHARE
Net income (loss) per common share is calculated using the weighted average
number of common shares outstanding during the periods. In periods of losses
from continuing operations, fully diluted per-share losses are the same as
basic losses per share disclosed in the accompanying condensed consolidated
statements of operations. If the company had reported income from continuing
operations, the number of shares used in calculating dilutive earnings per
share would have been 41,525,314 and 41,516,706, respectively, for the quarter
and six months ended June 30, 2001 and 41,053,655 and 41,157,887,
respectively, for the quarter and six months ended June 30, 2000.
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(7) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) and associated differences are as follows:
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2001 2000 2001 2000
---- ---- ---- ----
(IN THOUSANDS)
Differences between net income (loss),
as reported, and comprehensive loss:
Net income (loss), as reported $ 66,571 $ (42,129) $ 45,006 $ (68,653)
Translation adjustments 8,208 (636) 7,487 (1,249)
Unrealized gains on investments 18,511 (403) 17,965 (403)
----------- ------------- ----------- ------------
Comprehensive income (loss) $ 93,290 $ (43,168) $ 70,458 $ (70,305)
=========== ============= =========== ============
Accumulated differences between net
income (loss), as reported, and
comprehensive loss:
Beginning of period $ (8,419) $ (5,772) $ (7,152) $ (5,159)
Translation adjustments 8,208 (636) 7,487 (1,249)
Unrealized gains on investments 18,511 (403) 17,965 (403)
----------- ------------- ----------- ------------
End of period $ 18,300 $ (6,811) $ 18,300 $ (6,811)
=========== ============= =========== ============
(8) INVESTMENTS IN AND TRANSACTIONS WITH ORBCOMM
During 2000, Orbital owned a limited partnership interest in ORBCOMM and
accounted for this investment using the equity method of accounting in the
first half of 2000. In September 2000, ORBCOMM and its subsidiaries commenced
reorganization proceedings under Chapter 11 of the U.S. Federal Bankruptcy
Code. As a result, Orbital recorded non-cash charges totalling $113.1 million
in 2000 to fully write off its investment in ORBCOMM and to write down
ORBCOMM-related receivables and related inventory to their estimated
recoverable value of $196,000 and $12.9 million, respectively, at December 31,
2000. Although management believes that these write-offs are sufficient to
cover the company's current exposure, such reserves do not include any
additional charges that might result should any disputes, litigation or
unforeseen contingencies related to ORBCOMM arise. Orbital discontinued
recognizing ORBCOMM equity losses in the second half of 2000.
Until 2000, Orbital was the primary supplier to ORBCOMM of its communications
satellites, launch vehicles and certain of its satellite ground systems and
software. During the second quarter of 2000, ORBCOMM failed to meet payment
obligations to Orbital under the ORBCOMM system procurement agreements.
Accordingly, effective June 2000, the company ceased recognizing revenue on
the ORBCOMM system procurement agreements.
On April 23, 2001, immediately following approval of such sale by the United
States Bankruptcy Court for the District of Delaware, ORBCOMM sold a majority
of its assets to a newly formed
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acquisition entity called OGLP Acquisition Sub LLC ("OGLP Acquisition"). In
conjunction with the acquisition, ORBCOMM, Teleglobe Holdings Corporation,
OGLP Acquisition, ORBCOMM's unsecured creditors' committee, the holders of
more than $90 million in principal amount of ORBCOMM's senior notes, Orbital's
subsidiary Orbital Communications Corporation ("OCC"), and Orbital entered
into an agreement providing for a consensual liquidating plan of
reorganization for ORBCOMM. Under the liquidating plan, the company would
contribute shares of its common stock having a market value of $6.5 million
(subject to a floor price of $3.75 per share and a ceiling price of $6.50 per
share) and would release claims against ORBCOMM for amounts owed to Orbital
under ORBCOMM's satellite procurement agreements, all of which amounts were
written off in 2000 due to uncollectibility. Also under the liquidating plan,
Orbital would receive releases from the ORBCOMM estate, including releases of
potential preference claims totalling approximately $57 million and Orbital
would receive a release of OCC from the holders of at least a majority in
principal amount of ORBCOMM's senior notes. As required by the terms of the
proposed liquidating plan, in conjunction with the acquisition of ORBCOMM's
assets, OCC entered into an asset purchase agreement with OGLP Acquisition and
OGLP Acquisition Sub II Corp., a wholly owned subsidiary of OGLP Acquisition,
pursuant to which OCC has agreed to transfer to OGLP Acquisition Sub II Corp.,
subject to fulfillment of certain conditions, the Federal Communications
Commission licenses relating to the ORBCOMM System. Upon consummation of the
proposed liquidating plan, the company would receive an approximately 40%
equity interest in OGLP Acquisition. There can be no assurance that the plan
will be consummated; if it is not consummated, Orbital expects that ORBCOMM's
reorganization proceeding would be converted to a Chapter 7 liquidation
proceeding.
(9) INVESTMENTS IN AND TRANSACTIONS WITH ORBIMAGE
The company uses the equity method of accounting for its ownership interest in
ORBIMAGE. As of June 30, 2001 and December 31, 2000, the company's share of
ORBIMAGE's losses exceeded the company's investment in ORBIMAGE by $35.1
million and $16.0 million, respectively. This excess is reported as a
non-current liability in the accompanying condensed consolidated balance
sheet.
Under a procurement agreement between Orbital and ORBIMAGE, Orbital is
providing and launching the OrbView-3 and OrbView-4 satellites, and
constructing the related ground segment on a fixed-price basis. As a result of
ORBIMAGE's lack of liquidity and weakened financial condition, Orbital ceased
recognizing revenues on the ORBIMAGE system procurement contract beginning in
the third quarter of 2000 and commenced accounting for its contract with
ORBIMAGE using the completed contract method. Under the completed contract
method, costs incurred under the contract are capitalized as inventory. At
June 30, 2001, the company had a net asset of $4.4 million with respect to the
ORBIMAGE procurement contract.
In March 2001, ORBIMAGE defaulted on its interest payment obligations under
its $225 million Senior Notes due 2005. The Senior Notes are non-recourse to
Orbital. ORBIMAGE management does not believe that ORBIMAGE has sufficient
resources to meet its capital and
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operating requirements through the third quarter of 2001. ORBIMAGE is seeking
to restructure the Senior Notes and to obtain capital from third parties as
well as its existing shareholders, including the company. There can be no
assurance that such capital will be available on a timely basis or at all.
Should ORBIMAGE be unsuccessful in its efforts to raise additional capital,
Orbital's ORBIMAGE-related receivables and inventory could become impaired.
Furthermore, Orbital could be subject to litigation by ORBIMAGE and/or its
creditors.
(10) DEBT OBLIGATIONS
Orbital's primary credit facility (the "Primary Facility") is with an
international syndicate of banks and, at February 23, 2001, provided for
borrowings of $115 million, all of which was drawn and outstanding. On
February 23, 2001, the company entered into a $30 million 364-day loan (the
"Secondary Facility") with this bank syndicate. At that same time, the company
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. Orbital's borrowings are collateralized by
accounts receivable, intellectual property, inventory, equipment, real estate
and certain other assets, including the stock of the company's wholly-owned
subsidiaries. The Amended and Restated Primary Facility prohibits the payment
of cash dividends, the redemption of any of Orbital's outstanding stock, and
the making of investments, and limits capital expenditures for the year ending
December 31, 2001 to $35 million and for the six months ending June 30, 2002
to $18 million. In addition, the Amended and Restated Primary Facility
contains certain covenants and restrictions with respect to the company's
ability to take certain actions, including the consolidation or merger of the
company, and contains covenants with respect to working capital levels,
operating cash flows, leverage and net worth.
The terms of the Amended and Restated Primary Facility and the Secondary
Facility require that the company permanently reduce outstanding balances
under the facilities in connection with debt issuances, equity issuances or
asset sales according to a prescribed formula. Accordingly, during the second
quarter of 2001, Orbital repaid the $30 million Secondary Facility in full and
repaid $62 million of the Amended and Restated Primary Facility using cash
proceeds from the sales of MDA shares (see Note 3). After giving effect to
these repayments, as of June 30, 2001, the company had permanently reduced its
outstanding borrowings under the Amended and Restated Primary Facility to $50
million. In July 2001, the company further reduced its outstanding balance
under the Amended and Restated Primary Facility by $44 million using proceeds
from the sale of Magellan and NavSol and the sale of the company's remaining
MDA shares.
The company's $6.7 million outstanding balance on its note payable to
Northwestern Mutual Life Insurance Company was paid in full in the second
quarter of 2001 using proceeds from the sale of MDA shares.
Magellan maintained a short-term credit facility that was guaranteed by
Orbital. In the first half of 2001, the company repaid $4.3 million of this
credit facility under the guarantee in order to
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avoid a default of the tangible net worth covenant in this credit facility. At
June 30, 2001, $7.4 million was outstanding on this facility. In July 2001,
this credit facility was paid in full as part of the closing on the Magellan
sale.
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(11) COMMITMENTS AND CONTINGENCIES
LITIGATION
In the first quarter of 2000, PT Media Citra Indostar, an Indonesian company
("PT-MCI"), commenced arbitration seeking a refund of $163 million PT-MCI
asserts it paid in connection with a communications satellite constructed by
CTA Incorporated ("CTA") under a contract that was assigned to Orbital in
connection with its 1997 acquisition of CTA. PT-MCI's allegations include
fraud and multiple breaches of contract. The company's claims against PT-MCI
for unpaid invoices in the approximate amount of $14 million are also part of
the arbitration proceedings. In addition, under the terms of the CTA
acquisition, Orbital believes it is entitled to indemnification from CTA for
all or a part of any damages arising from the PT-MCI litigation and that CTA
retains liability for certain fraud claims being made by PT-MCI.
The company is currently arbitrating a claim brought by Thomas van der Heyden
alleging that the company is in actual or anticipatory breach of obligations
allegedly imposed on the company in a judgment in a previous action brought by
the plaintiff against CTA. Mr. van der Heyden claims that he is entitled to a
sum exceeding $30 million from the company, as successor-in-interest to CTA.
In addition, under the terms of the CTA acquisition, Orbital believes it is
entitled to indemnification from CTA for all or a part of any damages arising
from this litigation.
In addition, the company and its subsidiaries are parties to certain other
litigation or proceedings arising in the ordinary course of business. The
company believes that the allegations in the legal proceedings described above
are without merit and intends to vigorously defend against the allegations.
The eventual outcome of the foregoing legal matters is uncertain and could
have a material adverse impact on the company's results of operations and
financial condition. However, in the opinion of management, it is not probable
that the outcome of the foregoing legal matters will have a material adverse
effect on the company's results of operations or financial condition.
CONTRACTS
Most of the company'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 could materially adversely affect the company's 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 the
company's business.
Since 1996, Orbital had 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. The company wrote down X-34-related property, plant and equipment,
and accounts receivable to their estimated
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realizable values in the fourth quarter of 2000. In the second quarter of
2001, the company submitted an interim settlement proposal seeking recovery
from NASA of its uncompensated costs associated with the X-34 contract,
including costs associated with modifications made to the company's L-1011
aircraft to accommodate the X-34, as well as other termination and settlement
costs. Although in August 2001 Orbital received a $10 million provisional
payment from NASA, there can be no assurance that the company will recover all
or most of its costs under this settlement proposal.
CONTINGENCIES
In 1996, ORBCOMM issued $170 million 14% senior unsecured notes due 2004 (the
"ORBCOMM Notes") to institutional investors. ORBCOMM defaulted on the ORBCOMM
Notes in September 2000. The ORBCOMM Notes are fully and unconditionally
guaranteed on a joint and several basis by OCC and Teleglobe Mobile. On April
5, 2001, HSBC Bank USA, the indenture trustee for the ORBCOMM Notes, submitted
to OCC and other guarantors of the ORBCOMM Notes a formal demand for payment
of the outstanding principal amount of the notes, plus accrued unpaid interest
from February 15, 2000 and related expenses. OCC's obligation is non-recourse
to Orbital.
The creditors committee of ORBCOMM has notified the company that it believes
ORBCOMM's bankruptcy estate is entitled to recover approximately $57 million
in allegedly preferential payments that Orbital 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 $0.9
million in allegedly preferential payments received by MDA. Orbital believes
that all such claims are without merit and that the company has adequate
defenses to all such claims. As discussed in Note 8 above, the proposed
ORBCOMM liquidating plan of reorganization would, if consummated, include a
release of the foregoing claims.
During the second quarter of 2000, Orbital agreed to temporarily refund $20
million to ORBIMAGE in January 2001 from amounts previously paid by ORBIMAGE
under its procurement agreement with Orbital, provided, however, that such
obligation would be terminated if Orbital were to successfully broker a
renegotiation of ORBIMAGE's license agreement for worldwide RadarSat-2
satellite distribution rights with MDA by January 2001. 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. Orbital believes that as a result, its obligation to temporarily
refund $20 million was extinguished. ORBIMAGE has notified Orbital of its
position, that notwithstanding the renegotiation of the license agreement, the
$20 million refund is now due and payable, which Orbital disputes. The parties
are currently in discussions to resolve this matter. Under the new RadarSat-2
license agreement, $10 million will be due from ORBIMAGE to MDA in 2002.
Orbital has agreed to purchase up to $10 million of receivables from ORBIMAGE
in 2002, subject to certain conditions, if ORBIMAGE is unable to make its 2002
payments to MDA.
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(12) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination,
whether acquired individually or with a group of other assets, and the
accounting and reporting for goodwill and other intangibles subsequent to
their acquisition. Goodwill will no longer be amortized but instead will be
subject to impairment tests at least annually. The company is required to
adopt SFAS No. 142 on a prospective basis as of January 1, 2002.
Effective January 1, 2001, the company adopted SFAS No. 133, as amended,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities"
("SFAS No. 133"), which changes the way in which the company accounts for its
derivative transactions. The company engages in derivative transactions and
hedging activities on a very limited basis. The adoption of SFAS 133 did not
have a material impact on the company's financial statements.
(13) SUBSEQUENT EVENT
On August 2, 2001, the company entered into a definitive agreement to sell its
Pomona, California-based sensor systems division, which designs, manufactures
and supports sophisticated sensors and analytical instruments for defense,
space and industrial applications, to the Hamilton Sundstrand unit of United
Technologies Corporation. At closing, anticipated in September 2001, the
company expects to receive gross proceeds before transaction fees and expenses
of approximately $20 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTIES
With the exception of historical information, the matters discussed below and
elsewhere in this report on Form 10-Q include forward-looking statements that
involve risks and uncertainties, many of which are beyond our control. A
number of important factors, including those identified in our Annual Report
on Form 10-K/A for the year ended December 31, 2000, may affect our actual
results and may cause actual results to differ materially from those
anticipated or expected in any forward-looking statement. We assume no
obligation to update any forward-looking statements.
RESULTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 2001 AND
2000
Our products and services are grouped into three reportable segments: (i)
launch vehicles and advanced programs, (ii) satellites and related space
systems, and (iii) sensors and electronics systems. All other activities of
the company, as well as consolidating eliminations and adjustments, are
reported in corporate and other.
The financial results of the discontinued operations of Magellan, NavSol and
MDA are not included in the results from continuing operations for all periods
presented.
REVENUES
The following table summarizes revenues from our reportable business segments
and corporate and other:
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
(IN THOUSANDS)
Launch Vehicles and Advanced Programs (1) $ 36,275 $ 40,489 $ 66,116 $ 76,768
Satellites and Related Space Systems (2) 57,799 69,729 109,469 137,753
Sensors and Electronics Systems (3) 25,245 43,796 47,315 80,365
Corporate and Other (4) (671) (9,264) (2,227) (12,367)
-------- -------- -------- --------
TOTAL $118,648 $144,750 $220,673 $282,519
======== ======== ======== ========
(1) Revenues in this segment decreased in the second quarter of 2001 as
compared to the second quarter of 2000 as a result of a $6.4 million
decrease in revenues from advanced programs that was partly offset by a
$2.2 million increase in revenues from launch vehicles. Revenues from
advanced programs decreased primarily as a result of the termination of
the X-34 reusable rocketplane development contract with the National
Aeronautics and Space Administration ("NASA"), which NASA terminated
for convenience in March 2001. The increase in launch vehicle revenues
is attributable to several launch vehicle contracts, partially offset
by the absence in 2001 of ORBIMAGE and ORBCOMM procurement contract
revenues, which totalled $2.3 million in the second quarter of 2000.
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Revenues in this segment decreased in the six months ended June 30,
2001 as compared to the same period in 2000 due to a $8.7 million
decrease in revenues from advanced programs and a $1.9 million decrease
in revenues from launch vehicles. Revenues from advanced programs
decreased primarily as a result of the termination of the X-34
contract. Launch vehicle revenues decreased primarily as a result of
the absence of ORBIMAGE and ORBCOMM procurement contract revenues,
which totalled $13.6 million in the first half of 2000, partially
offset by increases in revenues from several launch vehicle contracts.
(2) Revenues from satellites and related space systems decreased in the
second quarter of 2001 as compared to the second quarter of 2000
largely as a result of the absence in 2001 of ORBCOMM and ORBIMAGE
procurement contract revenues, which totalled $9.6 million in the
second quarter of 2000. Satellites and related space systems revenues
were also impacted by the completion of several satellite production
contracts, partially offset by revenues generated from two large
geosynchronous satellite contracts. In addition, the second quarter of
2001 includes a $3.5 million adjustment to reduce revenues on our
contract with Japan's Broadcasting Satellite System Corporation
("BSAT"). The BSAT-2b geostationary communications satellite was
completed and launched in July 2001 on an Ariane 5 rocket. However, due
to a launch anomaly, this satellite did not reach its intended orbit.
We believe that we have adequate insurance coverage to cover this
situation; however, proceeds totalling $3.5 million that are
anticipated to be recovered under the insurance policy, have been
excluded from contract revenues in the second quarter of 2001. The
insurance proceeds to be recovered under this policy will be reported
as "other income" in the period such proceeds are received.
Revenues for the six months ended June 30, 2001 decreased as compared
to the same period in 2000 primarily as a result of $23.7 million of
lower revenues from the ORBCOMM and ORBIMAGE procurement agreements, in
addition to the other factors noted above.
(3) Revenues from sensors and electronics systems decreased in the second
quarter of 2001 as compared to the second quarter of 2000 primarily as
a result of the October 2000 sale of the Fairchild Defense electronics
business unit ("Fairchild"), which had revenues of $17.3 million in the
second quarter of 2000.
Revenues for the six months ended June 30, 2001 decreased as compared
to the same period in 2000, primarily as a result of the sale of
Fairchild, which had $34.2 million of revenues during the six month
period ended June 30, 2000.
(4) Corporate and other includes the elimination of intercompany revenues,
as well as adjustments to properly report revenues on certain contracts
that are subdivided among more than one business unit. The reduction in
such eliminations and adjustments in the second quarter of 2001 and the
six months ended June 30, 2001, as compared to the same
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periods in 2000, was primarily attributable to the absence of
intercompany activity and consolidation adjustments related to the
ORBIMAGE, ORBCOMM and X-34 programs.
INCOME (LOSS) FROM OPERATIONS
The following table summarizes income (loss) from operations for our
reportable business segment and corporate and other:
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
(IN THOUSANDS)
Launch Vehicles and Advanced Programs (1) $ 7,512 $ 4,762 $ 7,047 $ 8,046
Satellites and Related Space Systems (2) (13,081) (3,162) (14,912) (3,913)
Sensors and Electronics Systems (3) 857 1,670 1,269 3,025
Corporate and Other (4) (2,967) (7,656) (5,259) (9,817)
-------- ------- -------- -------
TOTAL $ (7,679) $(4,386) $(11,855) $(2,659)
======== ======= ======== =======
(1) Operating income for launch vehicles and advanced programs increased in
the second quarter of 2001 as compared to the second quarter of 2000
primarily as a result of a favorable $3.4 million contract earnings
adjustment on the X-34 program in the second quarter of 2001, in
addition to an overall increase in profits on several launch vehicle
programs. These increases were offset in part by the absence in 2001 of
a $2.6 million favorable launch vehicle contract settlement recorded in
the second quarter of 2000.
Operating income for the six months ended June 30, 2001 decreased as
compared to the first half of 2000. The favorable $3.4 million contract
earnings adjustment on the X-34 program and increases in profits on a
variety of launch vehicle programs was more than offset by the absence
in 2001 of profits from the ORBCOMM and ORBIMAGE procurement contracts
and the above-mentioned $2.6 million favorable contract settlement.
(2) Operating losses from satellites and related space systems increased in
the quarter and six months ended June 30, 2001 as compared to the same
periods in 2000 primarily as a result of production delays and the
associated cost growth on a large geosynchronous satellite production
contract, in addition to the absence in 2001 of profit from the ORBCOMM
procurement contract.
(3) Operating income from sensors and electronics systems decreased in the
second quarter and the first half of 2001 as compared to the same
periods in 2000 primarily as a result of the sale of Fairchild, which
had $1.8 million and $4.2 million of operating profit in the second
quarter and first six months of 2000, respectively.
(4) Corporate and other includes expenses for various corporate general and
administrative activities that are not allocated to the operating
segments, as well as consolidating adjustments for intracompany
contracts. The improvement in corporate and other in the second quarter
and first six months of 2001 as compared to the same periods in 2000 is
due
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to consolidating adjustments recorded in 2000 related to the ORBCOMM
and ORBIMAGE contracts.
INTEREST EXPENSE
Interest cost, before deducting capitalized interest, was $6.8 million and
$6.9 million for the quarters ended June 30, 2001 and 2000, respectively. No
interest was capitalized in the second quarter of 2001 and $658,000 was
capitalized in the second quarter of 2000. Interest expense did not decrease
in proportion to the decrease in average outstanding debt in the second
quarter of 2001, as compared to the second quarter of 2000, as a result of the
acceleration of the amortization of prepaid financing costs and interest
related to a vendor financing agreement, both recorded in the second quarter
of 2001.
Interest cost, before deducting capitalized interest, was $15.8 million and
$10.6 million for the six months ended June 30, 2001 and 2000, respectively.
No interest was capitalized in the first half of 2001 and $1.1 million was
capitalized in the first half of 2000. Interest expense increased in the first
half of 2001 as compared to the same period in 2000 primarily as a result of
fees incurred in the first quarter of 2001 to amend our primary credit
facility and to enter into a secondary credit facility in the first quarter of
2001, and the two items related to the second quarter of 2001 mentioned in the
previous paragraph.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, includes interest earnings on short-term
investments and realized gains and losses on investments. Other income
(expense), net, was $539,000 and $1.5 million for the second quarter of 2001
and 2000, respectively, and $980,000 and $2.4 million for the six months ended
June 30, 2001 and 2000, respectively.
EQUITY IN LOSSES OF AFFILIATES
Equity in losses of affiliates were as follows:
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
(IN THOUSANDS)
ORBCOMM (1)............ $ -- $(18,555) $ -- $(33,460)
ORBIMAGE (2) .......... (9,725) (1,896) (19,091) (8,054)
Other.................. (505) 544 (904) (1,737)
-------- -------- -------- --------
$(10,230) $(19,907) $(19,995) $(43,251)
======== ======== ======== ========
(1) We wrote off our investment in ORBCOMM in the second half of 2000;
accordingly, we no longer recognize equity losses for ORBCOMM.
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(2) We record Orbital's 100% share of ORBIMAGE's losses and preferred stock
dividends as equity losses. In the first half of 2000, we recognized
equity losses 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 of industry and market
conditions, we reconsidered our intentions regarding potential future
investments of additional capital to ORBIMAGE. As a result, we resumed
recognizing ORBIMAGE's losses in the fourth quarter of 2000.
Beginning in January 2001, ORBIMAGE discontinued capitalizing interest
on satellites under construction. As a result, ORBIMAGE's net loss
increased significantly in the second quarter and first half of 2001 as
compared to the same periods in 2000 due to the increase in interest
expensed.
LITIGATION SETTLEMENT
The second quarter of 2000 includes a charge of $11.5 million to reflect the
July 2000 settlement of a class-action lawsuit against the company alleging
violations of federal securities laws.
PROVISION FOR INCOME TAXES
We recorded no income tax provision in the second quarters of 2001 and 2000
and the six month periods ended June 30, 2001 and 2000, respectively, due to
pre-tax losses incurred in 2000 and due to net operating loss carryforwards
available to reduce potential 2001 tax liabilities.
BACKLOG
Our firm backlog was $532 million at June 30, 2001. 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 $2.9 billion at June 30, 2001. Total backlog
includes firm backlog in addition to unexercised options, undefinitized
orders, contract award selections and indefinite quantity contracts. Firm and
total backlog decreased $364 million and $1.0 billion, respectively, since
March 31, 2001, primarily as a result of removing MDA's backlog from our
consolidated backlog amounts. Firm and total backlog at June 30, 2001 does not
give effect to new orders received or any terminations or cancellations since
that date.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity has been, and continues to be, constrained. 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. During the first six months of 2001, we funded
our capital requirements for operations through cash from operations, cash on
hand, the proceeds from a $30 million loan from our bank syndicate discussed
below and
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the proceeds from the sale of MDA shares. In the second quarter of 2001, we
sold 16.35 million of our MDA shares for $150.3 million before transaction
fees and expenses. The remaining 1.65 million shares of MDA were sold on July
17, 2001 for $18.9 million before transaction fees and expenses. On July 13,
2001, we received gross proceeds of $65.5 million before transaction fees and
expenses from the sale of our interests in Magellan and NavSol.
On August 2, 2001, we entered into a definitive agreement to sell our Pomona,
California-based sensor systems division to the Hamilton Sundstrand unit of
United Technologies Corporation. At closing, anticipated in September 2001, we
expect to receive gross proceeds before transaction fees and expenses of
approximately $20 million.
Management's plans also include restructuring business operations by
consolidating operations and related systems and, if appropriate, through
reducing the company's work force and otherwise lowering expenses. The company
also intends to raise additional debt and/or equity capital and refinance
existing debt obligations. The company has commenced initial efforts to
replace the company's current senior credit facility. The company may also
consider the sale of additional non-core assets. Management expects this
strategy will generate sufficient liquidity to satisfy the company's
obligations; however, the company's ability to continue as a going concern is
contingent upon the company's successful implementation of the foregoing
strategy on a timely basis.
We incurred a loss from operations in the second quarter of 2001 and expect to
incur a net loss for the year ending December 31, 2001 before considering
gains or losses from any asset sales. As of June 30, 2001, we had $51.1
million of unrestricted cash and cash equivalents. Our accumulated deficit was
$419.5 million and current liabilities exceeded current assets by $7.4 million
at June 30, 2001. Our current ratio (defined as current assets divided by
current liabilities) was 97% at June 30, 2001. Our ratio of total debt less
cash and investments to total debt plus total stockholders' equity was
approximately 40% at June 30, 2001. During the six months ended June 30, 2001,
we reported a $52.1 million net use of cash from continuing operations.
Our primary credit facility (the "Primary Facility") is with an international
syndicate of banks and, at February 23, 2001, provided for borrowings of $115
million, all of which was drawn and outstanding. On February 23, 2001, we
entered into a $30 million 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. The
Amended and Restated Primary Facility and the Secondary Facility require that
the company permanently reduce outstanding balances under the facilities in
connection with debt issuances, equity issuances or asset sales according to a
prescribed formula. Accordingly, during the second quarter of 2001, we repaid
the $30 million Secondary Facility in full and we repaid $62 million of the
Amended and Restated Primary Facility using cash proceeds from the sale of MDA
shares. After giving effect to these repayments, as of June 30, 2001, the
company had permanently reduced its outstanding
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borrowings under the Amended and Restated Primary Facility to $50 million.
Additionally, the $6.7 million outstanding balance on our note payable to
Northwestern Mutual Life Insurance Company was paid in full in the second
quarter of 2001 using proceeds from the sale of MDA shares.
Magellan maintained a short-term credit facility that was guaranteed by
Orbital. In the first half of 2001, the company repaid $4.3 million of this
credit facility under the guarantee in order to avoid a default on the
tangible net worth covenant in this credit facility.
Our outstanding debt at June 30, 2001 included $100 million of convertible
subordinated notes due October 2002, $50 million outstanding under the Amended
and Restated Primary Facility, $7.4 million of short-term debt of Magellan and
other unsecured notes and asset-based financings. In July 2001, we further
reduced our outstanding balances under the Amended and Restated Primary
Facility by $44 million using proceeds from the sale of Magellan and NavSol
and the sale of the company's remaining MDA shares. Also in July 2001,
Magellan's credit facility was paid in full as part of the closing on the
Magellan sale.
ORBIMAGE management does not believe that ORBIMAGE has sufficient resources to
meet its capital and operating requirements through the third quarter of 2001.
ORBIMAGE is seeking to restructure the Senior Notes and to obtain capital from
third parties as well as its existing shareholders, including the company.
There can be no assurance that such capital will be available on a timely
basis or at all. Should ORBIMAGE be unsuccessful in its efforts to raise
additional capital, Orbital's ORBIMAGE-related receivables and inventory could
become impaired. Furthermore, Orbital could be subject to litigation by
ORBIMAGE and/or its creditors.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company does not have any material exposure to interest rate changes,
commodity price changes, foreign currency fluctuation, or similar market
risks, although we have entered into forward exchange contracts to hedge
against specific foreign currency fluctuations, principally with respect to
the Canadian dollar and Japanese yen. At June 30, 2001, the majority of the
company's long-term debt consisted of its $100 million 5% convertible
subordinated notes, due October 2002. The fair market value of these
convertible securities fluctuates with the company's stock price, and was
$63.6 million at June 30, 2001.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In addition to the litigation and proceedings described in
Part I of this report, the company and its subsidiaries are
parties to certain other litigation or proceedings arising
in the ordinary course of business. In the opinion of
management, the probability is remote that the outcome of
any such litigation or other proceedings would have a
material adverse effect on our results of operations or
financial condition.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY- HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - A complete listing of exhibits required
is given in the Exhibit Index that precedes the
exhibits filed with this report.
(b) Reports on Form 8-K.
On June 12, 2001, the company filed a Current
Report on Form 8-K, dated June 11, 2001, disclosing
the sale of 12.35 million common shares of its
Canadian subsidiary, MacDonald Dettwiler and
Associates Ltd. (MDA) on May 30, 2001.
On June 14, 2001, the company filed a Current
Report on Form 8-K/A, dated June 14, 2001, amending
the Form 8-K filed on June 12, 2001, to
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file pro forma financial information related to the
sale of 12.35 million MDA shares.
On July 5, 2001, the company filed another Form
8-K/A further amending such Form 8-K and Form 8-K/A
to give effect to the sales of the company's
remaining 5.65 million shares of MDA and to present
pro forma condensed consolidated financial
statements to reflect the sale of the entire 18
million common shares of MDA.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORBITAL SCIENCES CORPORATION
DATED: August 14, 2001 By: /s/ David W. Thompson
-------------------------------------------------
David W. Thompson
Chief Executive Officer
DATED: August 14, 2001 By: /s/ Garrett E. Pierce
-------------------------------------------------
Garrett E. Pierce
Executive Vice President, Chief Financial Officer
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EXHIBIT INDEX
The following exhibits are filed as part of this report.
Exhibit No. Description
- ----------- -----------
10.1 Agreement and Plan of Merger, dated as of May 25,
2001, by and among the company, Magellan
Corporation, Thales North America, Inc. and
Thomson-CSF Electronics Inc.
10.2 Purchase Agreement, dated as of May 25, 2001, by
and among the company, Orbital Navigation
Corporation and Thales North America Inc.
10.3 Purchase Agreement, dated April 12, 2001, by and
among CAI Capital Partners and Company II, L.P.,
CAI Capital Partners and Company II-C, L.P., CAI
Partners and Company II, L.P., 597858 B.C. Ltd.,
The Ontario Teachers' Pension Plan Boad, MDA
Holdings Corporation and Orbital Sciences
Corporation.
10.4 Amended and Restated Option Agreement, dated May
30, 2001, by and among CAI Capital Partners and
Company II, L.P., CAI Partners and Company II,
L.P., CAI Capital Partners and Company II-C, L.P.,
597858 B.C. Ltd. and MDA Holdings Corporation.
10.5 Amended and Restated Registration Rights
Agreement, dated as of May 30, 2001, by and among
CAI Capital Partners and Company II, L.P., CAI
Partners and Company II, L.P., CAI Capital
Partners and Company II-C, L.P., CAI Managers &
Co., L.P., 597858 B.C. Ltd., The Ontario Teachers'
Pension Plan Boad, MacDonald, Dettwiler and
Associates Ltd., MDA Holdings Corporation and
Orbital Sciences Corporation.
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