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
SEPTEMBER 30, 2001
ORBITAL SCIENCES CORPORATION
Commission file number 1-14279
------------------------------
DELAWARE 06-1209561
- ------------------------------------------ ----------------------------------
(State of Incorporation) (IRS Identification number)
21839 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166 (703) 406-5000
- ------------------------------------------ ----------------------------------
(Address of principal executive offices) (Telephone number)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166
- ------------------------------------------
(Former address, if changed since last
report, of principal executive offices)
The registrant has (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past 90 days.
As of November 7, 2001, 39,393,526 shares of the registrant's common stock
were outstanding.
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ -------------
(unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 32,564 $ 45,076
Restricted cash and short-term investments, at market 12,188 6,973
Receivables, net 143,986 88,188
Inventories, net 39,328 52,751
Other current assets 5,017 5,167
------------ -------------
TOTAL CURRENT ASSETS 233,083 198,155
------------ -------------
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS, NET -- 121,401
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation
and amortization of $82,814 and $79,362, respectively 90,437 94,088
GOODWILL, less accumulated amortization of $37,718 and $33,375,
respectively 110,544 114,760
OTHER NON-CURRENT ASSETS 11,019 8,049
------------ -------------
TOTAL ASSETS $ 445,083 $ 536,453
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term obligations $ 4,345 $ 134,796
Accounts payable and accrued expenses 162,322 150,665
Net current liabilities of discontinued operations -- 10,236
Deferred revenues 23,127 66,432
------------ -------------
TOTAL CURRENT LIABILITIES 189,794 362,129
------------ -------------
LONG-TERM OBLIGATIONS, net of current portion 105,211 108,291
OTHER NON-CURRENT LIABILITIES 3,965 582
ALLOCATED LOSSES OF AFFILIATE IN EXCESS OF COST OF INVESTMENT 40,181 21,300
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,
38,558,029 and 37,729,476 shares outstanding, respectively 386 377
Additional paid-in capital 519,460 515,462
Accumulated other comprehensive loss -- (7,152)
Accumulated deficit (413,914) (464,536)
------------ -------------
TOTAL STOCKHOLDERS' EQUITY 105,932 44,151
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 445,083 $ 536,453
============ =============
See accompanying notes to condensed consolidated financial statements.
1
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE QUARTER ENDED
SEPTEMBER 30,
---------------------------
2001 2000
----------- ------------
REVENUES $ 91,008 $ 80,073
Costs of goods sold 78,816 84,973
----------- ------------
GROSS PROFIT 12,192 (4,900)
Research and development expenses 2,060 2,690
Selling, general and administrative expenses 25,549 18,871
Amortization of goodwill 1,503 1,449
Provision for doubtful ORBCOMM accounts -- 54,750
----------- ------------
LOSS FROM OPERATIONS (16,920) (82,660)
Other income (expense), net 3,683 (27)
Interest expense, net of capitalized interest (3,041) (8,413)
Allocated share of losses of affiliates -- (51,039)
----------- ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (16,278) (142,139)
Provision for income taxes -- 9,886
----------- ------------
LOSS FROM CONTINUING OPERATIONS (16,278) (152,025)
Income from discontinued operations 21,895 30,703
----------- ------------
NET INCOME (LOSS) $ 5,617 $ (121,322)
=========== ============
NET INCOME (LOSS) PER COMMON AND DILUTIVE SHARE:
Loss from continuing operations $ (0.42) $ (4.05)
Income from discontinued operations 0.57 0.82
----------- ------------
Net income (loss) $ 0.15 $ (3.23)
=========== ============
Shares used in computing per share amounts 38,498,390 37,518,656
=========== ============
See accompanying notes to condensed consolidated financial statements.
2
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
----------- ------------
REVENUES $ 294,386 $ 312,657
Costs of goods sold 264,949 289,932
----------- ------------
GROSS PROFIT 29,437 22,725
Research and development expenses 6,281 7,520
Selling, general and administrative expenses 48,561 46,766
Amortization of goodwill 4,519 4,348
Provision for doubtful ORBCOMM accounts -- 54,750
----------- ------------
LOSS FROM OPERATIONS (29,924) (90,659)
Other income (expense), net 4,663 2,390
Interest expense, net of capitalized interest (18,851) (18,633)
Allocated share of losses of affiliates (19,995) (94,290)
Litigation settlement -- (11,500)
----------- ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (64,107) (212,692)
Provision for income taxes -- 9,886
----------- ------------
LOSS FROM CONTINUING OPERATIONS (64,107) (222,578)
Income from discontinued operations 114,729 32,602
----------- ------------
NET INCOME (LOSS) $ 50,622 $ (189,976)
=========== ============
NET INCOME (LOSS) PER COMMON AND DILUTIVE SHARE:
Loss from continuing operations $ (1.68) $ (5.94)
Income from discontinued operations 3.01 0.87
----------- ------------
Net income (loss) $ 1.33 $ (5.07)
=========== ============
Shares used in computing per share amounts 38,064,476 37,445,408
=========== ============
See accompanying notes to condensed consolidated financial statements.
3
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 50,622 $ (189,976)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Income from discontinued operations (114,729) (32,602)
Depreciation and amortization expenses 17,044 17,090
Allocated share of losses of affiliates 19,995 94,290
Provision for doubtful ORBCOMM accounts -- 54,750
Changes in assets and liabilities, and other (78,545) 52,192
----------- ------------
Net cash provided by (used in) continuing operations (105,613) (4,256)
Net cash provided by (used in) discontinued operations (8,680) 19,307
----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (114,293) 15,051
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,293) (20,731)
Investments in and advances to affiliates -- 1,025
Net cash provided by discontinued operations 248,111 11,084
----------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 238,818 (8,622)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (repayments) (8,145) 1,944
Principal payments on long-term obligations (155,457) (24,346)
Net proceeds from issuances of long-term obligations 30,000 --
Repayment to joint venture partner -- (28,418)
Net proceeds from issuances of common stock 1,015 1,054
Net cash used in discontinued operations (4,450) (8,122)
----------- ------------
NET CASH USED IN FINANCING ACTIVITIES (137,037) (57,888)
----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS -- 2,113
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (12,512) (49,346)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,076 53,215
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 32,564 $ 3,869
=========== ============
See accompanying notes to condensed consolidated financial statements.
4
ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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
electronic 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 incurred net losses from continuing operations for the quarter and
nine months ended September 30, 2001, and expects to incur a net loss from
continuing operations for the year ending December 31, 2001. As of September
30, 2001, the company had $32.6 million of unrestricted cash and cash
equivalents. The company's accumulated deficit was $413.9 million as of
September 30, 2001. The company completed the sales of certain non-core
assets, as discussed in Note 3, primarily to reduce debt and to provide
liquidity for operations. 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's liquidity has been, and continues to be, constrained. To meet the
company's capital and operating requirements, the company sold its interests in
four businesses in 2001, as discussed in Note 3. Management has also commenced
restructuring business operations by consolidating operations and related
systems, and work force reductions. The company also intends to raise
additional debt and/or equity capital and refinance existing debt obligations,
and has commenced efforts to replace the company's primary credit facility that
was paid off in the third quarter. The company is also considering 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
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
5
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 September 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 September 2001, the company sold its Pomona, California-based sensors
systems division ("Sensors"), 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. The proceeds from the sale were $19 million before
transaction fees and expenses and resulted in a gain on the sale of $8.0
million, subject to certain post-closing adjustments. Sensors and the
company's Fairchild Defense electronics business unit ("Fairchild") that was
sold in October 2000 comprised a segment of the company's business that has
now been discontinued. As a result, the assets and liabilities of Sensors as
of December 31, 2000 and results of operations related to Sensors for the
current and all prior periods (including the gain on sale of Sensors in the
third quarter of 2001), and the results of operations of Fairchild for prior
periods, have been reported in the accompanying financial statements as
discontinued operations.
In the second and third quarters of 2001, Orbital's wholly owned subsidiary,
MDA Holdings Corporation ("MDA Holdings"), sold 16.35 million and 1.65
million, respectively, of its MacDonald Dettwiler and Associates Ltd. ("MDA")
shares, representing the company's entire interest in MDA. The company
received gross proceeds of $169.2 million before transaction fees and
expenses, and recorded a $97.5 million gain in the second quarter of 2001 and
a $13.6 million gain in the third quarter of 2001. 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 (including the gain on sale of MDA
shares in the second and third quarters of 2001 and the $30 million gain on
sale of MDA shares in the third quarter of 2000 as a result of MDA's public
offering), have been
6
reported in the accompanying financial statements as discontinued operations.
An unrealized gain of $18.7 million related to the 1.65 million shares of MDA
was included in comprehensive income in the second quarter of 2001 and was
reversed in the third quarter of 2001 when the remaining shares were sold and
the gain was realized.
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 allocating $4.5 million of the proceeds to Magellan's
minority stockholders, the company received gross proceeds of $65.5 million
before transaction fees and expenses. 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 recorded a $33.0 million accrual
in the fourth quarter of 2000 for the estimated loss on disposals of Magellan
and NavSol, 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 $4.4 million
loss on the sale of these businesses recorded in 2001.
The following table presents the components of income from discontinued
operations:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
(IN THOUSANDS)
Income (loss) from discontinued operations $ (335) $ (21) $ (156) $ 1,878
Gain on disposal, net 22,230 30,724 114,885 30,724
-------- -------- -------- ----------
Income from discontinued operations $ 21,895 $ 30,703 $114,729 $ 32,602
======== ======== ======== ==========
The following table summarizes the operating results of discontinued
operations:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ----------------------
2001 2000 2001 2000
---- ---- ---- ----
(IN THOUSANDS)
Revenues $7,278 $127,979 $188,615 $350,411
Net income (loss) (a) (335) (21) (4,629) 1,878
(a) As noted above, a $4.5 million accrual was made in the fourth quarter of
2000 for Magellan's and NavSol's 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.
7
The company reclassified its consolidated statements of operations for the
quarter and nine months ended September 30, 2000 and cash flows for the nine
months ended September 30, 2000 to reflect the results of operations and cash
flows related to Sensors, Fairchild, Magellan, NavSol and MDA as discontinued
operations.
(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) electronic 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 Fairchild, Sensors,
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 nine months ended September 30, 2000
has been revised to conform to the new presentation.
The following table presents operating information for the quarter and nine
months ended September 30, 2001 and 2000 and identifiable assets at September
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.
8
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ----------------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
LAUNCH VEHICLES AND ADVANCED PROGRAMS:
Revenues $ 26,527 $ 27,112 $ 92,643 $ 103,880
Operating income (loss) (1) 574 (1,191) 7,621 7,416
Identifiable assets 110,220 115,297 110,220 115,297
Capital expenditures 97 1,420 775 2,690
Depreciation and amortization 1,875 2,201 5,772 6,489
SATELLITES AND RELATED SPACE SYSTEMS:
Revenues $ 48,179 $ 40,327 $ 157,648 $ 178,080
Operating income (loss) (1) (3,686) (33,982) (18,598) (37,895)
Identifiable assets 176,497 144,224 176,497 144,224
Capital expenditures 1,058 2,155 5,110 6,302
Depreciation and amortization 2,350 2,296 6,808 6,993
ELECTRONIC SYSTEMS:
Revenues $ 17,172 $ 15,384 $ 47,192 $ 43,990
Operating income (loss) (1) 735 (7,058) 1,292 (9,735)
Identifiable assets 67,786 55,697 67,786 55,697
Capital expenditures 55 193 325 596
Depreciation and amortization 533 561 1,600 1,693
CORPORATE AND OTHER:
Revenues $ (870) $ (2,750) $ (3,097) $ (13,293)
Operating income (loss) (1) (14,543) (40,429) (20,239) (50,445)
Allocated share of losses of affiliates -- (51,039) (19,995) (94,290)
Identifiable assets 90,580 221,235 90,580 221,235
Capital expenditures 933 1,894 3,083 11,143
Depreciation and amortization 980 694 2,864 1,915
CONSOLIDATED:
Revenues $ 91,008 $ 80,073 $ 294,386 $ 312,657
Operating income (loss) (1) (16,920) (82,660) (29,924) (90,659)
Allocated share of losses of affiliates -- (51,039) (19,995) (94,290)
Identifiable assets 445,083 536,453 445,083 536,453
Capital expenditures 2,143 5,662 9,293 20,731
Depreciation and amortization 5,738 5,752 17,044 17,090
(1) In the third quarter of 2000, the company recorded a $54,750,000 provision
for doubtful ORBCOMM accounts that negatively impacted operating income
for the three and nine months ended September 30, 2000 as follows (in
thousands):
Launch Vehicles and Advanced Programs $ 3,730
Satellites and Related Space Systems 19,321
Electronic Systems 2,236
Corporate and Other 29,463
------
CONSOLIDATED $54,750
=======
(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 42,069,856 and 41,737,878, respectively, for the quarter
and nine months ended September 30, 2001 and 41,115,013 and 41,129,790,
respectively, for the quarter and nine months ended September 30, 2000.
9
(7) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) and associated differences are as follows:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(IN THOUSANDS)
Differences between net income
(loss), as reported, and
comprehensive loss:
Net income (loss), as reported $ 5,617 $ (121,322) $ 50,622 $(189,976)
Translation adjustments -- (2,059) 7,487 (3,308)
Unrealized gains on investments (18,300) 1,784 (335) 1,381
----------- ------------ ----------- ----------
Comprehensive income (loss) $ (12,683) $ (121,597) $ 57,774 $(191,903)
=========== ============ =========== ==========
Accumulated differences between
net income (loss), as
reported, and comprehensive
loss:
Beginning of period $ 18,300 $ (6,811) $ (7,152) $ (5,159)
Translation adjustments -- (2,059) 7,487 (3,308)
Unrealized gains on investments (18,300) 1,784 (335) 1,381
----------- ------------ ----------- ----------
End of period $ -- $ (7,086) $ -- $ (7,086)
=========== ============ =========== ==========
(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 $0.2 million and $12.9 million, respectively. 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 acquisition entity called OGLP Acquisition Sub
LLC ("OGLP Acquisition"). In conjunction
10
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. Upon consummation of the proposed
liquidating plan, the company would receive an approximately 40% equity
interest in OGLP Acquisition. Also under the liquidating plan, Orbital would
receive releases from the ORBCOMM estate, including releases of potential
preference claims totalling approximately $57 million and OCC would receive a
release 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. 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.
The Bankruptcy Court is scheduled to hold a hearing on confirmation of the
proposed liquidating plan on November 15, 2001.
11
(9) INVESTMENTS IN AND TRANSACTIONS WITH ORBIMAGE
In March 2001, ORBIMAGE defaulted on its interest payment obligations under its
$225,000,000 Senior Notes due 2005 ("Senior Notes"). The Senior Notes are
non-recourse to Orbital. On September 19, 2001, ORBIMAGE, certain of its major
common and preferred shareholders, including Orbital, and an Informal Committee
representing the holders of approximately half of its Senior Notes, entered into
a non-binding agreement in principle (the "Agreement in Principle") to proceed
with a financial restructuring designed to strengthen ORBIMAGE's financial
condition. ORBIMAGE has announced that in the fourth quarter of 2001 it will
file a petition for reorganization under Chapter 11 of the U.S. Federal
Bankruptcy Code with a "prearranged" plan of reorganization based upon the
Agreement in Principle.
Under the Agreement in Principle, Orbital agreed to pay $5 million in cash to
ORBIMAGE in satisfaction of launch delay penalties, all of which has been paid
as of October 31, 2001. The Agreement in Principle also provides that Orbital
will defer up to $8.6 million of amounts otherwise payable by ORBIMAGE under its
procurement and administrative services agreements with Orbital, and that
Orbital will provide up to $3.6 million in debtor-in-possession funding
subsequent to ORBIMAGE's Chapter 11 filing, subject to certain conditions. If
the restructuring is successfully completed, then the launch delay penalty
payments would be converted into subordinated convertible notes, and Orbital
would receive new secured notes in exchange for the deferred amounts and other
funding described above.
The Agreement in Principle and ORBIMAGE's restructuring are subject to various
conditions, including the receipt by ORBIMAGE of certain third-party financing.
There can be no assurances that the Agreement in Principle and the restructuring
will be consummated.
Through June 30, 2001, the company had recognized 100% of ORBIMAGE's losses,
including preferred stock dividends. As of June 30, 2001, recognized losses
exceeded the company's investment in ORBIMAGE by $40.2 million and such amount
is reported as a credit in the consolidated balance sheet. While Orbital is not
legally obligated for the liabilities of ORBIMAGE, the company recognized such
additional losses because of its 100% common stock ownership and previous
intentions regarding potential funding of ORBIMAGE.
As a result of the further deterioration of ORBIMAGE's financial position and
the anticipated financial restructuring, Orbital has determined that it will not
provide any future funding to ORBIMAGE beyond that contemplated by the Agreement
in Principle, and if the restructuring contemplated by such agreement is not
completed, then Orbital would abandon its investment in ORBIMAGE. Furthermore,
the company has determined that the recognized losses exceed any conceivable
future funding or investment that Orbital would provide to ORBIMAGE.
Accordingly, the company ceased recognizing ORBIMAGE losses as of July 1, 2001.
12
On September 21, 2001, Orbital's Taurus rocket, which was carrying the OrbView-4
satellite for ORBIMAGE, did not achieve the mission's intended orbit and the
satellite was lost. Through the date of the launch, the company had recorded
inventory of approximately $16 million with respect to the OrbView-4 satellite,
net of payments received from ORBIMAGE and contract losses recognized. The
company anticipates that it will recover approximately $12 million of this
amount through insurance proceeds, and the remaining amount is due from
ORBIMAGE. Although Orbital would receive secured notes receivable for this
amount per the Agreement in Principle, given ORBIMAGE's current financial
condition, there is no assurance that the company will be able to recover this
amount. Accordingly, the company recorded a $4.3 million provision in the third
quarter of 2001 to write down this asset.
The company is also building ORBIMAGE's OrbView-3 satellite and the related
launch vehicle. The company continues to account for the OrbView-3 program using
the completed contract method. At September 30, 2001, the company had recorded
inventory of $2.1 million with respect to the OrbView-3 program, net of payments
received from ORBIMAGE and contract losses recognized. The company continues to
retain title to the OrbView-3 inventory and believes that such costs are fully
recoverable. In the future, the company may be required to write off such costs,
including amounts capitalized in subsequent periods, in the event that
ORBIMAGE's restructuring is not successful and the company is not otherwise able
to recover the recorded amount of costs in inventory.
(10) DEBT OBLIGATIONS
During the third quarter of 2001, the company permanently reduced to zero the
outstanding balance under the company's primary credit facility using $50
million of the proceeds from the sale of businesses. No additional borrowings
are available under the facility. The company has commenced efforts to replace
the facility.
(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 believes that the
allegations in the foregoing legal proceeding are without merit and intends to
vigorously defend against the allegations. The eventual outcome of the foregoing
legal matter, however, is uncertain and could have a material adverse impact on
the company's results of operations and financial condition.
13
The company is party to certain other litigation or proceedings arising in the
ordinary course of business. In the opinion of management, it is not probable
that the outcome of such 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 realizable values in the fourth quarter
of 2000. The company has submitted settlement proposals 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. There
can be no assurance that the company will recover all or most of its costs from
NASA under the final settlement. However, in August 2001 Orbital received a $10
million provisional payment from NASA, the majority of which was applied to
unpaid contract receivables. All remaining X-34 related receivables and assets
have been fully reserved.
CONTINGENCIES
In 1996, ORBCOMM issued $170 million of 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. Orbital believes that such claims are
without merit and that the company has adequate defenses to all
14
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. Orbital disputes that position. The Agreement in
Principle described in Note 9 above contemplates that ORBIMAGE, Orbital and
certain other parties would grant each other mutual releases of potential
claims, including the one described herein, upon the successful completion of
the restructuring of ORBIMAGE contemplated by the Agreement in Principle. 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.
(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.
15
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 NINE MONTHS ENDED SEPTEMBER 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) electronic 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 Sensors, Fairchild,
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(IN THOUSANDS)
Launch Vehicles and Advanced Programs (1) $ 26,527 $ 27,112 $ 92,643 $ 103,880
Satellites and Related Space Systems (2) 48,179 40,327 157,648 178,080
Electronic Systems (3) 17,172 15,384 47,192 43,990
Corporate and Other (4) (870) (2,750) (3,097) (13,293)
--------- --------- --------- ---------
TOTAL $ 91,008 $ 80,073 $ 294,386 $ 312,657
========= ========= ========= =========
(1) Revenues in this segment decreased in the third quarter of 2001 as
compared to the third quarter of 2000 as a result of a $3.2 million
decrease in revenues from advanced programs that was partly offset by a
$2.6 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
primarily attributable to new launch contracts.
16
Revenues in this segment decreased in the nine months ended September 30,
2001 as compared to the same period in 2000 due to an $11.9 million
decrease in revenues from advanced programs that was partly offset by a
$0.7 million increase in revenues from launch vehicles. Revenues from
advanced programs decreased primarily as a result of the termination of
the X-34 contract. The increase in launch vehicle revenues is primarily
attributable to new launch vehicle contracts. Offsetting this increase
was $8.3 million of ORBIMAGE and ORBCOMM revenues recorded in the first
half of 2000 for which there are no comparable revenues in 2001.
(2) Revenues from satellites and related space systems increased in the third
quarter of 2001 as compared to the third quarter of 2000 largely as a
result of a new large geosynchronous satellite contract entered into in
2001.
Revenues for the nine months ended September 30, 2001 decreased as
compared to the same period in 2000 primarily as a result of the absence
in 2001 of ORBCOMM and ORBIMAGE procurement revenues, which totalled
$20.7 million in the nine months ended September 30, 2000. Satellites and
related space systems revenues were also impacted by the completion of
several satellite production contracts in 2000 and early 2001, partially
offset by revenues generated from two large geosynchronous satellite
contracts.
(3) Revenues from electronic systems increased in the quarter and nine months
ended September 30, 2001 as compared to the same periods in 2000
primarily as a result of several new contracts in late 2000 and
throughout 2001.
(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 third quarter of 2001 and the nine
months ended September 30, 2001, as compared to the same periods in 2000,
was primarily attributable to a reduction of intercompany revenues and
the absence of consolidation adjustments related to the ORBIMAGE, ORBCOMM
and X-34 programs in 2001.
INCOME (LOSS) FROM OPERATIONS
The following table summarizes income (loss) from operations for our reportable
business segments and corporate and other:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS)
Launch Vehicles and Advanced Programs (1) $ 574 $ (1,191) $ 7,621 $ 7,416
Satellites and Related Space Systems (2) (3,686) (33,982) (18,598) (37,895)
Electronic Systems (3) 735 (7,058) 1,292 (9,735)
Corporate and Other (4) (14,543) (40,429) (20,239) (50,445)
-------- -------- -------- --------
TOTAL $(16,920) $(82,660) $(29,924) $(90,659)
======== ======== ======== ========
17
(1) Operating income for launch vehicles and advanced programs was higher in
the third quarter of 2001 as compared to the third quarter of 2000
primarily due to a $3.7 million one-time ORBCOMM-related charge in the
third quarter of 2000. Additionally, operating income for the third
quarter of 2001 was adversely impacted by schedule delays on several
launch vehicle programs and by costs incurred during the quarter related
to the X-34 contract termination claim.
Operating income was higher for the nine months ended September 30, 2001
as compared to the same period in 2000 primarily due to the one-time
ORBCOMM-related charge in 2000 and a favorable $3.4 million contract
earnings adjustment on the X-34 program in the second quarter of 2001.
Operating income for the nine months ended September 30, 2000 also
included a $2.6 million favorable launch vehicle contract settlement
recorded in the second quarter of 2000. Additionally, operating income
was adversely impacted by schedule delays on several launch vehicle
programs and costs related to the X-34 contract termination claim.
(2) Operating losses from satellites and related space systems decreased in
the third quarter of 2001 as compared to the same period in 2000
primarily as a result of a $19.3 million one-time ORBCOMM-related charge
in the third quarter of 2000 and cost overruns in the third quarter of
2000 related to a geosynchronous satellite contract.
Operating losses from satellites and related space systems decreased in
the nine months ended September 30, 2001 as compared to the same period
in 2000 primarily as a result of the one-time ORBCOMM-related charge. The
operating results in both 2001 and 2000 were adversely impacted by cost
overruns and contract losses primarily attributable to geosynchronous
satellite contracts.
(3) Operating income from electronic systems increased in the quarter and the
nine months ended September 30, 2001 as compared to the same periods in
2000 primarily as a result of the absence in 2001 of a $2.2 million
one-time ORBCOMM-related charge and costs accrued in the third quarter of
2000 related to the termination of a contract.
(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 third quarter of 2001 includes a $4.3 million provision
for potentially unrecoverable amounts related to the OrbView-4 satellite
construction program, and a $4.9 million provision for excess facility
costs. The third quarter of 2000 included a $29.5 million provision for
doubtful ORBCOMM accounts. In addition, the first half of 2000 included
consolidating entries related to the ORBCOMM and ORBIMAGE contracts.
18
INTEREST EXPENSE
Interest cost, before deducting capitalized interest, was $3.0 million and $8.7
million for the quarters ended September 30, 2001 and 2000, respectively. No
interest was capitalized in the third quarter of 2001 and $0.3 million was
capitalized in the third quarter of 2000. The third quarter of 2001 includes
approximately $1.1 million interest expense related to a vendor financing
agreement. Interest expense on bank debt and other borrowings decreased in 2001
in proportion to the decrease in outstanding debt.
Interest cost, before deducting capitalized interest, was $18.9 million and
$20.1 million for the nine months ended September 30, 2001 and 2000,
respectively. No interest was capitalized in the nine months ended September 30,
2001 and $1.5 million was capitalized in the nine months ended September 30,
2000. The first nine months of 2001 includes approximately $3.3 million of
interest expense related to a vendor financing agreement. Interest expense
during the nine months ended September 30, 2001 on bank debt and other
borrowings did not decrease in proportion to the decrease in outstanding debt as
a result of fees incurred in 2001 to amend our primary credit facility and to
enter into a secondary credit facility, and the acceleration of the amortization
of prepaid financing costs.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was $3.7 million and $(27,000) for the third quarter
of 2001 and 2000, respectively, and $4.7 million and $2.4 million, respectively
for the nine months ended September 30, 2001 and 2000. The third quarter of 2001
includes $3.5 million of insurance proceeds related to the BSAT-2b satellite
launch failure in July 2001. Other income (expense), net also includes interest
earnings on short-term investments and realized gains and losses on investments.
ALLOCATED SHARE OF LOSSES OF AFFILIATES
Allocated share of losses of affiliates was as follows:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------------
2001 2000 2001 2000
------ -------- -------- --------
(IN THOUSANDS)
ORBCOMM (1) ...... $ -- $(50,576) $ -- $(85,421)
ORBIMAGE (2) ..... -- -- (19,091) (8,054)
Other ............ -- (463) (904) (815)
------ -------- -------- --------
$ -- $(51,039) $(19,995) $(94,290)
====== ======== ======== ========
(1) In the third quarter of 2000, we wrote off our $50.6 investment in
ORBCOMM and, accordingly, we no longer recognize equity losses for
ORBCOMM.
(2) In the first half of 2000, we recognized 100% of ORBIMAGE's losses and
preferred stock dividends until our investment balance was reduced to
zero. In the first half of 2001, we
19
recognized 100% of ORBIMAGE's losses and preferred stock dividends as
allocated share of losses of affiliates. Beginning in January 2001,
ORBIMAGE discontinued capitalizing interest on satellites under
construction. Due to the increase in interest expensed, ORBIMAGE's net
loss increased significantly in 2001 as compared to 2000.
In the third quarter of 2001, we determined that our share of ORBIMAGE
losses accumulated to date exceeds any future funding commitment that we
would provide to ORBIMAGE. Therefore, we suspended recognition of
ORBIMAGE losses effective July 1, 2001.
LITIGATION SETTLEMENT
The second quarter of 2000 included 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 did not record an income tax provision in the third quarter of 2001 due to
net operating loss carryforwards available to reduce potential 2001 tax
liabilities. The third quarter of 2000 included an expense of $9.9 million to
fully reserve our U.S. deferred tax assets.
BACKLOG
Our firm backlog was $507 million at September 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 $2.52 billion at September 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 $76 million and $444 million, respectively, since June 30, 2001,
primarily as a result of removing Sensor's backlog from our consolidated backlog
amounts and as a result of reducing amounts available under indefinite quantity
contracts. Backlog at September 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 nine months ended September 30, 2001, we funded
our capital requirements for operations through cash from operations, cash on
hand, vendor financing, the proceeds from a $30 million loan from our bank
syndicate and the proceeds from the sales of MDA shares, Magellan, NavSol and
Sensors. In May, June and July 2001, we sold our MDA shares for gross proceeds
of $169.2 million before transaction fees and expenses. In July 2001, we
received gross proceeds of $65.5 million before transaction fees and expenses
from the sale of our interests in Magellan and
20
NavSol. In September 2001, we sold our sensor systems division for $19 million
before transaction fees and expenses, subject to certain post-closing
adjustments.
Management is restructuring business operations by consolidating operations and
related systems, and work force reductions. The company also intends to raise
additional debt and/or equity capital and refinance existing debt obligations,
and has commenced efforts to replace the company's primary credit facility. The
company is also considering 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.
As of September 30, 2001, we had $32.6 million of unrestricted cash and cash
equivalents. Our accumulated deficit was $413.9 million at September 30, 2001.
During the nine months ended September 30, 2001, we reported a $105.6 million
net use of cash from continuing operations.
During the third quarter of 2001, we permanently paid off the outstanding
balance under our primary credit facility using cash proceeds from the sales of
businesses. No additional borrowings are available under the facility, which we
are seeking to replace.
Our outstanding debt at September 30, 2001 included $100 million of convertible
subordinated notes due October 2002, which we are seeking to refinance, and
other asset-based financings.
On September 19, 2001, ORBIMAGE, certain of its major common and preferred
shareholders, including Orbital, and an Informal Committee representing the
holders of approximately half of its Senior Notes, entered into a non-binding
agreement in principle (the "Agreement in Principle") to proceed with a
financial restructuring designed to strengthen ORBIMAGE's financial condition
(see Note 9 to the accompanying financial statements). The Agreement in
Principle and ORBIMAGE's restructuring are subject to various conditions,
including the receipt by ORBIMAGE of certain third-party financing. There can be
no assurances that the Agreement in Principle and the restructuring will be
consummated.
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. Orbital disputes that position. The Agreement in
Principle contemplates that ORBIMAGE, Orbital and certain other parties would
grant each other mutual releases of potential claims, including the one
described herein, upon the successful completion of the restructuring of
ORBIMAGE
21
contemplated by the Agreement in Principle. 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.
22
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.
At September 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 $65 million at September 30, 2001.
23
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In addition to the litigation and proceedings described in Part I of
this report, the company is party 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.
The company and Thomas van der Heyden have agreed to settle a claim
brought by Mr. van der Heyden that the parties were arbitrating. The
settlement will not materially impact the company's 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.
(b) Reports on Form 8-K.
On July 5, 2001, the company filed a Form 8-K/A reporting 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.
24
On October 2, 2001, the company filed a Current Report on Form
8-K, dated September 24, 2001, disclosing that OBIMAGE had
reached a non-binding agreement in principle with certain of
its major common and preferred shareholders, including
Orbital, and an Informal Committee representing the holders of
approximately half of its Senior Notes, to proceed with a
financial restructuring designed to strengthen ORBIMAGE's
financial condition.
25
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: November 9, 2001 By: /s/ David W. Thompson
---------------------------------
David W. Thompson
Chief Executive Officer
DATED: November 9, 2001 By: /s/ Garrett E. Pierce
---------------------------------
Garrett E. Pierce
Executive Vice President, Chief
Financial Officer
26
EXHIBIT INDEX
The following exhibits are filed with this report unless otherwise indicated.
Exhibit No. Description
- ----------- -----------
3.1 Restated Certificate of Incorporation (incorporated by
reference to Exhibit 4.1 to the company's Registration
Statement on Form S-3 (File Number 333-08769) filed and
effective on July 25, 1996).
3.2 By-Laws of Orbital Sciences Corporation, as amended on July
27, 1995 (incorporated by reference to Exhibit 3 to the
company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995).
3.3 Certificate of Amendment to Restated Certificate of
Incorporation, dated April 29, 1997 (incorporated by reference
to Exhibit 3.3 to the company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
3.4 Certificate of Designation, Preferences and Rights of Series B
Junior Participating Preferred Stock, dated November 2, 1998
(incorporated by reference to Exhibit 2 to the company's
Report on Form 8-A filed on November 2, 1998).
10.1 Consulting Agreement between the company and Michael D.
Griffin dated August 24, 2001.
10.2 Severance Agreement between the company and Michael D. Griffin
dated August 22, 2001.
27