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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
SEPTEMBER 30, 1999
ORBITAL SCIENCES CORPORATION
Commission file number 0-18287
DELAWARE 06-1209561
--------------------------------------------------- ------------------------------------------
(State of Incorporation) (IRS Identification number)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166 (703) 406-5000
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(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 November 15, 1999, 37,416,772 shares of the registrant's common stock were
outstanding.
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FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
A S S E T S
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
(RESTATED)
CURRENT ASSETS:
Cash and cash equivalents $ 21,066 $ 17,764
Restricted cash and short-term investments, at market 18,174 7,922
Receivables, net 270,449 205,409
Inventories, net 65,053 64,710
Deferred income taxes and other assets 11,357 8,252
----------- -----------
TOTAL CURRENT ASSETS 386,099 304,057
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated
depreciation and amortization of $122,495 and $103,450, respectively 186,710 157,075
INVESTMENTS IN AND ADVANCES TO AFFILIATES, net 200,460 208,196
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED,
less accumulated amortization of $37,912 and $27,542, respectively 277,508 228,624
DEFERRED INCOME TAXES AND OTHER ASSETS, less accumulated
amortization of $1,567 and none, respectively 71,543 35,393
----------- -----------
TOTAL ASSETS $ 1,122,320 $ 933,345
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of
long-term obligations $ 55,612 $ 26,814
Accounts payable 67,306 39,093
Accrued expenses 109,480 110,833
Deferred revenues 143,976 82,364
----------- -----------
Total current liabilities 376,374 259,104
LONG-TERM OBLIGATIONS, net of current portion 313,925 181,281
OTHER LIABILITIES 13,998 3,007
----------- -----------
TOTAL LIABILITIES 704,297 443,392
NON-CONTROLLING INTERESTS IN
NET ASSETS OF CONSOLIDATED SUBSIDIARIES 9,506 17,150
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01; 10,000,000 shares authorized:
none outstanding -- --
Common Stock, par value $.01; 80,000,000 shares authorized,
37,395,343 and 37,018,256 shares outstanding, respectively
after deducting 20,877 shares held in treasury 374 370
Additional paid-in capital 496,651 490,540
Accumulated other comprehensive income (6,119) (7,225)
Accumulated deficit (82,389) (10,882)
----------- -----------
Total stockholders' equity 408,517 472,803
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,122,320 $ 933,345
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1999 1998
------------ ------------
(RESTATED)
REVENUES $ 248,914 $ 187,688
COSTS OF GOODS SOLD 194,187 141,195
------------ ------------
GROSS PROFIT 54,727 46,493
RESEARCH AND DEVELOPMENT EXPENSES 9,109 14,239
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 30,593 20,979
AMORTIZATION OF EXCESS OF PURCHASE PRICE OVER
NET ASSETS ACQUIRED 3,843 1,983
------------ ------------
INCOME FROM OPERATIONS 11,182 9,292
NET INVESTMENT INCOME (EXPENSE) (5,722) (667)
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES (37,550) (11,747)
NON-CONTROLLING INTERESTS IN (EARNINGS) LOSSES
OF CONSOLIDATED SUBSIDIARIES 1,723 2,458
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (30,367) (664)
PROVISION FOR INCOME TAXES 2,282 826
------------ ------------
NET LOSS $ (32,649) $ (1,490)
============ ============
NET LOSS PER COMMON SHARE $ (0.87) $ (0.04)
SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE 37,384,519 36,757,055
============ ============
See accompanying notes to condensed consolidated financial statements.
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ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1999 1998
------------ ------------
(RESTATED)
REVENUES $ 685,538 $ 558,363
COSTS OF GOODS SOLD 529,668 409,645
------------ ------------
GROSS PROFIT 155,870 148,718
RESEARCH AND DEVELOPMENT EXPENSES 29,227 34,255
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 89,389 77,634
AMORTIZATION OF EXCESS OF PURCHASE PRICE OVER
NET ASSETS ACQUIRED 9,932 5,921
------------ ------------
INCOME FROM OPERATIONS 27,322 30,908
NET INVESTMENT INCOME (EXPENSE) (13,410) (3,745)
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES (87,287) (43,796)
NON-CONTROLLING INTERESTS IN (EARNINGS) LOSSES
OF CONSOLIDATED SUBSIDIARIES 7,476 7,573
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (65,899) (9,060)
PROVISION FOR INCOME TAXES 5,608 3,131
------------ ------------
NET LOSS $ (71,507) $ (12,191)
============ ============
NET LOSS PER COMMON SHARE $ (1.92) $ (0.35)
SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE 37,240,742 35,199,984
============ ============
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
--------- ---------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (71,507) $ (12,191)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES:
Depreciation and amortization expenses 36,302 27,300
Amortization of prepaid financing costs 1,664 5,579
Equity in losses of affiliates 87,287 43,796
Non-controlling interests in losses of consolidated subsidiaries (7,476) (7,573)
Loss on sales of assets 992 --
Foreign currency translation adjustments 1,711 (1,076)
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in current and other non-current assets (32,405) (34,320)
Increase (decrease) in current and other non-current liabilities 36,720 (6,349)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 53,288 15,166
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (47,158) (33,259)
Payments for business combinations (26,374) --
Purchase of other assets (14,006) --
Purchases, sales and maturities of available-for-sale investment securities, net (8,276) 8,510
Investments in and advances to affiliates, net (74,946) (83,260)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (170,760) (108,009)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (repayments) 135 17,440
Principal payments on long-term obligations (90,476) (79,283)
Net proceeds from issuances of long-term obligations 205,000 27,000
Net proceeds from issuances of common stock 6,115 160,777
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 120,774 125,934
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,302 33,091
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,764 12,553
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,066 $ 45,644
========= =========
See accompanying notes to condensed consolidated financial statements.
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ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
Orbital Sciences Corporation, together with its subsidiaries, is hereafter
referred to as "Orbital" or the "company." As discussed below, the company is
continuing to work to resolve certain pending questions relating to previously
published financial data, which may also affect current financial data.
Accordingly, the accompanying financial statements are preliminary. These
preliminary financial statements reflect the company's determination of the
effects of presently known adjustments as discussed in Note 2 below. The
resolution of the pending matters could result in further adjustments to the
financial statements for any or all of the periods presented in this Report on
Form 10-Q. Neither the company's current nor its former independent auditors
have reviewed or approved the preliminary results reported herein.
In the opinion of management and subject to potential additional adjustments
that might be necessary as described below, the accompanying unaudited interim
financial information reflects all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation thereof. Certain information and
footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to instructions, rules and regulations prescribed by the
Securities and Exchange Commission (the "Commission"). The company believes that
the disclosures provided herein are adequate to make the information presented
not misleading when these unaudited interim condensed consolidated financial
statements are read in conjunction with the company's Annual Report on Form 10-K
for the year ended December 31, 1998 (provided that the company's consolidated
financial statements and the footnotes thereto included in such Annual Report on
Form 10-K have not yet been revised to reflect the restatement and the
unresolved pending accounting matters discussed in Notes 1 and 2 hereto).
Operating results for the three- and nine-month periods ended September 30, 1999
are not necessarily indicative of the results expected for the full year.
Pending Matters
The company's current auditors have raised questions arising out of prior year
valuations of the company's subsidiary, Magellan Corporation ("Magellan"),
reflected in the company's audited 1997 and 1998 financial statements. These
questions are still under review, and the effect of a change in previously
audited and unaudited financial statements as well as these unaudited
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financial statements, if any, relating to Magellan has not yet been determined.
In addition, the company's current auditors have questions pertaining to the
company's accounting for certain transactions related to its investments in
Orbital Imaging Corporation ("ORBIMAGE") and CCI International, N.V. ("CCI") in
addition to those discussed below. There can be no assurance that the company's
current auditors or its previous auditors will not raise additional questions.
Final resolution of these matters, including the determination of the impact of
any resultant changes, has not been completed. Accordingly, the accompanying
financial statements are preliminary, and may change as a result of resolution
of the issues that remain under discussion. The company is seeking to resolve
these matters as expeditiously as possible. Once the outstanding issues are
resolved, the company plans to publish revised financial data.
(2) RESTATEMENTS
As a result of the events described below, management has determined to revise
its previously audited accounting treatment with respect to its investments in
its affiliates, ORBIMAGE and CCI. Orbital's previous independent auditors
reviewed and approved the company's prior accounting treatment and had
concluded that the company's financial statements were fairly presented in
accordance with generally accepted accounting principles in 1997 and 1998. In
preparation for the 1999 audit, the company's current independent auditors
questioned certain aspects of the accounting treatment relating to ORBIMAGE and
CCI. The company's previous auditors have now changed their position with
respect to this accounting treatment and they have informed the company that
its financial statements should be restated for fiscal years ended December 31,
1997 and 1998, for the last three quarters of 1997 and for all four quarters of
1998, and that their earlier independent auditors' reports with respect to
these periods should no longer be relied upon. (The change with respect to
accounting for the CCI investment does not affect 1997 financial statements
because the investment was made in 1998.) Upon resolution of the pending
matters described in Note 1 above, the company will restate its financial
statements for the prior periods and for the first two quarters of 1999. The
financial statements contained in this report on Form 10-Q reflect the
restatement adjustments described below, but could be modified further
depending on resolution of the pending matters described above.
Restatement Adjustments
(a) The company uses the equity method of accounting for its investments in
affiliates in which the company has the ability to significantly influence, but
not control, such affiliates' operations. Accordingly, Orbital uses the equity
method of accounting for its investments in ORBIMAGE and CCI.
As a result of certain participating rights granted to holders of convertible
preferred stock of ORBIMAGE, Orbital significantly influences but does not
control ORBIMAGE even though it owns substantially all of ORBIMAGE's
outstanding common stock. The company's historical audited and unaudited
financial statements previously filed with the
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Commission reflected the company's application of the equity method of
accounting as it pertained to ORBIMAGE based on Orbital's percentage share of
ownership of ORBIMAGE calculated to give the effect to the conversion of
ORBIMAGE's outstanding convertible preferred stock into ORBIMAGE common stock.
Following the notification from the company's previous auditors as described
above, the company has revised its application of the equity method of
accounting with respect to its investment in ORBIMAGE to now be based upon its
common stock ownership percentage without giving effect to the conversion of
the preferred stock. The company has also similarly revised its application of
the equity method of accounting with respect to its investment in CCI.
This revision of the application of the equity method of accounting related to
the company's investments in ORBIMAGE and CCI resulted in Orbital increasing
its equity in losses of affiliates for the first half of 1999 and for the
three- and nine-month periods ended September 30, 1998 by $5,391,000, $325,000
and $10,130,000, respectively.
(b) ORBIMAGE's preferred stockholders are entitled to receive a cumulative
dividend, payable either in cash or in additional shares of convertible
preferred stock, and to date all dividends have been paid in additional shares
of convertible preferred stock. The company's historical audited and unaudited
financial statements previously filed with the Commission did not reflect
additional net losses as a result of ORBIMAGE's declaration of such "in-kind"
dividends on its convertible preferred stock. Following the notification from
the company's previous auditors as described above, Orbital now calculates its
equity in losses of affiliates taking into account ORBIMAGE's preferred stock
dividends.
This revision of the accounting for ORBIMAGE's preferred stock dividends
resulted in Orbital increasing its equity in losses of affiliates by $4,209,000
for the first half of 1999 and by $1,957,000 and $5,311,000 for the three- and
nine- month periods ended September 30, 1998, respectively.
(c) The company's historical audited and unaudited financial statements
previously filed with the Commission reflected the company's capitalization of
interest expense on its investment in ORBIMAGE. Following the notification from
the company's previous auditors as described above, Orbital is no longer
capitalizing interest expense on its investment in ORBIMAGE.
This revision of the accounting for the capitalization of interest expense
resulted in Orbital increasing its reported interest expense (and decreasing
its reported capitalized interest expense) by $3,238,000 for the first half of
1999 and by $1,644,000 and $5,136,000 for the three- and nine-month periods
ended September 30, 1998, respectively.
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(d) The company's historical audited and unaudited financial statements
previously filed with the Commission reflected recognition of a gain in the
second quarter of 1998 on ORBIMAGE's issuance of common stock purchase
warrants, in accordance with Orbital's stated accounting policy on sales of
subsidiary and affiliate equity. Following the notification from the company's
previous auditors as described above, the company has decreased its reported
gain on sale of affiliate equity by $4,793,000 in the second quarter of 1998.
(3) PREPARATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Management periodically assesses and
evaluates the sufficiency and/or deficiency of estimated liabilities recorded
for various operational and business risks and uncertainties. Actual results
could differ from these estimates. See also Notes 1 and 2 above.
Certain reclassifications have been made to the 1998 financial statements and
footnote disclosures to conform to the 1999 financial statement presentation.
All financial amounts are stated in U.S. dollars unless otherwise indicated.
(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 percentage-of-completion
method of accounting applied on a units of delivery basis, and (ii) partially
assembled commercial products, and generally includes direct production costs
and certain allocated indirect costs (including an allocation of general and
administrative costs). Work-in-progress inventory has been reduced by
contractual progress payments received. Finished goods inventory consists of
fully assembled commercial products awaiting shipment.
(5) DISAGGREGATED FINANCIAL INFORMATION
Orbital's operations are organized into three business sectors, which correspond
to different product and service types, the different markets served by such
products and services, and the manner in which these products and services are
managed. Orbital's
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three business sectors are: space and ground infrastructure systems, satellite
access products and satellite services. Space and ground infrastructure systems
include launch vehicles, satellites and related space systems, electronics and
sensor systems and transportation management systems, and satellite ground
systems, software, mapping and land information services. Satellite access
products include satellite-based navigation, positioning and communications
products. Satellite services include satellite-based mobile data communications
services, satellite-based remote imaging services, satellite-based automotive
information services and satellite-based voice communications services.
The following table presents preliminary operating information for the three and
nine months ended September 30, 1999 and 1998 by business sector. Operating
income (loss) is total revenues less costs of goods sold, research and
development expenses, selling, general and administrative expenses, and
amortization of goodwill. Identifiable assets are those assets used in the
operations of each business. There were no significant sales or transfers
between consolidated sectors.
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
(In thousands) 1999 1998 1999 1998
----------- ----------- ----------- -----------
(Restated) (Restated)
SPACE AND GROUND
INFRASTRUCTURE SYSTEMS:
Revenues $ 200,067 $ 164,512 $ 570,671 $ 483,308
Operating income 15,267 16,284 47,748 49,659
Identifiable assets (1) 803,750 593,818 803,750 593,818
Capital expenditures 11,953 10,726 38,370 30,017
Depreciation and amortization 10,746 5,439 28,198 21,770
SATELLITE ACCESS PRODUCTS:
Revenues $ 44,579 $ 23,037 $ 103,162 $ 74,593
Operating loss (870) (6,047) (5,925) (15,386)
Non-controlling interests in
(earnings) losses of consolidated
subsidiaries 1,317 2,022 4,506 6,021
Identifiable assets (1) 108,998 127,392 108,998 127,392
Capital expenditures 3,774 1,751 5,145 3,016
Depreciation and amortization 2,249 3,058 6,412 5,530
SATELLITE SERVICES:
Revenues $ 4,268 $ 139 $ 11,705 462
Operating loss (3,215) (945) (14,501) (3,365)
Equity in earnings (losses) of (37,550) (11,747) (87,287) (43,796)
affiliates
Non-controlling interests in
(earnings) losses of consolidated
subsidiaries 406 436 2,970 1,552
Identifiable assets (1) 209,572 212,135 209,572 212,135
Capital expenditures 72 51 3,643 492
Depreciation and amortization 567 -- 1,692 --
CONSOLIDATED:
Revenues $ 248,914 $ 187,688 $ 685,538 $ 558,363
Operating income 11,182 9,292 27,322 30,908
Equity in earnings (losses) of (37,550) (11,747) (87,287) (43,796)
affiliates
Non-controlling interests in
(earnings) losses of consolidated
subsidiaries 1,723 2,458 7,476 7,573
Identifiable assets (1) 1,122,320 933,345 1,122,320 933,345
Capital expenditures 15,799 12,528 47,158 33,525
Depreciation and amortization 13,562 8,497 36,302 27,300
----------- ----------- ----------- -----------
(1) Identifiable assets are as of September 30, 1999 and December 31, 1998.
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(6) BUSINESS COMBINATIONS AND INVESTMENTS IN AND ADVANCES TO AFFILIATES
During the second quarter of 1999, the company through its wholly owned
subsidiary, Orbital Navigation Corporation, and The Hertz Corporation ("Hertz")
formed a joint venture, Navigation Solutions, L.L.C. ("NavSolutions"). The
company, through its Magellan subsidiary, sells automotive navigation systems to
NavSolutions, which in turn collects a fee for the use of these systems from
Hertz. The company had contributed $13,800,000 as of September 30, 1999, for a
60% noncontrolling interest in the venture. Accordingly, the company currently
accounts for this investment using the equity method of accounting. Since
September 30, 1999, the company has contributed an additional $3,200,000 to the
venture. Under the terms of the joint venture agreement, the company is
committed to contribute up to an aggregate of $30,000,000, with the remainder
(approximately $13,000,000) to be contributed through mid-2000.
In May 1999, the company acquired all the assets and certain liabilities of the
space robotics division of Toronto-based Spar Aerospace Limited ("Robotics") for
approximately $43,000,000. The company paid half of the purchase price in cash
at closing and issued an unsecured 8% note, due May 2000, for the remainder. The
company has accounted for the acquisition using the purchase method of
accounting. The liabilities recorded exceeded the tangible and intangible assets
acquired resulting in goodwill of approximately $48,000,000. The company has
engaged an appraiser to conduct a valuation of Robotics' assets and liabilities
to assist in the allocation of the purchase price to the tangible and intangible
assets and liabilities. Orbital anticipates that the final purchase accounting
adjustments will be recorded in the fourth quarter of 1999.
Also in May 1999, the company entered into a $37,000,000 long-term license
agreement with the British Columbia provincial government whereby the company
obtained the exclusive rights to use certain government information databases
(the "License Agreement"). The company intends to provide Internet-based
services pursuant to the License Agreement. The company paid approximately
$13,000,000 in cash and borrowed approximately $24,000,000 to acquire the
license. The cost of this license is being amortized over ten years.
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The company made cash capital contributions to ORBCOMM Global, L.P. totaling
$41,500,000 during the first nine months of 1999. Additionally, the company has
deferred invoicing $17,757,000 during the first nine months of 1999 for work
performed under two satellite and launch procurement contracts. An affiliate of
Teleglobe Inc. has advanced cash to Orbital for approximately half of the
deferred invoicing.
Orbital has an equity investment in CCI, a development stage company formed to
offer satellite-based voice communications services, which has continued to
incur start-up losses. Two other start-up companies that have also been
developing similar satellite telecommunications systems recently announced that
they are experiencing significant financial difficulties and have filed for
bankruptcy protection. CCI needs a significant infusion of capital to complete
its contemplated constellation of satellites. Orbital believes that CCI's
ability to raise the needed capital in the current financial environment is
doubtful and, accordingly, Orbital has concluded that its investment in CCI is
impaired. The company recorded a one-time non-cash charge of $19,744,000 during
the quarter for its remaining investment in CCI. This charge is included in
equity in earnings (losses) of affiliates in the accompanying statement of
earnings.
(7) INCOME TAXES
The company has recorded its interim income tax provision (for U.S. Federal and
state taxes and foreign taxes) based on an estimate of its full-year provision.
Estimated provisions recorded during interim periods may be periodically
revised, if necessary, to reflect current estimates.
(8) EARNINGS PER SHARE
Net income (loss) per common share is calculated using the weighted average
number of common shares outstanding during the periods. Net income (loss) per
common share, assuming dilution, is calculated using the weighted average number
of common and common equivalent shares outstanding during the periods, plus the
effects of an assumed conversion of the company's convertible notes, after
giving effect to all net income adjustments that would result from the assumed
conversion.
In periods of net loss, the assumed conversion of convertible notes and stock
options is anti-dilutive. Accordingly, fully diluted per-share losses are the
same as basic losses per share disclosed on the accompanying statements of
earnings. For the three and nine months ended September 30, 1999, adjusted
shares, assuming conversion of convertible notes and the dilutive impact of
outstanding stock options, would have been 41,569,899 and 41,749,105,
respectively. For the three and nine months ended September 30, 1998, adjusted
shares, assuming conversion of convertible notes and the dilutive impact of
outstanding stock options, would have been 41,172,222 and 39,925,234,
respectively.
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(9) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) and associated differences are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In thousands) 1999 1998 1999 1998
-------- -------- -------- --------
(Restated) (Restated)
Differences between net income (loss), as
reported, and comprehensive income
(loss):
Net loss, as reported $(32,649) $ (1,490) $(71,507) $(12,191)
Unrealized gains (losses) on
short-term investments -- 251 -- 115
Translation adjustments (59) (676) 1,106 (1,191)
-------- -------- -------- --------
Comprehensive income (loss) $(32,708) $ (1,915) $(70,401) $(13,267)
======== ======== ======== ========
Accumulated differences between
net income (loss), as reported,
and comprehensive income (loss):
Beginning of period $ (6,060) $ (5,322) $ (7,225) $ (4,671)
Unrealized gains (losses) on
short-term investments -- 251 -- 115
Translation adjustments (59) (676) 1,106 (1,191)
-------- -------- -------- --------
End of period $ (6,119) $ (5,747) $ (6,119) $ (5,747)
======== ======== ======== ========
(10) COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
In March 1999, the company signed an agreement to purchase Lowrance Electronics,
Inc. ("Lowrance"), a leading manufacturer of marine and recreational electronics
using GPS-satellite navigation and sonar technology. The merger agreement
originally called for an exchange of Orbital common stock for the outstanding
shares of Lowrance, but was amended in September 1999 to require a cash payment
of approximately $27,000,000 in exchange for the Lowrance shares. The
acquisition has been approved by Lowrance's shareholders, but the closing is
subject to the consent of Orbital's primary lenders, who have conditioned their
consent on Orbital raising additional equity. If such lender consent is not
obtained by December 23, 1999, the merger agreement will terminate unless
extended by mutual agreement.
During the first quarter of 1999, a number of class action lawsuits were filed
in the U.S. District Court for the Eastern District of Virginia (the "District
Court") against the company, an officer and an officer/director alleging
violations of the federal securities laws, on behalf of purchasers of the
company's stock during the period from April 21, 1998 through February 16, 1999,
and seeking monetary damages. On May 21,1999, the cases were consolidated into a
single class action and, on May 28, 1999, an amended consolidated class action
complaint was filed with the District Court. An additional class action
complaint was filed on behalf of purchasers of call options on July 1,
1999, which
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action was consolidated with the previous action. The District Court also denied
the company's motion to dismiss and granted the plaintiff's motion for class
certification.
In connection with the company's recent announcement of the restatement of its
financial statements for fiscal years 1997, 1998 and the first two quarters of
1999, a class action lawsuit was filed in the District Court on November 10,
1999 against the company, an officer and an officer/director alleging violations
of the federal securities laws, on behalf of purchasers of the company's stock
and call options during the period from April 22, 1997 through October 29, 1999.
On November 19, 1999, the District Court granted the plaintiffs leave to file an
amended complaint consolidating the new action with the previously consolidated
pending cases. While the amounts to be claimed may be substantial, the company
believes that the allegations are without merit and intends to defend vigorously
against such allegations.
In October 1999, Orbital entered into a stock purchase agreement with ORBIMAGE
pursuant to which Orbital has agreed to purchase up to 2,500,000 shares of
ORBIMAGE's common stock for up to $25,000,000. This investment may be made over
time in $5,000,000 minimum increments when ORBIMAGE's cash balance falls below
$10,000,000. Orbital is required to obtain the consent of one of its lenders in
order to make this investment.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As described in Note 2 to the accompanying financial statements, as a result of
questions raised by our current auditors and in light of notification from our
previous auditors that they have changed their position with respect to certain
issues, management has determined to restate its financial statements for the
fiscal years ended December 31, 1997 and 1998, for the last three quarters of
1997, for all four quarters of 1998 and the first two quarters of 1999. This
restatement relates to the accounting treatment with respect to Orbital's
investments in Orbital Imaging Corporation ("ORBIMAGE") and CCI International,
N.V. ("CCI"). In addition, there are several pending matters relating to our
historical audited and unaudited financial statements that are still under
discussion between our current and previous auditors. Accordingly, the
financial information contained in this discussion is preliminary. This
preliminary financial information reflects our determination of the effects of
presently known adjustments as discussed in Note 2 to the accompanying
financial statements. The resolution of the pending matters could result in
further adjustments to the financial statements for any or all the periods
presented in this report on Form 10-Q. We are seeking to resolve these matters
as expeditiously as possible. Once the outstanding issues are resolved, we plan
to publish revised financial data. Neither our current nor our former auditors
has reviewed or approved the preliminary results reported herein.
Certain statements included in this discussion relating to future revenues,
expenses, growth rates, net income, preliminary results, liquidity, new
business, operational performance schedules, sources and uses of funds, "Year
2000" issues, the outcome of pending litigation and the performance of our
affiliates, ORBIMAGE, ORBCOMM Global L.P. ("ORBCOMM"), Navigation Solutions,
L.L.C. ("NavSolutions") and CCI, are forward-looking statements that involve
known and unknown risks, uncertainties and other factors that may cause actual
results, performance, achievements or investments of Orbital to differ
materially from any future results, performance, achievements, or investments
expressed or implied by such forward-looking statements. Such factors include
general economic and business conditions, launch results, product performance,
risks associated with government contracts, market acceptance of consumer and
industrial products, the introduction of products and services by competitors,
risks associated with acquired businesses, the availability of required capital,
our ability and the ability of our customers and suppliers to assess and correct
timely and accurately "Year 2000" issues, market acceptance of new products and
technologies, risks associated with long-term contracts, the effects of pending
or possible litigation or government investigations, the outcome of discussions
between our current and former auditors and other factors more fully described
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Outlook: Issues and Uncertainties" included in our Annual Report on
Form 10-K for the year ended December 31, 1998.
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16
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
Our products and services are grouped into three business sectors: space and
ground infrastructure systems, satellite access products and satellite services.
Space and ground infrastructure systems include launch vehicles, satellites and
related space systems, electronics and sensor systems and transportation
management systems, and satellite ground systems, software, mapping and land
information services. Our satellite access products sector consists of
satellite-based navigation, positioning and communications products. The
satellite services sector includes satellite-based mobile data communications
services, satellite-based remote imaging services, satellite-based automotive
information services and satellite-based voice communications services. This
sector includes our share of the income or losses of our unconsolidated
affiliates, ORBCOMM, ORBIMAGE, NavSolutions and CCI.
As noted above, the results of operations presented herein for the 1999 and 1998
periods are preliminary.
REVENUES. Our consolidated revenues for the quarter ended September 30, 1999
were $248,914,000 as compared to $187,688,000 for the same quarter last year.
Consolidated revenues for the nine-month periods ended September 30, 1999 and
1998 were $685,538,000 and $558,363,000, respectively.
Space and Ground Infrastructure Systems. Revenues from our space and ground
infrastructure systems sector totaled $200,067,000 and $164,512,000 for the
three months ended September 30, 1999 and 1998, respectively. Revenues from this
sector totaled $570,671,000 and $483,308,000 for the nine months ended September
30, 1999 and 1998, respectively.
Revenues from launch vehicles increased to $37,492,000 for the third quarter of
1999 from $34,636,000 in the third quarter of 1998. Year-to-date revenues were
$117,798,000 as compared to $128,063,000 for the same period last year. The
year-to-date decrease is primarily attributable to launch delays caused by late
delivery of customer satellites and payloads, while the quarter-to-quarter
increase is due to increased activity on certain contracts.
Satellite and related space systems revenues increased to $92,438,000 for the
quarter ended September 30, 1999, as compared to $75,529,000 for the third
quarter of 1998. Year-to-date revenues increased to $246,612,000 as compared to
$194,112,000 for the same period last year. As discussed in Note 6 to the
accompanying financial statements, in May 1999, we acquired the space robotics
division of Spar Aerospace Limited ("Robotics"). Robotics' revenues, which are
now consolidated in our financial statements, were approximately $19,917,000 and
$33,655,000, respectively, for the three- and nine-month periods ended September
30, 1999. The remaining increase in 1999
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17
satellite and related space systems revenues is due, in part, to revenues
realized from a new commercial geosynchronous satellite contract received in
late 1998.
Revenues from electronics and sensor systems and transportation management
systems, increased to $34,557,000 for the quarter ended September 30, 1999 from
$29,641,000 for the quarter ended September 30, 1998. Year-to-date revenues
increased to $107,174,000 from $93,207,000 for the first three quarters of 1998.
The increase in revenues this year is primarily due to new contract awards in
early 1999 as well as an increase in transportation management systems revenues.
The increase in transportation management systems revenues is partly
attributable to our December 1998 acquisition of Raytheon Company's
transportation management systems business.
Revenues from our satellite ground systems, software, mapping and land
information services were $35,580,000 for the quarter ended September 30, 1999,
as compared to $24,706,000 for the same quarter last year, and $99,087,000 for
the nine months ended September 30, 1999, as compared to $67,926,000 for the
same period last year. These increases are primarily attributable to revenues
recognized on work performed on orders received in 1998 for a new remote imaging
system and other satellite ground systems and system upgrades as well as
increased revenues from mapping and land information services.
Space and ground infrastructure revenues included sales to our noncontrolled and
unconsolidated affiliates totaling $34,809,000 and $24,798,000 for the quarters
ended September 30, 1999 and 1998, respectively, and $93,742,000 and $95,518,000
for the nine months ended September 30, 1999 and 1998, respectively.
Satellite Access Products. Revenues from sales of satellite-based navigation,
positioning and communications products increased to $44,579,000 for the quarter
ended September 30, 1999 from $23,037,000 for last year's third quarter.
Satellite access products revenues were $103,162,000 for the first three
quarters of 1999 as compared to $74,593,000 for the same period last year. The
increase is largely due to sales of $19,461,000 in the third quarter of 1999 to
NavSolutions discussed in Note 6 to the accompanying financial statements.
Satellite Services. Revenues for this sector totaled $4,268,000 and $139,000 for
the third quarters of 1999 and 1998, respectively, and $11,705,000 and $462,000
for the first three quarters of 1999 and 1998, respectively. The increase in
revenues this year is primarily attributable to the acquisition of a controlling
interest in Radarsat International ("RSI") in the first quarter of 1999.
GROSS MARGINS. Gross profit margin depends on a number of factors, including the
mix of contract types and costs incurred thereon in relation to revenues
recognized. Costs of goods sold include the costs of personnel, materials,
subcontracts and overhead related to sales of commercial products and to costs
incurred under various development and production contracts. Our consolidated
gross margin for the third quarter of 1999 was $54,727,000 as compared to
$46,493,000 in the third quarter of 1998, and $155,870,000
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for the first nine months of 1999 as compared to $148,718,000 for the first nine
months of 1998. Consolidated gross profit margins as a percentage of revenues
were approximately 22% and 25%, respectively, for the quarters ended September
30, 1999 and 1998, and 23% and 27%, respectively, for the nine-month periods
ended September 30, 1999 and 1998.
Space and Ground Infrastructure Systems. Gross margins from our space and ground
infrastructure systems sector were $43,143,000 (or 22% of sector revenues) and
$39,672,000 (or 24% of sector revenues) for the quarters ended September 30,
1999 and 1998, respectively. Gross margins for this sector were $124,194,000 (or
22% of sector revenues) and $124,363,000 (or 26% of sector revenues) for the
nine months ended September 30, 1999 and 1998, respectively. Gross margins
percentages by product lines were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Launch vehicles 28% 24% 24% 25%
Satellites and related space
systems 18% 27% 20% 27%
Electronics and sensor systems
and transportation management
systems 27% 30% 26% 26%
Ground systems, software, mapping
and land information services 19% 10% 20% 21%
The increase in launch vehicle gross margins in third quarter of 1999 as
compared to the same quarter last year is primarily due to increased profits on
certain existing contracts. Year-to-date margins declined slightly primarily due
to launch delays caused by late deliveries of customer satellites and payloads
and to completing work on certain less profitable contracts.
The decrease in gross margins for satellites and related space systems for both
the quarter and year-to-date periods is due to work performed on a large
commercial geosynchronous satellite contract won in late 1998, which contains a
significant amount of lower-margin, external subcontract effort, and from lower
margins for work performed on certain contracts.
Gross margins for electronics and sensor systems and transportation management
systems declined in the third quarter as compared to the same quarter last year,
although margins were the same for the year-to-date periods. The decline in
margins in the third quarter is due to reduced profitability on certain
transportation management systems contracts.
Gross margins for ground systems, software, mapping and land information
services nearly doubled in the third quarter of this year as compared to the
same quarter last year due to low gross margins in 1998 on less profitable
contracts completed during that period. Year-to-date margins declined slightly
due to lower margins from sales pursuant
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to a British Columbia government license agreement (discussed in Note 6 to the
accompanying financial statements) and an increase in the amount of lower
margin, subcontract work on several ground systems contracts.
Satellite Access Products. Gross margins percentages for satellite access
products were 25% and 33%, respectively, for the quarters ended September 30,
1999 and 1998, and 30% and 37%, respectively, for the nine months ended
September 30, 1999 and 1998. The decrease in gross margins in 1999 is primarily
due to the increase in sales of lower margin automotive navigation products to
NavSolutions as discussed in Note 6 to the accompanying financial statements.
Satellite Services. This sector had gross margins (losses) of $560,000 and
($898,000) during the third quarters of 1999 and 1998, respectively, and
$573,000 and ($3,193,000) during the first nine months of 1999 and 1998,
respectively. The improvement in 1999 gross margins is primarily attributable to
consolidation of RSI operations in 1999 as discussed above.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses represent
Orbital's self-funded product development activities, and exclude direct
customer-funded development. Research and development expenses for the quarters
ended September 30, 1999 and 1998 were $9,109,000 (or 4% of revenues) and
$14,239,000 (or 8% of revenues), respectively. Research and development expenses
were $29,227,000 (or 4% of revenues) and $34,255,000 (or 6% of revenues) for the
first three quarters of 1999 and 1998, respectively. Research and development
expenses relate primarily to the development of new or improved satellite access
products, improved launch vehicles and new satellite initiatives.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include the costs of marketing, advertising, promotional
and other selling expenses as well as the costs of the finance, legal,
administrative and general management functions of the company. Selling, general
and administrative expenses for the quarter ended September 30, 1999 and 1998
were $30,593,000 (or 12% of revenues) and $20,979,000 (or 11% of revenues),
respectively. Selling, general and administrative expenses for the nine months
ended September 30, 1999 and 1998 were $89,389,000 (or 13% of revenues) and
$77,634,000 (or 14% of revenues), respectively.
NET INVESTMENT INCOME (EXPENSE). Net investment income (expense) was
($5,722,000) and ($668,000) for the three months ended September 30, 1999 and
1998, respectively. Net investment income (expense) was ($13,410,000) and
($3,745,000) for the nine months ended September 30, 1999 and 1998,
respectively. Net investment income (expense) includes interest earnings on
short-term investments and realized gains and losses on investments, net of
interest expense. Interest expense, net of interest capitalized, was $7,036,000
and $1,669,000 for the third quarters of 1999 and 1998, respectively, and
$16,161,000 and $6,620,000 for the first three quarters of 1999 and 1998,
respectively. Capitalized interest was $761,000 and $2,507,000 for the third
quarters of 1999 and 1998,
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20
respectively, and $2,795,000 and $7,565,000 for the first nine months of 1999
and 1998, respectively.
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES. Equity in earnings (losses) of
affiliates was($37,550,000) and ($11,747,000) for the three months ended
September 30, 1999 and 1998, respectively, and was ($87,287,000) and
($43,796,000) for the nine months ended September 30, 1999 and 1998,
respectively. These amounts primarily include our proportionate share of the
current period earnings and losses of our unconsolidated affiliates (ORBCOMM,
ORBIMAGE, CCI and NavSolutions) and the elimination of our proportionate share
of profits or losses, when appropriate, on sales to these affiliates.
Additionally, the third quarter of 1999 included a one-time non-cash charge of
$19,744,000 to write off our investment in CCI as discussed in Note 6 to the
accompanying financial statements. In addition to this write-off, equity losses
increased in 1999 as compared to 1998, primarily due to an increase in ORBCOMM's
losses. ORBCOMM's losses increased due to (i) higher general and administrative
expenses relating to the rollout of global commercial services, (ii) increased
interest expense and (iii) increased system depreciation expense. ORBCOMM
stopped capitalizing interest and began depreciating its full satellite
constellation in the fourth quarter of 1998. We expect equity in losses of
affiliates in the remainder of 1999 to continue to be significantly higher than
last year, primarily due to increased losses at ORBCOMM.
NON-CONTROLLING INTERESTS IN (EARNINGS) LOSSES OF CONSOLIDATED SUBSIDIARIES.
Non-controlling interests in (earnings) losses of consolidated subsidiaries were
$1,723,000 and $2,458,000 for the three months ended September 30, 1999 and
1998, respectively, and $7,476,000 and $7,573,000 for the nine months ended
September 30, 1999 and 1998, respectively. These amounts represent the
non-controlling stockholders' proportionate share of ORBCOMM USA's and
Magellan's's current period earnings and losses.
PROVISION FOR INCOME TAXES. We recorded an income tax provision of $2,282,000
and $826,000 for the three months ended September 30, 1999 and 1998,
respectively, and $5,608,000 and $3,131,000 for the nine months ended September
30, 1999 and 1998, respectively. The provision in both periods was entirely due
to foreign taxes attributable to our Canadian operations. Our interim income tax
provision is based on an estimate of our full-year provision. Estimated
provisions recorded during interim periods may be periodically revised, if
necessary, to reflect current estimates of the full year provision.
NET INCOME (LOSS). Our consolidated net income (loss) for the third quarter of
1999 and 1998 was ($32,649,000) and ($1,491,000), respectively, and
($71,507,000) and ($12,191,000) for the first three quarters of 1999 and 1998,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our growth has required, and continues to require, substantial capital to fund
investments in affiliates, business acquisitions, expanding working capital
needs, new business initiatives, research and development and capital
expenditures. We have funded these
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requirements to date through cash generated by operations, working capital, loan
facilities, asset-based financings, joint venture arrangements and private and
public equity and debt offerings. As described below, our liquidity is currently
constrained primarily as a result of the pending restatement of our financial
statements. (See Notes 1 and 2 to the accompanying financial statements). While
we believe that cash from operations and available resources are sufficient to
fund our core operations through the early part of 2000, to satisfy our capital
requirements beyond such core operations we need to raise additional equity
and/or debt capital. We are pursuing these alternatives, but no assurance can be
given that we will be successful in completing any new equity or debt
financings. We are also examining our existing commitments to affiliates and, in
particular, are exploring alternative methods to provide additional funds to
ORBCOMM as described below. Our inability to raise additional capital may have a
material adverse effect on our business.
Cash and investments were $39,240,000 and total debt obligations were
$369,537,000 at September 30, 1999. The outstanding debt is comprised primarily
of our $100,000,000 5% convertible subordinated notes, advances under several
revolving credit facilities, secured and unsecured notes, and asset-based
financings. Cash and investments at September 30, 1999 included approximately
$18,174,000 restricted against outstanding letters of credit. Our current ratio
was 1.1 and 1.2 at September 30, 1999 and December 31, 1998, respectively. Our
debt-to-equity ratio was approximately 90% at September 30, 1999 as compared to
44% at December 31, 1998.
Our primary revolving credit facility provides for total borrowings from a
syndicate of banks of up to $200,000,000. Borrowings of $164,000,000 were
outstanding under the facility at September 30, 1999 at a weighted average
interest rate of 7.4% and are secured by accounts receivable. Borrowings of
approximately $187,000,000 are currently outstanding. The facility prohibits the
payment of cash dividends, contains certain covenants with respect to our
working capital levels, fixed charges ratio, leverage ratio and net worth, and
expires in December 2002. We also issued $45,200,000 of new debt in the first
nine months of 1999 related to various business acquisitions. (See Note 6 to the
accompanying financial statements.)
In October, we amended our $200,000,000 primary revolving credit facility in
order to receive full availability under the facility. The amendment provides
for the resetting of, and waivers to covenants with respect to net worth,
leverage and fixed charges ratios. The waivers expire on December 30, 1999.
In exchange for the amendment, we and certain of our subsidiaries are obligated
to deliver additional collateral to our syndicate of banks on or before
November 30, 1999. The additional collateral currently consists primarily of
all intellectual property, all general intangibles, all financial instruments
and all stock of certain subsidiaries, not including Magellan. As a result of
our announcement in late October that previously audited and unaudited
financial results would need to be restated, we are currently unable to borrow
additional amounts under the bank facility. We have advised our bank group
that, based on the preliminary results through September 30, 1999, we believe
we no longer comply with the minimum consolidated net worth covenant and a
permitted investment
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22
covenant that is tied to net worth, and that adjustments to such covenants will
be necessary. There can be no assurance that our syndicate of banks will agree
either to adjust the covenants or to waive the defaults. Our inability to
resolve these defaults with the banks could have a material adverse effect on
our business.
During the first nine months of 1999, we provided $41,500,000 in capital to
ORBCOMM. In addition, during this time frame, we deferred invoicing ORBCOMM for
approximately $17,800,000 of work performed under our ORBCOMM satellite and
launch procurement agreement and anticipate deferring additional invoicing
during the remainder of 1999. Approximately one-half of the deferred invoice
amounts has been, and is expected to continue to be, advanced to Orbital by
Teleglobe Inc. ORBCOMM will require additional funding and Orbital and Telegobe
are currently analyzing different capital raising and partner funding
alternatives.
In addition to our investment in ORBCOMM, for the nine months ended September
30, 1999, we invested approximately $13,800,000 in NavSolutions, $40,380,000 in
business and other asset acquisitions and $47,158,000 in capital expenditures
for various satellite, launch vehicle and other infrastructure production,
manufacturing and test equipment, leasehold improvements and office equipment.
Our operations provided net cash of approximately $53,288,000 during the first
nine months of 1999.
We are expanding our offices and satellite-related engineering, manufacturing
and operations facilities adjacent to our Dulles, Virginia headquarters in order
to consolidate certain operational facilities and office space and provide for
future growth. Construction has commenced and is expected to continue into 2001.
To finance the majority of this expansion, we have negotiated a built-to-suit
agreement with a developer for the office expansion. We are actively pursuing
third-party financing for the engineering, manufacturing and operating
facilities.
YEAR 2000 ISSUES
Orbital and its operating companies have been engaged in a comprehensive plan to
prepare for potential "Year 2000" issues with respect to various operational,
technical and financial computer-related systems. The plan was designed to
minimize risk to the company and its customers using a standard industry
five-phase approach, including awareness, assessment, renovation, validation and
implementation, which we have essentially completed.
Activities through September 30, 1999 included renovating, validating and
implementing our corrective action plan by reprogramming affected hardware and
software when appropriate and feasible, obtaining vendor-provided software
upgrades when available and completely replacing affected systems when
necessary. Actions in the last quarter of the year will include further testing
and validation and ensuring Year 2000 compliance of newly introduced system
changes.
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23
The total costs to implement our comprehensive plan, which include the
previously planned replacement of existing systems to support our overall
growth, are estimated to be less than 1% of 1998 revenues. More than 85% of
the estimated costs to implement our plan has been incurred so far with the
remaining costs expected to be incurred during the remainder of 1999. All costs,
including the costs of internal personnel, outside consultants, system
replacements and other equipment, will be expensed as incurred, except for the
purchase of long-lived assets, which will be capitalized in accordance with our
capitalization policies. We have not postponed the implementation or upgrade of
other systems as a result of focusing on the Year 2000 plan.
As part of our plan, we have been surveying our customers, suppliers and other
service providers regarding their Year 2000 readiness. At this point we believe
that any "Year 2000" issues will not negatively impact our significant customers
(including the U.S. government), key suppliers or critical service providers and
consequently, will not materially impact the company's cash flows or operating
results. We will continue to monitor the status of our customers and suppliers
through the remainder of the year.
A "reasonably likely worst case" scenario of the Year 2000 issue for us could
include isolated performance problems with engineering, financial and
administrative systems; isolated interruption of deliveries from suppliers;
product liability or warranty issues; and the temporary inability of key
customers to pay amounts due us. Contingency plans are being finalized, and will
be implemented if necessary, including the identification of alternative
suppliers for critical components. There can be no assurance that we have
identified, or will identify, all "Year 2000" affected systems, suppliers,
customers and service providers, or that our corrective action plan will be
timely and successful.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company does not have any material exposure to interest rate changes,
commodity price changes, foreign currency fluctuation, or similar market risks,
although we do enter into forward exchange contracts to hedge against specific
foreign currency fluctuations, principally with respect to the Canadian dollar
and Japanese yen. At September 30, 1999, the majority of the company's long-term
debt consisted of its $100,000,000, 5% convertible subordinated notes, due 2002.
The fair market value of these convertible securities fluctuates with the
company's stock price, and was $111,000,000 at September 30, 1999.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the first quarter of 1999, a number of class action
lawsuits were filed in the U.S. District Court for the Eastern
District of Virginia (the "District Court") against the
company, an officer and an officer/director alleging
violations of the federal securities laws, on behalf of
purchasers of the company's stock during the period from April
21, 1998 through February 16, 1999, and seeking monetary
damages. On May 21,1999, the cases were consolidated into a
single class action and, on May 28, 1999, an amended
consolidated class action complaint was filed with the
District Court. An additional class action complaint was filed
on behalf of purchasers of call options on July 1, 1999. The
District Court consolidated that case with the previous action
on July 30, 1999. The District Court also denied the company's
motion to dismiss and granted the plaintiff's motion for class
certification. In connection with the company's recent
announcement of the restatement of its financial reports for
fiscal years 1997, 1998 and the first two quarters of 1999, a
class action lawsuit was filed in the District Court on
November 10, 1999 against the company, an officer and an
officer/director alleging violations of the federal securities
laws, on behalf of purchasers of the company's stock and call
options during the period from April 22, 1997 through October
29, 1999. On November 19, 1999, the District Court granted the
plaintiffs leave to file an amended complaint consolidating
the new action with the previously consolidated pending cases.
While the amounts to be claimed may be substantial, the
company believes that the allegations are without merit and
intends to defend vigorously against such allegations.
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25
As previously reported in the company's Report on Form 10-K
for the fiscal year ended December 31, 1998, Thomas van der
Heyden filed a lawsuit in December 1998 in the Circuit Court
for Montgomery County, Maryland alleging that the company is
in actual or anticipatory breach of obligations allegedly
imposed on it in a judgment confirming an award granted in an
arbitration between van der Heyden and CTA. The plaintiff
claims that he is entitled to a sum exceeding $30 million from
the company, as successor-in-interest to CTA. The company
removed this action to United States District Court for the
District of Maryland. In response to a motion by the company,
the plaintiff agreed to voluntarily dismiss the action and
arbitrate his claims. We believe that the allegations are
without merit and intend to vigorously defend against the
allegations. In addition, under the terms of the CTA
acquisition agreement, we believe we may be entitled to
indemnification from CTA for all or a part of any damages
arising from the van der Heyden arbitration.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity
and Capital Resources" above, we have advised our bank group
that, based on the preliminary results through September 30,
1999, we believe we no longer comply with the minimum
consolidated net worth covenant and a permitted investment
covenant that is tied to net worth, and that adjustments to
such covenants will be necessary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY- HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
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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.
(i) On July 28, 1999, the company filed a Current
Report on Form 8-K, dated July 28, 1999, disclosing
its financial results for the quarter ended June 30,
1999.
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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: November 22, 1999 By: /s/ David W. Thompson
---------------------------------------------
David W. Thompson, President
and Chief Executive Officer
DATED: November 22, 1999 By: /s/ Jeffrey V. Pirone
---------------------------------------------
Jeffrey V. Pirone, Executive Vice President
and Principal Financial Officer
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EXHIBIT INDEX
The following exhibits are filed as part of this report.
Exhibit No. Description
- ----------- -----------
10.12.3 Performance Share Agreement between the Company and
David W. Thompson, James R. Thompson and Jeffrey V.
Pirone dated July 21, 1999 (transmitted herewith).
10.12.4 Performance Share Agreement between the Company and
James R. Thompson dated July 21, 1999 (transmitted
herewith).
10.12.5 Performance Share Agreement between the Company and
Jeffrey V. Pirone dated July 21, 1999 (transmitted
herewith).
11 Computation of Earnings Per Share
27 Financial Data Schedule (such schedule is furnished
for the information of the Securities and Exchange
Commission and is not to be deemed "filed" as part
of the Form 10-Q, or otherwise subject to the
liabilities of Section 18 of the Securities
Exchange Act of 1934) (transmitted herewith).