-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KXfFOq7x/FHVLF3ue5mtV1dTj9KY0yUEFavdqBcc73U+foKSQHQ+oiLijc6Hs/Ql uZOgaUT5gU4hTol4Gro2mQ== 0000950133-02-001791.txt : 20020503 0000950133-02-001791.hdr.sgml : 20020503 ACCESSION NUMBER: 0000950133-02-001791 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORBITAL SCIENCES CORP /DE/ CENTRAL INDEX KEY: 0000820736 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 061209561 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14279 FILM NUMBER: 02634123 BUSINESS ADDRESS: STREET 1: 21700 ATLANTIC BLVD CITY: DULLES STATE: VA ZIP: 20166 BUSINESS PHONE: 7034065000 MAIL ADDRESS: STREET 1: 21700 ATLANTIC BLVD STREET 2: 21700 ATLANTIC BLVD CITY: DULLES STATE: VA ZIP: 20166 FORMER COMPANY: FORMER CONFORMED NAME: ORBITAL SCIENCES CORP II DATE OF NAME CHANGE: 19900212 10-Q 1 w60250e10-q.txt FORM 10-Q 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 MARCH 31, 2002 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) 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 May 1, 2002, 43,055,842 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)
MARCH 31, DECEMBER 31, 2002 2001 --------- --------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 61,044 $ 63,215 Restricted cash and cash equivalents 10,547 10,815 Receivables, net 128,079 125,538 Inventories, net 20,931 21,627 Other current assets 4,135 3,403 --------- --------- TOTAL CURRENT ASSETS 224,736 224,598 --------- --------- PROPERTY, PLANT AND EQUIPMENT, net 89,204 88,795 GOODWILL, net 109,088 109,088 OTHER NON-CURRENT ASSETS 13,091 10,253 --------- --------- TOTAL ASSETS $ 436,119 $ 432,734 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term obligations $ 101,845 $ 103,710 Accounts payable and accrued expenses 129,845 160,386 Deferred revenues 26,761 23,886 --------- --------- TOTAL CURRENT LIABILITIES 258,451 287,982 --------- --------- LONG-TERM OBLIGATIONS, net of current portion 29,172 4,665 OTHER NON-CURRENT LIABILITIES 4,904 5,216 ALLOCATED LOSSES OF AFFILIATE IN EXCESS OF COST OF INVESTMENT 40,586 40,586 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, 42,806,127 and 41,240,870 shares outstanding, respectively 428 412 Additional paid-in capital 545,771 539,458 Accumulated deficit (443,193) (445,585) --------- --------- TOTAL STOCKHOLDERS' EQUITY 103,006 94,285 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 436,119 $ 432,734 ========= =========
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 QUARTERS ENDED MARCH 31, ------------------------------- 2002 2001 --------- --------- REVENUES $ 120,712 $ 94,889 Costs of goods sold 100,767 84,242 --------- --------- GROSS PROFIT 19,945 10,647 Research and development expenses 1,706 1,667 Selling, general and administrative expenses 13,038 11,918 Amortization of goodwill -- 1,575 --------- --------- INCOME (LOSS) FROM OPERATIONS 5,201 (4,513) Interest expense (3,025) (9,023) Other income, net 216 608 Allocated share of losses of affiliate -- (9,764) --------- --------- Income (loss) before provision for income taxes and discontinued operations 2,392 (22,692) Provision for income taxes -- -- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS 2,392 (22,692) Income from discontinued operations -- 1,125 --------- --------- NET INCOME (LOSS) $ 2,392 $ (21,567) ========= ========= BASIC EARNINGS (LOSS) PER SHARE: Income (loss) from continuing operations $ 0.06 $ (0.60) Income from discontinued operations -- 0.03 --------- --------- Net income (loss) $ 0.06 $ (0.57) ========= ========= DILUTED EARNINGS (LOSS) PER SHARE: Income (loss) from continuing operations $ 0.05 $ (0.60) Income from discontinued operations -- 0.03 --------- --------- Net income (loss) $ 0.05 $ (0.57) ========= =========
See accompanying notes to condensed consolidated financial statements. 2 ORBITAL SCIENCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
FOR THE QUARTERS ENDED MARCH 31, ------------------------- 2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) $ 2,392 $(21,567) Adjustments to reconcile net income (loss) to net cash used in operating activities: Income from discontinued operations -- (1,125) Depreciation and amortization 4,024 5,565 Allocated share of losses of affiliate -- 9,764 Changes in assets and liabilities and other (24,858) (37,177) -------- -------- Net cash used in continuing operations (18,442) (44,540) Net cash used in discontinued operations -- (10,428) -------- -------- NET CASH USED IN OPERATING ACTIVITIES (18,442) (54,968) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,144) (3,455) -------- -------- Net cash used in continuing operations (4,144) (3,455) Net cash provided by discontinued operations -- 4,931 -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (4,144) 1,476 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net short-term borrowings -- 729 Principal payments on long-term obligations (2,357) (1,606) Net proceeds from issuances of long-term obligations 22,364 30,000 Net proceeds from issuances of common stock 408 80 -------- -------- Net cash provided by continuing operations 20,415 29,203 Net cash used in discontinued operations -- (7,868) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 20,415 21,335 -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (2,171) (32,157) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 63,215 45,076 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 61,044 $ 12,919 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 ORBITAL SCIENCES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 AND 2001 (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, with the exception of the first quarter of 2002, the company reported losses from operations and net losses from continuing operations for the past several years. In addition, the company's March 31, 2002 cash balance, operating cash flow and available borrowing capacity in 2002 will be insufficient to repay the outstanding subordinated convertible notes that become due on October 1, 2002, as discussed below. The company's accumulated deficit was $443.2 million as of March 31, 2002. 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 continuation as a going concern is dependent upon its ability to restructure its outstanding subordinated notes, meet its 2002 cash flow plan and comply with the terms of its new credit facility. 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 and used a substantial amount of the proceeds from these divestitures to reduce debt. The company is also considering the sale of additional non-core assets. In addition, during 2001, the company consolidated certain business operations, reduced its workforce and implemented other cost-cutting measures. As of March 31, 2002, the company had $61.0 million of unrestricted cash and cash equivalents. On March 1, 2002, Orbital entered into a new three-year primary credit facility, which includes (i) a $25 million term loan and (ii) a $35 million revolving line of credit facility (see Note 9). The company's $100 million subordinated convertible notes become due on October 1, 2002. The company is exploring various alternatives in order to repay or restructure these notes. These alternatives include seeking to raise additional equity capital and/or debt in order to repay the notes or pursuing an exchange offer whereby the company would make an offer to the noteholders to exchange the notes for new debt and/or equity securities. There can be no assurance that the company will successfully raise enough capital in order to repay the notes, nor can there be any assurance that an exchange offer on terms acceptable to the company can be implemented and accepted by the company's existing noteholders. A default by the company on 4 the subordinated convertible notes would also result in a default on the company's new primary credit facility described above. 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 company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim condensed consolidated financial statements are read in conjunction with the audited consolidated financial statements contained in the company's Annual Report on Form 10-K for the year ended December 31, 2001. Operating results for the quarter ended March 31, 2002 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 in the United States requires management to make estimates and assumptions, including estimates of future contract costs and earnings. Such estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and earnings during the current reporting period. Management periodically assesses and evaluates the adequacy and/or deficiency of estimated liabilities recorded for various reserves, liabilities, contract risks and uncertainties. Actual results could differ from these estimates. Certain reclassifications have been made to the 2001 financial statements and footnote disclosures to conform to the 2002 financial statement presentation. All financial amounts are stated in U.S. dollars unless otherwise indicated. (3) DISCONTINUED OPERATIONS The company reclassified its condensed consolidated statements of operations and cash flows for the quarter ended March 31, 2001 to report the results of operations and cash flows of divested businesses as discontinued operations. (4) 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. Corporate and other includes certain corporate office general and administrative expenses that have not been attributed to a particular 5 segment and, for the quarter ended March 31, 2001, corporate office general and administrative expenses related to discontinued operations. 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. The following table presents operating information for the quarters ended March 31, 2002 and 2001 and identifiable assets at March 31, 2002 and December 31, 2001 by reportable segment (in thousands).
QUARTERS ENDED MARCH 31, -------------------------------- 2002 2001 ----------- ------------ LAUNCH VEHICLES AND ADVANCED PROGRAMS: Revenues $ 44,701 $ 29,841 Operating income (loss) 4,160 (464) Identifiable assets 112,624 114,403(1) Capital expenditures 1,138 468 Depreciation and amortization 1,420 1,925 SATELLITES AND RELATED SPACE SYSTEMS: Revenues $ 60,828 $ 51,670 Operating income (loss) 100 (1,831) Identifiable assets 138,065 132,047(1) Capital expenditures 2,537 1,635 Depreciation and amortization 1,189 2,134 ELECTRONIC SYSTEMS: Revenues $ 16,007 $ 14,934 Operating income (loss) 1,240 220 Identifiable assets 65,647 66,749(1) Capital expenditures 142 160 Depreciation and amortization 210 544 CORPORATE AND OTHER: Revenues $ (824) $ (1,556) Operating income (loss) (299) (2,438) Allocated share of losses of affiliate -- (9,764) Identifiable assets 119,783 119,535 (1) Capital expenditures 327 1,192 Depreciation and amortization 1,205 962 CONSOLIDATED: Revenues $ 120,712 $ 94,889 Operating income (loss) 5,201 (4,513) Allocated share of losses of affiliate -- (9,764) Identifiable assets 436,119 432,734 (1) Capital expenditures 4,144 3,455 Depreciation and amortization 4,024 5,565
- ------------------- (1)Identifiable assets as of December 31, 2001 6 (5) INVENTORIES Inventories consisted of the following (in thousands):
MARCH 31, 2002 DECEMBER 31, 2001 -------------- ----------------- Components and raw materials $ 11,820 $ 10,622 Work-in-process 10,738 12,395 Allowance for inventory obsolescence (1,627) (1,390) -------- -------- Total $ 20,931 $ 21,627 ======== ========
(6) EARNINGS PER SHARE The following table presents the shares used in computing basic and dilutive earnings per share ("EPS") for the first quarter of 2002: Weighted average of outstanding shares for basic EPS 42,170,322 Dilutive effect of outstanding stock options and warrants 1,562,978 ---------- Shares for diluted EPS 43,733,300 ==========
In periods of losses from continuing operations, such as the first quarter of 2001, fully diluted per-share losses are the same as basic per-share losses. The weighted average of outstanding shares used to compute per share amounts in the first quarter of 2001 was 37,745,045. (7) COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) and associated differences are as follows (in thousands):
QUARTERS ENDED MARCH 31, ---------------------- 2002 2001 -------- -------- COMPUTATION OF COMPREHENSIVE INCOME (LOSS): Net income (loss), as reported $ 2,392 $(21,567) Translation adjustments -- (721) Unrealized gains on investments -- (546) -------- -------- Comprehensive income (loss) $ 2,392 $(22,834) ======== ======== ACCUMULATED DIFFERENCES BETWEEN NET INCOME (LOSS), AS REPORTED, AND COMPREHENSIVE LOSS: Beginning of period $ -- $ (7,152) Translation adjustments -- (721) Unrealized gains on investments -- (546) -------- -------- End of period $ -- $ (8,419) ======== ========
(8) INVESTMENTS IN AND TRANSACTIONS WITH ORBIMAGE The company uses the equity method of accounting for its ownership interest in Orbital Imaging Corporation ("ORBIMAGE"). In the first half of 2001, the company recognized 100% of ORBIMAGE's losses, including preferred stock dividends, in allocated share of losses of affiliate in the accompanying statements of operations. During 2001, such losses exceeded the company's investment in ORBIMAGE. The company ceased recognizing ORBIMAGE losses as 7 of July 1, 2001. As of March 31, 2002 and December 31, 2001, recognized losses exceeded the company's investment in ORBIMAGE by $40.6 million and such amount is reported as "allocated losses of affiliate in excess of cost of investment" on the accompanying consolidated balance sheets. The disposition of the $40.6 million balance is dependent upon the future of ORBIMAGE as an entity, and could include, among other outcomes, a full or partial reversal of this balance from future earnings of ORBIMAGE or, in the event that ORBIMAGE were to restructure through bankruptcy or liquidate and dissolve, the remaining balance would be reversed at that time. In April 2002, ORBIMAGE filed a voluntary petition of reorganization under Chapter 11 of the U.S. Federal Bankruptcy Code in the Eastern District of Virginia and is currently negotiating a plan of reorganization with its major creditors and shareholders, including Orbital. There can be no assurance that a consensual plan of reorganization will be successfully negotiated, in which case Orbital could be subject to litigation brought by ORBIMAGE, its other shareholders and/or its creditors. Under a fixed-price procurement contract between Orbital and ORBIMAGE, Orbital has produced and launched ORBIMAGE's satellites, and is continuing to construct the OrbView-3 satellite and related launch vehicle and ground segment. As a result of ORBIMAGE's lack of liquidity and weakened financial condition, Orbital ceased recognizing revenues on the ORBIMAGE procurement contract in 2000 and commenced accounting for its contract with ORBIMAGE using the completed contract method. The liabilities associated with the ORBIMAGE contract exceeded the related assets by $12.9 million and $16.4 million as of March 31, 2002 and December 31, 2001, respectively, and are included in accounts payable and accrued expenses. (9) DEBT On March 1, 2002, Orbital entered into a three-year primary credit facility with Foothill Capital Corporation ("Foothill") as arranger and agent. The facility provides for total borrowings of up to $60 million, including (i) a $25 million term loan (the "Term Loan") and (ii) a $35 million revolver (the "Revolver"), of which up to $30 million may be available for borrowing based on Orbital's billed and unbilled receivables. Upon closing the facility, the company borrowed the entire $25 million available under the Term Loan, which provided $22.4 million in net proceeds to the company after deducting transaction fees and expenses. As of March 31, 2002, the entire Term Loan was outstanding at an interest rate of 11%. As of March 31, 2002, there were no borrowings under the Revolver although $5.5 million of the amount available for borrowing was utilized for letters of credit and foreign exchange forward contracts. Accordingly, $24.5 million of the Revolver was available for borrowing as of March 31, 2002. The borrowings under the facility are collateralized by all of the company's assets. As of March 31, 2002, the company was in compliance with the loan covenants. The facility imposes restrictions on the company's ability to refinance existing indebtedness and, accordingly, Foothill's consent is likely to be required in order to refinance the company's convertible notes as discussed below. 8 Orbital's $100 million of 5% convertible subordinated notes become due on October 1, 2002, accordingly, the entire balance is reported as a current liability. Orbital is considering alternatives with respect to the payment or refinancing of these notes (see Note 1). A default by the company on the subordinated convertible notes would also result in a default on the company's new primary credit facility described above. (10) COMMITMENTS AND CONTINGENCIES LITIGATION The company is party to certain litigation or other legal proceedings arising in the ordinary course of business. In the opinion of management, the outcome of such legal matters will not 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 financial condition and/or results of operations. CONTINGENCIES As described in Note 8 above, ORBIMAGE filed a voluntary petition of reorganization under Chapter 11 of the U.S. Federal Bankruptcy Code and is currently negotiating a plan of reorganization with its major creditors and shareholders, including Orbital. There can be no assurance that a consensual plan of reorganization will be successfully negotiated, in which case Orbital could be subject to litigation brought by ORBIMAGE, its other shareholders and/or its creditors. The outcome of any such litigation is uncertain. 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 then existing license agreement for worldwide RadarSat-2 satellite distribution rights with MacDonald Dettwiler and Associates Ltd. ("MDA") by January 2001. The then existing RadarSat-2 license 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. 9 In 2001, ORBIMAGE entered into a new license agreement with MDA for exclusive U.S. RadarSat-2 imagery distribution rights. Under the new RadarSat-2 license agreement, two $5 million installments will be due from ORBIMAGE to MDA in 2002. If ORBIMAGE is unable to make these payments to MDA, Orbital has agreed to make such payments on its behalf in exchange for receivables from ORBIMAGE in an amount equal to the payments, to the extent that receivables are available. There can be no assurance that ORBIMAGE's receivables will be collectible. (11) RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," was issued in June 2001. Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are no longer amortized, but are reviewed at least annually for impairment. A two-step impairment test is used to first identify potential goodwill impairment and then measure the amount of goodwill impairment loss, if any. SFAS No. 142 is effective for the company beginning in 2002, and is required to be applied as of January 1, 2002. Impairment losses that arise due to the initial application of SFAS No. 142 will be reported as a cumulative effect of a change in accounting principle. The first step of the goodwill impairment test, which must be completed in the first half of 2002, will identify potential goodwill impairment. The second step of the goodwill impairment test, which must be completed prior to the issuance of the financial statements for the year ending December 31, 2002, will measure the amount of goodwill impairment loss, if any. The company has not completed its analysis of the effect of adopting SFAS No. 142. In accordance with SFAS No. 142, goodwill amortization was discontinued as of January 1, 2002. The following table adjusts the reported loss from continuing operations for the quarter ended March 31, 2001 and the related basic and diluted per share amounts to exclude goodwill amortization (in thousands, except per share amounts): Reported loss from continuing operations $(22,692) Goodwill amortization 1,575 -------- Adjusted loss from continuing operations $(21,117) ======== Reported loss per share from continuing operations $ (0.60) Goodwill amortization 0.04 -------- Adjusted loss per share from continuing operations $ (0.56) ========
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS With the exception of historical information, the matters discussed below under the headings "Consolidated Results of Operations for the Quarters Ended March 31, 2002 and 2001", "Liquidity and Capital Resources" 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 for the year ended December 31, 2001, 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. Orbital designs, manufactures, operates and markets a broad range of space-related systems for commercial, civil government and military customers. Our primary products include low-orbit, geosynchronous-orbit and planetary spacecraft for communications, remote sensing and scientific missions; ground- and air-launched rockets that deliver satellites into orbit; and missile defense boosters that are used as interceptor and target vehicles for missile defense systems. We also offer space-related technical services to government agencies and develop and build satellite-based transportation management systems for public transit agencies and private vehicle fleet operators. CONSOLIDATED RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2002 AND 2001 Revenues - Our consolidated revenues were $120.7 million and $94.9 million in the first quarters of 2002 and 2001, respectively. Revenues increased in the first quarter of 2002 as compared to the same period in 2001 primarily due to substantial revenue growth in our launch vehicle business and, to a lesser extent, our satellite and related space systems business. Gross Profit - Our consolidated gross profit was $19.9 million and $10.6 million in the first quarters of 2002 and 2001, respectively. Gross profit in the first quarter of 2002 increased as compared to the same period in 2001 primarily as a result of increased revenues in our launch systems business, increased gross profit in our satellite and related space systems business, an improvement in profits on electronic systems contracts and the absence in 2002 of costs recorded in 2001 related to the termination of the X-34 program. Research and Development Expenses - Research and development expenses were $1.7 million in both the first quarter of 2002 and the first quarter of 2001. These expenses related primarily to the development of improved launch vehicles and satellites. Selling, General and Administrative Expenses - Selling, general and administrative expenses were $13.0 million and $11.9 million in the first quarters of 2002 and 2001, respectively. Selling, general and administrative expenses increased in the first quarter of 2002 as compared to the first quarter of 2001 in part as a result of an insurance reimbursement recorded in the first quarter of 2001 for certain prior period legal expenses and an increase in general and administrative expenses as a result of higher contract volume in 2002. 11 Goodwill Amortization - In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, which is effective for Orbital beginning in 2002, the amortization of goodwill was discontinued as of January 1, 2002. Goodwill amortization expense was $1.6 million in the first quarter of 2001. Interest Expense - Interest expense was $3.0 million and $9.0 million for the first quarters of 2002 and 2001, respectively. Interest expense in both the first quarter of 2002 and the first quarter of 2001 included $1.0 million related to a vendor financing agreement. Interest expense in the first quarter of 2001 included $2.6 million of fees related to an amendment of our prior credit facility and $3.4 million of higher interest expense related to the prior credit facility. Allocated Share of Losses of Affiliate - In the first quarter of 2001, we recognized $9.4 million, or 100% of ORBIMAGE's losses and preferred stock dividends, as allocated share of losses of affiliate and $0.4 million of other adjustments related to our interest in ORBIMAGE. We ceased recognizing ORBIMAGE's losses after the second quarter of 2001. Provision for Income Taxes - We did not record an income tax expense in the first quarter of 2002 due to the availability of net operating loss carry forwards. We did not record an income tax benefit in the first quarter of 2001 related to the loss for that period because such benefit could not be reasonably assured from future operating results. Discontinued Operations - We reported as discontinued operations net income of $1.1 million for the first quarter of 2001 related to our divested businesses. Net Income (Loss) - Our consolidated income (loss) from continuing operations was $2.4 million and ($22.7) million in the first quarters of 2002 and 2001, respectively. Net income (loss) was $2.4 million and ($21.6) million in the first quarters of 2002 and 2001, respectively. SEGMENT RESULTS 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 following table summarizes revenues and income (loss) from operations for our reportable business segments and corporate and other (in thousands): 12
QUARTERS ENDED MARCH 31, ------------------------- 2002 2001 --------- --------- REVENUES: Launch Vehicles and Advanced Programs $ 44,701 $ 29,841 Satellites and Related Space Systems 60,828 51,670 Electronic Systems 16,007 14,934 Corporate and Other (824) (1,556) --------- --------- TOTAL $ 120,712 $ 94,889 ========= ========= INCOME (LOSS) FROM OPERATIONS: Launch Vehicles and Advanced Programs $ 4,160 $ (464) Satellites and Related Space Systems 100 (1,831) Electronic Systems 1,240 220 Corporate and Other (299) (2,438) --------- --------- TOTAL $ 5,201 $ (4,513) ========= =========
Launch Vehicles and Advanced Programs - Revenues in this segment increased in the first quarter of 2002 as compared to the first quarter of 2001 primarily as a result of work on a major defense contract that was awarded in the first quarter of 2002. Operating income for launch vehicles and advanced programs improved in the first quarter of 2002 as compared to the first quarter of 2001 as a result of a $2.0 million increase in launch vehicle operating income and a $2.6 million increase in advanced programs operating income. Operating income for launch vehicles increased in the first quarter of 2002 as compared to the same period in 2001 as a result of the overall increase in launch vehicle revenues. Additionally, the absence of goodwill amortization in the first quarter of 2002, which was $0.4 million in the first quarter of 2001, contributed to an improvement in launch vehicle operating income. Operating income for advanced programs improved in the first quarter of 2002 as compared to the same period in 2001 primarily due to the absence in 2002 of costs incurred in the first quarter of 2001 related to the termination of the X-34 program. Satellites and Related Space Systems - Revenues from satellites and related space systems increased in the first quarter of 2002 as compared to the first quarter of 2001 largely as a result of higher revenues for our commercial geosynchronous satellite product line. The growth in this product line is attributable to a new geosynchronous satellite contract awarded late in the first quarter of 2001 in addition to an order received in the second half of 2001 to build an additional satellite for an existing customer. Operating income from satellites and related space systems increased in the first quarter of 2002 as compared to the same period in 2001 primarily as a result of the absence of goodwill amortization in the first quarter of 2002, which was $0.8 million in the first quarter of 2001, and improved profitability on commercial geosynchronous satellite contracts. Electronic Systems - Revenues from electronic systems increased in the first quarter of 2002 as compared to the same period in 2001 primarily as a result of increased volume represented by several new contracts for transportation systems. 13 Operating income from electronic systems increased in the first quarter of 2002 as compared to the same period in 2001 primarily as a result of the profit related to higher revenues in 2002 and the absence of goodwill amortization in the first quarter of 2002, which was $0.4 million in the first quarter of 2001. Corporate and Other - Corporate and other includes the elimination of intercompany revenues. The reduction in such eliminations in the first quarter of 2002 as compared to the first quarter of 2001 is due primarily to the absence of intercompany work in 2002 associated with the termination of the X-34 contract in March 2001. Corporate and other operating loss includes expenses for corporate general and administrative activities that are not allocated to the operating segments. The reduction in such expenses in the first quarter of 2002 as compared to the same period in 2001 was attributable to the absence in the first quarter of 2002 of costs related to discontinued operations in 2001. BACKLOG During the first quarter of 2002, we received $407 million in new firm orders and $553 million in new option backlog. The major contributor to our backlog was a $900 million award, of which approximately $300 million was firm, to supply missile defense-related vehicles under the Ground-based Midcourse Defense Boost Vehicle missile defense contract through the end of the decade. As a result of new orders, offset by the expiration of several contract options and revenues recognized during the quarter, our firm and total backlog increased from $582 million and $2.55 billion, respectively, at December 31, 2001, to $850 million and $2.63 billion, respectively, as of March 31, 2002. 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 includes firm backlog in addition to unexercised options, indefinite-quantity contracts and undefinitized orders and contract award selections. Backlog at March 31, 2002 does not give effect to new orders received or any terminations or cancellations since that date. LIQUIDITY AND CAPITAL RESOURCES Although we had $61.0 million of unrestricted cash and cash equivalents as of March 31, 2002, our liquidity has been and continues to be constrained. We will not have sufficient cash to repay our $100 million subordinated convertible notes that become due on October 1, 2002. Additionally, while we currently expect that our cash on hand and our primary credit facility (discussed below) will be sufficient to meet our operating and capital expenditure requirements in 2002, there can be no assurance that this will be the case. During the first quarter of 2002, we reported net cash used in operations of $18.4 million, which included a $25.0 million payment related to our vendor financing agreement from a launch services provider and a $13.0 million receipt from NASA as final settlement of the termination of the X-34 contract. Our investing activities used $4.1 million for capital expenditures for the first quarter of 2002. 14 Our financing activities provided $20.4 million during the first quarter of 2002 primarily as a result of $22.4 million in net proceeds from our new credit facility term loan discussed below. Additionally, we received $0.4 million in the first quarter of 2002 from the exercise of stock options and warrants. In August 2001, we issued warrants in connection with the settlement of a class action lawsuit. The warrants are exercisable for up to 4,631,121 shares of common stock at an exercise price of $4.82 per share, for a period of three years from the date of their issuance. During the first quarter of 2002, a total of 3,054 warrants were exercised. During the first quarter of 2002, we made $2.4 million of principal payments on capital leases and other debt. On March 1, 2002, we entered into a three-year primary credit facility with Foothill Capital Corporation ("Foothill") as arranger and agent. This facility provides for total borrowings of up to $60 million, including (i) a $25 million term loan (the "Term Loan") and (ii) a $35 million revolver (the "Revolver"), of which up to $30 million may be available for borrowing based on our billed and unbilled receivables. Upon closing the facility, we borrowed the entire $25 million available under the Term Loan, which provided $22.4 million in net proceeds to us after deducting transaction fees and expenses. As of March 31, 2002, the entire Term Loan was outstanding at an interest rate of 11%. As of March 31, 2002, there were no borrowings under the Revolver although $5.5 million of the amount available for borrowing was utilized for letters of credit and foreign exchange forward contracts. Accordingly, $24.5 million of the Revolver was available for borrowing as of March 31, 2002. The borrowings under the facility are collateralized by all of our assets. As of March 31, 2002, we were in compliance with loan covenants. The facility also imposes restrictions on our ability to refinance existing indebtedness and, accordingly, Foothill's consent is likely to be required in order to refinance our convertible notes as discussed below. Our $100 million subordinated convertible notes become due on October 1, 2002. We are considering various alternatives in order to repay or restructure these notes. These alternatives include seeking to raise additional equity and/or debt capital in order to repay the notes or pursuing an exchange offer whereby we would make an offer to the noteholders to exchange the notes for new debt and/or equity securities. We are engaged in discussions with financial advisors regarding possible transactions. There can be no assurance that we will successfully raise enough capital in order to repay the notes, nor can there be any assurance that an exchange offer on terms acceptable to us can be implemented and accepted by our existing noteholders. A default by us on the convertible notes would also result in a default on our new primary credit facility described above. Our ability to continue as a going concern is contingent upon, among other factors, a successful refinancing or restructuring of the convertible notes. As of March 31, 2002, $24.8 million of deferred vendor payments and accrued interest at a rate of 10.5% under a vendor financing arrangement with a launch services provider were recorded in accounts payable. This financing arrangement commits us to pay the entire balance prior to the launch, which is expected to occur in the second quarter of 2002. 15 In April 2002, ORBIMAGE filed a voluntary petition of reorganization under Chapter 11 of the U.S. Federal Bankruptcy Code and is currently negotiating a plan of reorganization with its major creditors and shareholders, including Orbital. There can be no assurance that a consensual plan of reorganization will be successfully negotiated, in which case Orbital could be subject to litigation brought by ORBIMAGE, its other shareholders and/or its creditors. During the second quarter of 2000, we agreed to temporarily refund $20 million to ORBIMAGE in January 2001 from amounts previously paid by ORBIMAGE under its procurement agreement with us, provided, however, that such obligation would be terminated if we were to successfully broker a renegotiation of ORBIMAGE's then existing license agreement for worldwide RadarSat-2 satellite distribution rights with MacDonald Dettwiler and Associates Ltd. ("MDA") by January 2001. The then existing RadarSat-2 agreement was terminated in February 2001 and replaced by a new agreement between MDA and ORBIMAGE for exclusive U.S. RadarSat-2 distribution rights. We believe that as a result, our obligation to temporarily refund $20 million was extinguished. ORBIMAGE has notified us of its position that, notwithstanding the renegotiation of the license agreement, the $20 million refund is now due and payable. We dispute that position. In our negotiation of a consensual plan of reorganization for ORBIMAGE, we are seeking general mutual releases of all potential claims among ORBIMAGE, its various stakeholders and Orbital. In 2001, ORBIMAGE entered into a new license agreement with MDA for exclusive U.S. RadarSat-2 imagery distribution rights. Under the new RadarSat-2 license agreement, two $5 million installments will be due from ORBIMAGE to MDA in 2002. If ORBIMAGE is unable to make these payments to MDA, we have agreed to make such payments on its behalf in exchange for receivables from ORBIMAGE in an amount equal to the payments, to the extent that receivables are available. There can be no assurance that ORBIMAGE's receivables will be collectible. Certain international contracts and many of our electronic systems contracts customarily require us to post performance bonds or letters of credit pending completion of work. We had $13.8 million of standby letters of credit outstanding at March 31, 2002. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," was issued in June 2001. Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are no longer amortized, but are reviewed at least annually for impairment. A two-step impairment test is used to first identify potential goodwill impairment and then measure the amount of goodwill impairment loss, if any. SFAS No. 142 is effective for us beginning in 2002, and is required to be applied as of January 1, 2002. Impairment losses that arise due to the initial application of SFAS No. 142 will be reported as a cumulative effect of a change in accounting principle. The first step of the goodwill impairment test, which must be completed in the first half of 2002, will identify potential goodwill impairment. The second step of the goodwill impairment test, which must be completed prior to the issuance of the financial statements for the year ending December 31, 2002, will measure the 16 amount of goodwill impairment loss, if any. We have not completed our analysis of the effect of adopting SFAS No. 142. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do 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 on specific receivables denominated in Japanese Yen. Accordingly, we are subject to off-balance sheet market risk for the possibility that future changes in market prices may make the forward exchange contracts less valuable. At March 31, 2002, the company had foreign currency forward exchange contracts to sell a total of 1.6 billion Japanese Yen for $12.9 million. The market value of these contracts was $13.6 million as of March 31, 2002. The fair market value of our $100 million 5% convertible subordinated notes that are due on October 1, 2002 was $89.1 million at March 31, 2002. We have a deferred compensation plan for senior managers and executive officers, with a total liability balance of $4.7 million at March 31, 2002. This liability is subject to fluctuation based upon the market value of underlying securities. 17 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are 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. 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. None. 18 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: May 3, 2002 By: /s/ David W. Thompson ---------------------------------- David W. Thompson Chief Executive Officer DATED: May 3, 2002 By: /s/ Garrett E. Pierce ---------------------------------- Garrett E. Pierce Executive Vice President, Chief Financial Officer 19 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 Orbital Sciences Corporation 1997 Stock Option and Incentive Plan, as amended through April 25, 2002 (transmitted herewith).*
*Management Compensatory Plan EX-10.1 3 w60250ex10-1.txt 1997 STOCK OPTION AND INCENTIVE PLAN EXHIBIT 10.1 ORBITAL SCIENCES CORPORATION 1997 STOCK OPTION AND INCENTIVE PLAN (as amended through April 25, 2002) 1. PURPOSE OF PLAN The purpose of this 1997 Stock Option and Incentive Plan (the "Plan") is to advance the interests of Orbital Sciences Corporation and its stockholders by enabling Orbital and Participating Companies (as defined below) to attract and retain highly talented employees, directors, consultants and advisers who are in a position to make significant contributions to the success of Orbital, to reward them for their contributions to the success of Orbital, and to encourage them, through stock ownership, to increase their proprietary interest in Orbital and their personal interest in its continued success and progress. The Plan provides for the award of Orbital stock options and Orbital common stock. Options granted pursuant to the Plan may be incentive or nonstatutory stock options. Options granted pursuant to the Plan shall be presumed to be nonstatutory options unless expressly designated as incentive options at the time of grant. 2. DEFINITIONS For the purposes of this Plan and related documents, the following definitions apply: "Award Agreement" means the stock option agreement, restricted stock agreement or other written agreement between Orbital and a Grantee that evidences and sets out the terms and conditions of a Grant. "Board" means the Board of Directors of the Company. "Committee" means a committee of, and designated from time to time by resolution of the Board, which shall consist of no fewer than two members of the Board, none of whom shall be an officer or other salaried employee of the Company or any affiliate, and each of whom shall qualify in all respects as a "non-employee director" within the meaning of Rule 16b-3 under the Exchange Act or any successor rule or regulation. Commencing on the Effective Date, and until such time as the Board shall determine otherwise, the Committee shall be the Human Resources and Nominating Committee of the Board. "Company" or "Orbital" means Orbital Sciences Corporation, a Delaware corporation, or any successor thereof. "Effective Date" means January 24, 1997. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means the closing sale price of Stock on the national securities exchange on which the Stock is then principally traded or, if that measure of price is not available, on a composite index of such exchanges or, if that measure of price is not available, in a national market system for securities on the date of the option grant (or such other date as is specified herein). In the event that there are no sales of Stock on any such exchange or market on date of the option grant (or such other date as is specified herein), the fair market value of Stock on the date of the grant (or such other date as is specified herein) shall be deemed to be the closing sales price on the next preceding day on which Stock was sold on any such exchange or market. In the event that the Stock is not listed on any such market or exchange on the applicable date, a reasonable valuation of the fair market value of the Stock on such date shall be made by the Board. "Grant" means an award of an option or Restricted Stock under the Plan. "Grantee" means a person who receives or holds an option or Restricted Stock under the Plan. "I.R.C." means the Internal Revenue Code of 1986, as it may be amended from time to time. "Incentive Option" means any option granted under the Plan intended to satisfy the requirements under I.R.C. Section 422(b) as an incentive stock option. "Nonstatutory Option" means any option granted under the Plan that does not qualify as an Incentive Option. "Old Option Plans" shall mean Orbital's 1990 Stock Option Plan and Orbital's 1990 Stock Option Plan for Non-Employee Directors. "Option Termination Date" is defined in Section 11(c) below. "Outside Director" means a member of the Board who is not an officer or employee of the Company. "Parent" means a parent corporation as defined in I.R.C. Section 424(e). "Participating Company" means the Company, any Parent of the Company, and any subsidiary (as defined in Rule 405 under the Securities Act of 1933, as amended) of the Company or its Parent. "Plan" means this 1997 Stock Option and Incentive Plan. "Restricted Stock" means shares of Stock awarded to a Grantee pursuant to Section 13 hereof. "Stock" means shares of the Company's authorized Common Stock, $.01 par value per share. "Subsidiary" means a subsidiary corporation as defined in I.R.C. Section 424(f). "Terminating Transaction" means any of the following events: (a) the dissolution or liquidation of the Company; (b) a reorganization, merger or consolidation of the Company with one or more other persons in which the Company is not the surviving corporation or becomes a subsidiary of another corporation other than a corporation that was a Participating Company immediately prior to such event; (c) a sale of substantially all the Company's assets to a person or entity other than a corporation that was a Participating Company immediately prior to such event; or (d) a person (or persons acting as a group or otherwise in concert) owning equity securities of the Company that represent a majority or more of the aggregate voting power of all outstanding equity securities of the Company. As used herein or elsewhere in this Plan, the word "person" shall mean an individual, corporation, partnership, association or other person or entity, or any group of two or more of the foregoing that have agreed to act together. "Total Disability" means a "total and permanent disability" as defined in I.R.C. Section 22(e)(3). 3. ADMINISTRATION OF PLAN (a) Administration by Board. The Plan shall be administered by the Board. The Board shall have authority, not inconsistent with the express provisions of the Plan, to: (i) award Grants consisting of options or Restricted Stock, or both, to such eligible persons as the Board may select; (ii) determine the timing of Grants and the number of shares of Stock subject to each Grant; (iii) determine the terms and conditions of each Grant, including whether an option is an Incentive Option or a Nonstatutory Option (consistent with the requirements of the I.R.C.) and the nature and duration of any restriction or condition (or provision for lapse thereof) relating to the vesting or forfeiture of a Grant; (iv) adopt such rules and regulations as the Board may deem necessary or appropriate to carry out the purposes of the Plan; and (v) interpret the provisions of the Plan and of any Grants made hereunder and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. All decisions, determinations, interpretations or other actions by the Board with respect to the Plan shall be final, conclusive and binding on all persons, including the Company, Participating Companies and Grantees and their respective legal representatives, their successors in interest and permitted assigns and upon all other persons claiming by, through, under or against any of them. (b) Administration and Delegation by Committee. The Board, in its sole discretion, may delegate some or all of its powers with respect to the Plan to a Committee (in which case references to the Board in this Plan shall be deemed to refer to the Committee, where appropriate) except for interpreting or making changes to Section 9 or Section 11(b) and except with respect to any grants to directors of the Company under Sections 8 and 13. The Committee, in its sole discretion, may delegate to the Chairman, the President and the Chief Executive Officer, or any of them, while any such officer is a member of the Board, authority to award Grants under the Plan. Such authority shall be on such terms and conditions, and subject to such limitations, as the Committee shall specify in its delegation of authority. Except to the extent otherwise specified by the Committee in such delegation, the delegated authority to grant awards of options and Restricted Stock shall include the power to: (i) award Grants consisting of options or Restricted Stock, or both, to such eligible persons as the authorized officer may select; (ii) determine the timing of Grants and the number of shares of Stock subject to each award; and (iii) determine the terms and conditions of each Grant, including whether an option is an Incentive Option or a Nonstatutory Option (consistent with the requirements of the I.R.C.) and the nature and duration of any restriction or condition (or provision for lapse thereof) relating to the vesting or forfeiture of a Grant. Except to the extent otherwise specified by the Committee in such delegation, the authority so delegated shall be in addition to, and not in lieu of, the authority of the Committee to make awards under the Plan. 4. SHARES SUBJECT TO THE PLAN (a) Availailability. Subject to adjustment as provided in Section 4(c) below, the maximum aggregate number of shares of Stock available for issuance under the Plan shall be 10,600,000. (b) Reavailability of Options; Stock to be Delivered. If any Stock covered by a Grant is not purchased or is forfeited, or if a Grant otherwise terminates without delivery of any Stock subject thereto, then the number of shares of Stock so terminated or forfeited shall again be available for making Grants under the Plan. In the event that Stock that was previously issued by the Company is reacquired by the Company as part of the consideration received (in accordance with Section 12(b) below) upon the subsequent exercise of an option, such reacquired Shares shall again be available for the granting of options hereunder. Stock delivered under the Plan shall be authorized but unissued shares or, at the Board 's discretion, previously issued Stock acquired by the Company and held in its treasury. No fractional shares of Stock shall be delivered under the Plan. (c) Changes in Stock. In the event of a stock dividend, stock split or combination of shares, exchange of shares, distribution payable in capital stock, recapitalization or other change in Orbital's capital stock, the number and kind of shares of Stock subject to Grants then outstanding or subsequently awarded under the Plan, the exercise price of any outstanding option, the maximum number of shares of Stock that may be delivered under the Plan, and other relevant provisions shall be appropriately adjusted by the Board, so that the proportionate interest of the Grantee immediately following such event shall, to the extent practicable, be the same as immediately before such event. 5. EFFECTIVE DATE. The Plan shall be effective as of the Effective Date, subject to approval of the Plan within one year of the Effective Date by Orbital's shareholders. Upon approval of the Plan by the stockholders of Orbital as set forth above, all Grants made under the Plan on or after the Effective Date shall be fully effective as if Orbital's stockholders had approved the Plan on the Effective Date. If the stockholders fail to approve the Plan within one year of the Effective Date, any Grants made hereunder shall be null and void and of no effect. 6. AWARD AGREEMENT Each Grant pursuant to the Plan shall be evidenced by an Award Agreement, to be executed by Orbital and by the Grantee, in such form or forms as the Board shall from time to time approve. Each Award Agreement evidencing a Grant of options shall specify whether such options are intended to be Nonstatutory Options or Incentive Options. 7. OPTION EXERCISE PRICE The option exercise price for shares of Stock to be issued under the Plan shall be the Fair Market Value of the Stock on the Grant date (or 110% of the Fair Market Value in the case of an Incentive Option granted to a ten-percent shareholder). 8. DISCRETIONARY OPTION GRANTS. Grants may be made under the Plan to any employee or director of any Participating Company as the Board shall determine and designate from time to time. Grants of options may be made under the Plan to any consultant or adviser to any Participating Company whose participation in the Plan is determined by the Board to be in the best interests of the Company and is so designated by the Board. Notwithstanding the foregoing, grants to persons who are not employees of the Company or any Parent or Subsidiary of the Company shall not be Incentive Options. 9. OUTSIDE DIRECTOR OPTION GRANTS (a) Automatic Grants. On January 2 of each year, each Outside Director shall automatically be awarded a Grant of a Nonstatutory Option to purchase 5,000 shares of Stock. (b) Grants in Lieu of Annual Fee. Each Outside Director shall be entitled to receive a Nonstatutory Option to purchase a specified number of shares of Stock in lieu of his or her annual Board retainer fee. Such specified number (i) shall be calculated by the Chief Financial Officer of the Company, using a Black-Scholes (or other generally accepted) valuation method based on the Fair Market Value of the Stock on January 15 of the applicable year (or the next business day, if January 15 falls on a weekend), assuming a ten-year option term and (ii) shall be adjusted upward by 10% to take into account the one-year vesting term. The exercise price of such option shall be equal to the Fair Market Value of Shares on January 15 (or the next business day, if January 15 falls on a weekend), which shall also be the Grant date. Any Outside Director desiring to receive an option in lieu of cash shall notify the Company of this election, which shall be irrevocable, by submitting a written notice to the Corporate Secretary in accordance to procedures as determined by the Board. 10. LIMITATIONS ON GRANTS (a) Limitation on Shares of Stock Subject to Grants. The maximum number of shares of Stock subject to Options that can be awarded under the Plan to any person eligible for a Grant under Section 8 hereof is 1,200,000 shares of Stock during the first ten (10) calendar years of the Plan, and 100,000 per year thereafter. The "per individual" limitations described in this paragraph shall be construed and applied consistent with the rules and regulations under I.R.C. Section 162(m). (b) Limitations on Incentive Options. Incentive Options may only be granted to employees of the Company or any Parent or Subsidiary of the Company. 11. VESTING AND TERMINATION OF OPTIONS (a) Vesting of Discretionary Options. Subject to the other provisions of this Section 11, Options granted pursuant to Section 8 shall vest and become exercisable at such time and in such installments as the Board shall provide in each individual Award Agreement. Notwithstanding the foregoing, the Board may, in its sole discretion, accelerate the time at which all or any part of an option may be exercised. (b) Vesting of Outside Director Options. Subject to the other provisions of this Section 11, options granted under Section 9 shall become exercisable as to 100% of the Stock covered thereby on the first anniversary of the Grant date. (c) Termination of Options. All options shall expire and terminate on such date as the Board shall determine ("Option Termination Date"), which in no event shall be later than ten (10) years from the date such option was granted. In the case of an Incentive Option granted to a ten-percent stockholder, the option shall not be exercisable after the expiration of five (5) years from the date such option was granted. Upon termination of an option or portion thereof, the Grantee shall have no further right to purchase Stock pursuant to such option. (d) Termination of Employment or Service. (i) Termination of Employment or Directorship. Upon the termination of the employment or directorship of a Grantee with a Participating Company for any reason other than for "cause" (pursuant to Section 14 below) or by reason of death or Total Disability, all options that are not exercisable shall terminate on the employment/directorship termination date. Options that are exercisable on the employment/directorship termination date shall continue to be exercisable for (A) six (6) months following the employment/directorship termination date (in the case of Nonstatutory Options), (B) three (3) months following the employment termination date (in the case of Incentive Options), or (C) the Option Termination Date, whichever occurs first. A Grantee who is an employee or director of a Participating Company shall be deemed to have incurred a termination for purposes of this Section 11 (d)(i) if such Participating Company ceases to be a Participating Company, unless such Grantee is an employee, director, consultant or adviser of any other Participating Company. (ii) Service Termination. In the case of an optionee who is not an employee or director of any Participating Company, provisions relating to the exercisability of options following termination of service shall be specified in the award. If not so specified, all options held by such optionee that are not then exercisable shall terminate upon termination of service for any reason. Unless such termination was for "cause" (pursuant to Section 14 below), options that are exercisable on the date the optionee's service as a consultant or adviser terminates shall continue to be exercisable for a period of six (6) months following the service termination date (as defined in a consulting or similar agreement or as determined by the Board) or the Option Termination Date, whichever occurs first. (e) Rights in the Event of Death. In the event that the employment and/or directorship of an optionee with a Participating Company is terminated by reason of death, all options that are not exercisable shall terminate on the date of death. Options that were exercisable on the date prior to the optionee's death may be exercised by the optionee's executor or administrator or by the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, at any time within the one-year period (or such longer period as the Board may determine prior to the expiration of such one-year period) beginning with the date of the optionee's death, but in no event beyond the Option Termination Date. (f) Rights in the Event of Total Disability. In the event that the employment and/or directorship of an optionee with a Participating Company is terminated by reason of Total Disability, all options that are not exercisable shall terminate on the employment/directorship termination date. Options that were exercisable on the employment/directorship termination date may be exercised at any time within the one-year period (or such longer period as the Board may determine prior to the expiration of such one-year period) beginning with the commencement of the optionee's Total Disability (as determined by the Board) but in no event beyond the Option Termination Date. (g) Leave of Absence. An approved leave of absence shall not constitute a termination of employment under the Plan. An approved leave of absence shall mean an absence approved pursuant to the policy of a Participating Company for military leave, sick leave, or other bona fide leave, not to exceed ninety (90) days or, if longer, as long as the employee's right to re-employment is guaranteed by contract, statute or the policy of a Participating Company. Notwithstanding the foregoing, in no event shall an approved leave of absence extend an option beyond the Option Termination Date. 12. EXERCISE OF OPTIONS; NON-TRANSFERABILITY (a) Exercise of Options. Vested options may be exercised, in whole or in part, by giving written notice of exercise to the Company, which notice shall specify the number of shares of Stock to be purchased and shall be accompanied by payment in full of the purchase price in accordance with Section 12(b) below and the full amount of any federal and state withholding and other employment taxes applicable to such person as a result of such exercise. No shares of Stock shall be issued until full payment of the purchase price and applicable withholding tax has been made. Until the issuance of stock certificates, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to optioned shares notwithstanding the exercise of the option. (b) Payment. Full payment of the purchase price for the Stock as to which an option is being exercised shall be made (i) in United States dollars in cash or by check in a form satisfactory to the Company, (ii) at the Grantee's election, and subject to discretion of the Board, through delivery of Shares having a Fair Market Value on the day immediately preceding the day notice of exercise is received by the Company equal to the cash exercise price of the option, (iii) in accordance with a so-called cashless exercise plan established with a securities brokerage firm, or (iv) by any combination of the permissible forms of payment. (c) Non-Transferability of Options. Except as the Board may otherwise determine, no option may be transferred other than by will or by the laws of descent and distribution, and during an optionee's lifetime an option may be exercised only by the Grantee. 13. RESTRICTED STOCK (a) Grant of Restricted Stock. The Board may from time to time grant Restricted Stock to certain employees and directors of a Participating Company, subject to such restrictions, conditions and other terms, if any, as the Board may determine. (b) Restrictions. At the time a Grant of Restricted Stock is made, the Board may establish a period of time (the "Restricted Period") during which a Grantee's right to all or a portion of such Restricted Stock shall vest over time, subject to certain terms and conditions. Each Grant of Restricted Stock may be subject to a different Restricted Period. The Board may, in its sole discretion, at the time a Grant of Restricted Stock is made, prescribe forfeiture or vesting conditions in addition to or other than the expiration of the Restricted Period. The Board also may, in its sole discretion, shorten or terminate the Restricted Period or waive any other restrictions applicable to all or a portion of the Restricted Stock. Restricted Stock may not be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restricted Period or prior to the satisfaction of any other restrictions prescribed by the Board with respect to such Restricted Stock. (c) Restricted Stock Certificates. Orbital shall issue, in the name of each Grantee to whom Restricted Stock has been granted, stock certificates representing the total number of shares of Restricted Stock granted to the Grantee. The Secretary of Orbital shall hold such certificates for the Grantee's benefit until such time as the restrictions lapse or the Restricted Stock is forfeited to Orbital. (d) Rights of Holders of Restricted Stock. Unless the Board otherwise provides in an Award Agreement, holders of Restricted Stock shall have the right to vote such Stock and the right to receive any dividends declared or paid with respect to such Stock. The Board may provide that any dividends paid on Restricted Stock must be reinvested in Stock, which may or may not be subject to the same vesting conditions and restrictions applicable to such Restricted Stock. All distributions, if any, received by a Grantee with respect to Restricted Stock as a result of any stock split, stock dividend, combination of shares, or other similar transaction shall be subject to the restrictions applicable to the original Grant. (e) Termination of Employment. Upon termination of the employment/directorship of a Grantee with Orbital, other than by reason of death or Total Disability, any Restricted Stock held by such Grantee that has not vested, or with respect to which all applicable restrictions and conditions have not lapsed, shall immediately be deemed forfeited, unless the Board, in its discretion, determines otherwise. Upon forfeiture of Restricted Stock, the Grantee shall have no further rights with respect to such Grant, including but not limited to any right to vote Restricted Stock or any right to receive dividends with respect to shares of Restricted Stock. (f) Rights in the Event of Total Disability or Death. The rights of a Grantee with respect to Restricted Stock in the event such Grantee terminates employment/directorship with Orbital by reason of Total Disability or death shall be determined by the Board at the time of Grant. (g) Delivery of Stock and Payment Therefor. Upon the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Board, the restrictions applicable to shares of Restricted Stock shall lapse, and, upon payment by the Grantee to Orbital, in cash or by check, of the aggregate par value of the shares of Stock represented by such Restricted Stock, a stock certificate for such shares shall be delivered, free of all such restrictions, to the Grantee or the Grantee's beneficiary or estate, as the case may be. 14. FORFEITURE CONDITIONS. The Board may provide in an Award Agreement for conditions of forfeiture for "cause" of any Grantee's rights with respect to a Grant. "Cause" shall include engaging in an activity that is detrimental to the Company including, without limitation, criminal activity, failure to carry out the duties assigned to the Grantee as a result of incompetence or willful neglect, conduct casting such discredit on the Company as in the opinion of the Board justifies termination or forfeiture of the Grant, or such other reasons, including the existence of a conflict of interest, as the Board may determine. "Cause" is not limited to events that have occurred prior to the Grantee's termination of service, nor is it necessary that the Board's finding of "cause" occur prior to such termination. If the Board determines, subsequent to a Grantee's termination of service but prior to the exercise of any rights under a Grant, that either prior or subsequent to the Grantee's termination the Grantee engaged in conduct that would constitute "cause," then the rights with respect to a Grant shall be forfeited. 15. COMPLIANCE WITH SECURITIES LAWS. (a) The delivery of Stock upon the exercise of an option or lapse of a Restricted Period shall be subject to compliance with (i) applicable federal and state laws and regulations, (ii) all applicable listing requirements of any national securities exchange or national market system on which the Stock is then listed or quoted, and (iii) Company counsel's approval of all other legal matters in connection with the issuance and delivery of such Stock. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the option or receipt of Restricted Stock, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. (b) It is the intent of the Company that Grants pursuant to the Plan and the exercise of options granted hereunder will qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any provision of the Plan or action by the Board does not comply with the requirements of Rule 16b-3 in respect of an employee or director subject to Section 16(b) of the Exchange Act, it shall be deemed inoperative to the extent permitted by law and deemed advisable by the Board, and shall not affect the validity of the Plan. In the event that Rule 16b-3 is revised or replaced, the Board may exercise its discretion to modify this Plan in any respect necessary to satisfy the requirements of, or take advantage of any features of the revised exemption or its replacement. 16. MERGERS, etc. (a) Effect on Options and Plan. Except as otherwise provided herein, all options outstanding under the Plan shall accelerate and become immediately exercisable for a period of fifteen days (or such longer or shorter period as the Board may prescribe) immediately prior to the scheduled consummation of a Terminating Transaction, which exercise shall be (i) conditioned upon the consummation of the Terminating Transaction and (ii) effective only immediately before the consummation of such Terminating Transaction. Upon consummation of any such event, the Plan and all outstanding but unexercised options shall terminate. Notwithstanding the foregoing, to the extent provision is made in writing in connection with such Terminating Transaction, for the continuation of the Plan and the assumption of options under the Plan theretofore granted, or for the substitution for such options of new options covering the stock of a successor company, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares or units and exercise prices, then the Plan and options theretofore granted shall continue in the manner and under the terms so provided, and the acceleration and termination provisions set forth in the first two sentences of this Section 16(a) shall be of no effect. The Company shall send written notice of a Terminating Transaction to all individuals who hold options not later than the time at which the Company gives notice thereof to its stockholders. b. Effect on Restricted Stock. All outstanding shares of Restricted Stock shall be deemed to have vested, and all restrictions and conditions applicable to such shares of Restricted Stock shall be deemed to have lapsed immediately prior to the occurrence of a Terminating Transaction. 17. TAXES The Board shall make such provisions and take such steps as it deems necessary or appropriate for the withholding of any federal, state, local and other tax required by law to be withheld with respect to the grant or exercise of options, or the vesting of or other lapse of restrictions applicable to Restricted Stock, or with respect to the disposition of Stock acquired pursuant to the Plan, including, but without limitation, the deduction of the amount of any such withholding tax from any compensation or other amounts payable to a Grantee, or requiring a Grantee (or the optionee's beneficiary or legal representative), as a condition of a Grant or exercise of an option or receipt of Restricted Stock, to pay to the appropriate Participating Company any amount required to be withheld, or to execute such other documents as the Board deems necessary or desirable in connection with the satisfaction of any applicable withholding obligation. 18. EMPLOYMENT RIGHTS Neither the adoption of the Plan nor the making of any Grants shall confer upon any Grantee any right to continue as an employee or director of, or consultant or adviser to, any Participating Company or affect in any way the right of any Participating Company to terminate them at any time. Except as specifically provided by the Board in any particular case, the loss of existing or potential profit in Grants under this Plan shall not constitute an element of damages in the event of termination of the relationship of a Grantee even if the termination is in violation of an obligation of the Company to the Grantee by contract or otherwise. 19. AMENDMENT OR TERMINATION OF PLAN (a) Neither adoption of the Plan nor the making of any Grants shall affect the Company's right to make awards to any person that is not subject to the Plan, to issue to such persons Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued. (b) The Board may at any time discontinue granting awards under the Plan. With the consent of the Grantee, the Board may at any time cancel an existing Grant in whole or in part and make any other Grant for such number of shares as the Board specifies. The Board may at any time, prospectively or retroactively, amend the Plan or any outstanding Grant for the purpose of satisfying the requirements of I.R.C. Section 422 or of any changes in applicable laws or regulations or for any other purpose that may at the time be permitted by law, or may at any time terminate the Plan as to further grants of awards, but no such amendment shall materially adversely affect the rights of any Grantee (without the Grantee's consent) under any outstanding Grant. (c) In the Board's discretion, the Board may, with an optionee's consent, substitute Nonstatutory Options for outstanding Incentive Options, and any such substitution shall not constitute a new option grant for the purposes of the Plan, and shall not require a revaluation of the option exercise price for the substituted option. Any such substitution may be implemented by an amendment to the applicable option agreement or in such other manner as the Board in its discretion may determine. 20. GENERAL PROVISIONS (a) Titles and Headings. Titles and headings of sections of the Plan are for convenience of reference only and shall not affect the construction of any provision of the Plan. (b) Governing Law. The Plan shall be governed by, interpreted under and construed and enforced in accordance with the internal laws, and not the laws pertaining to conflicts or choice of laws, of the State of Delaware, applicable to agreements made and to be performed wholly within the State of Delaware. (c) Severability. If any provision of the Plan or any Award Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction. * * * The Plan was duly adopted by the Board of Directors of the Company as of January 24, 1997. /s/ Leslie C. Seeman ------------------------------------- Leslie C. Seeman Senior Vice President, General Counsel and Secretary of the Company The Plan was duly approved by the stockholders of the Company on April 24, 1997. /s/ Leslie C. Seeman ------------------------------------- Leslie C. Seeman Senior Vice President, General Counsel and Secretary of the Company -----END PRIVACY-ENHANCED MESSAGE-----