-----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, Cwj6cQyBPzP3rvTa9MJ8Hz5Aq7oGJqPBrS6Ay0BwA10BzqEWwJscB5zeaw+5jYUt g5qIcwUYzeeqiTyImpSz0g== 0000950133-99-001149.txt : 19990412 0000950133-99-001149.hdr.sgml : 19990412 ACCESSION NUMBER: 0000950133-99-001149 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORBITAL SCIENCES CORP /DE/ CENTRAL INDEX KEY: 0000820736 STANDARD INDUSTRIAL CLASSIFICATION: 3812 IRS NUMBER: 061209561 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14279 FILM NUMBER: 99583772 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-K 1 FORM 10-K 1 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ ANNUAL REPORT ON FORM 10-K For the fiscal year ended December 31, 1998 COMMISSION FILE NUMBER 0-18287 ------------------------ ORBITAL SCIENCES CORPORATION (Exact name of registrant as specified in charter) DELAWARE 06-1209561 (State of Incorporation of Registrant) (I.R.S. Employer I.D. No.)
21700 ATLANTIC BOULEVARD DULLES, VIRGINIA 20166 (Address of principal executive offices) (703) 406-5000 (Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.01 (LISTED ON THE NEW YORK STOCK EXCHANGE) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing sales price as reported on the New York Stock Exchange on March 22, 1999 was approximately $767,918,943. As of March 22, 1999, 37,182,819 shares of the registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement dated March 29, 1999 are incorporated by reference in Part III of this Report. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
ITEM PAGE ---- ---- PART I ITEM 1. Business.................................................... 1 ITEM 2. Properties.................................................. 11 ITEM 3. Legal Proceedings........................................... 12 ITEM 4. Submission of Matters to a Vote of Security Holders......... 12 ITEM 4A. Executive Officers of the Registrant........................ 12 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 14 ITEM 6. Selected Financial Data..................................... 15 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 16 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 23 ITEM 8. Financial Statements and Supplementary Data................. 24 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 53 PART III ITEM 10. Directors and Executive Officers of the Registrant.......... 53 ITEM 11. Executive Compensation...................................... 53 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................................ 53 ITEM 13. Certain Relationships and Related Transactions.............. 53 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 53
- - ------------------------ Pegasus(R) is a registered trademark and service mark of Orbital Sciences Corporation; Taurus(R) is a registered trademark of Orbital Sciences Corporation; Orbital(TM) is a trademark of Orbital Sciences Corporation; OrbView(R) and ORBIMAGE(R) are registered service marks of Orbital Imaging Corporation; and ORBCOMM(R) is a registered service mark of ORBCOMM Global L.P. 3 PART I ITEM 1. BUSINESS BACKGROUND Orbital Sciences Corporation, together with its subsidiaries, is a leading space and information systems company that designs, manufactures, operates and markets a broad range of space-related products and services. Our products and services are grouped into three general 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 satellite ground systems and software. Satellite access products include satellite-based navigation, positioning and communications products and transportation management systems. Satellite services include satellite-based two-way mobile data communications services, satellite-based remote imaging services, and new initiatives relating to satellite-based automotive information services and satellite-based voice communications services. Orbital was incorporated in Delaware in 1987 to consolidate the assets, liabilities and operations of Space Systems Corporation and Orbital Research Partners, L.P. Since inception, it has been our strategy to develop and grow a core integrated business of space systems technologies and products, starting with the design and manufacturing of small satellites and lightweight rockets and other inexpensive space systems intended to capitalize on the commercial development of space. A major part of this strategy has centered on market-expanding innovations that we have pioneered. For example, in 1990, we introduced the world's first privately-developed space launch vehicle; in 1992, we operated the first commercial orbit transfer vehicle; in 1995, we launched the first operational low-orbit commercial communications satellites; in 1997, we deployed the first small geosynchronous television broadcast satellite and also launched the first privately-owned remote imaging satellite; and in 1998, we shipped the first hand-held satellite communications device. In the last ten years, we have also expanded our space-based product lines through a number of acquisitions and strategic investments. For example, in 1994 and 1997, we acquired Fairchild Space and Defense Corporation and the space systems and communications service businesses of CTA Incorporated ("CTA"), respectively, broadening our satellite system and subsystem development and production capabilities and expanding our product lines by adding various sophisticated electronics products and transportation management systems. We further enhanced our transportation management systems product line with the 1998 acquisition of Raytheon Company's transportation management systems business. Through our 1994 acquisition of Magellan Corporation ("Magellan"), we expanded our technology base and product lines into the consumer markets for hand-held receivers for Global Positioning System, or GPS, satellite-based navigation and positioning. We expanded our GPS business with the 1997 acquisition of the satellite-aided automotive navigation product line from Rockwell International Corporation and the 1997 merger of Magellan with Ashtech Inc. ("Ashtech"), a developer and supplier of high-precision GPS products, components and technologies. In 1995, we acquired MacDonald, Dettwiler and Associates Ltd. ("MDA"), a leading supplier of commercial satellite imaging ground stations and related information processing software based in Vancouver, British Columbia. In 1990, we developed the "ORBCOMM" concept and in 1993, our subsidiary, Orbital Communications Corporation ("OCC"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), an affiliate of Teleglobe Inc., formed ORBCOMM Global, L.P. ("ORBCOMM") for the design, development, construction, integration, testing and operation of a low-Earth orbit satellite communications system known as the ORBCOMM System. OCC and Teleglobe Mobile are each 50% general partners in ORBCOMM. Additionally, OCC is a 2% partner in ORBCOMM USA, L.P. ("ORBCOMM USA") and Teleglobe Mobile is a 2% general partner in ORBCOMM International Partners, L.P. ("ORBCOMM International"), two partnerships formed to market the ORBCOMM System. ORBCOMM is a 98% general partner in each of the two marketing partnerships. We control and, therefore, consolidate ORBCOMM USA's results of operations. We do not control ORBCOMM's or ORBCOMM International's operational or financial affairs and therefore do not consolidate their results of operations. 1 4 In 1992, we established a subsidiary, Orbital Imaging Corporation ("ORBIMAGE"), to develop and operate commercial remote imaging satellites and to market the products and services derived from such satellites. ORBIMAGE raised equity in private placements of preferred stock in 1997 and 1998, and as a result we own approximately 60% of ORBIMAGE. Based on certain rights granted to the preferred equity investors, we do not control ORBIMAGE's operational or financial affairs and therefore do not consolidate its results of operations. We have also begun to pursue additional satellite-based services opportunities. In early 1999, we formed a subsidiary, Orbital Navigation Corporation ("ORBNAV"), to develop, operate and market, directly or through joint ventures, satellite-aided automotive guidance and related value-added information services for the rental car, private passenger car, commercial delivery vehicle and emergency vehicle markets. ORBNAV plans to leverage Magellan's satellite access products, ORBCOMM's satellite data network and other technologies to pursue growth opportunities in these markets. ORBNAV's current focus is on developing the rental car market through a joint venture with The Hertz Corporation. In 1998, we also made a strategic investment in CCI International N.V. ("CCI"), a company formed to offer satellite-based voice communications services. We own approximately 40% of the equity interests in CCI in the form of nonvoting preferred stock with various protective provisions, and we have entered into a contract for the construction and launch of CCI's satellites. We do not control CCI's operational or financial affairs and therefore do not consolidate its results of operations. DESCRIPTION OF ORBITAL'S PRODUCTS AND SERVICES Our products and services are grouped into three general business sectors: space and ground infrastructure systems, satellite access products and satellite services. Our overall business is not seasonal to any significant extent. SPACE AND GROUND INFRASTRUCTURE SYSTEMS Our space and ground infrastructure systems sector currently includes launch vehicles, satellites and related space systems, electronics and sensor systems, and satellite ground systems and software products, and is described more fully below. Launch Vehicles. We developed and produce the Pegasus and Taurus space launch vehicles that place small satellites into Earth orbit. Our Pegasus launch vehicle is launched from beneath our L-1011 carrier aircraft to deploy satellites weighing up to 1,000 pounds into low-Earth orbit. The Taurus launch vehicle is a ground-launched derivative of the Pegasus vehicle that can carry payloads weighing up to 3,000 pounds to low-Earth orbit and payloads weighing up to 800 pounds to geosynchronous orbit. The Pegasus has performed a total of 26 missions, including six successful launches in 1998 and one successful mission so far in 1999. The Taurus has performed a total of three launches, including two successful missions in 1998. Customers for Pegasus launch services currently include the National Aeronautics and Space Administration ("NASA"), the U.S. Air Force, the Defense Advanced Research Projects Agency ("DARPA"), ORBCOMM and ORBIMAGE. Customers for Taurus missions currently include the U.S. Air Force, South Korea's space agency and ORBIMAGE. Under a research and development contract with NASA, we are designing and constructing three X-34 unmanned reusable launch vehicles that will be launched from our L-1011 carrier aircraft. The X-34 will test and demonstrate advanced reusable launch system technologies and materials as part of NASA's program that is focused on the development of next-generation, lower cost launch vehicles. We have completed the detailed design of the X-34, have constructed and shipped one vehicle to the launch test site and are constructing two other vehicles. The first test flight of the X-34 is currently scheduled for later in 1999. NASA has contracted with us to conduct up to 27 test flights using the X-34. We also produce suborbital launch vehicles, which place payloads into a variety of high-altitude trajectories but, unlike space launch vehicles, do not place payloads into orbit around the Earth. Our suborbital launch products include suborbital vehicles and their principal subsystems, payloads carried by such vehicles, and related launch support installations and systems used in their assembly and operation. Customers typically use our suborbital launch vehicles to launch scientific and other payloads and for defense-related 2 5 applications such as target signature and interceptor experiments. Our primary customers for suborbital launch vehicles include various branches of the U.S. military. We conducted three successful suborbital launches in 1998 and, since 1982, we (including a predecessor company) have performed 102 suborbital missions. Orbital's space launch technology is also the basis for several other space and suborbital programs. We are currently performing work under a suborbital contract with the U.S. Air Force to combine surplus government ballistic missile equipment with Pegasus and Taurus launch vehicle technology to conduct up to 24 space and suborbital launch missions over the next several years. In addition, under NASA's Hyper-X project, we are building several Pegasus-derivative rockets to explore technologies that could be applied to hypersonic aircraft of the future. Satellites and Related Space Systems. We design and manufacture small and medium-class satellites to be used in low-Earth orbit, or LEO, and in geosynchronous orbit, or GEO. In addition, we are in the process of designing small and medium-class satellites to be used in medium-Earth orbit, or MEO. Our satellites are used by various commercial and governmental customers for a wide range of communications, broadcasting, remote imaging, scientific and military missions. Since 1982, we (including two predecessor companies) have built and delivered 74 satellites. Twenty Orbital-built satellites were deployed during 1998, including 18 ORBCOMM communications satellites. Customers for our LEO and MEO satellites include NASA, the U.S. Air Force, DARPA, the Canadian Space Agency, ORBCOMM, ORBIMAGE and CCI, while Japan's Broadcast Satellite Systems Corporation has ordered two GEO direct-to-home broadcast satellites from Orbital. We design and manufacture various other space systems, including satellite command and data handling, attitude control and structural subsystems for a variety of government and commercial customers. In addition, we provide a broad range of spacecraft design and engineering services as well as specialized space-related analytical engineering services for U.S. government agencies, including NASA, the Jet Propulsion Laboratory, the Department of Defense ("DoD") and the Department of Energy. Electronics and Sensor Systems. Orbital develops and manufactures defense electronics products, including advanced avionics and data management systems for aircraft flight operations and ground support applications. These systems collect, process and store mission-critical data for, among other things, mission planning and flight operations, and manage on-board equipment for aircraft and similar platforms. The primary customers for data management systems are the U.S. Navy, the U.S. Air Force, and various DoD prime contractors and foreign governments. We are the leading supplier of certain avionics systems and products, including mission data equipment for the U.S. Navy and data transfer equipment and digital terrain systems for the U.S. Air Force and foreign military customers. In addition, we provide stores management systems, including weapons arming and firing functions for use on tactical aircraft and helicopters. The avionics systems and products are deployed on a number of platforms, including the F-4, F-14, F-16, F-18 and F-22 aircraft and the LAMPS helicopter. The U.S. Army is also a customer for land combat vehicle-based systems that are derived from Orbital's avionics systems. Orbital also produces satellite-borne scientific sensors and instruments, such as atmospheric ozone monitoring instruments and environmental sensors. For example, our instruments have successfully operated in space, measuring ozone concentrations around the world. We also developed and produced an atmospheric monitoring system for use on the International Space Station. We provide sensors performing similar functions for U.S. Navy nuclear submarines, and we are developing sensors for the DoD for use in the detection of chemical or biological weapons. In addition, Orbital manufactures and markets sensors that analyze gas properties for commercial customers in the chemical, biotechnology, pharmaceutical and steel industries. Satellite Ground Systems and Software. Through our MDA subsidiary, we are the leading supplier of turn-key commercial imaging satellite ground stations and a provider of advanced image processing software used in such stations. In recent years, our ground systems have also expanded to include software-intensive products designed for air and sea navigation systems, along with a variety of military applications including naval mine-hunting operations, artillery command and control, radar deception and logistics support. 3 6 Of approximately 45 major non-military imaging satellite ground stations around the world, Orbital has been the prime contractor or a major supplier in the construction of 35 ground stations in 19 countries. These ground stations are designed to receive and process data from the eight major civil and commercial Earth observation satellites currently in operation. Orbital also develops and markets software that generates and processes imagery from satellites and airborne sensors. Customers for our ground stations and Earth information systems and system upgrades include the European and Canadian space agencies as well as ORBIMAGE, EarthWatch, Incorporated and various other commercial and government customers in the United States, Brazil, China, Europe and Japan. We also produce automated aeronautical information and air traffic control systems. Faster and less expensive to operate than traditional manual systems, automated aeronautical information systems provide pilots and other users with aeronautical and meteorological information on a timely basis. Customers for our aeronautical systems products include the military and civil aviation authorities in various countries such as Australia, Belgium, Canada, Malaysia, Norway and Switzerland. We are building on our expertise in satellite image processing software by expanding into land-oriented information systems. In 1998, the British Columbia government selected MDA to operate and enhance the province's electronic information access system, which provides the public with electronic access to a series of land-related government databases, such as land titles, tax records and property assessment information. SATELLITE ACCESS PRODUCTS Our satellite access products include the satellite-based navigation, positioning and communications products of our Magellan subsidiary, as well as transportation management systems, as described more fully below. GPS Navigation, Positioning and Communications Products. Magellan's product line consists of inexpensive satellite-based navigation and positioning products for consumer markets as well as GPS products that are used for professional and other high-precision industrial applications. Its consumer products are marketed to recreational marine and general aviation customers and outdoor recreation users such as campers, hunters and hikers. In 1998, Magellan introduced the GSC 100, a hand-held satellite communications device that combines GPS and communications functions. The GSC 100 represents the first generation of Magellan products that will be used in conjunction with the ORBCOMM System described below. Professional and industrial applications include using GPS for precision surveying, guiding aircraft under low-visibility conditions, monitoring movements of the Earth's surface for researchers, and managing natural resources. In addition, some of Magellan's higher-performance products incorporate technology that provides access to both the U.S. GPS satellites and GLONASS, the comparable Russian satellite navigation system, which improves performance and accuracy. Magellan has also entered the market for GPS-based car navigation products with its automotive navigation system, which uses GPS information to provide electronic map guidance to individual motorists. Magellan's automotive navigation system is currently in use in approximately 6,000 Hertz rental cars. Magellan recently introduced its second-generation vehicle navigation system, which has greater functionality and improved features to address broader private passenger vehicle and rental car markets. As one of the first opportunities we are pursuing through our ORBNAV initiative, we have agreed with Hertz to enter into an exclusive joint venture, subject to negotiation of final documentation, whereby Hertz will offer Magellan's new automotive navigation systems in 50,000 of its rental cars in the U.S., Canada and Europe. Magellan also pursues technology license agreements whereby Magellan licenses its GPS and GLONASS technology to manufacturers of GPS consumer and industrial products. Magellan has entered into such license arrangements with a Mitsubishi subsidiary, Philips Semiconductor and Matsushita Electric Works. In the first quarter of 1999, Magellan and Japan-based Topcon Corporation entered into a preliminary agreement to form a joint venture to develop and sell GPS-based positioning products for the surveying, industrial geographic information systems, mapping and machine control markets. Under the terms of the 4 7 agreement, which is subject to negotiation of final documentation, Magellan will transfer certain assets and technology in exchange for cash, royalties, rights in technology and a 30% ownership interest. Topcon also will contribute assets to the venture in exchange for a 70% ownership interest. In connection with the 1997 merger of Ashtech with Magellan, Orbital entered into a stockholders' agreement with certain substantial stockholders of Ashtech. The Ashtech stockholders were granted certain rights with respect to Magellan, including, among others, the right to designate two members of Magellan's seven-member board of directors and to demand registration of their Magellan common stock after the earlier of 180 days after an initial public offering of the common stock of Magellan or December 31, 1999. Orbital and former Ashtech stockholders own approximately 66% and 34%, respectively, of Magellan. Transportation Management Systems. Orbital also produces satellite-related vehicle location and fleet management systems that have been used primarily for metropolitan mass transit operators. Our ORBTRAC transportation management systems combine GPS vehicle tracking technology with local area wireless terrestrial communications to help manage public bus and light rail systems, provide for voice and data communications and transmit precise GPS-based location information in emergency situations. The 1998 acquisition of Raytheon Company's transportation management systems business expanded our satellite-based vehicle location products to include fleet management software for utilities and other companies. Customers for our transportation management systems include the metropolitan mass transit authorities in Chicago, New York, Oakland, Philadelphia, Houston and Detroit, as well as a number of smaller state and municipal transit systems and vehicle fleets. SATELLITE SERVICES In Orbital's satellite services sector, our ORBCOMM and ORBIMAGE affiliates are developing and providing satellite-based services to address markets for global two-way data communications and digital imagery of the Earth's surface. We have also begun to pursue additional satellite-provided services opportunities in the markets for automotive information services through ORBNAV. As a result of our equity investment in CCI, our satellite services sector also includes the development of a satellite-based voice communications system. ORBCOMM Communications Services. The ORBCOMM System consists of global space and ground segments designed to provide continuous low-cost monitoring, tracking and messaging communications coverage over most of the Earth's surface. ORBCOMM is currently providing commercial service primarily in the monitoring and tracking applications. The system is intended to be a reliable, cost-effective method of providing fixed asset monitoring, mobile asset tracking and data messaging services to a broad range of industrial and commercial customers around the world, enabling customers to collect data from multiple locations, track assets on a global basis and transmit and receive messages outside the coverage area of terrestrial services. It is designed to permit subscribers to use inexpensive communicators to send and receive short messages, high-priority alerts and other information, such as the location and condition of automobiles, trucks, railcars, industrial equipment, shipping vessels and other remote or mobile assets. We expect that the ability to send and receive data and messages without the geographic limitations of existing terrestrial communications systems will stimulate the growth of new markets for satellite-based monitoring, tracking and messaging communications and will be used to supplement terrestrial-based communications systems by providing relatively low-cost wide area geographic coverage in areas those systems are unable to reach. The ORBCOMM System initial network consists of a constellation of 28 small LEO satellites, with a satellite control center that operates and positions the satellites, fixed and mobile communicators used by subscribers to transmit messages to and receive messages from the satellites, and regional ground gateway systems that transmit and control the flow of data and message communications and other information for the system. A gateway generally consists of a satellite tracking station that sends signals to and receives signals from the satellites and a message switching system that processes the message traffic. There are currently four operational U.S. gateway stations located in New York, Washington, Arizona and Georgia. Gateways are also planned to be owned and operated by ORBCOMM licensees in strategic locations around the world. These licensees are responsible for obtaining the necessary regulatory approvals for 5 8 operating the ORBCOMM System in their regions. Gateways located in Italy, Brazil, and Japan, providing coverage for significant portions of Europe and South America and all of Japan, have successfully completed acceptance testing. ORBCOMM's international licensees in Italy and Brazil commenced commercial service for their respective regions in early 1999, and Japan is expected to commence commercial service shortly. ORBCOMM has agreements with several manufacturers for the development and manufacture of hand-held communicators used by individuals and various types of industrial communicators that monitor fixed and mobile assets. Subscriber communicator manufacturers include Panasonic, Magellan and Scientific Atlanta. Orbital is completing construction of ORBCOMM's equatorial plane of seven satellites, scheduled for launch on a Pegasus vehicle later in 1999. Orbital and ORBCOMM have also entered into a procurement agreement valued at up to $72 million, under which Orbital has agreed to build and launch an additional seven satellites on a fixed-price basis, with options to build and launch up to an additional 22 satellites. Orbital also provides ORBCOMM with certain administrative services, generally on a cost-reimbursable basis. Orbital developed the "ORBCOMM" concept in 1990, and in 1993 formed the ORBCOMM partnership with Teleglobe Mobile for the design, development, construction, integration, testing and operation of the ORBCOMM System. OCC and Teleglobe Mobile each hold a 50% interest in ORBCOMM and have invested approximately $110,000,000 and $118,000,000, respectively, through December 31, 1998. OCC and Teleglobe Mobile also formed two marketing partnerships, ORBCOMM USA and ORBCOMM International, each with the exclusive right to market the ORBCOMM System in the U.S. and internationally, respectively. Pursuant to the terms of the partnership agreements, OCC indirectly holds a 51% interest in ORBCOMM USA, with the result that OCC acting alone can generally control the operational and financial affairs of ORBCOMM USA, and Teleglobe Mobile indirectly holds a 51% interest in ORBCOMM International, with the result that Teleglobe Mobile acting alone can generally control the operational and financial affairs of ORBCOMM International. Since OCC is unable to control, but is able to exercise significant influence over, ORBCOMM's and ORBCOMM International's operational and financial affairs, we account for our investments in ORBCOMM and ORBCOMM International using the equity method of accounting. Since OCC is able to control the operational and financial affairs of ORBCOMM USA, we consolidate ORBCOMM USA's results of operations. In accordance with the equity method of accounting, we recognize 100% of the revenues earned and costs incurred on sales of products and services to ORBCOMM. We also recognize as equity in earnings (losses) of affiliates our proportionate share of ORBCOMM's profits and losses. To the extent ORBCOMM capitalizes its purchases from Orbital, we eliminate as equity in earnings (losses) of affiliates approximately 50%, our current equity ownership in ORBCOMM, of our profits and losses from sales to ORBCOMM. We believe that ORBCOMM will require significant additional funding in 1999. Orbital and ORBCOMM are currently in the process of exploring financing alternatives to fund future capital expenditures and to fund ORBCOMM's operations costs. Such alternatives include, but are not limited to, additional capital contributions from ORBCOMM's existing partners or other strategic investors, vendor financing, deferred invoicing, equity or debt transactions and other strategic alternatives. There can be no assurance that any financing will be completed or available on terms commercially acceptable to ORBCOMM. During 1998, Orbital deferred invoicing ORBCOMM for approximately $35,144,000 of work performed under our ORBCOMM satellite and launch procurement agreement. During 1999, we may defer up to $25,000,000 of invoicing for work performed for ORBCOMM. One-half of the deferred invoice amounts has been, and is expected to continue to be, advanced to Orbital by an affiliate of Teleglobe Inc. Orbital anticipates that start-up of the ORBCOMM System will continue to produce substantial operating losses through 1999. There can be no assurance that an adequate market will develop for ORBCOMM services, that ORBCOMM will achieve profitable operations or that we will recover any of our past or anticipated investment in ORBCOMM. ORBIMAGE Imagery Services. ORBIMAGE operates, and is further developing, a fleet of satellites that collect, process and distribute digital imagery of the Earth's surface, the atmosphere and weather conditions. ORBIMAGE's imaging products and services are designed to provide customers with timely and 6 9 competitively priced information concerning, among other things, the location and movement of military assets, urban growth, forestry and crop health, land and ocean-based natural resources and weather patterns and wind conditions. In April 1995, ORBIMAGE launched its first satellite, OrbView-1, which provides to NASA dedicated weather-related imagery and meteorological products. ORBIMAGE's second satellite, OrbView-2 (operated under a licensing agreement with Orbital), commenced commercial service in 1997 and is used by ORBIMAGE to deliver high-quality multi-spectral ocean imagery and land surface imagery to government and commercial customers. ORBIMAGE expects to launch two additional satellites, OrbView-3 and OrbView-4, in 1999 and 2000, respectively. We believe that OrbView-3 and OrbView-4 will be among the first commercial satellites with high-resolution imagery capability and that OrbView-4 will be the world's first satellite with commercially available hyperspectral imaging capability. As of December 31, 1998, ORBIMAGE and MDA entered into a license agreement whereby ORBIMAGE agreed to acquire from MDA the exclusive worldwide rights to distribute and sell radar imagery from the RadarSat-2 satellite that is expected to be operational in 2002. Orbital is constructing the RadarSat-2 satellite and ground system, which are being financed by the Canadian Space Agency, the anchor customer for RadarSat-2 imagery. Under the procurement agreement between Orbital and ORBIMAGE, Orbital is producing and launching the OrbView-3 and OrbView-4 satellites, and is constructing the related ground segment on a fixed-price basis. Orbital also provides ORBIMAGE with administrative services and technical support, generally on a cost-reimbursable basis. In February 1998, ORBIMAGE completed a private financing of $150,000,000 units consisting of 11 5/8% Senior Notes due 2005 and warrants to purchase an aggregate of approximately 3% of ORBIMAGE's outstanding common stock. Concurrently, the existing preferred stockholders of ORBIMAGE exercised an option to purchase additional preferred stock of ORBIMAGE, resulting in additional net proceeds to ORBIMAGE of approximately $21,000,000. The preferred stockholders have certain demand registration rights with respect to their shares after June 30, 2002. We own approximately 60% of ORBIMAGE, with the remainder owned primarily by the preferred stockholders. As a result of certain rights granted to the preferred stockholders, including the right to elect certain directors and have such directors participate in significant management decisions, we do not control the operational and financial affairs of ORBIMAGE. In accordance with the equity method of accounting, we recognize 100% of the revenues earned and costs incurred on sales of products and services to ORBIMAGE. We also recognize as equity in earnings (losses) of affiliates our proportionate share of ORBIMAGE's profits and losses. To the extent ORBIMAGE capitalizes its purchases from Orbital, we eliminate as equity in earnings (losses) of affiliates approximately 60%, our current equity ownership in ORBIMAGE, of our profits and losses from sales to ORBIMAGE. As of December 31, 1998, we had invested approximately $83,000,000 in ORBIMAGE. We anticipate that ORBIMAGE will incur operating losses at least through 1999. There can be no assurance that an adequate market will develop for ORBIMAGE's products and services, that it will achieve profitable operations or that we will recover our investment in ORBIMAGE. ORBNAV Automotive Information Services. We established ORBNAV in early 1999 to develop, operate and market, directly or through joint ventures, satellite-aided automotive guidance and related value-added information services for the rental car, private passenger car, commercial delivery vehicle and emergency vehicle markets. ORBNAV's initial focus is on developing the rental car market through an exclusive joint venture for which final documentation is currently under negotiation with Hertz, which venture will initially purchase 50,000 Magellan automotive navigation systems for installation in Hertz rental cars. Through ORBNAV, Orbital intends to invest up to $30,000,000 in exchange for a 60% interest, while Hertz intends to invest up to $20,000,000 and provide initial marketing services in exchange for a 40% interest in the joint venture. 7 10 CCI Voice Communications. In 1998, we made a strategic investment in CCI. CCI was formed to develop, construct and operate a constellation of satellites offering satellite-based voice communications services in the world's equatorial regions. Pursuant to the terms of our stock purchase agreement, we have agreed, subject to the satisfaction by CCI of various operational and financial milestones, to purchase up to $50,000,000 of CCI's nonvoting convertible preferred shares, and we have an option to purchase an additional $50,000,000 of such preferred shares. In connection with the stock purchase transaction, we also entered into a satellite and launch vehicle procurement contract valued at approximately $480,000,000 for the satellites (and a price to be determined for the launch vehicles in the event we procure them). We have also agreed, subject to satisfaction of various conditions, to provide vendor financing. We own approximately 40% of CCI, with the remainder owned by outside investors. Our preferred shares in CCI are nonvoting, but pursuant to the terms of such shares, we have approval rights with respect to significant management decisions. Our approval rights may become diluted to the extent additional investors in CCI purchase preferred shares with similar terms. Though we do not control CCI, we are able to exercise significant influence over CCI's operational and financial affairs, and we currently account for our investment in CCI using a modified equity method of accounting. In accordance with the modified equity method of accounting, we recognize 100% of the revenues earned and costs incurred on sales of products and services to CCI, and we recognize 100% of CCI's profits and losses. As of December 31, 1998, we had purchased $22,000,000 of the preferred shares and had not provided any vendor financing. There can be no assurance that CCI will achieve its financial or operational milestones, some of which entail raising additional capital, or that an adequate market will develop for CCI's products and services, and we may be required to write off all, or a portion, of our investment. RECENT DEVELOPMENTS On March 12, 1999, Orbital and Magellan signed a merger agreement with Lowrance Electronics, Inc., a leading manufacturer of marine and recreational electronics using GPS-satellite navigation and sonar technology. Under the terms of the merger, Orbital will acquire all the outstanding common stock of Lowrance and Lowrance shareholders will receive between 745,000 and 1,250,000 shares of Orbital common stock, based on the fair market value of Orbital common stock prior to closing. Lowrance will be merged into Magellan at the closing and Orbital's ownership of Magellan following the merger will increase to approximately 85%. We expect the transaction to close in the second half of 1999. Closing is subject to regulatory approval and Lowrance shareholder approval. On March 18, 1999, MDA and Toronto-based Spar Aerospace Limited signed an asset purchase agreement pursuant to which MDA will acquire Spar's space robotics division for approximately $43,000,000 in cash, one-half of which is payable upon closing, with the other half payable a year following closing. The Spar acquisition will expand our product lines to include advanced robotics primarily for the manned space market. We expect the transaction to close in the second quarter of 1999, subject to customary closing conditions. COMPETITION Orbital believes that competition for sales of its products and services is based on performance and other technical features, price, reliability, scheduling and customization. The primary domestic competition for the Pegasus and Taurus launch vehicles comes from the Athena launch vehicles developed by Lockheed Martin Corporation. In addition, Pegasus may face competition from launch systems derived from U.S. government surplus ballistic missiles. The Israeli Shavit vehicle and other potential foreign launch vehicles could also pose competitive challenges to Pegasus, although U.S. government policy currently prohibits the launch of foreign vehicles from U.S. territory. Competition for Taurus could come from surplus Titan II launch vehicles, although a very limited inventory remains, and from the Russian Kosmos SL-8 launch vehicle. Competition to Pegasus and Taurus vehicles also exists in the form of partial or secondary payload capacity on larger boosters including the Ariane, Atlas and Delta launch vehicles. Our 8 11 primary competitors in the suborbital launch vehicle product line are Coleman Research Corporation, Lockheed Martin and Space Vector Corporation. Our satellites and satellite subsystems products compete with products and services produced or provided by government entities and numerous private entities, including TRW Inc., Ball Aerospace and Technology Corporation, Lockheed Martin, GM Hughes Electronics Corporation and Spectrum Astro, Inc. Our airborne and ground-based electronics, data management systems, defense-oriented avionics products and software systems, aviation systems and space sensors and instruments face competition from several established manufacturers, including Smiths Industries, Lockheed Sanders and Honeywell Inc. Our main competitors in the area of satellite ground stations include Datron Systems Inc., Matra Marconi Space N.V. and Hughes-STX Corp. Our satellite access products primarily face competition from Trimble Navigation Ltd., Garmin International, Philips Automotive Electonics, Alpine Electronics and Clarion. The main competitors to our transportation management systems are Rockwell and Harris Corporation. ORBCOMM may face competition from numerous existing and proposed satellite-based and terrestrial systems providing data communications services. ORBIMAGE may face competition from U.S. and foreign governmental entities and private entities, including Space Imaging EOSAT and EarthWatch, that provide or are seeking to provide satellite-based imagery products. Many of our competitors are larger and have substantially greater resources than we do. Furthermore, the possibility exists that other domestic or foreign companies or governments, some with greater experience in the space industry and greater financial resources than Orbital, will seek to produce products or services that compete with our products or services. Any such foreign competitor could benefit from subsidies from or other protective measures by its home country. RESEARCH AND DEVELOPMENT We expect to continue to invest in product-related research and development, to conceive and develop new products and services, to enhance existing products and services and to seek customer and, where appropriate, third-party strategic investments in these products and services. Our research and development expenses, excluding direct customer-funded development, were approximately $44,597,000, $26,355,000 and $22,179,000, respectively, for the fiscal years ended December 31, 1998, 1997 and 1996. PATENTS AND TRADEMARKS We rely, in part, on patents, trade secrets and know-how to develop and maintain our competitive position and technological advantage. We hold and have applications pending for various U.S. and foreign patents relating to the Pegasus vehicle, our satellites, certain of our GPS products, and other systems and products. Certain of the trademarks and service marks used in connection with our products and services have been registered with the U.S. Patent and Trademark Office, the Canadian Intellectual Property Office and certain other foreign trademark authorities. COMPONENTS, RAW MATERIALS AND CARRIER AIRCRAFT We purchase a significant percentage of our product components, including rocket propulsion motors, structural assemblies, electronic equipment and computer chips, from third parties. We also occasionally obtain from the U.S. government parts and equipment that are used in the production of our products or in the provision of our services. We have not experienced material difficulty in obtaining product components or necessary parts and equipment and we believe that alternative sources of supply would be available, although increased costs and possible delays could be incurred in securing alternative sources of supply. Our ability to launch our Pegasus vehicle depends on the availability of an aircraft with the capability of carrying and launching such space launch vehicle. We own the modified Lockheed L-1011 carrier aircraft that is used for the Pegasus vehicle and will be used for the X-34 and one suborbital program. In the event that the L-1011 carrier aircraft were to be unavailable, we would experience significant delays, expenses and loss of revenues as a result of having to acquire and modify a new carrier aircraft. 9 12 U.S. GOVERNMENT CONTRACTS During 1998, 1997 and 1996, approximately 46%, 38% and 45%, respectively, of our total annual revenues were derived from contracts with the U.S. government and its agencies or from subcontracts with the U.S. government's prime contractors. Most of our U.S. government contracts are funded incrementally on a year-to-year basis. Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies or the imposition of budgetary constraints could materially adversely affect our financial condition or results of operations. Customers that accounted for 10% or more of our consolidated 1998 revenues were NASA, DoD and ORBIMAGE. The accuracy and appropriateness of our direct and indirect costs and expenses under our contracts with the U.S. government are subject to extensive regulation and audit by the Defense Contract Audit Agency or by other appropriate agencies of the U.S. government. These agencies have the right to challenge our cost estimates or allocations with respect to any such contract. Additionally, a substantial portion of payments to Orbital under U.S. government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies. We believe that any adjustments likely to result from inquiries or audits of our contracts will not have a material adverse impact on our financial condition or results of operations. Since Orbital's inception, we have not experienced any material adjustments as a result of any such inquiries or audits. Orbital's major contracts with the U.S. government fall into three categories: firm fixed-price contracts, fixed-price incentive fee contracts and cost-plus-fee contracts. Under firm fixed-price contracts, work performed and products shipped are paid for at a fixed price without adjustment for actual costs incurred in connection with the contract. Therefore, we bear the risk of loss due to increased cost, although some of this risk may be passed on to subcontractors. Under fixed-price government contracts, we may receive progress payments, generally in an amount equal to between 80% and 95% of monthly costs and profits, or we may receive milestone payments upon the occurrence of certain program achievements, with final payments occurring at project completion. Fixed-price incentive fee contracts provide for sharing by Orbital and the customer of unexpected costs incurred or savings realized within specified limits, and may provide for adjustments in price depending on actual contract performance other than costs. Costs in excess of the negotiated maximum (ceiling) price and the risk of loss by reason of such excess costs are borne by Orbital, although some of this risk may be passed on to subcontractors. Under a cost-plus-fee contract, we recover our actual allowable costs incurred and receive a fee consisting of a base amount that is fixed at the inception of the contract and/or an award amount that is based on the U.S. government's subjective evaluation of the contractor's performance in terms of the criteria stated in the contract. All of our U.S. government contracts and, in general, our subcontracts with the U.S. government's prime contractors provide that such contracts may be terminated at will by the U.S. government or the prime contractor, respectively. Furthermore, any of these contracts may become subject to a government-issued stop work order under which we would be required to suspend production. In the event of a termination at will, Orbital would normally be entitled to recognize the purchase price for delivered items, reimbursement for allowable costs for work in process and an allowance for reasonable profit thereon or adjustment for loss if completion of performance would have resulted in a loss. From time to time we experience contract suspensions and terminations. REGULATION Our ability to pursue our business activities is regulated by various agencies and departments of the U.S. government and, in certain circumstances, the governments of other countries. Commercial space launches require licenses from the U.S. Department of Transportation (the "DoT") and operation of our L-1011 aircraft requires licenses from certain agencies of the DoT, including the Federal Aviation Administration. Construction, launch and operation of commercial communications satellites, including the ORBCOMM communications network and CCI's business, require licenses from the U.S. Federal Communications Commission (the "FCC") and frequently require the approval of international and individual country regulatory authorities. ORBCOMM has received the necessary FCC regulatory authority to operate its 10 13 system. ORBCOMM's international licensees have obtained or are responsible for obtaining the necessary international regulatory licenses. In addition, commercial remote imagery satellite systems such as those developed by ORBIMAGE require licenses from the U.S. Department of Commerce (the "DoC") and the FCC for the construction, launch and operation of remote imaging satellites. ORBIMAGE has the necessary DoC licenses and its FCC license to construct, launch and operate the OrbView-3 and OrbView-4 satellites. ORBIMAGE has applied to DoC to amend its OrbView-4 license to permit the commercial distribution of hyperspectral imagery from such satellite. The DoC has indicated that its approval may be subject to certain limitations, such as delaying release of imagery or degrading spatial resolution of imagery for commercial uses. Exports of our products, services and technical information frequently require licenses from the U.S. Department of State or the DoC. There can be no assurance that we will be successful in our efforts to obtain necessary licenses or regulatory approvals. The inability of Orbital, ORBCOMM, ORBIMAGE or CCI to secure or maintain any necessary licenses or approvals or significant delays in obtaining such licenses or approvals could have a material adverse effect on the financial condition or results of operations of Orbital. BACKLOG Orbital's contract backlog is attributable to its space and ground infrastructure systems business. Our firm backlog at December 31, 1998 and 1997 was approximately $1,826,000,000 and $1,040,000,000, respectively. As of December 31, 1998, approximately 41% of our firm backlog was with the U.S. government and its agencies or from subcontracts with the U.S. government's prime contractors. 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 in the amounts of approximately $1,300,000,000 and $435,000,000 as of December 31, 1998 and 1997, respectively. Approximately 55% of total firm backlog is currently scheduled to be performed beyond 1999. Firm backlog excludes unexercised contract options and undefinitized new contracts having an aggregate potential contract value at December 31, 1998 of approximately $2,220,000,000. EMPLOYEES As of December 31, 1998, Orbital (including ORBCOMM and ORBIMAGE) had approximately 4,400 full-time permanent employees. We do not have any collective bargaining agreements with our employees and believe our employee relations are good. ITEM 2. PROPERTIES Orbital owns or leases over 1,700,000 square feet of office, engineering and manufacturing space in various locations throughout the world. In 1998, we purchased a parcel of real estate adjacent to our corporate headquarters in Northern Virginia to expand our satellite-related engineering, manufacturing and operations facilities at this site, which will allow us to consolidate our existing Northern Virginia and portions of our Maryland work force in a single integrated site. Orbital expects to convey portions of this land to a third-party developer shortly so that construction of the buildings can commence. As such buildings are completed, Orbital expects to lease the buildings pursuant to long-term leases. In 1993, Orbital entered into a 12-year lease agreement for approximately 100,000 square feet of office and engineering space in Dulles, Virginia, which serves as its corporate headquarters. We own a 59,000 square-foot manufacturing facility on land adjacent to the Dulles office facility that has office, engineering and manufacturing space. We intend to increase the size of this facility by approximately 50,000 to 75,000 square feet over the next year. Orbital also leases approximately 73,000 square feet of office, engineering and manufacturing space in McLean, Virginia; 400,000 square feet of office, engineering and manufacturing space in Germantown, Maryland; 345,000 square feet of office, engineering and manufacturing space in Chandler, Arizona; 182,000 square feet of office and engineering space in Richmond, British Columbia; 135,000 square feet of office, engineering and manufacturing space in Pomona, California; 75,000 square feet of office, engineering and manufacturing space in San Dimas, California; and 82,500 square feet of office, engineering and manufacturing space in Santa Clara, California. We lease or own other smaller facilities, offices or 11 14 manufacturing space around the United States, in Canada and in Russia. Although completion of our existing and pending contracts may in the future require additional manufacturing capacity, we believe that our existing facilities are adequate for our near-term requirements and that such facilities, along with those to be constructed, will be adequate for our medium-term requirements. ITEM 3. LEGAL PROCEEDINGS In the first quarter of 1999, a number of class action lawsuits were filed in federal court in the Eastern District of Virginia against Orbital, an officer and an officer/director, alleging violations of the federal securities laws during the period from April 21, 1998 through February 16, 1999 and seeking monetary damages. In December 1998, Thomas van der Heyden filed a lawsuit in the Circuit Court for Montgomery County, Maryland alleging that Orbital is in actual or anticipatory breach of obligations allegedly imposed on Orbital in a judgment in a previous action brought by plaintiff against CTA. The plaintiff claims that he is entitled to a sum exceeding $30 million from Orbital, as successor-in-interest to CTA. We believe that the allegations in the legal proceedings described above are without merit and intend to vigorously defend against the allegations. In addition, under the terms of the CTA acquisition, we believe we are entitled to indemnification from CTA for all or a part of any damages arising from the van der Heyden litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There was no matter submitted to a vote of our security holders during the fourth quarter of 1998. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the name, age and position of each of the executive officers of Orbital as of March 1, 1999. All executive officers are elected annually and serve at the discretion of the Board of Directors.
NAME AGE POSITION ---- --- -------- David W. Thompson.................... 44 Chairman of the Board, President and Chief Executive Officer James R. Thompson.................... 62 Director, Executive Vice President and General Manager/ Launch Systems Group Robert R. Lovell..................... 62 Executive Vice President and General Manager/Space Systems Group John P. Huyett....................... 45 Executive Vice President and General Manager/Satellite Access Products Group Robert D. Strain..................... 42 Executive Vice President and General Manager/Electronics and Sensor Systems Group Daniel E. Friedmann.................. 42 Executive Vice President and General Manager/Systems Integration and Software Group Jeffrey V. Pirone.................... 38 Executive Vice President and Chief Financial Officer Michael D. Griffin................... 49 Executive Vice President and Chief Technical Officer Antonio L. Elias..................... 49 Senior Vice President for Advanced Programs Leslie C. Seeman..................... 46 Senior Vice President, General Counsel and Secretary
- - ------------------------ David W. Thompson is a co-founder of Orbital and has been Chairman of the Board, President and Chief Executive Officer of Orbital since 1982. Prior to founding Orbital, Mr. Thompson was employed by Hughes Electronics Corporation as special assistant to the President of its Missile Systems Group and by NASA at the Marshall Space Flight Center as a project manager and engineer, and also worked on the Space Shuttle's autopilot design at the Charles Stark Draper Laboratory. Mr. Thompson serves as Chairman of Magellan, Chairman and Chief Executive Officer of ORBIMAGE and as a director of ORBCOMM and CCI. Mr. Thompson is a Fellow of the American Institute of Aeronautics and Astronautics, the American Astronautical Society and the Royal Aeronautical Society. 12 15 James R. Thompson (who is not related to David W. Thompson) has been Executive Vice President and General Manager/Launch Systems Group since 1993 and a director of Orbital since 1992. Mr. Thompson was Executive Vice President and Chief Technical Officer of Orbital from 1991 to 1993. He was Deputy Administrator of NASA from 1989 to 1991. From 1986 until 1989, Mr. Thompson was Director of NASA's Marshall Space Flight Center. He was Deputy Director for Technical Operations at Princeton University's Plasma Physics Laboratory from 1983 through 1986. Before that, he had a 20-year career with NASA at the Marshall Space Flight Center. He is a director of Nichols Research Corp. and SPACEHAB Incorporated. John P. Huyett has been Executive Vice President and General Manager, Satellite Access Products since January 1, 1999. Mr. Huyett also serves, effective January 1, 1999, as President and Chief Executive Officer of Magellan. Mr. Huyett joined Magellan as its Vice President and Chief Financial Officer in 1998. From 1993 through 1998, Mr. Huyett was the Vice President and Chief Financial Officer of Avant! Corporation and its predecessor, Integrated Silicon Systems, a software company. From 1985 through 1993, Mr. Huyett was a partner at KPMG LLP. Mr. Huyett is a director of Magellan. Robert R. Lovell has been Executive Vice President and General Manager/Space Systems Group since 1997. From 1994 to 1997, he was Senior Vice President for Special Projects at Orbital. Mr. Lovell previously served as Executive Vice President and General Manager/Space Systems Group from 1993 to 1994. From 1990 to 1993, he was President/Space Systems Division of Orbital and, from 1987 to 1989, he served as Vice President/Space Applications. From 1980 to 1987, Mr. Lovell was employed by NASA as Director of the Communications Division in the Office of Space Science and Applications. Before that, he had an 18-year career with NASA at the Lewis Research Center. Mr. Lovell is a director of CCI. Michael D. Griffin has been Executive Vice President and Chief Technical Officer since 1997. From 1996 to 1997, Dr. Griffin served as Executive Vice President/Space Systems Group. Dr. Griffin joined Orbital in 1995 when he was appointed Senior Vice President and Chief Technical Officer. From 1994 to 1995, he was Senior Vice President for Program Development at Space Industries International. From 1991 to 1994, he served as Chief Engineer of NASA and, from 1989 to 1991, was Deputy Director for Technology at the Strategic Defense Initiative Organization. Dr. Griffin is a director of Magellan. Robert D. Strain has been Executive Vice President and General Manager/Electronics and Sensor Systems Group since 1996. From 1994 until 1996, he was Vice President for Finance and Manufacturing at Orbital. Prior to that he served in a variety of senior-level financial positions with Fairchild Space and Defense Corporation, including Vice President of Finance, Treasurer and Controller. Daniel E. Friedmann has been Executive Vice President and General Manager/Systems Integration and Software Group since 1996. He continues to serve as President and Chief Executive Officer of Orbital's subsidiary, MDA, a position he has held since 1995. From 1992 to 1995, he served as Executive Vice President and Chief Operating Officer of MDA. Between 1979 and 1992, he held a variety of positions at MDA, including serving as Vice President of various divisions. Jeffrey V. Pirone has been Executive Vice President and Chief Financial Officer since 1996. From 1993 until 1996, Mr. Pirone served as Vice President and Controller of Orbital. Mr. Pirone joined Orbital as Controller in 1991, and prior to that was a Senior Manager at KPMG LLP. Mr. Pirone is a director of Magellan and ORBCOMM. Antonio L. Elias has been Senior Vice President for Advanced Programs since August 1997. From January 1996 until August 1997, Dr. Elias served as Senior Vice President and Chief Technical Officer. From May 1993 through December 1995 he was Senior Vice President for Advanced Projects and was Senior Vice President/Space Systems Division from 1990 to April 1993. He was Vice President/Engineering of Orbital from 1989 to 1990 and was Chief Engineer from 1986 to 1989. From 1980 to 1986, Dr. Elias was an Assistant Professor of Aeronautics and Astronautics at Massachusetts Institute of Technology. Leslie C. Seeman has been Senior Vice President of Orbital since 1993 and General Counsel and Secretary of Orbital since 1989. From 1989 to 1993, she was also Vice President of Orbital, and from 1987 to 1989, Ms. Seeman was Assistant General Counsel of Orbital. From 1984 to 1987, she was General Counsel of 13 16 Source Telecomputing Corporation, a telecommunications company. Prior to that, she was an attorney at the law firm of Wilmer, Cutler and Pickering. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On March 22, 1999, there were 1,325 Orbital stockholders of record. Our common stock began trading on the New York Stock Exchange ("NYSE") on July 10, 1998 under the symbol ORB. Prior to that our common stock was traded on the Nasdaq National Market under the symbol ORBI. The range of high and low sales prices of Orbital common stock from 1996 through 1998, as reported on Nasdaq or the NYSE, as applicable, was as follows:
1998 HIGH LOW ---- ---- --- 4th Quarter................................................. $44 1/4 $19 1/2 3rd Quarter................................................. $39 1/4 $17 3/4 2nd Quarter................................................. $50 $32 1/4 1st Quarter................................................. $46 1/2 $29
1997 HIGH LOW ---- ---- --- 4th Quarter................................................. $30 3/4 $21 3rd Quarter................................................. $25 $15 7/8 2nd Quarter................................................. $18 $12 3/4 1st Quarter................................................. $19 1/4 $13 3/4
1996 HIGH LOW ---- ---- --- 4th Quarter................................................. $21 7/8 $16 1/4 3rd Quarter................................................. $20 $16 3/8 2nd Quarter................................................. $19 7/8 $13 1st Quarter................................................. $16 1/8 $11 3/4
We have never paid any cash dividends on our common stock. We presently intend to retain future earnings for working capital and product development and therefore do not anticipate paying cash dividends on our common stock at any time in the foreseeable future. In addition, we are prohibited from paying cash dividends under an existing credit facility. The transfer agent for our Common Stock is: The First National Bank of Boston c/o Boston Equiserve P.O. Box 8040 Boston, MA 02266-8040 Telephone: (617) 575-3170 or (800) 730-4001 www.bostonequiserve.com The trustee for our 5% convertible subordinated notes due 2002 is: Deutsche Bank AG, New York Branch 31 W. 52nd St. New York, NY 10019 14 17 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto included in this Report. The consolidated operating data and other data for the three-year period ended December 31, 1998 and the consolidated balance sheet data at December 31, 1998 and 1997 are derived from and should be read in conjunction with the audited consolidated financial statements and notes thereto included in this Report. The consolidated operating data and other data for the years ended December 31, 1995 and 1994 and the consolidated balance sheet data at December 31, 1996, 1995 and 1994 are derived from audited consolidated financial statements not included or incorporated by reference herein.
YEARS ENDED DECEMBER 31, -------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) OPERATING DATA: Revenues....................................... $ 734,277 $ 605,975 $ 461,435 $ 364,320 $ 301,576 Costs of goods sold............................ 546,721 456,772 336,261 268,016 216,417 ---------- ---------- ---------- ---------- ---------- Gross profit................................... 187,556 149,203 125,174 96,304 85,159 Research and development expenses.............. 44,597 26,355 22,179 28,512 17,259 Selling, general and administrative expenses... 109,727 89,502 76,019 63,427 53,165 Amortization of excess of purchase price over net assets acquired.......................... 7,939 3,852 3,134 3,221 2,360 ---------- ---------- ---------- ---------- ---------- Income from operations......................... 25,293 29,494 23,842 1,144 12,375 Net investment income (expense)................ 2,567 1,475 (1,123) 639 (244) Equity in earnings (losses) of affiliates...... (45,092) (26,034) (6,454) (759) (1,264) Non-controlling interests in (earnings) losses of consolidated subsidiaries................. 10,610 2,638 1,473 427 -- Gain on sale of subsidiary equity.............. 4,793 21,810 -- -- -- Acquisition expenses........................... -- (4,343) -- (3,441) (503) ---------- ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income taxes and cumulative effect of accounting change............................ (1,829) 25,040 17,738 (1,990) 10,364 Provision (benefit) for income taxes........... 4,543 2,035 1,831 (1,302) 2,744 ---------- ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of accounting change............................ (6,372) 23,005 15,907 (688) 7,620 Cumulative effect of accounting change, net of taxes........................................ -- -- -- (4,160) -- ---------- ---------- ---------- ---------- ---------- Net income (loss).............................. $ (6,372) $ 23,005 $ 15,907 $ (4,848) $ 7,620 ========== ========== ========== ========== ========== NET INCOME (LOSS) PER COMMON SHARE(1): Income (loss) before cumulative effect of accounting change............................ $ (0.18) $ 0.71 $ 0.55 $ (0.03) $ 0.33 Cumulative effect of accounting change......... -- -- -- (0.16) -- ---------- ---------- ---------- ---------- ---------- $ (0.18) $ 0.71 $ 0.55 $ (0.19) $ 0.33 ========== ========== ========== ========== ========== Shares used in computing net income (loss) per common share................................. 35,624,888 32,283,138 29,137,361 26,207,746 23,191,553 ========== ========== ========== ========== ========== NET INCOME (LOSS) PER COMMON SHARE, ASSUMING DILUTION(2): Income (loss) before cumulative effect of accounting change............................ $ (0.18) $ 0.69 $ 0.55 $ (0.03) $ 0.32 Cumulative effect of accounting change......... -- -- -- (0.16) -- ---------- ---------- ---------- ---------- ---------- $ (0.18) $ 0.69 $ 0.55 $ (0.19) $ 0.32 ========== ========== ========== ========== ========== Shares used in computing net income (loss) per common share, assuming dilution.............. 40,336,587 33,980,747 31,616,119 30,103,858 27,309,336 ========== ========== ========== ========== ========== BALANCE SHEET DATA: Cash and investments........................... $ 25,686 $ 15,126 $ 32,686 $ 35,030 $ 40,345 Net working capital............................ 53,330 50,198 83,673 87,553 57,449 Total assets................................... 962,738 793,992 500,770 466,908 441,042 Short-term borrowings.......................... 26,814 29,317 38,519 11,907 28,977 Long-term obligations, net..................... 181,281 198,394 33,076 96,990 86,068 Stockholders' equity........................... 510,573 355,101 330,502 238,908 206,943
- - ------------------------ (1) Net income (loss) per common share is calculated using the weighted average number of shares outstanding during the periods. (2) Net income (loss) per common share, assuming dilution, is calculated using the weighted average number of shares and dilutive equivalent shares outstanding during the periods, plus the effect of an assumed conversion of our convertible subordinated notes. 15 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW With the exception of historical information, the matters discussed below under the headings "Recent Developments," "Results of Operations" and "Liquidity and Capital Resources" and elsewhere in this Annual Report on Form 10-K include forward-looking statements that involve risks and uncertainties, many of which are beyond our control. We wish to caution readers that a number of important factors, including those identified below in "Outlook: Issues and Uncertainties," may affect our actual results and may cause actual results to differ materially from those in any forward-looking statement. Our products and services are grouped into three general 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 satellite ground systems and software. Satellite access products include satellite-based navigation, positioning and communications products and transportation management systems. Satellite services include satellite-based two-way mobile data communications services, satellite-based remote imaging services, our new ORBNAV initiative relating to satellite-based automotive information services and satellite-based voice communications services provided by ORBCOMM and ORBIMAGE and to be provided by ORBNAV and CCI, respectively. We are accounting for our investments in ORBCOMM, ORBIMAGE and CCI using the equity method of accounting. In accordance with the equity method of accounting, we recognize as equity in earnings (losses) of affiliates our proportionate share of ORBCOMM's and ORBIMAGE's profits and losses. In accordance with a modified equity method of accounting, we currently recognize as equity in earnings (losses) of affiliates 100% of CCI's profits and losses. We also recognize 100% of the revenues earned and costs incurred on sales of products and services to these entities. However, as these companies are currently capitalizing substantially all system construction costs, including amounts paid to Orbital, we eliminate as equity in earnings (losses) of affiliates our proportionate share of our profits and losses from sales to ORBCOMM, ORBIMAGE and CCI, respectively. RECENT DEVELOPMENTS In April 1998, we sold 3,450,000 shares of our common stock in a public offering at $45.81 per share, generating net proceeds of approximately $150,000,000. In July 1998, our common stock began trading on the New York Stock Exchange under the ticker symbol "ORB." Our stock had previously traded on the Nasdaq National Market under the symbol "ORBI." In August 1998, we entered into a stock purchase agreement with CCI pursuant to which we agreed, subject to the satisfaction by CCI of certain milestones and conditions, to purchase up to $50,000,000 of CCI's non-voting convertible preferred shares, with an option to purchase an additional $50,000,000 of preferred shares, and to provide vendor financing. In connection with the execution of the stock purchase agreement, we entered into a satellite and launch vehicle procurement contract with CCI valued at approximately $480,000,000 for the satellites (and a price to be determined for the launch vehicles in the event we procure them). As of December 31, 1998, we had purchased $22,000,000 of the preferred shares and had not provided any vendor financing. Should CCI not achieve its financial or operational milestones, some of which entail raising capital, or if an adequate market for its products and services should not develop, we may be required to write off all, or a portion, of this investment. In October 1998, we adopted a stockholder rights plan in which preferred stock purchase rights were granted as a dividend at the rate of one right for each share of common stock to stockholders of record on November 13, 1998. The plan is designed to deter coercive or unfair takeover tactics. The rights become exercisable only if a person or group in the future becomes the beneficial owner of 15% or more of our common stock, or announces a tender or exchange offer that would result in its ownership of 15% or more of our common stock. Each right, when exercisable, entitles the holder to purchase one-one thousandth of a share of Series B Junior Participating Preferred Stock. Under certain circumstances, each holder of a right will 16 19 be able to exercise the right and receive common stock having a value equal to two times the exercise price. The rights are generally redeemable by our Board of Directors at a redemption price of $0.005 per right and expire on October 31, 2008. On December 31, 1998, we acquired the transportation systems business of Raytheon Company for approximately $21,000,000 in cash. We merged the acquired business into our existing transportation management systems business. RESULTS OF OPERATIONS The following table shows our revenues, gross profits and gross margins by major product category within each business sector for each of the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ---------------------------- ---------------------------- ---------------------------- GROSS GROSS GROSS REVENUES PROFITS MARGIN REVENUES PROFITS MARGIN REVENUES PROFITS MARGIN -------- -------- ------ -------- -------- ------ -------- -------- ------ (DOLLARS IN THOUSANDS) SPACE AND GROUND INFRASTRUCTURE SYSTEMS................. $617,126 $153,998 25% $534,419 $131,209 25% $388,814 $101,867 26% Launch Vehicles......... 173,178 38,539 22 121,631 28,631 24 108,478 23,356 22 Satellites.............. 237,533 54,376 23 233,989 56,940 24 105,148 22,406 21 Electronics and Sensor Systems............... 111,033 34,494 31 100,554 26,236 26 92,070 26,608 29 Satellite Ground Systems and Software.......... 95,382 26,589 28 78,245 19,402 25 83,118 29,497 36 SATELLITE ACCESS PRODUCTS................ 116,392 33,556 29 71,384 18,205 26 71,188 25,134 35 SATELLITE SERVICES........ 759 2 N/A 172 (211) N/A 1,433 (1,827) N/A -------- -------- --- -------- -------- --- -------- -------- --- CONSOLIDATED TOTALS....... $734,277 $187,556 26% $605,975 $149,203 25% $461,435 $125,174 27% ======== ======== === ======== ======== === ======== ======== ===
REVENUES Our consolidated revenues for the years ended December 31, 1998, 1997 and 1996 were $734,277,000, $605,975,000 and $461,435,000, respectively. Space and Ground Infrastructure Systems. Revenues from our space and ground infrastructure systems sector increased to $617,126,000 in 1998, from $534,419,000 in 1997 and $388,814,000 in 1996. Revenues from our launch vehicles increased to $173,178,000 in 1998, from $121,631,000 in 1997 and $108,478,000 in 1996. The increase in revenues in 1998 and 1997 was attributable to a number of factors, including increased work performed under contracts received for our Taurus launch vehicle, a significant increase in new orders for our Pegasus and suborbital launch vehicles and increased work performed on the X-34 reusable launch vehicle. Revenues from sales of satellites increased to $237,533,000 in 1998, from $233,989,000 in 1997 and $105,148,000 in 1996. Satellite revenues remained generally consistent from 1997 to 1998 as work on several programs were completed concurrent with the receipt of new satellite orders. The substantial increase in 1997 satellite revenues was primarily due to new satellite orders received in the second half of 1996 and in 1997. Revenues in 1998 and 1997 also included approximately $51,471,000 and $54,090,000, respectively, of sales generated by the satellite contracts we acquired from CTA in August 1997. Revenues from electronics and sensor systems increased to $111,033,000 in 1998, from $100,554,000 in 1997 and $92,070,000 in 1996. The increase in 1998 and 1997 revenues was primarily attributable to work performed on new orders for defense electronics products received during 1997 and early 1998. Revenues from satellite ground systems and software products increased to $95,382,000 in 1998, from $78,245,000 in 1997 and $83,118,000 in 1996. The increase in 1998 revenues is primarily due to work performed on orders received in 1997 and 1998, including work on a new remote imaging system. The decrease in 1997 revenues from 1996 revenues was primarily due to the sale in late 1996 of a software-related business that had generated 1996 revenues of approximately $15,755,000. 17 20 Orbital's space and ground infrastructure systems sector revenues included sales to ORBCOMM of approximately $35,479,000, $57,988,000 and $47,215,000 in 1998, 1997 and 1996, respectively, and to ORBIMAGE of approximately $89,006,000 and $88,618,000 in 1998 and 1997, respectively. This sector's revenues also included $6,556,000 from sales to CCI in 1998 (none in earlier years). We expect 1999 sales to our satellite services affiliates to be less than those recorded in 1998 primarily because the basic ORBCOMM satellite construction and launch program is nearing completion. Satellite Access Products. Revenues from sales of consumer, high-precision and automotive satellite-based positioning and navigation products, satellite communications products and transportation management systems increased to $116,392,000 in 1998, from $71,384,000 in 1997 and $71,188,000 in 1996. Revenues in 1998 included approximately $44,636,000 of sales generated by our high-precision navigation products that were acquired as a result of the December 1997 merger of Ashtech with our Magellan subsidiary. Although 1998 revenues from satellite access products were greater than 1997 revenues, revenues were below our expectations due to increased competition in consumer products and slower sales of automotive navigation products. Gross Profit/Costs of Goods Sold Costs of goods sold include the costs of personnel, materials, subcontracts and overhead related to commercial products and under various development and production contracts. Gross profit depends on a number of factors, including our mix of contract types and costs incurred thereon in relation to estimated costs. Our consolidated gross profit for 1998, 1997 and 1996 was $187,556,000 (26% of revenues), $149,203,000 (25% of revenues) and $125,174,000 (27% of revenues), respectively. Space and Ground Infrastructure Systems. Gross profit from our space and ground infrastructure systems sector was $153,998,000 (25% of sector revenues), $131,209,000 (25% of sector revenues) and $101,867,000 (26% of sector revenues) for 1998, 1997 and 1996, respectively. Gross profit margins from our space and ground infrastructure systems sector for 1998 were generally consistent with 1997 margins. Gross profit margins were slightly higher in 1996 due to the inclusion of higher margins from a software-related business that was part of our ground systems business and was sold in late 1996. Gross profit margins in this sector are impacted by management's periodic assessments and reevaluations of programmatic risks included in estimated costs to complete long-term contracts. Satellite Access Products. Gross profit from our satellite access products sector was $33,556,000 (29% of sector revenues), $18,205,000 (26% of sector revenues) and $25,134,000 (35% of sector revenues) for 1998, 1997 and 1996, respectively. The overall increase in 1998 gross profit margins when compared to 1997 margins is due to the inclusion of higher margin, high-precision positioning and navigation product lines acquired from Ashtech offset, in part, by lower margins achieved on other consumer and automotive navigation product sales. The decrease in gross profit margins from 1996 to 1997 was due to lower unit sales prices for consumer products and certain fourth quarter 1997 reorganizational charges incurred by Magellan. During 1998, Magellan disposed of approximately $12,500,000 of obsolete inventory that was offset, in part, by previously established inventory obsolescence reserves. Magellan continues to face increased competition, which places significant pressure on individual product lifetimes and inventory levels. Gross profit in 1998 was reduced by approximately $7,300,000 of increased inventory obsolescence reserves. Research and Development Expenses Research and development expenses represent our self-funded product development activities and exclude direct customer-funded development. Research and development expenses during 1998, 1997 and 1996 were $44,597,000 (6% of revenues), $26,355,000 (4% of revenues) and $22,179,000 (5% of revenues), respectively. Research and development spending during these periods related primarily to the development of 18 21 new or improved satellite access products, improved launch vehicles, and new satellite initiatives. Research and development expenses in 1998 also included approximately $5,000,000 of costs related to identifying and resolving certain technical issues arising on ORBCOMM data communications satellites. Selling, General and Administrative Expenses Selling, general and administrative expenses include the costs of marketing, advertising, promotion and other selling expenses, as well as the costs of the finance, legal, administrative and general management functions of Orbital. Selling, general and administrative expenses for 1998, 1997 and 1996 were $109,727,000 (15% of revenues), $89,502,000 (15% of revenues) and $76,019,000 (17% of revenues), respectively. While selling, general and administrative expenses as a percentage of revenues was consistent from 1998 to 1997, the total amount of selling, general and administrative costs increased substantially, primarily as a result of growth in our space and ground infrastructure systems sector and the impact of various business and product line acquisitions. The decrease in selling, general and administrative expenses as a percentage of revenues in 1997 from 1996 was primarily attributable to significant growth in space and ground infrastructure systems revenues, along with only modest growth in selling, general and administrative expenses attributable to those product lines. Net Investment Income (Expense) Net investment income (expense) was $2,567,000, $1,475,000 and ($1,123,000) for 1998, 1997 and 1996, respectively. Investment income reflected interest earnings on short-term investments and realized gains and losses on investments, reduced by interest expense on outstanding debt of $3,982,000, $429,000 and $2,486,000 in 1998, 1997 and 1996, respectively. Interest expense was net of capitalized interest of approximately $17,842,000, $9,700,000 and $7,300,000 in 1998, 1997 and 1996, respectively. Equity in Earnings (Losses) of Affiliates and Non-Controlling Interests in (Earnings) Losses of Consolidated Subsidiaries Equity in earnings (losses) of affiliates and non-controlling interests in (earnings) losses of consolidated subsidiaries were ($34,482,000), ($23,396,000) and ($4,981,000) for 1998, 1997 and 1996, respectively. These amounts primarily represent (i) elimination of proportionate profits or losses on sales of infrastructure products to ORBCOMM, ORBIMAGE and CCI, (ii) our proportionate share of ORBCOMM's, ORBCOMM International Partners, L.P.'s and ORBIMAGE's earnings and losses for 1998, (iii) 100% of CCI's earnings and losses for 1998, and (iv) non-controlling stockholders' proportionate share of ORBCOMM USA, L.P.'s and Magellan's current period earnings and losses. The increases in 1998 and 1997 were primarily due to increased operational and system depreciation expenses and resulting losses at ORBCOMM. We expect equity in earnings (losses) of affiliates to increase in 1999 primarily due to increased losses at ORBCOMM. Gain on Sale of Subsidiary Equity We recorded a gain on sale of subsidiary equity of $4,793,000 and $21,810,000 in 1998 and 1997, respectively. The 1998 gain related to the issuance of additional equity by our ORBIMAGE affiliate. The 1997 gain related to the issuance of additional equity by our Magellan subsidiary. Provision for Income Taxes We recorded consolidated income tax provisions of $4,543,000, $2,035,000 and $1,831,000 for 1998, 1997 and 1996, respectively. Our provisions for these periods were entirely due to foreign taxes attributable to our Canadian operations. At December 31, 1998, we had U.S. federal net operating loss carryforwards (portions of which expire beginning in 2004) of approximately $278,000,000, U.S. research and experimental income tax credit carryforwards of approximately $3,148,000, and foreign investment income tax credit carryforwards (subject to expiration in 2008) of approximately $5,000,000. Such net operating loss carryforwards and tax credits are 19 22 subject to certain limitations and other restrictions. At December 31, 1998 and 1997, we provided a valuation reserve of $71,139,000 and $49,588,000, respectively, against certain of our consolidated deferred tax assets. Net Income (Loss) Our consolidated net income (loss) for the years ended December 31, 1998, 1997 and 1996 was ($6,372,000), $23,005,000 and $15,907,000, respectively. Our space and ground infrastructure systems sector generated net income of approximately $52,521,000, $45,670,000 and $27,474,000 for 1998, 1997 and 1996, respectively. Our satellite access products sector reported net losses of $16,318,000 for 1998, as compared to net income of $5,638,000 in 1997 and $4,520,000 in 1996. Our satellite services sector generated net losses of $42,575,000, $28,303,000 and $16,087,000 in 1998, 1997 and 1996, respectively, and such losses are expected to increase in 1999 primarily as a result of increased losses at ORBCOMM. During 1998, our satellite access products sector continued to face increased competition in consumer products and slower sales of automotive navigation products, placing pressure on revenues and margins. Magellan has introduced new products and is implementing cost savings measures intended to moderate the unfavorable trends experienced in 1998 in this sector. In addition, this sector incurred significant costs in 1998 associated with the integration and restructuring of Ashtech and Magellan and research and development with respect to new products and enhancements of existing products. Net income for 1997 included a $21,810,000 gain on the issuance of Magellan stock. LIQUIDITY AND CAPITAL RESOURCES Our growth has required substantial capital to fund expanding working capital needs, investments in affiliates, certain business acquisitions, new business initiatives, research and development and capital expenditures. We have funded these requirements to date, and expect to fund our future requirements, through cash generated by operations, working capital, loan facilities, asset-based financings, joint venture arrangements and private and public equity and debt offerings. We expect to continue to pursue potential acquisitions, new business opportunities and equity investments that we believe would enhance our businesses and to fund such transactions through existing cash, loan facilities, joint ventures, the issuance of equity and/ or debt securities, asset-based financings, and cash generated by operations. At December 31, 1998, cash and investments were $25,686,000, and we had total debt obligations outstanding of approximately $208,095,000. The outstanding debt is comprised of our $100,000,000 5% convertible subordinated notes, advances under our line of credit facilities, secured and unsecured notes, and asset-based financings. Cash and investments at December 31, 1998 included approximately $7,757,000 of cash and short-term investments restricted against outstanding letters of credit. Our current ratio was 1.2 at December 31, 1998 and 1997. In 1998, we amended and restated our primary credit facility to increase the maximum amount available under a revolving line of credit from $100,000,000 to $200,000,000 and to modify certain financial covenants. At December 31, 1998, $36,000,000 was outstanding on the facility. During the first quarter of 1999, the facility was amended to modify a financial covenant to provide full availability under the facility. The interest rate charged under the facility is a variable rate based on the prime rate or LIBOR. The weighted average interest rate on borrowings outstanding under this facility at December 31, 1998 was 7.5%. The facility is secured by accounts receivable, 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. During 1998, we provided $34,500,000 in capital to ORBCOMM. We currently estimate that our share of additional funding for ORBCOMM's 1999 capital needs could exceed $30,000,000, of which $18,450,000 has been contributed so far in 1999. We expect to fund our share of ORBCOMM's capital needs through existing resources, including our primary credit facility. In addition, during 1998, Orbital deferred invoicing ORBCOMM for approximately $35,144,000 of work performed under our ORBCOMM satellite and launch procurement agreement. During 1999, we may defer up to $25,000,000 of invoicing for work done under our 20 23 ORBCOMM procurement agreement. One-half of the deferred invoice amounts has been, and is expected to continue to be, advanced to Orbital by an affiliate of Teleglobe Inc. Our operations provided net cash of approximately $48,205,000 during 1998. Also during 1998, in addition to our investment in ORBCOMM, we invested approximately (i) $22,000,000 in CCI, (ii) $48,263,000 in capital expenditures for various satellite and launch vehicle production, manufacturing and test equipment and office equipment, and (iii) $22,751,000 in business acquisitions. In the event CCI meets various operational and financial milestones, we may invest an additional $28,000,000 in CCI over the next two years. We are expanding our offices and satellite-related engineering, manufacturing and operations facilities adjacent to our Dulles, Virginia headquarters. Construction is scheduled to commence in the first half of 1999 and we expect completion in 2001. To finance the majority of this expansion, Orbital is pursuing various financing alternatives, including third-party debt financings and a "build-to-suit" agreement. On March 18, 1999, MDA and Toronto-based Spar Aerospace Limited signed an asset purchase agreement pursuant to which MDA will acquire Spar's robotics division for approximately $43,000,000 in cash. The transaction is expected to close during the second quarter of 1999. Approximately one-half of the purchase price will be paid at closing and the balance is payable one year from closing. We expect to fund the first installment of the purchase price through an existing credit facility, and have received a commitment from a lender to finance the second installment due in 2000. In late 1998, we agreed to enter into an exclusive $50,000,000 joint venture with Hertz whereby Hertz will offer Magellan's automotive navigation systems in its rental cars in the U.S., Canada and Europe. The agreement, which is subject to negotiation of the joint venture documents, contemplates that we will receive a 60% interest in the venture in exchange for a $30,000,000 investment to be made during 1999 and 2000. We expect that our capital needs for 1999 will be provided by working capital, cash flows from operations, existing or new credit facilities, and operating lease arrangements. To support further business expansion, we may also consider equity and debt financings. NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 becomes effective June 15, 1999 and will require the company to disclose additional information on its hedging activities. Also in 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). Initial application by the company of SOP 98-5 was as of January 1, 1998. This SOP requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 also amended certain sections of Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1"), which addresses revenue recognition on long-term contracts using the percentage-of-completion method of accounting. The impact of adopting SOP 98-5 in 1998 was not significant. YEAR 2000 ISSUES We have developed a plan to prepare for potential "Year 2000" issues with respect to various operational, technical and financial computer-related systems. The plan has been designed to minimize risk to Orbital and its customers using a standard industry five-phase approach. The five phases are awareness, assessment, renovation, validation and implementation. We have substantially completed the awareness and assessment phases, including preparation of a comprehensive inventory of potentially affected systems. In many cases renovation work is well underway and validation testing has begun with respect to certain critical systems. We currently plan to achieve our overall goal of Year 2000 readiness in mid-1999. The first half of 1999 will be devoted to renovating, validating and implementing our corrective action plan by reprogramming 21 24 affected software when appropriate and feasible, obtaining vendor-provided software upgrades when available and completely replacing affected systems when necessary. The total costs to implement the plan, which costs include the already planned replacement of existing systems to support our overall growth, are estimated to be well less than one percent of 1998 revenues. Approximately 70% of the estimated costs to implement the plan have been incurred to date and the remaining costs are expected to be incurred in the remainder of 1999. All costs, including the cost of internal personnel, outside consultants, system replacements and other equipment, will be expensed as incurred, except for 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 the plan, formal communication with our suppliers, customers and other service providers has been initiated. To date, however, we have not determined whether "Year 2000" issues affecting key suppliers, significant customers (including the U.S. government), or critical service providers will materially impact our cash flows or operating results. A "reasonably likely worst case" scenario of the Year 2000 issue for Orbital could include: isolated performance problems with engineering, financial and administrative systems; isolated interruption of deliveries from critical suppliers; product liability or warranty issues; and the temporary inability of key customers to pay amounts due to Orbital. Contingency plans are being prepared, and will be implemented if necessary, including having sufficient liquidity available to sustain a temporary interruption of cash receipts during early 2000 and 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. OUTLOOK: ISSUES AND UNCERTAINTIES The Private Securities Litigation Reform Act of 1995 provides a safe harbor, in certain circumstances, for forward-looking statements made by or on behalf of Orbital. Orbital and its representatives may from time to time make written or verbal forward-looking statements, including statements contained in our filings with the SEC and in the report to stockholders. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to our sales and earnings growth, statements expressing general optimism about future operating results, statements relating to our belief about the outcome of pending litigation, and statements relating to our achievement of Year 2000 readiness are forward-looking statements within the meaning of the Act. The forward-looking statements are and will be based on management's then-current views and assumptions regarding future events and operating performance. The following are some of the factors that could cause actual results to differ materially from information contained in our forward-looking statements: Most of the products we and our affiliates develop and manufacture are technologically advanced and sometimes novel systems that must function under demanding operating conditions and are subject to significant technological change and innovation. We have occasionally experienced product failures or other operational problems. In addition to any costs resulting from product warranties or required remedial action, product failures may result in increased costs or loss of revenues due to postponement or cancellation of subsequently scheduled operations or product deliveries. Our financial performance generally, as well as the recoverability of our investments in ORBCOMM, ORBIMAGE and CCI and any other company in which we make a strategic investment, and investments that we make in the development of new technologies for new products or existing product enhancements, depend on several factors including, among other things, the successful and timely funding and implementation of innovative and novel technologies involving complex systems in a cost-effective manner, the establishment and expansion of commercial markets and customer acceptance, competition and such entities' ability to raise necessary capital. If we conclude at any time that our investments are not recoverable, we may be required to write off part or all of such investments. 22 25 Historically, we have made strategic acquisitions of businesses, and we routinely evaluate potential acquisition candidates that we believe would enhance our business. We have also historically pursued strategic alliances through joint ventures, and we routinely evaluate similar opportunities. Such transactions commonly involve certain risks including, among others, assimilating the acquired operations, technologies and personnel and maintaining appropriate standards, controls, procedures and policies, entering markets in which we have little or no direct prior experience, potentially losing key employees of acquired organizations, the diversion of management attention from other ongoing business concerns and resolving potential disputes with joint venture partners. At December 31, 1998, approximately 41% of our total firm contract backlog was derived from contracts with the U.S. government and its agencies or from subcontracts with prime contractors to the U.S. government. Most of our government contracts are funded incrementally on a year-to-year basis. Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies could materially adversely affect our financial condition or results of operations. Furthermore, contracts with the U.S. government may be terminated or suspended by the U.S. government at any time, with or without cause. Such contract suspensions or terminations could result in unreimbursable expenses or charges or otherwise adversely affect our business. The accuracy and appropriateness of our direct and indirect costs and expenses under our contracts with the U.S. government are subject to extensive regulation and audit by the Defense Contract Audit Agency or by other appropriate agencies of the U.S. government. These agencies have the right to challenge our cost estimates or allocations with respect to any such contract. A substantial portion of payments to us under U.S. government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies. The majority of our contracts, particularly for our space and ground infrastructure systems, are long-term contracts. We recognize revenues on long-term contracts using the percentage of completion method of accounting, whereby revenue, and therefore profit, is recognized based on actual costs incurred in relation to total estimated costs to complete the contract or based on specific delivery terms and conditions. Revenue recognition and profitability, if any, from a particular contract may be adversely affected to the extent that original cost estimates, estimated costs to complete or incentive or award fee estimates are revised, delivery schedules are delayed, or progress under a contract is otherwise impeded. The costs and other effects of pending or possible litigation or governmental investigations could have an adverse effect on our business and could divert the attention of management from ongoing business matters. Virtually all our products and services face significant competition from existing competitors, many of whom are larger and have substantially greater resources than we do. Furthermore, the possibility exists that other domestic or foreign companies or governments will seek to produce products or services that compete with our products or services. A foreign competitor could benefit from subsidies from, or other protective measures by, its home country. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any material exposure to interest rate changes, commodity price changes, foreign currency fluctuations, or similar market risks, although it does enter into forward exchange contracts to hedge against specific foreign currency fluctuations, principally with respect to the Canadian dollar. 23 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ 25 Consolidated Statements of Earnings......................... 26 Consolidated Balance Sheets................................. 27 Consolidated Statements of Stockholders' Equity............. 28 Consolidated Statements of Cash Flows....................... 29 Notes to Consolidated Financial Statements.................. 30
24 27 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Orbital Sciences Corporation: We have audited the accompanying consolidated balance sheets of Orbital Sciences Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orbital Sciences Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Washington, D.C. February 16, 1999, except as to note 12 which is as of March 18, 1999 25 28 ORBITAL SCIENCES CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Revenues.............................................. $ 734,277 $ 605,975 $ 461,435 Costs of goods sold................................... 546,721 456,772 336,261 ----------- ----------- ----------- Gross profit.......................................... 187,556 149,203 125,174 Research and development expenses..................... 44,597 26,355 22,179 Selling, general and administrative expenses.......... 109,727 89,502 76,019 Amortization of excess of purchase price over net assets acquired..................................... 7,939 3,852 3,134 ----------- ----------- ----------- Income from operations................................ 25,293 29,494 23,842 Net investment income, net of interest expense of $3,982, $429 and $2,486, respectively............... 2,567 1,475 (1,123) Equity in earnings (losses) of affiliates............. (45,092) (26,034) (6,454) Non-controlling interests in (earnings) losses of consolidated subsidiaries........................... 10,610 2,638 1,473 Gain on sales of subsidiary equity.................... 4,793 21,810 -- Acquisition expenses.................................. -- (4,343) -- ----------- ----------- ----------- Income (loss) before provision for income taxes....... (1,829) 25,040 17,738 Provision for income taxes............................ 4,543 2,035 1,831 ----------- ----------- ----------- Net income (loss)..................................... $ (6,372) $ 23,005 $ 15,907 =========== =========== =========== Net income (loss) per common share.................... $ (0.18) $ 0.71 $ 0.55 =========== =========== =========== Shares used in computing net income (loss) per common share............................................... 35,624,888 32,283,138 29,137,361 =========== =========== =========== Net income (loss) per common share, assuming dilution............................................ $ (0.18) $ 0.69 $ 0.55 =========== =========== =========== Shares used in computing net income (loss) per common share, assuming dilution............................ 40,336,587 33,980,747 31,616,119 =========== =========== ===========
See accompanying notes to consolidated financial statements. 26 29 ORBITAL SCIENCES CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------- 1998 1997 -------- -------- ASSETS Current Assets: Cash and cash equivalents.............................. $ 17,764 $ 6,391 Restricted cash and short-term investments, at market................................................ 7,922 8,735 Receivables, net....................................... 205,409 180,204 Inventories, net....................................... 64,710 59,239 Deferred income taxes and other assets................. 8,252 5,889 -------- -------- Total current assets.............................. 304,057 260,458 -------- -------- Property, plant and equipment, at cost, less accumulated depreciation and amortization of $103,450 and $79,347, respectively.............................................. 157,075 137,498 Investments in and advances to affiliates, net.............. 237,589 159,230 Excess of purchase price over net assets acquired, less accumulated amortization of $27,542 and $19,794, respectively.............................................. 228,624 208,295 Deferred income taxes and other assets...................... 35,393 28,511 -------- -------- TOTAL ASSETS...................................... $962,738 $793,992 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term borrowings and current portion of long-term obligations........................................... $ 26,814 $ 29,317 Accounts payable....................................... 39,093 36,217 Accrued expenses....................................... 110,833 98,588 Deferred revenue....................................... 73,987 46,138 -------- -------- Total current liabilities......................... 250,727 210,260 -------- -------- Long-term obligations, net of current portion............... 181,281 198,394 Other liabilities........................................... 3,007 2,443 -------- -------- Total liabilities................................. 435,015 411,097 -------- -------- Non-controlling interests in net assets of consolidated subsidiaries.............................................. 17,150 27,794 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, 37,018,256 and 32,481,719 shares outstanding, respectively, after deducting 20,877 shares held in treasury............................... 370 325 Additional paid-in capital............................. 490,540 326,187 Accumulated other comprehensive income (loss).......... (7,225) (4,671) Retained earnings...................................... 26,888 33,260 -------- -------- Total stockholders' equity........................ 510,573 355,101 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $962,738 $793,992 ======== ========
See accompanying notes to consolidated financial statements. 27 30 ORBITAL SCIENCES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED OTHER COMMON STOCK ADDITIONAL COMPREHENSIVE RETAINED ------------------- PAID-IN INCOME EARNINGS SHARES AMOUNT CAPITAL (LOSS) (DEFICIT) TOTAL ------ ------ ---------- ------------- --------- ----- Balance, December 31, 1995..... 26,766,029 $268 $247,580 $(3,288) $(5,652) $238,908 Conversion of convertible debentures................ 3,895,653 39 53,598 -- -- 53,637 Shares issued in private offering.................. 1,200,000 12 20,251 -- -- 20,263 Shares issued to employees and directors............. 298,916 3 2,163 -- -- 2,166 Comprehensive income (loss): Net income (loss)......... -- -- -- -- 15,907 15,907 Translation adjustment.... -- -- -- (325) -- (325) Unrealized losses on short-term investments............. -- -- -- (54) -- (54) ---------- ---- -------- ------- ------- -------- Total comprehensive income (loss).................... -- -- -- (379) 15,907 15,528 ---------- ---- -------- ------- ------- -------- Balance, December 31, 1996..... 32,160,598 322 323,592 (3,667) 10,255 330,502 Shares issued to employees and directors............. 321,121 3 2,595 -- -- 2,598 Comprehensive income (loss): Net income (loss)......... -- -- -- -- 23,005 23,005 Translation adjustment.... -- -- -- (1,262) -- (1,262) Unrealized gains on short-term investments............. -- -- -- 258 -- 258 ---------- ---- -------- ------- ------- -------- Total comprehensive income (loss).................... -- -- -- (1,004) 23,005 22,001 ---------- ---- -------- ------- ------- -------- Balance, December 31, 1997..... 32,481,719 325 326,187 (4,671) 33,260 355,101 Shares issued in public offering.................. 3,450,000 34 150,118 -- -- 150,152 Shares issued to employees and directors............. 1,086,537 11 14,235 -- -- 14,246 Comprehensive income (loss): Net income (loss)......... -- -- -- -- (6,372) (6,372) Translation adjustment.... -- -- -- (2,282) -- (2,282) Unrealized losses on short-term investments............. -- -- -- (272) -- (272) ---------- ---- -------- ------- ------- -------- Total comprehensive income (loss).................... -- -- -- (2,554) (6,372) (8,926) ---------- ---- -------- ------- ------- -------- Balance, December 31, 1998..... 37,018,256 $370 $490,540 $(7,225) $26,888 $510,573 ========== ==== ======== ======= ======= ========
See accompanying notes to consolidated financial statements. 28 31 ORBITAL SCIENCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 --------- --------- -------- Cash Flows from Operating Activities: Net income (loss)........................................... $ (6,372) $ 23,005 $ 15,907 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expenses................. 36,563 23,854 25,096 Equity in losses of affiliates......................... 45,092 26,034 6,454 Non-controlling interests in losses of consolidated subsidiaries......................................... (10,610) (2,638) (1,473) (Gain) loss on sales of subsidiary equity, fixed assets and investments, net................................. (5,097) (21,810) 226 Foreign currency translation adjustment................ (2,282) (1,262) (325) Changes in assets and liabilities: (Increase) decrease in receivables..................... (22,469) 10,915 (29,916) (Increase) decrease in inventories..................... (3,207) (26,602) 10,261 (Increase) decrease in other assets.................... (7,534) (537) 1,317 Increase (decrease) in accounts payable and accrued expenses............................................. 11,993 (11,181) (11,051) Increase in deferred revenue........................... 13,433 3,742 919 Increase (decrease) in other liabilities............... (1,305) 6,363 (2,954) --------- --------- -------- Net cash provided by operating activities............ 48,205 29,883 14,461 --------- --------- -------- Cash Flows from Investing Activities: Capital expenditures................................... (48,263) (45,012) (43,544) Proceeds from sales of assets, net..................... 620 34,682 9,518 Purchases of available-for-sale investment securities........................................... (2,500) (25,328) (5,623) Sales of available-for-sale investment securities...... -- 22,209 11,041 Maturities of available-for-sale investment securities........................................... 2,408 6,631 8,220 Investments in and advances to affiliates.............. (116,128) (107,110) (21,991) Payments for business acquisitions, net of cash acquired............................................. (22,751) (66,558) -- --------- --------- -------- Net cash used in investing activities................ (186,614) (180,486) (42,379) --------- --------- -------- Cash Flows from Financing Activities: Net short-term borrowings (repayments)................. 1,940 (3,700) 26,200 Principal payments on long-term obligations............ (79,556) (20,237) (7,502) Net proceeds from issuance of long-term obligations.... 63,000 163,078 -- Fees associated with conversion of debentures.......... -- -- (2,571) Net proceeds from issuances of common stock............ 164,398 2,598 22,429 --------- --------- -------- Net cash provided by financing activities............ 149,782 141,739 38,556 --------- --------- -------- Net Increase (Decrease) in Cash and Cash Equivalents........ 11,373 (8,864) 10,638 Cash and Cash Equivalents, beginning of year................ 6,391 15,255 4,617 --------- --------- -------- Cash and Cash Equivalents, end of year...................... $ 17,764 $ 6,391 $ 15,255 ========= ========= ========
See accompanying notes to consolidated financial statements. 29 32 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Orbital Sciences Corporation (together with its subsidiaries, "Orbital" or the "company"), a Delaware corporation, is a leading space and information systems company that designs, manufactures, operates and markets a broad range of space-related products and services that are grouped into three 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 satellite ground systems and software. Satellite access products include satellite-based navigation, positioning and communications products and transportation management systems. Satellite services include satellite-based two-way mobile data communications, satellite-based remote imaging and satellite-based voice communications services. Disaggregated financial information is presented in note 2. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Orbital, all wholly and partially owned subsidiaries controlled by Orbital, and partnerships in which Orbital directly or indirectly controls the general partner interests. All material transactions and accounts among consolidated entities have been eliminated in consolidation. PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS The preparation of 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 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 programmatic risks and uncertainties. Actual results could differ from these estimates. Certain reclassifications have been made to the 1997 and 1996 financial statements to conform to the 1998 financial statement presentation. All financial amounts are stated in U.S. dollars unless otherwise indicated. REVENUE RECOGNITION Orbital recognizes revenues on long-term contracts using the percentage-of-completion method of accounting. Accordingly, (i) revenues on cost-plus-fee contracts are recognized to the extent of costs incurred plus a proportionate amount of fee earned, and (ii) revenues on fixed-price contracts are recognized based on costs incurred in relation to total estimated costs, or based on specific delivery terms and conditions. To the extent that estimated costs of completion are adjusted, revenue and profit recognized from a particular contract will be affected in the period of the adjustment. Anticipated contract losses are recognized as they become known. Revenues from sales of satellite access products and satellite services are generally recognized when the product is shipped or the service is performed. FOREIGN CURRENCY Orbital's operating entities conduct business in a number of countries and deal in a number of foreign currencies. The financial results of foreign operations are translated into U.S. dollars using year-end exchange rates for assets and liabilities and using weighted average exchange rates for revenues, expenses, gains and losses. Translation gains and losses relating to foreign operations that are self-contained and integrated within a particular country or economic environment, and therefore are not dependent on the U.S. dollar, are recognized as a separate component of stockholders' equity until there is a realized reduction in Orbital's net 30 33 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) investment in the foreign operation. Translation losses in 1998, 1997 and 1996 were approximately $2,282,000, $1,262,000 and $325,000, respectively. Transaction gains and losses relating to foreign operations that are a direct and integral component or extension of Orbital's domestic operations, and therefore are dependent on the U.S. dollar, are reported currently as a component of net income. Orbital enters into forward exchange contracts to hedge against foreign currency fluctuations on certain receivables and payables. Gains and losses on contracts to hedge specific foreign currency commitments are deferred and accounted for as part of the underlying transaction. RESEARCH AND DEVELOPMENT Research and development expenses include self-funded product development activities and exclude direct customer-funded development and are expensed as incurred. Research and development expenses are allocated, when appropriate, to U.S. government contracts under government-mandated cost accounting standards. DEPRECIATION, AMORTIZATION AND RECOVERABILITY OF LONG-LIVED ASSETS Depreciation and amortization are provided using the straight-line method as follows: Buildings................................ 18 to 20 years Machinery, equipment, software and intellectual property.................. 3 to 10 years Satellite systems........................ 5 to 7 years Shorter of estimated useful life or lease Leasehold improvements................... term
Orbital's policy is to review its long-lived assets, including excess of purchase price over net assets acquired, investments in and advances to affiliates, and specialized equipment used to support specific space-related products, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The company recognizes an impairment loss when the sum of expected future cash flows is less than the carrying amount of the asset. Given the inherent technical and commercial risks within the space industry, it is possible that the company's current expectation that it will recover the carrying amount of its long-lived assets from future operations may change. INCOME TAXES The company recognizes income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a tax rate change on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. STOCK-BASED COMPENSATION On January 1, 1996, the company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which requires companies to (i) recognize as expense the fair value of all stock-based awards on the date of grant, or (ii) continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issues to Employees" ("APB 25") and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as 31 34 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) if the fair-value-based method defined in SFAS 123 had been applied. The company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure in accordance with the provisions of SFAS 123. EARNINGS PER SHARE The company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), in the fourth quarter of 1997. SFAS 128 requires companies to present basic earnings per share and diluted earnings per share, instead of the primary and fully diluted earnings per share that had previously been required. 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 shares and dilutive 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. CASH AND INVESTMENTS Orbital considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Investments in securities that do not meet the definition of cash equivalents are classified as short-term investments. Since Orbital does not intend to hold its investments in debt and equity securities until maturity and does not actively trade the securities to maximize trading gains, Orbital classifies these securities as "available-for-sale" and, accordingly, reports such securities at fair value plus accrued interest. Any temporary excess (deficiency) of market value over (under) the underlying cost of the short-term investment is excluded from current period earnings and is reported as unrealized gains (losses) as a separate component of stockholders' equity. In addition, at December 31, 1998 and 1997, the company had approximately $7,757,000 and $6,162,000, respectively, of cash and short-term investments restricted to support outstanding letters of credit. 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 ("FIFO") or specific identification basis. 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). Finished goods inventory consists of fully assembled commercial products awaiting shipment. SELF-CONSTRUCTED ASSETS AND INTERNALLY DEVELOPED SOFTWARE The company self-constructs much of its ground and airborne support and special test equipment used in the manufacture, production and delivery of many of its space infrastructure products. Orbital also develops and manufactures product improvements and enhancements to existing products for sale. Orbital capitalizes certain costs incurred in constructing ground and airborne support and special test equipment, product improvements and enhancements, and satellite systems. Capitalized costs generally include direct construction costs and certain allocated indirect costs, and exclude general and administrative and research and development costs. The company also capitalizes certain internal costs incurred in developing software to be used to support various products. Capitalized costs generally include direct software coding costs and certain allocated indirect 32 35 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) costs, and exclude general and administrative and research and development costs. Amortization of capitalized software costs begins when the software is placed in service and totalled $1,050,000 in 1998 (none in prior years). INVESTMENTS IN AND ADVANCES TO AFFILIATES The company uses the equity method of accounting for its investments in and advances to, and equity in earnings (losses) of, affiliates, in which the company has the ability to significantly influence, but not control, the affiliates' operations. In accordance with the equity method of accounting, the company's carrying amount of an investment in an affiliate is initially recorded at cost and is increased to reflect its proportionate share of the affiliate's income and is reduced to reflect its proportionate share of the affiliate's losses. For those investments for which Orbital has provided substantially all of the investee's funding, the company uses the modified equity method of accounting whereby 100% of the investee's current period earnings or losses are recognized. Orbital's investment is also increased to reflect contributions to, and decreased to reflect distributions received from, the affiliate. Any excess of the amount of Orbital's investment over the amount of the underlying equity in each affiliate's net assets is amortized over a period of 20 years. The company capitalizes interest costs on equity method investments when an affiliate has significant assets under construction. At December 31, 1998 and 1997, approximately $41,334,000 and $25,576,000, respectively, of interest costs had been capitalized cumulatively as part of the historical cost of investments in and advances to affiliates. The company uses the cost method of accounting for investments in affiliates in which it cannot control or significantly influence operations. EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED The company amortizes the excess of purchase price over net assets acquired related to prior business combinations on a straight-line basis over its estimated useful life, generally 10-40 years. Orbital periodically assesses and evaluates the recoverability of such assets based on current facts and circumstances and the operational performance of the acquired businesses. SALES OF SUBSIDIARY EQUITY At times, the company may divest a portion or all its ownership in its subsidiaries through the sale of subsidiary equity or through the issuance of additional subsidiary equity. The company recognizes the difference between the carrying amount of its interest in the subsidiary equity sold and the fair market value of the equity as a gain or loss upon divestiture or issuance when the company believes the realization of the gain or loss is assured. The company recognized a gain on sale of subsidiary equity of $4,793,000 and $21,810,000 in 1998 and 1997, respectively. The 1998 gain related to the issuance of additional equity by the company's affiliate, Orbital Imaging Corporation ("ORBIMAGE"), while the 1997 gain related to the issuance of additional equity by the company's majority owned subsidiary, Magellan Corporation ("Magellan"). WARRANTIES The company occasionally accepts warranty clauses in its commercial and government contracts. In the event the company does not purchase insurance coverage to protect itself in connection with such warranty clauses, the company records a liability for warranty claims when it determines that a specific material liability exists. The company at times provides limited warranties on certain commercial products and accrues an estimate of expected warranty costs based on historical experience. 33 36 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 becomes effective June 15, 1999 and will require the company to disclose additional information on its hedging activities. Also in 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). Initial application by the company of SOP 98-5 was as of January 1, 1998. This SOP requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 also amended certain sections of Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1"), which addresses revenue recognition on long-term contracts using the percentage-of-completion method of accounting. The impact of adopting SOP 98-5 in 1998 was not significant. 2. DISAGGREGATED FINANCIAL INFORMATION INDUSTRY SECTOR INFORMATION During 1998, the company adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). The adoption of SFAS 131 had no significant impact on the manner of presentation of Orbital's disaggregated financial information in prior years. Orbital's operations are organized into three business sectors, which correspond to the different markets served by the company's products and services, as well as the manner in which these products and services are managed. Orbital's 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 satellite ground systems and software. Satellite access products include satellite-based navigation products, satellite positioning and communications products and transportation management systems. Satellite services include satellite-based two-way mobile data communications, satellite-based remote imaging and satellite-based voice communications services. The following table presents operating information and identifiable assets 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 sector. There were no significant sales or transfers between consolidated sectors.
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (In thousands) SPACE AND GROUND INFRASTRUCTURE SYSTEMS: Revenues............................................... $617,126 $534,419 $388,814 Operating income....................................... 54,223 47,953 26,376 Identifiable assets.................................... 593,818 519,264 362,700 Capital expenditures................................... 42,813 42,823 27,529 Depreciation and amortization.......................... 29,051 21,491 21,954
34 37 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. DISAGGREGATED FINANCIAL INFORMATION -- (CONTINUED)
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (In thousands) SATELLITE ACCESS PRODUCTS: Revenues............................................... $116,392 $ 71,384 $ 71,188 Operating income (loss)................................ (24,891) (11,754) 4,902 Non-controlling interests in losses of consolidated subsidiaries......................................... 8,847 8,151 -- Gain on sale of subsidiary equity...................... -- 21,810 -- Identifiable assets.................................... 127,392 141,550 32,376 Capital expenditures................................... 5,450 1,692 3,402 Depreciation and amortization.......................... 7,512 1,962 944 SATELLITE SERVICES: Revenues............................................... $ 759 $ 172 $ 1,433 Operating loss......................................... (4,039) (6,705) (7,436) Equity in earnings (losses) of affiliates.............. (45,092) (26,034) (6,454) Non-controlling interests in (earnings) losses of consolidated subsidiaries............................ 1,763 (5,513) 1,473 Gain on sale of subsidiary equity...................... 4,793 -- -- Identifiable assets.................................... 241,528 133,178 105,694 Capital expenditures................................... -- 497 12,613 Depreciation and amortization.......................... -- 401 2,198 CONSOLIDATED: Revenues............................................... $734,277 $605,975 $461,435 Operating income....................................... 25,293 29,494 23,842 Equity in earnings (losses) of affiliates.............. (45,092) (26,034) (6,454) Non-controlling interests in losses of consolidated subsidiaries......................................... 10,610 2,638 1,473 Gain on sales of subsidiary equity..................... 4,793 21,810 -- Identifiable assets.................................... 962,738 793,992 500,770 Capital expenditures................................... 48,263 45,012 43,544 Depreciation and amortization.......................... 36,563 23,854 25,096
DOMESTIC AND NON-U.S. OPERATIONS The following table presents Orbital's revenues, operating income (loss) and identifiable assets by major originating location:
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (In thousands) REVENUES: United States.......................................... $648,885 $525,144 $392,130 Canada and Mexico...................................... 71,820 75,584 65,350 Other.................................................. 13,572 5,247 3,955 -------- -------- -------- Total............................................. $734,277 $605,975 $461,435 ======== ======== ========
35 38 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. DISAGGREGATED FINANCIAL INFORMATION -- (CONTINUED)
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (In thousands) OPERATING INCOME (LOSS): United States.......................................... $ 20,403 $ 27,959 $ 21,183 Canada and Mexico...................................... 6,460 1,465 2,416 Other.................................................. (1,570) 70 243 -------- -------- -------- Total............................................. $ 25,293 $ 29,494 $ 23,842 ======== ======== ======== IDENTIFIABLE ASSETS: United States.......................................... $901,130 $740,790 $450,394 Canada and Mexico...................................... 56,591 50,690 46,984 Other.................................................. 5,017 2,512 3,392 -------- -------- -------- Total............................................. $962,738 $793,992 $500,770 ======== ======== ========
EXPORT SALES AND MAJOR CUSTOMERS Orbital's sales to geographic areas were as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (In thousands) United States............................................... $551,591 $447,041 $349,555 Canada...................................................... 48,330 39,274 46,742 Far East.................................................... 39,196 32,875 17,517 Middle East and other....................................... 38,486 24,326 13,859 Southeast Asia.............................................. 28,976 35,688 -- Europe...................................................... 27,698 26,771 33,762 -------- -------- -------- Total............................................. $734,277 $605,975 $461,435 ======== ======== ========
Approximately 46%, 38% and 45% of the company's revenues in 1998, 1997 and 1996, respectively, were generated under contracts with the U.S. government and its agencies or under subcontracts with the U.S. government's prime contractors. 3. INVESTMENTS IN AND ADVANCES TO AFFILIATES ORBCOMM In 1993, the company's subsidiary, Orbital Communications Corporation ("OCC"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), an affiliate of Teleglobe Inc. ("Teleglobe"), formed a partnership, ORBCOMM Global, L.P. ("ORBCOMM"), for the design, development, construction, integration, testing and operation of a low-Earth orbit satellite communications system (the "ORBCOMM System"). OCC and Teleglobe Mobile are each 50% general partners in ORBCOMM. Additionally, OCC is a 2% general partner in ORBCOMM USA, L.P. ("ORBCOMM USA") and Teleglobe Mobile is a 2% general partner in ORBCOMM International Partners, L.P. ("ORBCOMM International"), two partnerships formed to market the ORBCOMM System. ORBCOMM is a 98% general partner in each of the two marketing partnerships. Pursuant to the terms of the partnership agreements, (i) OCC and Teleglobe Mobile share equal responsibility for the operational and financial affairs of ORBCOMM, (ii) OCC controls and consolidates the operational and financial affairs of ORBCOMM USA, and (iii) Teleglobe Mobile controls the operational 36 39 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED) and financial affairs of ORBCOMM International. Since OCC is unable to control, but is able to exercise significant influence over ORBCOMM's and ORBCOMM International's operational and financial affairs, the company accounts for its investments in ORBCOMM and ORBCOMM International using the equity method of accounting. Orbital is the primary supplier to ORBCOMM of its communications satellites, launch vehicles and certain of its satellite ground systems and software. During 1998, 1997 and 1996, Orbital recorded sales to ORBCOMM of approximately $35,479,000, $57,988,000 and $47,215,000, respectively. During 1998, Orbital deferred invoicing ORBCOMM for approximately $35,144,000 for work done under a satellite and launch procurement agreement. Approximately one-half of the deferred invoice amount has been advanced to Orbital by an affiliate of Teleglobe. This deferral is classified as an advance to ORBCOMM and is repayable by December 31, 1999, or at the time of ORBCOMM's initial public offering, whichever occurs first. In addition, since 1995 Orbital has provided certain administrative services to ORBCOMM on a cost-reimbursable basis. During 1998, 1997 and 1996, Orbital was reimbursed approximately $3,183,000, $2,298,000 and $1,295,000, respectively, for such services. At December 31, 1998 and 1997, Orbital had approximately $118,627,000 and $84,291,000, respectively, in investments in and advances to ORBCOMM, of which $49,570,000 and $32,704,000, respectively, represented receivables and deferred invoicing (net of the amount advanced by Teleglobe). At December 31, 1998 and 1997, ORBCOMM had approximately $346,634,000 and $316,969,000 in total assets, $241,844,000 and $210,551,000 in total liabilities and $104,790,000 and $106,418,000 of total partners' capital, respectively. ORBCOMM recorded approximately $1,262,000 and $527,000 in revenues and $69,628,000 and $31,436,000 in net losses for the years ended December 31, 1998 and 1997, respectively. ORBIMAGE In 1997, the company's then-subsidiary, ORBIMAGE, completed a private placement of equity. Since Orbital is unable to control, but is able to exercise significant influence over ORBIMAGE's operational and financial affairs, the company uses the equity method of accounting for its 60% ownership interest in ORBIMAGE. As of December 31, 1998 and 1997, the company's investments in and advances to ORBIMAGE were $94,973,000 and $86,987,000, respectively. Orbital is the primary supplier to ORBIMAGE of imaging satellites, launch services and satellite ground systems and software. During the years ended December 31, 1998 and 1997, Orbital recorded sales to ORBIMAGE of approximately $89,006,000 and $88,618,000, respectively. Additionally, Orbital provides certain administrative services to ORBIMAGE on a cost-reimbursable basis. During 1998 and 1997, Orbital was reimbursed approximately $1,985,000 and $1,444,000, respectively, for such administrative services. At December 31, 1998 and 1997, the company had total receivables due from ORBIMAGE of approximately $18,725,113 and $3,548,000, respectively. At December 31, 1998 and 1997, ORBIMAGE had approximately $307,969,000 and $137,750,000 in total assets, $194,597,000 and $52,389,000 in total liabilities and $113,372,000 and $85,361,000 of total stockholders' equity, respectively. ORBIMAGE recorded approximately $11,663,000 and $2,062,000 in revenues and $5,519,000 and $4,082,000 in net losses for the years ended December 31, 1998 and 1997, respectively. CCI INTERNATIONAL, N.V. In 1998, the company entered into a stock purchase agreement with CCI International, N.V. ("CCI"), a corporation that plans to provide satellite-based voice-communication services. In connection with the execution of the agreement, the company and CCI entered into a satellite and launch vehicle procurement 37 40 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED) contract valued at approximately $480,000,000 for the satellites (and a price to be determined for the launch vehicles in the event Orbital procures them). Pursuant to this contract, the company recorded $6,556,000 in sales to CCI during 1998. As of December 31, 1998, the company's investment in and advances to CCI was $21,382,000. The company currently owns 40% of CCI and may make additional investments in CCI during 1999, and uses the modified equity method of accounting to account for its investment in CCI. OTHER INVESTMENTS The company owns equity interests in several emerging space-related companies. The cost basis of these investments was approximately $6,947,000 and $7,275,000, respectively, at December 31, 1998 and 1997. The company provides a valuation allowance against investments in affiliates when it is determined that recovery of all or part of the investment is not probable. At December 31, 1998 and 1997, approximately $4,338,000 and $4,886,000 of allowance had been recorded against certain of these investments. 4. BUSINESS COMBINATIONS RAYTHEON COMPANY On December 31, 1998, the company acquired the transportation management systems business of Raytheon Company for approximately $21,000,000 in cash. The acquired business produces satellite-based automatic vehicle location systems for public transit fleets. The company accounted for the acquisition using the purchase method of accounting. The purchase price exceeded the fair value of the net assets acquired by approximately $19,931,000, which is being amortized on a straight-line basis over 15 years. ASHTECH INC. On December 31, 1997, Orbital merged Magellan with Ashtech Inc. ("Ashtech"). To effect the merger Orbital paid approximately $52,800,000 to former Ashtech stockholders consisting of $25,000,000 in cash and approximately 23,954,000 shares of Magellan common stock, and now owns a controlling interest of approximately 66% of Magellan. Orbital recognized a gain of $21,810,000 on the issuance of the shares of Magellan common stock. The merger was accounted for using the purchase method of accounting. The purchase price exceeded the fair value of the net assets acquired by approximately $73,002,000, which is being amortized on a straight-line basis over 20 years. CTA INCORPORATED On August 15, 1997, Orbital acquired substantially all the assets, including all the stock of certain subsidiaries, and certain liabilities relating to the satellite manufacturing and communications services businesses of CTA Incorporated ("CTA"). The financial results of the acquired businesses have been included in the company's consolidated results since August 15, 1997. As consideration, Orbital paid approximately $13,000,000 in cash, and repaid $27,000,000 of outstanding debt related to the acquired business. The company accounted for the acquisition using the purchase method of accounting. The purchase price exceeded the preliminary estimates of fair value of the net assets acquired by approximately $65,724,000, which is being amortized on a straight-line basis over 30 years. During 1998, the company revised the preliminary allocation of the purchase price to the fair value of the net assets acquired and received a $2,100,000 refund of the initial purchase price pursuant to the terms of the acquisition agreement, resulting in a net increase in goodwill of approximately $4,500,000. During the five years following the closing, CTA will also be entitled to receive (i) royalties from $500,000 to $3,000,000 for sales by the company of certain geostationary satellites in excess of certain threshold sales, and (ii) 3% of cumulative revenues in excess of $50,000,000 earned during such period from the acquired transportation management business of CTA. 38 41 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. BUSINESS COMBINATIONS -- (CONTINUED) ROCKWELL INTERNATIONAL CORPORATION. In July 1997, Orbital acquired from Rockwell International Corporation ("Rockwell") the assets and certain liabilities associated with Rockwell's automotive navigation product line. Orbital paid approximately $3,550,000 in cash and issued Rockwell a $4,350,000 unsecured note. The company accounted for the acquisition using the purchase method of accounting. The purchase price exceeded the fair value of the net assets acquired by approximately $2,262,000, which is being amortized on a straight-line basis over 10 years. The following unaudited, supplemental financial information presents the consolidated results of operations, on a pro forma basis, as though the acquisitions were consummated on January 1, 1997:
DECEMBER 31, --------------------- 1998 1997 --------- --------- (In thousands, except per share data) Revenues.................................................... $753,349 $719,699 Net income (loss)........................................... $ (9,454) $ 21,434 Net income (loss) per common share.......................... $ (0.27) $ 0.66 Net income (loss) per common share, assuming dilution....... $ (0.27) $ 0.64
The allocation of purchase price to net assets acquired in 1998 may be adjusted in 1999 if additional information becomes known about certain business assumptions used to estimate the fair value of such net assets. In October 1996, Orbital's wholly owned subsidiary, MacDonald, Dettwiler and Associates Ltd. ("MDA"), sold substantially all the assets of The PSC Communications Group Inc. for approximately $13,000,000, resulting in a gain of approximately $3,600,000. The gain was included in revenues in the 1996 consolidated statement of earnings. 5. BALANCE SHEET ACCOUNTS SHORT-TERM INVESTMENTS The following table sets forth the aggregate amortized cost, aggregate fair value and gross unrealized gains for Orbital's short-term investments in debt securities:
DECEMBER 31, --------------- 1998 1997 ------ ------ (In thousands) Amortized cost.............................................. $2,665 $2,301 Fair value.................................................. 2,665 2,573 ------ ------ Unrealized gains............................................ $ -- $ 272 ====== ======
During 1998, the company did not realize any significant gains on sales of investments corresponding to unrealized gains included in other comprehensive income as of December 31, 1997. All debt securities held at December 31, 1998 are scheduled to mature in 1999. 39 42 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. BALANCE SHEET ACCOUNTS -- (CONTINUED) INVENTORY Inventories, net of allowances for obsolescence, consisted of the following:
DECEMBER 31, ------------------- 1998 1997 -------- -------- (In thousands) Components and raw materials................................ $ 14,488 $ 24,913 Work-in-process............................................. 51,747 35,246 Finished goods.............................................. 6,690 9,980 Allowance for inventory obsolescence........................ (8,215) (10,900) -------- -------- Total............................................. $ 64,710 $ 59,239 ======== ========
Work-in-process inventory was reduced by contractual progress payments received of $5,624,000 and $5,899,000 at December 31, 1998 and 1997, respectively. ACCOUNTS RECEIVABLE The components of receivables were as follows:
DECEMBER 31, ------------------- 1998 1997 -------- -------- (In thousands) Billed and billable......................................... $102,443 $118,613 Recoverable costs and accrued profit not billed............. 119,549 73,536 Retainages due upon contract completion..................... 4,987 6,132 Allowance for doubtful accounts............................. (21,570) (18,077) -------- -------- Total............................................. $205,409 $180,204 ======== ========
Approximately 84% of recoverable costs and accrued profit not billed and retainages due upon contract completion at December 31, 1998 is due within one year and will be billed on the basis of contract terms and delivery schedules. The accuracy and appropriateness of Orbital's direct and indirect costs and expenses under its government contracts, and therefore its receivables recorded pursuant to such contracts, are subject to extensive regulation and audit by the U.S. Defense Contract Audit Agency or by other appropriate agencies of the U.S. government, which have the right to challenge Orbital's cost estimates or allocations with respect to any such contracts. Additionally, a substantial portion of the payments to the company under government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies. In the opinion of management, any adjustments likely to result from inquiries or audits of its contracts will not have a material adverse impact on the company's financial condition or results of operations. At December 31, 1998 and 1997, $50,165,000 and $43,294,000, respectively, were receivable from non-U.S. customers. The company enters into forward exchange contracts in an effort to hedge against foreign currency fluctuations on certain receivables and payables denominated in foreign currencies. Accordingly, Orbital is subject to off-balance sheet market risk for the possibility that future changes in market prices may make the forward exchange contracts less valuable. The following table summarizes at December 31, 1998, 40 43 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. BALANCE SHEET ACCOUNTS -- (CONTINUED) outstanding foreign exchange contracts to sell (purchase) foreign currencies, along with current market values:
CURRENCIES CURRENT UNREALIZED HEDGED CONTRACT MARKET GAIN FOREIGN CURRENCY HEDGED AGAINST AMOUNT VALUE (LOSS) ----------------------- ---------- -------- ------- ---------- (U.S. dollars, in thousands) Australian Dollars............................ CD $ 144 $ 142 $ (2) Belgian Francs................................ CD 243 232 (11) European Currency Units....................... CD 2,053 2,023 (30) European Currency Units....................... PS 759 732 (27) Pounds Sterling............................... CD (373) (384) (11) Norwegian Kroner.............................. CD 1,016 981 (35) U.S. Dollars.................................. CD 16,430 14,917 (1,513) U.S. Dollars.................................. PS 64 66 2
- - ------------------------ CD -- Canadian Dollars PS -- Pounds Sterling MDA is also subject to off-balance sheet risk for a letter-of-credit facility to cover foreign exchange commitments. At December 31, 1998, $10,000,000 of letters of credit were secured by this facility and $37,000,000 remained available. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following:
DECEMBER 31, -------------------- 1998 1997 --------- -------- (In thousands) Land........................................................ $ 4,123 $ 852 Buildings and leasehold improvements........................ 21,557 22,112 Machinery and equipment..................................... 160,795 136,310 Equipment and satellite systems under construction.......... 38,035 41,821 Software, intellectual property and technical drawings...... 36,015 15,750 Accumulated depreciation and amortization................... (103,450) (79,347) --------- -------- Total............................................. $ 157,075 $137,498 ========= ========
Interest expense of approximately $2,084,000, $90,000 and $1,430,000 was capitalized during 1998, 1997 and 1996, respectively, as part of the historical cost of land, buildings and equipment under construction. 41 44 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. BALANCE SHEET ACCOUNTS -- (CONTINUED) ACCRUED EXPENSES Accrued expenses consisted of the following:
DECEMBER 31, ------------------- 1998 1997 -------- -------- (In thousands) Payroll, payroll taxes and fringe benefits.................. $ 39,289 $ 28,291 Payable to subcontractors................................... 18,703 15,534 Accrued contract costs...................................... 32,118 38,866 Other accrued expenses...................................... 20,723 15,897 -------- -------- Total............................................. $110,833 $ 98,588 ======== ========
Approximately $6,520,000 and $16,332,000 of accrued contract costs at December 31, 1998 and 1997, respectively, related to certain contracts acquired in 1997. 6. DEBT OBLIGATIONS The following sets forth long-term obligations, excluding capital lease obligations (see note 7):
DECEMBER 31, ------------------- 1998 1997 -------- -------- (In thousands) 7% note, principal and interest due monthly through 1998.... $ -- $ 631 7.09 - 9.35% notes, principal and interest due monthly 1998-1999................................................. 3,098 7,421 8.25% bank note, principal and interest due monthly through 2001...................................................... 1,142 -- 7.19% - 8.64% notes, principal and interest due monthly through 2003.............................................. 24,428 24,562 8.41% note, principal and interest due monthly through 2005...................................................... 8,439 9,407 6% note, principal and interest due semi-annually through 2000...................................................... 2,900 4,350 6% bank notes, principal and interest due monthly through 2002...................................................... 1,823 1,964 12% note, interest due semi-annually, principal due 1999-2001................................................. 20,000 20,000 7.5% bank notes, interest and principal due quarterly through 2002.............................................. 36,000 47,750 5% convertible subordinated notes, interest due semi-annually, principal due 2002......................... 100,000 100,000 -------- -------- 197,830 216,085 LESS CURRENT PORTION........................................ (19,236) (18,189) -------- -------- LONG-TERM PORTION........................................... $178,594 $197,896 ======== ========
The 7.09% - 9.35% notes are secured by certain equipment located at the company's Germantown, Maryland facility. The 8.25% bank note is secured by certain Magellan assets. The 7.19% - 8.64% notes are secured by certain office, computer and test equipment located at the company's Germantown, Maryland, Chandler, Arizona and Dulles, Virginia facilities. The 8.41% note is secured by the company's L-1011 aircraft. The 6% note is unsecured. The 6% bank notes due 2002 are secured by MDA's accounts receivable, inventory and certain other assets. The related credit agreements contain certain covenants with respect to MDA's leverage ratio and tangible net worth. 42 45 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. DEBT OBLIGATIONS -- (CONTINUED) The company's 12% unsecured note restricts the payment of cash dividends and contains certain covenants with respect to fixed charges ratio, leverage ratio and tangible net worth, and includes certain cross-default provisions. Orbital's primary credit facility from an international syndicate of six banks was amended and restated in 1998 to increase maximum borrowings to $200,000,000 from $100,000,000. The interest rate charged under the facility is a variable rate based on the prime rate or LIBOR. The weighted average interest rate on borrowings outstanding under this facility at December 31, 1998 was 7.5%. Outstanding borrowings are collateralized by the company's accounts receivable. The facility prohibits the payment of cash dividends and contains certain covenants with respect to the company's working capital levels, fixed charge ratio, leverage ratio and net worth, and expires in December 2002. On September 16, 1997, Orbital sold $100,000,000 of 5% convertible subordinated notes due October 2002. The notes, which are non-callable for three years, are convertible at the option of the holders into Orbital common stock at a conversion price of $28.00 per share, subject to adjustment in certain events. The fair value of Orbital's long-term obligations at December 31, 1998 and 1997 is estimated at approximately $127,830,000 and $178,455,000, respectively. Fair value estimates are based on quoted market prices or on current rates offered for debt of similar remaining maturities. Scheduled maturities of long-term debt for each of the years in the five-year period ending December 31, 2003 and thereafter are $19,236,000, $16,614,000, $15,491,000, $142,366,000, $1,668,000 and $2,455,000, respectively. Magellan maintains its own short-term credit facility. At December 31, 1998 and 1997, approximately $6,008,000 and $6,567,000 was outstanding on this facility at an average borrowing rate of 9.25% and 8%, respectively. These borrowings are secured by Magellan's accounts receivable, inventory, equipment and general intangibles. In 1996, ORBCOMM issued $170,000,000 senior unsecured notes due 2004 (the "ORBCOMM Notes") to institutional investors. The ORBCOMM Notes bear interest at a fixed rate of 14% and provide for noteholder participation in future ORBCOMM service revenues. The ORBCOMM Notes are fully and unconditionally guaranteed on a joint and several basis by OCC and Teleglobe Mobile. The guarantee is non- recourse to Orbital. 43 46 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LEASE COMMITMENTS Aggregate minimum rental commitments under non-cancelable operating and capital leases (primarily for office space and equipment) at December 31, 1998 were as follows:
OPERATING CAPITAL --------- ------- (In thousands) 1999........................................................ $14,425 $ 1,877 2000........................................................ 13,462 1,308 2001........................................................ 10,995 1,213 2002........................................................ 9,135 202 2003........................................................ 8,878 169 2004 and thereafter......................................... 29,948 -- ------- ------- $86,843 4,769 ======= Less interest at 10%........................................ (512) Less current portion........................................ (1,570) ------- Long-term portion........................................... $ 2,687 =======
Rent expense for 1998, 1997 and 1996 was approximately $14,124,000, $10,870,000 and $12,300,000, respectively. 8. INCOME TAXES The provisions for income taxes consisted of the following:
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (In thousands) CURRENT PROVISION: U.S. Federal.............................................. $ -- $ -- $ -- Foreign................................................... 1,394 1,283 1,831 State..................................................... -- -- -- DEFERRED PROVISION: U.S. Federal.............................................. -- -- -- Foreign................................................... 3,149 752 -- State..................................................... -- -- -- ------ ------ ------ Total............................................. $4,543 $2,035 $1,831 ====== ====== ======
44 47 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. INCOME TAXES -- (CONTINUED) The income tax provisions were different from those computed using the statutory U.S. Federal income tax rate as set forth below:
YEARS ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 ------ ----- ----- U.S. Federal statutory rate................................. (35.0)% 35.0% 35.0% Changes in valuation allowance.............................. 652.4 (36.1) (15.0) Investments in affiliates and non-controlling interests in net assets of consolidated subsidiaries................... (568.9) -- -- Intangible amortization..................................... 126.6 5.0 13.2 Foreign income taxes, net................................... 60.0 3.3 (12.9) Other, net.................................................. 13.3 0.9 (10.0) ------ ----- ----- Effective rate.................................... 248.4% 8.1% 10.3% ====== ===== =====
The tax effects of significant temporary differences were as follows:
DECEMBER 31, ------------------ 1998 1997 -------- ------- (In thousands) TAX ASSETS: U.S. Federal net operating loss carryforward.............. $106,390 $64,261 Non-deductible financial statement accruals............... 49,384 55,792 U.S. Federal and foreign tax credit carryforward.......... 9,993 11,219 Intangible assets......................................... 5,012 5,988 -------- ------- 170,779 137,260 Valuation allowance....................................... (71,139) (49,588) -------- ------- Tax assets, net........................................ $ 99,640 $87,672 ======== ======= TAX LIABILITIES: Excess deductions for tax reporting purposes.............. $ 48,827 $34,850 Excess tax depreciation................................... 27,216 15,916 Investments in subsidiaries/affiliates.................... 7,627 16,790 Percentage-of-completion accounting....................... 5,049 5,211 -------- ------- Tax liabilities........................................ $ 88,719 $72,767 ======== =======
In 1998, 1997 and 1996 approximately $8,300,000, $5,200,000 and $4,900,000, respectively, of income (loss) before provision for income taxes was generated from foreign sources. At December 31, 1998, the company had U.S. federal net operating loss carryforwards (portions of which expire beginning in 2004) of approximately $278,000,000, U.S. research and experimental income tax credit carryforwards of approximately $3,148,000, and foreign investment income tax credit carryforwards (subject to expiration in 2008) of approximately $5,000,000. Such net operating loss carryforwards and tax credits are subject to certain limitations and other restrictions. Additionally, at December 31, 1998, approximately $43,000,000 of net deferred tax assets will reduce goodwill and approximately $9,700,000 of net deferred tax assets will reduce equity to the extent such assets reduce future taxable income. Management believes that it is more likely than not that the net deferred tax assets recorded will be realized in the future. 45 48 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. COMMON STOCK AND STOCK OPTION PLANS In October 1998, the company adopted a stockholder rights plan in which preferred stock purchase rights were granted as a dividend at the rate of one right for each share of common stock to stockholders of record on November 13, 1998. The plan is designed to deter coercive or unfair takeover tactics. The rights become exercisable only if a person or group in the future becomes the beneficial owner of 15% or more of Orbital's common stock, or announces a tender or exchange offer that would result in its ownership of 15% of more of the company's common stock. The rights are generally redeemable by Orbital's Board of Directors at a redemption price of $0.005 per right and expire on October 31, 2008. Effective January 1, 1999, the company adopted, subject to stockholder approval, an Employee Stock Purchase Plan ("ESPP") for employees of the company (including its consolidated U.S. subsidiaries). Under the ESPP, eligible employees may purchase up to 1,000,000 shares of Orbital's common stock, subject to certain limitations. The ESPP has semi-annual offering periods beginning on January 1 and July 1 and allows employees to purchase shares of stock at the lesser of 85% of the fair market value of shares at either the beginning or the end of the offering period. Also effective January 1, 1999, the company adopted a similar employee stock purchase plan for its Canadian employees to purchase up to 500,000 shares of Orbital common stock. As of December 31, 1998, the company's 1997 Stock Option and Incentive Plan (the "1997 Plan") provided for awards of up to 3,200,000 incentive or non-qualified stock options and shares of restricted stock to employees, directors, consultants and advisors of the company and its subsidiaries. In January 1999, the Board approved an amendment to the 1997 Plan to increase the number of shares available for option grants by 1,800,000 to 5,000,000. Under the terms of the 1997 Plan, options may not be issued at less than 100% of the fair market value of the company's common stock on the date of grant. Options under the 1997 Plan vest at a rate set forth by the Board of Directors in each individual option agreement, generally in one-third increments over a three-year period following the date of grant. Options expire no more than ten years following the grant date. The 1997 Plan provides for automatic grants of non-qualified stock options to nonemployee directors of the company. The company also has options outstanding that were issued pursuant to two predecessor plans to the 1997 Plan as well as replacement options issued in connection with certain acquisitions. The following two tables summarize information regarding options under the company's stock option plans for the last three years:
WEIGHTED AVERAGE OUTSTANDING NUMBER OF OPTION PRICE EXERCISE AND ORBITAL OPTIONS SHARES PER SHARE PRICE EXERCISABLE --------------- ---------- ------------ -------- ----------- Outstanding at December 31, 1995....... 2,240,525 $1.82-$22.00 $14.16 1,133,713 Granted.............................. 1,372,000 12.25-17.63 13.26 Exercised............................ (298,916) 1.82-17.75 7.20 Cancelled or expired................. (588,399) 3.51-22.00 20.23 ---------- Outstanding at December 31, 1996....... 2,725,210 1.82-22.00 13.10 1,324,316 Granted.............................. 1,908,650 13.50-24.00 17.29 Exercised............................ (326,263) 1.82-18.81 10.43 Cancelled or expired................. (300,306) 1.82-22.00 15.12 ---------- Outstanding at December 31, 1997....... 4,007,291 1.84-24.00 15.16 1,549,185 Granted.............................. 2,236,700 18.38-38.44 32.49 Exercised............................ (1,086,537) 1.76-20.75 13.39 Cancelled or expired................. (713,898) 3.51-38.44 35.07 ---------- Outstanding at December 31, 1998....... 4,443,556 $3.51-$38.44 $21.09 1,548,218 ========== ============ ====== =========
46 49 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- --------------------------------- WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT DEC. 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE AT DEC. 31, 1998 EXERCISE PRICE --------------- ---------------- ---------------- -------------- ---------------- -------------- $ 3.51-$16.50 1,987,735 6.66 $14.30 1,064,127 $13.43 $16.63-$30.69 1,959,821 8.76 $24.26 450,757 $18.60 $32.88-$38.44 496,000 9.35 $35.77 33,334 $32.88 ------------- --------- ---- ------ --------- ------ $ 3.51-$38.44 4,443,556 7.88 $21.09 1,548,218 $15.36 ============= ========= ==== ====== ========= ======
OCC adopted a stock option plan in 1992 (the "OCC Plan"). The OCC Plan provides for grants of incentive and non-qualified stock options to purchase OCC common stock to officers and employees of ORBCOMM and the company. Under the terms of the OCC Plan, incentive stock options may not be granted at less than 100% of the fair market value, and non-qualified options may not be granted at less than 85% of the fair market value of OCC common stock at the date of grant as determined by OCC's Board of Directors. Options under the OCC Plan vest at a rate set forth by the Board of Directors in each individual option agreement, generally in one-fourth increments over a four-year period following the date of grant. Certain provisions of the OCC Plan require OCC to repurchase, with cash or promissory notes, the common stock acquired pursuant to the options. The cash repurchase amount is restricted by the terms of the ORBCOMM Notes to an amount not to exceed $1,000,000 in any one year. During 1998 and 1997, OCC repurchased 1,000 and 43,800 shares, respectively, of OCC common stock under this provision. The following two tables summarize information regarding options under the OCC Plan for the last three years:
WEIGHTED AVERAGE OUTSTANDING NUMBER OF OPTION PRICE EXERCISE AND OCC OPTIONS SHARES PER SHARE PRICE EXERCISABLE ----------- --------- ------------ -------- ----------- Outstanding at December 31, 1995........ 545,900 $1.50-$14.00 $ 5.56 411,086 Granted............................... 154,500 17.00-25.00 20.50 Exercised............................. (67,270) 1.50-13.00 2.43 Cancelled or expired.................. (34,300) 1.50-17.00 13.81 --------- Outstanding at December 31, 1996........ 598,830 1.50-25.00 9.40 393,903 Granted............................... 284,500 26.50 26.50 Exercised............................. (20,900) 1.50-25.00 6.68 Cancelled or expired.................. (112,600) 1.50-25.00 14.86 --------- Outstanding at December 31, 1997........ 749,830 1.50-26.50 15.22 415,804 Granted............................... 305,300 26.50-39.75 32.37 Exercised............................. (32,600) 1.50-13.00 3.15 Cancelled or expired.................. (17,700) 1.50-26.50 23.94 --------- Outstanding at December 31, 1998........ 1,004,830 $1.50-$39.75 $20.40 520,864 ========= ============ ====== =======
47 50 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED)
WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT DEC. 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE AT DEC. 31, 1998 EXERCISE PRICE --------------- ---------------- ---------------- -------------- ---------------- -------------- $ 1.50-$13.00 345,530 4.10 $ 4.96 345,530 $ 4.96 $17.00-$25.00 77,500 7.19 $20.35 43,750 $19.97 $26.50-$39.75 581,800 8.83 $29.58 131,584 $26.50 ------------- --------- ---- ------ ------- ------ $ 1.50-$39.75 1,004,830 7.08 $20.40 520,864 $11.66 ============= ========= ==== ====== ======= ======
Magellan adopted a stock option plan in 1998 (the "1998 Magellan Plan"). The 1998 Magellan Plan authorizes the issuance of incentive or non-qualified options to purchase up to 19,900,000 shares of Magellan common stock to Magellan and Orbital employees, consultants or advisors. Stock options may not be granted with an exercise price less than 85% of the fair market value of the common stock at the date of grant as determined by Magellan's Board of Directors. Options under the 1998 Magellan Plan vest at a rate set forth by the Board of Directors in each individual option agreement, generally in one-third increments over a three-year period following the date of the grant. There are also Magellan options outstanding that were issued pursuant to an option plan adopted in 1996. The following two tables summarize information regarding options under Magellan's stock option plans for the last three years:
WEIGHTED OUTSTANDING NUMBER OF OPTION PRICE AVERAGE AND MAGELLAN OPTIONS SHARES PER SHARE EXERCISE PRICE EXERCISABLE ---------------- ---------- ------------ -------------- ----------- Outstanding at December 31, 1995............. -- -- -- -- Granted.................................... 6,915,900 $ 1.10 $1.10 Exercised.................................. -- -- -- Cancelled or expired....................... (322,300) 1.10 1.10 ---------- Outstanding at December 31, 1996............. 6,593,600 1.10 1.10 667,539 Granted.................................... 1,717,500 1.10 1.10 Exercised.................................. (103,909) 1.10 1.10 Cancelled or expired....................... (1,427,531) 1.10 1.10 ---------- Outstanding at December 31, 1997............. 6,779,660 1.10 1.10 2,528,097 Granted.................................... 15,307,204 0.40 0.40 Exercised.................................. (21,300) 0.40-1.10 $0.98 Cancelled or expired....................... (5,093,210) 0.40-1.10 1.03 ---------- Outstanding at December 31, 1998............. 16,972,354 $0.40-$1.10 $0.47 5,389,208 ========== =========== ===== =========
WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT DEC., 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE AT DEC., 31, 1998 EXERCISE PRICE --------------- ----------------- ---------------- -------------- ----------------- -------------- $0.40-$0.40 15,268,917 8.28 $0.40 3,900,075 $0.40 $1.10-$1.10 1,703,437 7.59 $1.10 1,489,133 $1.10 ----------- ---------- ---- ----- --------- ----- $0.40-$1.10 16,972,354 8.21 $0.47 5,389,208 $0.59 =========== ========== ==== ===== ========= =====
In connection with Magellan's merger with Ashtech on December 31, 1997, Magellan assumed Ashtech's option plan and issued replacement options that are exercisable into Magellan common stock. At December 31, 1998, 650,077 non-qualified replacement options were outstanding, 494,561 of which were 48 51 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED) exercisable at prices ranging from $0.81 to $1.72. The weighted average remaining contractual life on these outstanding options is seven years. 10. STOCK-BASED COMPENSATION The company uses the Black-Scholes option pricing model to determine the pro forma impact under SFAS 123 to the company's net income and earnings per share. The model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the option being valued, and requires certain assumptions, such as the expected amount of time an option will be outstanding until it is exercised or it expires, to calculate the weighted average fair value per share of stock options granted. This information and the assumptions used for 1998, 1997 and 1996 for all option plans is summarized as follows:
ADDITIONAL SHARES WEIGHTED AVERAGE AVAILABLE AT RISK-FREE FAIR VALUE DECEMBER 31, VOLATILITY INTEREST RATE PER SHARE AT GRANT DATE ----------------------------- ------------------ ------------------ ------------------------ 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996 --------- ------- ------- ---- ---- ---- ---- ---- ---- ------ ------ ------ Orbital Plans........ 271,619 218,868 231,955 55% 54% 56% 5.8% 6.1% 5.3% $32.49 $17.29 $13.26 OCC Plan............. 56,925 48,878 20,778 30% 30% 30% 5.4% 6.1% 5.6% $32.37 $26.50 $20.50 Magellan Plans....... 9,892,346 116,431 406,400 30% 30% 30% 5.5% 5.9% 6.4% $ 0.40 $ 1.10 $ 1.10
The assumed expected dividend yield was zero for all years for all option plans. The assumed average expected life for all options for all years was 4.5 years. Had the company determined compensation expense in accordance with the provisions of SFAS 123, based on the calculated fair value of stock options at the grant date, the company's net income (loss), net income (loss) per common share and net income (loss) per common share, assuming dilution, would have been $(26,267,000), $(0.74) and $(0.65), respectively, for the year ended December 31, 1998; $11,804,000, $0.37 and $0.35, respectively, for the year ended December 31, 1997; and $7,202,000, $0.25 and $0.25, respectively, for the year ended December 31, 1996. Pro forma net income (loss) reflects only options granted in 1998, 1997 and 1996 and, therefore, may not be representative of the effects for future periods. In 1996, the company issued 150,000 stock appreciation rights that vested annually through 1998. Payment was dependent on appreciation of the company's common stock over the vesting period. The company recorded approximately $250,000 and $1,470,000, respectively, in compensation expense during 1998 and 1997 with respect to these rights (none in 1996). 11. SUPPLEMENTAL DISCLOSURES DEFINED CONTRIBUTION PLANS At December 31, 1998, the company had several defined contribution plans (the "Plans") generally covering all full-time employees in the U.S. and Canada. Company contributions to the Plans are made based on certain plan provisions and at the discretion of the Board of Directors, and were approximately $10,370,000, $9,108,000 and $7,097,000 during 1998, 1997 and 1996, respectively. 49 52 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. SUPPLEMENTAL DISCLOSURES -- (CONTINUED) CASH FLOWS Cash payments for interest and income taxes were as follows:
YEARS ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ------- ------- ------- (In thousands) Interest paid............................................ $16,032 $10,059 $10,860 Income taxes paid, net of refunds........................ 1,624 544 1,327
NET INCOME (LOSS) PER COMMON SHARE Net income (loss) and outstanding shares of common stock used in calculating earnings (loss) per share differed from those amounts reported in the consolidated financial statements as follows:
NET INCOME (LOSS) NET INCOME (LOSS) PER COMMON SHARE, PER COMMON SHARE ASSUMING DILUTION ----------------- ----------------- (In thousands) 1998 Net income (loss).......................................... $(6,372) N/A Assuming conversion of convertible notes................... -- N/A ------- ------- Net income (loss), as adjusted........................ $(6,372) N/A ======= ======= Outstanding common shares.................................. 37,018 N/A Effect of weighting for outstanding shares................. (1,393) N/A Dilutive impact of outstanding stock options............... -- N/A Assuming conversion of convertible notes................... -- N/A ------- ------- Adjusted shares....................................... 35,625 N/A ======= ======= 1997 Net income................................................. $23,005 $23,005 Assuming conversion of convertible notes................... -- 429 ------- ------- Net income, as adjusted............................... $23,005 $23,434 ======= ======= Outstanding common shares 32,482 32,482 Effect of weighting for outstanding shares (199) (199) Dilutive impact of outstanding stock options............... -- 656 Assuming conversion of convertible notes................... -- 1,042 ------- ------- Adjusted shares....................................... 32,283 33,981 ======= ======= 1996 Net income................................................. $15,907 $15,907 Assuming conversion of convertible notes................... -- 2,357 ------- ------- Net income, as adjusted............................... $15,907 $18,264 ======= ======= Outstanding common shares.................................. 32,161 32,161 Effect of weighting for outstanding shares................. (3,024) (3,024) Dilutive impact of outstanding stock options............... -- 83 Assuming conversion of convertible notes................... -- 2,396 ------- ------- Adjusted shares....................................... 29,137 31,616 ======= =======
50 53 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. SUPPLEMENTAL DISCLOSURES -- (CONTINUED) In periods of net loss, the assumed conversion of convertible notes and stock options are anti-dilutive. For the year ended December 31, 1998, assuming conversion of convertible notes and the dilutive impact of outstanding stock options, diluted shares would have been 40,336,587. SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Based on accounting decisions made in connection with the preparation of the company's consolidated year-end financial statements, the company restated its interim financial statements for the first three quarters of 1998. The following is a summary of selected quarterly financial data for the previous three years:
QUARTER ENDED ----------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- -------- -------- -------- (In thousands, except share data) 1998 Revenues............................................ $186,159 $184,516 $187,688 $175,914 Gross profit........................................ 51,374 50,851 46,493 38,838 Income (loss) from operations....................... 13,365 8,251 9,292 (5,615) Net income (loss)................................... 4,745 5,998 2,436 (19,551) Net income (loss) per common share.................. 0.14 0.17 0.07 (0.53) Net income (loss) per common share, assuming dilution.......................................... 0.13 0.17 0.06 (0.53) 1997 Revenues............................................ 122,112 142,226 164,670 176,967 Gross profit........................................ 33,678 39,673 46,015 29,837 Income from operations.............................. 6,047 11,005 12,249 193 Net income.......................................... 5,094 5,603 6,130 6,178 Net income per common share......................... 0.16 0.17 0.19 0.20 Net income per common share, assuming dilution...... 0.16 0.17 0.18 0.18 1996 Revenues............................................ 104,894 116,512 119,571 120,458 Gross profit........................................ 32,312 32,888 31,875 28,099 Income from operations.............................. 5,872 7,324 7,124 3,522 Net income.......................................... 3,128 3,839 4,456 4,484 Net income per common share......................... 0.12 0.14 0.15 0.14 Net income per common share, assuming dilution...... 0.12 0.14 0.15 0.14
12. SUBSEQUENT EVENTS AND OTHER MATTERS Litigation. In the first quarter of 1999, a number of class action lawsuits were filed in federal court in the Eastern District of Virginia against Orbital, an officer and an officer/director, alleging violations of the federal securities laws during the period from April 21, 1998 through February 16, 1999 and seeking monetary damages. In December 1998, Thomas van der Heyden filed a lawsuit in the Circuit Court for Montgomery County, Maryland alleging that Orbital is in actual or anticipatory breach of obligations allegedly imposed on Orbital in a judgment in a previous action brought by plaintiff against CTA. The plaintiff claims that he is entitled to a sum exceeding $30 million from Orbital, as successor-in-interest to CTA. The company believes that the allegations in the legal proceedings described above are without merit and intends to vigorously defend against the allegations. In addition, under the terms of the CTA acquisition, the company believes it is entitled to indemnification from CTA for all or a part of any damages arising from the van der Heyden litigation. Business Combinations. On March 12, 1999, Orbital and Magellan signed a merger agreement with Lowrance Electronics, Inc., a leading manufacturer of marine and recreational electronics using GPS-satellite navigation and sonar technology. Under the terms of the merger, Orbital will acquire all the outstanding 51 54 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. SUBSEQUENT EVENTS AND OTHER MATTERS -- (CONTINUED) common stock of Lowrance and Lowrance shareholders will receive between 745,000 and 1,250,000 shares of Orbital common stock, based on the fair market value of Orbital common stock prior to closing. Lowrance will be merged into Magellan at the closing and Orbital's ownership of Magellan following the merger will increase to approximately 85%. The transaction is expected to close in the second half of 1999. Closing is subject to regulatory approval and Lowrance shareholder approval. On March 18, 1999, MDA and Toronto-based Spar Aerospace Limited signed an asset purchase agreement pursuant to which MDA will acquire Spar's space robotics division for approximately $43,000,000 in cash, one half of which is payable upon closing, with the other half payable a year following closing. The acquisition will expand the company's product lines to include advanced robotics primarily for the manned space market. Orbital expects the transaction to close in the second quarter of 1999, subject to customary closing conditions. 52 55 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is included in Item 4A above and under the caption "Election of Directors -- Directors to be Elected at the 1999 Annual Meeting, -- Directors Whose Terms Expire in 2000 and -- Directors Whose Terms Expire in 2001" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement filed pursuant to Regulation 14A on or about March 29, 1999 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is included under the captions "Summary Compensation Table," "Option Grants in Last Fiscal Year," "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Indemnification Agreements," "Executive Employment Agreements" and "Information Concerning the Board and Its Committees" of the Proxy Statement filed pursuant to Regulation 14A on or about March 29, 1999 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is included under the caption "Ownership of Common Stock" of the Proxy Statement filed pursuant to Regulation 14A on or about March 29, 1999 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is included under the caption "Related Transactions" of the Proxy Statement filed pursuant to Regulation 14A on or about March 29, 1999 and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: 1. Financial Statements. The following financial statements, together with the report of KPMG LLP are filed as a part of this report: A. Independent Auditors' Report B. Consolidated Statements of Earnings C. Consolidated Balance Sheets D. Consolidated Statements of Stockholders' Equity E. Consolidated Statements of Cash Flows F. Notes to Consolidated Financial Statements 53 56 2. Financial Statements of 50-Percent Owned Subsidiary and Financial Statement Schedules. The financial statements of ORBCOMM Global, L.P. are transmitted with this report. The following additional financial data are transmitted with this report and should be read in conjunction with the Consolidated Financial Statements contained herein. Schedules other than those listed below have been omitted because they are inapplicable or are not required. Independent Auditors' Report on Consolidated Financial Statements Schedule II -- Valuation and Qualifying Accounts 3. 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 October 23, 1998, we filed a Current Report on Form 8-K, dated October 20, 1998, disclosing, under Item 5 our financial results for the fiscal quarter ending September 30, 1998. (ii) On November 2, 1998, we filed a Current Report on Form 8-K, dated October 30, 1998, disclosing under Item 5, the adoption of a stockholder rights plan. (c) See Item 14(a)(3) of this report. (d) See Item 14(a)(2) of this report. 54 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: March 29, 1999 ORBITAL SCIENCES CORPORATION By: /s/ DAVID W. THOMPSON ------------------------------------ David W. Thompson, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Dated: March 29, 1999
SIGNATURE TITLE --------- ----- /s/ DAVID W. THOMPSON Chairman of the Board, Principal Executive - - ------------------------------------------------ Officer and Director DAVID W. THOMPSON /s/ Jeffrey V. Pirone Executive Vice President and Chief - - ------------------------------------------------ Financial Officer JEFFREY V. PIRONE /s/ Michael P. Keegan Vice President and Controller - - ------------------------------------------------ MICHAEL P. KEEGAN Director - - ------------------------------------------------ FRED C. ALCORN /s/ Kelly H. Burke Director - - ------------------------------------------------ KELLY H. BURKE /s/ Bruce W. Ferguson Director - - ------------------------------------------------ BRUCE W. FERGUSON /s/ Daniel J. Fink Director - - ------------------------------------------------ DANIEL J. FINK /s/ Lennard A. Fisk Director - - ------------------------------------------------ LENNARD A. FISK /s/ Jack L. Kerrebrock Director - - ------------------------------------------------ JACK L. KERREBROCK /s/ Douglas S. Luke Director - - ------------------------------------------------ DOUGLAS S. LUKE
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SIGNATURE TITLE --------- ----- /s/ John L. McLucas Director - - ------------------------------------------------ JOHN L. MCLUCAS /s/ Janice I. Obuchowski Director - - ------------------------------------------------ JANICE I. OBUCHOWSKI Director - - ------------------------------------------------ FRANK L. SALIZZONI Director - - ------------------------------------------------ HARRISON H. SCHMITT /s/ James R. Thompson Director - - ------------------------------------------------ JAMES R. THOMPSON Director - - ------------------------------------------------ SCOTT L. WEBSTER
56 59 Independent Auditors' Report The Board of Directors and Stockholders Orbital Sciences Corporation: Under date of February 16, 1999, except as to note 12, which is as of March 18, 1999, we reported on the consolidated balance sheets of Orbital Sciences Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, as contained in the 1998 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in Item 14(a)2 in the Company's Form 10-K as of and for the years ended December 31, 1998, 1997 and 1996. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Washington, D.C. February 16, 1999, except as to note 12, which is as of March 18, 1999 60 ORBITAL SCIENCES CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C - - ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONS --------------------------------------------------- CHARGED/ BALANCE AT CHARGED TO COSTS CREDITED TO DESCRIPTION START OF PERIOD AND EXPENSES OTHER ACCOUNTS (1) - - -------------------------------------------------- ------------------------ ---------------------- ------------------------- YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts $ 773 $ 603 $ - Allowance for obsolete inventory 3,778 667 685 Allowance for unrecoverable investments 1,100 - - Deferred income tax valuation reserve 60,041 - - YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts $ 1,368 $ 709 $ 16,550 Allowance for obsolete inventory 5,098 1,527 4,902 Allowance for unrecoverable investments 1,100 729 3,057 Deferred income tax valuation reserve 52,233 - - YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts $ 18,077 $ 4,635 794 Allowance for obsolete inventory 10,900 6,023 4,161 Allowance for unrecoverable investments 4,886 552 (1,100) Deferred income tax valuation reserve 49,588 21,551 - COLUMN A COLUMN D COLUMN E - - ------------------------------------------------------------------------------------------------------------ BALANCE AT DESCRIPTION DEDUCTIONS (2) END OF PERIOD - - -------------------------------------------------- ------------------------- -------------------------- YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts $ (8) $ 1,368 Allowance for obsolete inventory (32) 5,098 Allowance for unrecoverable investments - 1,100 Deferred income tax valuation reserve (7,808) 52,233 YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts $ (550) $ 18,077 Allowance for obsolete inventory (627) 10,900 Allowance for unrecoverable investments - 4,886 Deferred income tax valuation reserve (2,645) 49,588 YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts (1,936) $ 21,570 Allowance for obsolete inventory (12,869) 8,215 Allowance for unrecoverable investments - 4,338 Deferred income tax valuation reserve - 71,139
(1)- Amounts charged/credited to other accounts represent valuation and qualifying accounts recorded pursuant to purchase business combinations as described in Note (4) to the consolidated financial statements incorporated by reference elsewhere herein, and certain other reclassifications. (2)- Deduction for revaluation of allowance account. 61 EXHIBIT INDEX The following exhibits are filed as part of this report. Where such filing is made by incorporation by reference to a previously filed statement or report, such statement or report is identified in parentheses.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - - ------- ---------------------- 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 (transmitted herewith). 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). 4.1 Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to the company's Registration Statement on Form S-1 (File Number 33-33453) filed on February 9, 1990 and effective on April 24, 1990). 4.2 Indenture dated as of September 16, 1997 between the company and Deutsche Bank AG, New York Branch, as Trustee (incorporated by reference to Exhibit 4.1 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 4.3 First Supplemental Indenture dated as of December 15, 1997 between the company and Deutsche Bank AG, New York Branch, as Trustee (incorporated by reference to Exhibit 4.4 to the company's Registration Statement on Form S-3 (File Number 333-42271) filed on December 15, 1997 and effective on March 12, 1998). 4.4 Form of 5% Convertible Subordinated Note (incorporated by reference to Exhibit 4.5 to the company's Registration Statement on Form S-3 (File Number 333-42271) filed on December 15, 1997 and effective on March 12, 1998). 4.5 Registration Rights Agreement dated as of September 16, 1997 among the company and Deutsche Morgan Grenfell Inc. and J.P. Morgan Securities Inc. (incorporated by reference to Exhibit 4.6 to the company's Registration Statement on Form S-3 (File Number 333-42271) filed on December 15, 1997 and effective on March 12, 1998). 4.6 Rights Agreement dated as of October 22, 1998 between the company and BankBoston N.A., as Rights Agent (incorporated by reference to Exhibit 1 to the company's Report on Form 8-A filed on November 2, 1998). 4.7 Form of Rights Certificate (incorporated by reference to Exhibit 3 to the company's Report on Form 8-A filed on November 2, 1998). 10.1 Third Amended and Restated Credit Agreement, dated as of December 21, 1998 among the company, Magellan Corporation, the Banks listed therein, Morgan Guaranty Trust Company of New York, as Administrative Agent and Collateral Agent (the "Credit Agreement") (transmitted herewith). 10.2 Note Agreement, dated as of June 14, 1995 between the company and The Northwestern Mutual Life Insurance Company (the "NWML Note Agreement") (incorporated by reference to Exhibit 4.7.1 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - - ------- ---------------------- 10.2.1 First Amendment to the NWML Note Agreement, dated as of June 30, 1995, between the company and The Northwestern Mutual Life Insurance Company (incorporated by reference to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.2.2 Second Amendment to the NWML Note Agreement, dated as of March 15, 1996 (incorporated by reference to Exhibit 10.2.2 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.2.3 Third Amendment to NWML Note Agreement, dated as of July 13, 1996 (incorporated by reference to Exhibit 10.2 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.2.4 Fourth Amendment to NWML Note Agreement, dated as of March 31, 1997 (incorporated by reference to Exhibit 10.2.4 to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). 10.2.5 Fifth Amendment to NWML Note Agreement, dated as of December 23, 1997 (incorporated by reference to Exhibit 10.2.5 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.2.6 Sixth Amendment to NWML Note Agreement, dated as of August 14, 1998 (incorporated by reference to Exhibit 10.2.6 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 10.3 Promissory Notes dated as of August 31, 1994 made by Fairchild Space and Defense Corporation and Corporate Guaranty dated August 31, 1994 made by the company (incorporated by reference to Exhibit 10.7 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.4 Amended and Restated Security Agreement dated as of August 5, 1997 among the company, Morgan Guaranty Trust Company, as Collateral Agent, and NationsBank, N.A., as Designated Lockbox Bank (incorporated by Reference to Exhibit 10.4 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.4.1 Security Agreement dated as of August 5, 1997 among the company, Morgan Guaranty Trust Company, as Collateral Agent, and NationsBank, N.A., as Designated Lockbox Bank (incorporated by Reference to Exhibit 10.4.1 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.5 Master Security Agreement dated as of August 31, 1994 between Fairchild Space and Defense Corporation and General Electric Capital Corporation (incorporated by reference to Exhibit 10.7 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.6 Orbital Sciences Corporation 1990 Stock Option Plan, restated as of April 27, 1995 (incorporated by reference to Exhibit 10.5.1 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).* 10.7 Orbital Sciences Corporation 1990 Stock Option Plan for Non-Employee Directors, restated as of April 27, 1995 (incorporated by reference 10.7 to Exhibit 10.5.2 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).* 10.8 Orbital Communications Corporation Restated 1992 Stock Option Plan, restated as of September 12, 1995 (incorporated by reference to Exhibit 10.8 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.8.1 Amendment to Orbital Communications Corporation Restated 1992 Stock Option Plan, dated February 5, 1997 (incorporated by reference to Exhibit 10.8.1 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).*
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - - ------- ---------------------- 10.9 Orbital Sciences Corporation 1995 Deferred Compensation Plan (incorporated by reference to Exhibit 10.9 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).* 10.10 Magellan Corporation 1996 Stock Option Plan (incorporated by reference to Exhibit 10.3 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).* 10.11 Orbital Imaging Corporation 1996 Stock Option Plan (incorporated by reference to Exhibit 10.11 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).* 10.12 Form of Executive Employment Agreement entered into between the Company and Executive Officers and certain other Officers of the Company (incorporated by reference to Exhibit 10.17 to the company's Registration Statement on Form S-1 (File Number 33-33453) filed on February 9, 1990 and effective on April 24, 1990).* 10.12.1 Performance Share Agreement dated October 23, 1996 between the Company and Mr. D. W. Thompson (incorporated by reference to Exhibit 10.12.1 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).* 10.12.2 Amendment No. 1 to Performance Share Agreement dated January 30, 1998 between the company and Mr. D.W. Thompson (incorporated by reference to Exhibit 10.12.2 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).* 10.13 Form of Indemnification Agreement entered into between the company and directors, executive Officers and certain other officers of the company (incorporated by reference to Exhibit 10.18 to the company's Registration Statement on Form S-1 (File Number 33-33453) filed on February 9, 1990 and effective on April 24, 1990).* 10.13.1 Amendment dated October 22, 1992 to form of Indemnification Agreement entered into between the company and directors, executive officers and certain other officers of the company (incorporated by reference to Exhibit 19 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992).* 10.15 Restated Master Agreement, dated as of September 12, 1995, by and among the company, OCC, Teleglobe Inc. and Teleglobe Mobile Partners (incorporated by reference to Exhibit 10 to ORBCOMM Global L.P.'s Registration Statement on Form S-4 (File Number 333-11149) filed on August 30, 1996. 10.15.1 Amendment No. 1 to Restated Master Agreement, restated as of September 12, 1995, by and among the company, OCC, Teleglobe Inc. and Teleglobe Mobile Partners filed on August 30, 1996 (incorporated by reference to Exhibit 10.15.1 to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). 10.16 Restated Agreement of Limited Partnership of ORBCOMM Global, L.P., dated as of September 12, 1995, between OCC and Teleglobe Mobile Partners (incorporated by reference to Exhibit 3.2 to ORBCOMM Global L.P.'s Registration Statement on Form S-4 (File Number 333-11149) filed on August 30, 1996. 10.16.1 Amendment No. 1 to Restated Agreement of Limited Partnership of ORBCOMM Global, L.P., dated December 2, 1996 (incorporated by reference to Exhibit 10.16.1 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 10.17 Restated Agreement of Limited Partnership of ORBCOMM USA, L.P., dated as of September 12, 1995 between Orbital Communications Corporation and ORBCOMM Global (incorporated by reference to Exhibit 3.4 to ORBCOMM Global L.P.'s Registration Statement on Form S-4 (File Number 333-11149) filed on August 30, 1996. 10.18 Amended and Restated Orbital Sciences Corporation 1997 Stock Option and Incentive Plan (transmitted herewith).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - - ------- ---------------------- 10.19 Promissory Note dated June 27, 1997 from the company payable to the order of General Electric Capital Corporation ("GECC") (incorporated by reference to Exhibit 10.19 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.20 Aircraft Security Agreement dated as of June 27, 1997 from the company to GECC (incorporated by reference to Exhibit 10.20 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.21 1998 Magellan Stock Option Plan (transmitted herewith). 10.22 Letter Agreement between the company and Robert Lovell dated July 28, 1997 (transmitted herewith).* 10.23 Form of 1998 Indemnification Agreement (transmitted herewith).* 10.24 Form of 1998 Executive Employment Agreement (transmitted herewith).* 11 Statement re: Computation of Earnings Per Share (transmitted herewith). 13.1 ORBCOMM Global, L.P. financial statements (transmitted herewith). 21 Subsidiaries of the Company (transmitted herewith). 23.1 Consent of KPMG LLP (transmitted herewith). 27 Financial Data Schedule for year ended December 31, 1998 (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-K, or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934) (transmitted herewith).
- - --------------- * Management Contract or Compensatory Plan or Arrangement. 60 EX-3.3 2 CERTIFICATE OF AMENDMENT TO RESTATED CERT. OF INC. 1 EXHIBIT 3.3 CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION OF ORBITAL SCIENCES CORPORATION Orbital Sciences Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify: FIRST: That at a meeting of the Board of Directors of the Corporation (the "Board") on January 24, 1997, the Board duly adopted the following resolutions in accordance with Section 242 of the General Corporation Law of the State of Delaware: RESOLVED, that the Board hereby declares it advisable and in the best interest of the Corporation that the first paragraph of Section 5 of the Restated Certificate of Incorporation of the Corporation be amended to read in its entirety as follows: "5. The total number of shares of stock that this Corporation shall have authority to issue is 90,000,000 shares consisting of 80,000,000 shares of Common Stock, $.01 par value per share (the "Common Stock") and 10,000,000 shares of Preferred Stock, $.01 par value per share (the "Preferred Stock") which may be issued as follows:" and FURTHER RESOLVED, that this amendment be submitted to the Corporation's stockholders for their approval; and that, subject to the approval of the stockholders, a Certificate setting forth such amendment and certifying that the amendment has been duly adopted in accordance with Section 242 of the General Corporation Law of the State of Delaware be executed, acknowledged, filed and recorded in accordance with Section 103 of the General Corporation Law of the State of Delaware. SECOND: That the said amendment has been considered and approved by the Corporation's stockholders at the Corporation's annual meeting of stockholders on April 24, 1997, called and held in accordance with the provisions of Section 222 of the General Corporation Law of the State of Delaware. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. 2 IN WITNESS WHEREOF, Orbital Sciences Corporation has caused this Certificate to be executed on its behalf by David W. Thompson, its President, and attested by Susan Herlick, its Assistant Secretary, as of this April 29, 1997. By: /s/ David W. Thompson ------------------------------- David W. Thompson President The foregoing is attested: By: /s/ Susan Herlick ------------------------------- Susan Herlick Assistant Secretary 3 PAGE 1 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE ------------------------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY (CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "ORBITAL SCIENCES CORPORATION", FILED IN THIS OFFICE ON THE THIRTIETH DAY OF APRIL, A.D. 1997, AT 9 O'CLOCK A.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING. [STATE OF DELAWARE SEAL] /s/ EDWARD J. FREEL ----------------------------------- EDWARD J. FREEL, SECRETARY OF STATE 2130792 8100 AUTHENTICATION: 8444504 971139853 DATE: 04-30-97 EX-10.1 3 THIRD AMENDED AND RESTATED CREDIT AGREEMENT 1 Exhibit 10.1 CONFORMED COPY $200,000,000 THIRD AMENDED AND RESTATED CREDIT AND REIMBURSEMENT AGREEMENT dated as of December 21, 1998 among Orbital Sciences Corporation The Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Administrative Agent and as Collateral Agent ---------------------------------------------- The Bank of Nova Scotia and NationsBank, N.A., Co-Syndication Agents 2 TABLE OF CONTENTS PAGE ---- ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions.....................................................2 SECTION 1.02. Accounting Terms and Determinations............................17 SECTION 1.03. Types of Borrowings............................................17 ARTICLE 2 THE CREDITS SECTION 2.01. Commitments to Lend............................................18 SECTION 2.02. Method of Borrowing............................................18 SECTION 2.03. Letters of Credit..............................................19 SECTION 2.04. Notes..........................................................22 SECTION 2.05. Maturity of Loans..............................................23 SECTION 2.06. Interest Rates.................................................23 SECTION 2.07. Commitment Fees................................................25 SECTION 2.08. Participation Fees.............................................25 SECTION 2.09. Optional Termination of the Commitments........................25 SECTION 2.10. Mandatory Termination of Commitments...........................25 SECTION 2.11. Optional Prepayments...........................................25 SECTION 2.12. General Provisions as to Payments..............................26 SECTION 2.13. Funding Losses.................................................26 SECTION 2.14. Computation of Interest and Fees...............................27 SECTION 2.15. Withholding Tax Exemption......................................27 SECTION 2.16. Method of Electing Interest Rates..............................28 ARTICLE 3 CONDITIONS SECTION 3.01. Effectiveness..................................................29 SECTION 3.02. Transitional Provisions........................................31 SECTION 3.03. All Credit Events..............................................31 SECTION 3.04. First Borrowing by Each Borrower Subsidiary....................32 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE CREDIT PARTIES SECTION 4.01. Corporate Existence and Power..................................33 3 SECTION 4.02. Corporate and Governmental Authorization No Contravention......33 SECTION 4.03. Binding Effect.................................................33 SECTION 4.04. Lien Enforceable...............................................33 SECTION 4.05. Assignments Valid..............................................34 SECTION 4.06. Financial Information..........................................34 SECTION 4.07. Litigation.....................................................34 SECTION 4.08. Compliance with ERISA..........................................35 SECTION 4.09. Environmental Matters..........................................35 SECTION 4.10. Taxes..........................................................35 SECTION 4.11. Subsidiaries...................................................36 SECTION 4.12. Full Disclosure................................................36 ARTICLE 5 COVENANTS SECTION 5.01. Information....................................................36 SECTION 5.02. Payment of Obligations.........................................39 SECTION 5.03. Maintenance of Property; Insurance.............................39 SECTION 5.04. Conduct of Business and Maintenance of Existence...............41 SECTION 5.05. Compliance with Laws...........................................41 SECTION 5.06. Inspection of Property, Books and Records......................41 SECTION 5.07. Investments....................................................41 SECTION 5.08. Minimum Consolidated Net Worth.................................44 SECTION 5.09. Leverage.......................................................44 SECTION 5.10. Consolidated Fixed Charge Ratio................................44 SECTION 5.11. Consolidated Loss Ratio........................................44 SECTION 5.12. Consolidated Delinquency Ratio.................................45 SECTION 5.13. Consolidated DSO Ratio.........................................45 SECTION 5.14. Negative Pledge................................................45 SECTION 5.15. Consolidations, Mergers and Sales of Assets....................47 SECTION 5.16. Use of Proceeds................................................47 SECTION 5.17. Subsidiary Debt................................................47 SECTION 5.18. Restricted Payments............................................47 ARTICLE 6 DEFAULTS SECTION 6.01. Events of Default..............................................48 SECTION 6.02. Notice of Default..............................................51 ARTICLE 7 THE AGENTS 4 SECTION 7.01. Appointment and Authorization..................................51 SECTION 7.02. Agents and Affiliates..........................................51 SECTION 7.03. Action by Agents...............................................51 SECTION 7.04. Consultation with Experts......................................52 SECTION 7.05. Liability of Agents............................................52 SECTION 7.06. Indemnification................................................52 SECTION 7.07. Credit Decision................................................52 SECTION 7.08. Successor Agents...............................................53 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair.......53 SECTION 8.02. Illegality.....................................................54 SECTION 8.03. Increased Cost and Reduced Return..............................54 SECTION 8.04. Base Rate Loans Substituted for Affected Euro-Dollar Loans.....56 ARTICLE 9 GUARANTY SECTION 9.01. The Guaranty...................................................57 SECTION 9.02. Guaranty Unconditional.........................................57 SECTION 9.03. Discharge Only upon Payment in Full; Reinstatement.............58 SECTION 9.04. Waiver by the Guarantor........................................58 SECTION 9.05. Limit of Liability.............................................58 SECTION 9.06. Subrogation....................................................58 SECTION 9.07. Stay of Acceleration...........................................58 ARTICLE 10 MISCELLANEOUS SECTION 10.01. Notices.......................................................59 SECTION 10.02. No Waiver.....................................................59 SECTION 10.03. Expenses; Documentary Taxes; Indemnification..................59 SECTION 10.04. Sharing of Set-Offs...........................................60 SECTION 10.05. Amendments and Waivers........................................61 SECTION 10.06. Successors and Assigns........................................61 SECTION 10.07. Collateral....................................................62 SECTION 10.08. Proprietary Information.......................................62 SECTION 10.09. Governing Law; Submission to Jurisdiction.....................63 SECTION 10.10. Counterparts; Integration.....................................63 5 SECTION 10.11. Severability..................................................63 SECTION 10.12. WAIVER OF JURY TRIAL..........................................63 PRICING SCHEDULE.............................................................69 SCHEDULE I - Investment Policies of the Company SCHEDULE II - Liens Existing on and as of the Effective Date SCHEDULE III - MDA Investments EXHIBIT A - Note EXHIBIT B - Opinion of Hogan & Hartson L.L.P., Special Counsel for the Borrowers EXHIBIT C - Opinion of Davis Polk & Wardwell, Special Counsel for the Administrative Agent and the Collateral Agent EXHIBIT D - Form of Subsidiary Security Agreement EXHIBIT E - [Intentionally Omitted] EXHIBIT F - Form of Assignment and Assumption Agreement EXHIBIT G-1 - Government Contracts EXHIBIT G-2 - Form of Assignment EXHIBIT G-3 - Form of Notice of Assignment EXHIBIT H - Commercial Contractors EXHIBIT I - [Intentionally Omitted] EXHIBIT J - Form of Election to Participate EXHIBIT K - Form of Election to Terminate EXHIBIT L - Form of Opinion of Counsel for each Borrower Subsidiary 6 THIRD AMENDED AND RESTATED CREDIT AND REIMBURSEMENT AGREEMENT AGREEMENT dated as of December 21, 1998 among ORBITAL SCIENCES CORPORATION, as Borrower and Guarantor, the BANKS listed on the signature pages hereof, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent and as Collateral Agent. W I T N E S S E T H : WHEREAS, Orbital Sciences Corporation, a Delaware corporation (together with its successors, the "COMPANY"), as Borrower, the banks party thereto (the "ORIGINAL BANKS"), Morgan Guaranty Trust Company of New York, as Administrative Agent (the "ADMINISTRATIVE AGENT") and J.P. Morgan Delaware, as Collateral Agent (the "COLLATERAL AGENT"), are parties to an Amended and Restated Credit and Reimbursement Agreement dated as of September 27, 1994 (as amended, the "ORIGINAL CREDIT AGREEMENT"); and WHEREAS, pursuant to an Amended and Restated Security Agreement dated as of June 30, 1992 and amended and restated as of August 5, 1997 among the Company, the Collateral Agent and NationsBank, N.A., as Designated Lockbox Bank (as amended from time to time, the "COMPANY SECURITY AGREEMENT"), the obligations of the Company under the Financing Documents (as defined in the Existing Agreement (as defined below)) are secured by Liens (as defined below) on the Collateral (as defined below); WHEREAS, the Company, Magellan Corporation, the Original Banks, the Administrative Agent, and the Collateral Agent are parties to a Second Amended and Restated Credit and Reimbursement Agreement dated as of August 5, 1997 (as amended prior to the Effective Date (as defined below), the "EXISTING AGREEMENT") amending and restating the Original Credit Agreement and the other Financing Documents; WHEREAS, pursuant to that certain Amendment No. 1 to the Existing Agreement dated as of December 19, 1997 among the Company, the Original Banks, the Administrative Agent and the Collateral Agent, Magellan Corporation was released from its obligations as a borrower and a guarantor under the Financing Documents; and WHEREAS, the Company and the Banks wish to amend and restate the Existing Agreement as set forth herein; 7 NOW, THEREFORE, the parties hereto hereby agree that, on and as of the Effective Date, the Existing Agreement is hereby amended and restated in its entirety as follows: ARTICLE 1 DEFINITIONS SECTION 1.1. Definitions. The following terms, as used herein, have the following meanings: "ADJUSTED LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section 2.06(b). "ADMINISTRATIVE AGENT" means Morgan Guaranty Trust Company of New York in its capacity as administrative agent for the Banks hereunder, and its successors in such capacity. "ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Company) duly completed by such Bank. "AFFILIATE" means, with respect to any Person (i) any Person that directly, or indirectly through one or more intermediaries, controls such Person (a "CONTROLLING PERSON") or (ii) any Person (other than a Subsidiary of such Person) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "AGENT" means the Administrative Agent or the Collateral Agent, as the context may require, and "AGENTS" means both of them. "AGGREGATE LC AMOUNT" has the meaning set forth in Section 6.01. "AGREEMENT" means the Existing Agreement as amended and restated by the Amended Agreement and as the same may be further amended or restated from time to time in accordance with the terms hereof. "AMENDED AGREEMENT" means this Third Amended and Restated Credit and Reimbursement Agreement. 2 8 "APPLICABLE LENDING OFFICE" means, with respect to any Bank, (i) in the case of its Base Rate Loans, its Domestic Lending Office and (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office. "ASSET SALE" means any sale, lease (as lessor) or other disposition (including any such transaction effected by way of merger or consolidation or any sale-leaseback transaction) by the Company or any of its Subsidiaries of any asset, but excluding (i) dispositions of inventory, cash, cash equivalents and other cash management investments and obsolete, unused or unnecessary equipment and undeveloped real estate, in each case in the ordinary course of business and (ii) dispositions to the Company or any Subsidiary. "ASSIGNEE" has the meaning set forth in Section 10.06(c). "ASSIGNMENT OF CLAIMS ACT" means the Assignment of Claims Act of 1940, as amended, or any successor statute. "AVAILABLE LC AMOUNT" means, on any date, with respect to each Borrower, an amount equal to the excess (if any) of $15,000,000 over the aggregate Letter of Credit Liabilities of all other Borrowers on such date. "BANK" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 10.06(c), and their respective successors. "BASE RATE" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "BASE RATE LOAN" means a loan made by a Bank pursuant to Section 2.01 which bears interest at the Base Rate plus the Base Rate Margin pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election or the provisions of Article 8. "BASE RATE MARGIN" means a rate per annum determined daily in accordance with the Pricing Schedule. "BENEFIT ARRANGEMENT" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA that is not a Plan or a Multiemployer Plan and that is maintained or otherwise contributed to by any member of the ERISA Group. "BORROWER LC AMOUNT" has the meaning set forth in Section 6.01. 3 9 "BORROWERS" means the Company and each of the Borrower Subsidiaries, and "BORROWER" means any one of them. "BORROWER SUBSIDIARIES" means any Wholly-Owned Subsidiary of the Company as to which an Election to Participate shall have been delivered to the Administrative Agent and as to which an Election to Terminate shall not have been delivered to the Administrative Agent. Each such Election to Participate and Election to Terminate shall be duly executed on behalf of such Wholly-Owned Subsidiary and the Company in such number of copies as the Administrative Agent may request. The delivery of an Election to Terminate shall not affect any obligation of a Borrower Subsidiary theretofore incurred. The Administrative Agent shall promptly give notice to the Banks of the receipt of any Election to Participate or Election to Terminate. "COLLATERAL" means all of the collateral in which a security interest is granted to the Collateral Agent on behalf of the Banks in the Security Agreements. "COLLATERAL ACCOUNT" has the meaning set forth in each Security Agreement. "COLLATERAL AGENT" means Morgan Guaranty Trust Company of New York (as successor by merger to J.P. Morgan Delaware) in its capacity as collateral agent for the Secured Parties hereunder and under each Security Agreement and its successors in such capacity. "COMMITMENT" means (i) with respect to each Bank listed on the signature pages hereof, the amount set forth opposite the name of such Bank on the signature pages hereof and (ii) with respect to each Assignee that becomes a Bank pursuant to Section 10.06(c), the amount of the Commitment thereby assumed by it, in each case as such amount may be increased or reduced from time to time pursuant to Section 10.06(c) or reduced from time to time pursuant to Section 2.09. "COMMITMENT FEE RATE" means a rate per annum determined in accordance with the Pricing Schedule. "COMPANY" has the meaning set forth in the first WHEREAS clause. "COMPANY SECURITY AGREEMENT" has the meaning set forth in the second WHEREAS clause. "COMPANY'S 1997 FORM 10-K" means the Company's annual report on Form 10-K for the fiscal year ended December 31, 1997, as filed with the 4 10 Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. "CONSOLIDATED DEBT" means at any date, without duplication, the sum of (i) the Debt of the Company and its Consolidated Subsidiaries determined on a consolidated basis plus (ii) the portion of the Debt (other than Excluded ORBCOMM Debt) of any Person accounted for by the Company on the equity method properly allocable to the direct or indirect interest of the Company in such Person, all determined as of such date. "CONSOLIDATED DELINQUENCY RATIO" means, for any period, the percentage equivalent of a fraction (i) the numerator of which is the average amount of Receivables of all the Borrowers as of the last day of each calendar month during such period that have remained unpaid for more than 60 days from the original due date specified at the time of the original issuance of the invoice therefor and (ii) the denominator of which is the average amount of Receivables of all the Borrowers outstanding as of the last day of each calendar month during such period. "CONSOLIDATED DSO RATIO" means, for any period, a fraction (i) the numerator of which is the average amount of Receivables of all the Borrowers as of the last day of each calendar month during such period and (ii) the denominator of which is the average daily revenues of all the Borrowers for the preceding twelve month period ending on the last day of such period. "CONSOLIDATED EBITDA" means, for any period, Consolidated Net Income for such period plus, to the extent deducted in determining such Consolidated Net Income, the aggregate amount of (i) consolidated interest expense, (ii) income tax expense and (iii) depreciation, amortization and other similar non-cash charges. "CONSOLIDATED FIXED CHARGES" means, for any period, the sum, without duplication, of (i) interest accrued on all Debt of the Company and its Consolidated Subsidiaries (other than Debt owing to the Company or a Consolidated Subsidiary) during such period, whether expensed or capitalized and (ii) rental expense of the Company and its Consolidated Subsidiaries for such period under operating leases of real or personal property. "CONSOLIDATED LEVERAGE RATIO" means on any date the ratio of Consolidated Debt on such date to Consolidated EBITDA for the period of four consecutive fiscal quarters most recently ended on or prior to such date. "CONSOLIDATED LOSS RATIO" means, for any calendar month, the percentage equivalent of a fraction (i) the numerator of which is the gross credit 5 11 write offs of Receivables by all the Borrowers during such month and (ii) the denominator of which is the amount of Receivables of all the Borrowers outstanding at the end of such month. "CONSOLIDATED NET INCOME" means, for any period, the consolidated net income of the Company and its Consolidated Subsidiaries for such period. "CONSOLIDATED NET WORTH" means, at any date, the consolidated stockholders' equity of the Company and its Consolidated Subsidiaries as of such date. "CONSOLIDATED SUBSIDIARY" means, at any date with respect to any Person, any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date; provided that in no event shall Orbital Imaging be a "Consolidated Subsidiary" of the Company. "CONSOLIDATED TANGIBLE NET WORTH" means, at any date, Consolidated Net Worth less consolidated Intangible Assets, all determined as of such date. For purposes of this definition "INTANGIBLE ASSETS" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to December 31, 1996 in the book value of any asset owned by the Company or a Consolidated Subsidiary, and (ii) all goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards not fully reserved, copyrights, organization or developmental expenses and other intangible assets. "CONTROLLING PERSON" has the meaning assigned to such term in the definition of "Affiliate". "CREDIT EVENT" means the making of a Loan or the issuance of a Letter of Credit. "DEBT" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all obligations of such Person (whether fixed or contingent) to reimburse any bank or other Person in respect of amounts paid or payable under a letter of credit or similar instrument, (vi) all Debt 6 12 of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person (such Debt to have a principal amount, for purposes of determinations under this Agreement, not exceeding the greater of (x) the net unencumbered carrying value of such asset under generally accepted accounting principles and (y) the fair market value of such asset as of the date the principal amount of such Debt is determined), and (vii) all Debt of others Guaranteed by such Person; provided that Excluded ORBCOMM Debt shall not constitute Debt of the Company or any of its Consolidated Subsidiaries. "DEFAULT" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "DERIVATIVES OBLIGATIONS" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "DESIGNATED INSURANCE POLICIES" has the meaning set forth in Section 5.03(c). "DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close. "DOMESTIC LENDING OFFICE" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Company and the Administrative Agent. "DOMESTIC RECEIVABLE" means any Receivable due from an Obligor that is both domiciled in the United States of America and (if not a natural person) organized under the laws of the United States of America or any State thereof. "EARNINGS AVAILABLE FOR FIXED CHARGES" means, for any period, Consolidated Net Income for such period (excluding therefrom (i) any extraordinary items of gain or loss and (ii) any gain or loss of any other Person accounted for pursuant to the equity method, except in the case of gain to the extent of cash distributions received from such Person during the relevant period), 7 13 plus the aggregate amounts deducted in determining Consolidated Net Income for such period in respect of (i) interest and rental expense and (ii) income taxes. "EFFECTIVE DATE" means the date this Amended Agreement becomes effective in accordance with Section 3.01. "ELECTION TO PARTICIPATE" means an Election to Participate substantially in the form of Exhibit J hereto. "ELECTION TO TERMINATE" means an Election to Terminate substantially in the form of Exhibit K hereto. "ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA GROUP" means the Company, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company, or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "EURO-DOLLAR BUSINESS DAY" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "EURO-DOLLAR LENDING OFFICE" means, as to each Bank, its office, branch or Affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or Affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Company and the Administrative Agent. 8 14 "EURO-DOLLAR LOAN" means a loan made by a Bank pursuant to Section 2.01 which bears interest at a Euro-Dollar Rate plus the Euro-Dollar Margin pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election. "EURO-DOLLAR MARGIN" means a rate per annum determined daily in accordance with the Pricing Schedule. "EURO-DOLLAR RATE" means a rate of interest determined pursuant to Section 2.06(b) on the basis of an Adjusted London Interbank Offered Rate. "EVENTS OF DEFAULT" has the meaning set forth in Section 6.01. "EXCLUDED ORBCOMM DEBT" means, at any date, (i) any Debt of ORBCOMM Global which is not Guaranteed by the Borrower or any Consolidated Subsidiary (other than OCC and ORBCOMM USA) and (ii) the ORBCOMM Global Guaranty and any other Guarantee by OCC or ORBCOMM USA of any Debt of ORBCOMM Global so long as at such date (A) the only assets owned or otherwise held by OCC are the Federal Communications Commission's licenses and authorizations to construct, launch and operate 34 satellites for the ORBCOMM low-earth satellite system and to operate related gateway earth stations and subscriber communications, as such licenses and authorizations may be amended or modified, contracts between OCC and the Partnerships related to the construction or operation of the ORBCOMM low-earth satellite system and OCC's investments in ORBCOMM Global and ORBCOMM USA, (B) OCC conducts no business activities other than holding such assets and (C) such Guarantee is non-recourse to, and is not otherwise supported by the credit of, the Company or any of its Consolidated Subsidiaries (other than OCC and ORBCOMM USA). "EXISTING AGREEMENT" has the meaning set forth in the third WHEREAS clause. "EXPOSURE" means, with respect to each Bank and in respect of any Borrower, at any time, an amount equal to the sum of (i) the aggregate principal amount of the Loans of such Bank to such Borrower outstanding at such time and (ii) such Bank's LC Exposure at such time with respect to such Borrower. "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided that (i) if such day is not a Domestic Business 9 15 Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Administrative Agent. "FINANCING DOCUMENTS" means this Agreement, the Security Agreements and the Notes, and "FINANCING DOCUMENT" means any one of them. "GROUP OF LOANS" means, at any time, a group of Loans consisting of (i) all Loans to a single Borrower which are Base Rate Loans at such time or (ii) all Euro-Dollar Loans to a single Borrower having the same Interest Period at such time, provided that, if a Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Article 8, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. "GUARANTEE" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "GUARANTOR" means, with respect to each Borrower, the other Borrowers. "INSURANCE ACCOUNT" has the meaning set forth in each Security Agreement. "INTEREST PERIOD" means, with respect to each Euro-Dollar Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in an applicable Notice of Interest Rate Election and ending one, two or three months thereafter as the Borrower may elect in such notice; provided that: 10 16 (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute. "INVESTMENT" means any investment in any Person, whether by means of share purchase, capital contribution, loan, time deposit or otherwise. "LC BANK" means First Union National Bank, First Union National Bank of Virginia or First Union National Bank through First Union National Bank of North Carolina in its capacity as LC Bank under the letter of credit facility described in Section 2.03, and its successors in such capacity. "LC EXPOSURE" means, with respect to each Bank and in respect of any Borrower, at any one time, an amount equal to such Bank's Percentage of the aggregate amount of Letter of Credit Liabilities at such time in respect of all Letters of Credit issued upon the request of such Borrower. "LETTER OF CREDIT COMMISSION RATE" means a rate per annum determined in accordance with the Pricing Schedule. "LETTER OF CREDIT LIABILITIES" means, on any date and in respect of any Letter of Credit, the sum, without duplication, of (i) the amount available for drawing under such Letter of Credit on such date plus (ii) the aggregate amount outstanding on such date of all Reimbursement Obligations in respect of such Letter of Credit. "LETTERS OF CREDIT" has the meaning set forth in Section 2.03(a), and "LETTER OF CREDIT" means any one of them. 11 17 "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Company or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "LOAN" means a Base Rate Loan or a Euro-Dollar Loan and "LOANS" means Base Rate Loans or Euro-Dollar Loans or both. "MAGELLAN" means Magellan Corporation, a Delaware corporation, and its successors. "MAGELLAN FINANCING" means one or more credit agreements to which Magellan is or may become a party providing for loans thereunder to be used by Magellan for working capital purposes; provided that the aggregate principal amount of Debt that may be incurred under such credit agreements shall not exceed $20,000,000. "MATERIAL DEBT" means Debt in an aggregate principal amount exceeding $10,000,000 (other than the Loans and the Reimbursement Obligations) of the Company and/or one of more of its Subsidiaries arising in one or more related or unrelated transactions. "MATERIAL PLAN" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $5,000,000. "MDA" means MacDonald, Dettwiler and Associates Ltd, a Canadian corporation, and its successors. "MOODY'S" means Moody's Investors Service, Inc. or any successor to such corporation's business of rating debt securities. "MULTIEMPLOYER PLAN" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "NOTES" means promissory notes of a Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of such Borrower to repay the Loans made to it, together with any modifications, substitutions, extensions or 12 18 renewals of such promissory notes, and "NOTE" means any one of such promissory notes issued hereunder. "NOTICE OF BORROWING" has the meaning set forth in Section 2.02. "NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section 2.16. "OCC" means Orbital Communications Corporation, a Delaware corporation, and its successors. "ORBCOMM GLOBAL" means ORBCOMM Global L.P., a Delaware limited partnership, and its successors. "ORBCOMM GLOBAL GUARANTY" means the non-recourse guaranty dated August 7, 1996, by OCC and ORBCOMM USA of the $170,000,000 14% Senior Notes Due 2004 issued by ORBCOMM Global and ORBCOMM Global Capital Corp., contained in the Indenture dated as of August 7, 1996, issued by ORBCOMM Global and ORBCOMM Global Capital Corp. in favor of Marine Midland Bank as Trustee, the proceeds of which Notes are to be applied to develop the ORBCOMM system. "ORBCOMM USA" means ORBCOMM USA L.P., a Delaware limited partnership, and its successors. "ORBITAL IMAGING" means Orbital Imaging Corporation, a Delaware corporation, and its successors. "ORIGINAL CREDIT AGREEMENT" has the meaning set forth in the first WHEREAS clause. "PARENT" means, with respect to any Bank, any Controlling Person of such Bank. "PARTNERSHIPS" means ORBCOMM Global, ORBCOMM USA and ORBCOMM International Partners L.P. "PARTICIPANT" has the meaning set forth in Section 10.06(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERCENTAGE" means, with respect to each Bank, at any time, the percentage that such Bank's Commitment constitutes of the aggregate amount of the Commitments at such time. 13 19 "PERMITTED LIEN" has the meaning set forth in Section 5.14. "PERSON" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof (including, without limitation, the Government). "PLAN" means at any time an employee pension benefit plan (other than a Multiemployer Plan) that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person that was at such time a member of the ERISA Group for employees of any Person that was at such time a member of the ERISA Group. "PRICING SCHEDULE" means the Schedule attached hereto and identified as such. "PRIME RATE" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time as its Prime Rate. "QUARTERLY PAYMENT DATE" means each March 31, June 30, September 30 and December 31. "RECEIVABLE" means, at any date of determination thereof, the amount of the unpaid portion of an obligation, as stated in the invoice to a customer of any Borrower which such Borrower has issued with respect thereto, in respect of goods delivered, services rendered or the achievement of other contractual milestones in the ordinary course of business, which amount has been earned by performance under the terms of the contract between the Borrower and such customer relating to such goods, services or other contractual milestones, as the case may be, net of any credits, rebates or offsets owed to the customer. "REFERENCE BANKS" means the principal London offices of First Union National Bank, The Bank of Nova Scotia and Morgan Guaranty Trust Company of New York. "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REIMBURSEMENT OBLIGATIONS" means at any date, with respect to any Borrower, the obligations of such Borrower pursuant to Section 2.03 to reimburse the LC Bank for any amount, outstanding as of such date, paid by the LC Bank in 14 20 respect of a drawing under a Letter of Credit issued upon request of such Borrower. "REQUIRED BANKS" means at any time Banks having at least 66 2/3% of the aggregate amount of the Commitments or, if theCommitments shall have been terminated, having at least 66 2/3% of the aggregate Exposures at such time. "RESTRICTED PAYMENT" means (i) any dividend or other distribution on any shares of the Company's capital stock (except dividends payable solely in shares of its capital stock) or (ii) any payment on account of the purchase, redemption, retirement or acquisition of (a) any shares of the Company's capital stock or (b) any option, warrant or other right to acquire shares of the Company's capital stock. "SECURED PARTY" has the meaning set forth in any Security Agreement. "SECURITY AGREEMENTS" means, collectively, the Company Security Agreement and any Subsidiary Security Agreements executed after the Effective Date, and "SECURITY AGREEMENT" means any one of them. "SECURITY EVENT" has the meaning set forth in any of the Security Agreements. "S&P" means Standard and Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc., or any successor to its business of rating debt securities. "SUBSIDIARY" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company (or if such term is used with reference to any other Person, by such other Person); provided that in no event shall Orbital Imaging or ORBCOMM USA be a "Subsidiary" of the Company. "SUBSIDIARY SECURITY AGREEMENTS" means security agreements substantially in the form of Exhibit D, among each Borrower Subsidiary, the Collateral Agent and NationsBank, N.A., as the Designated Lockbox Bank, as amended from time to time, and "SUBSIDIARY SECURITY AGREEMENT" means any one of them. "TEMPORARY CASH INVESTMENT" means any Investment in (i) direct obligations of the United States or Canada or any agency thereof, or obligations guaranteed by the United States or Canada or any agency thereof, (ii) commercial paper rated at least A-1 by S&P and P-1 by Moody's, (iii) time deposits with, 15 21 including certificates of deposit issued by, any office located in the United States or Canada of any Bank or any bank or trust company which is organized under the laws of the United States or any state thereof or Canada or any province thereof, has capital, surplus and undivided profits aggregating at least $100,000,000 and the unsecured long-term debt of which is rated at least investment grade by each nationally recognized statistical rating organization that rates such debt, (iv) money market funds that invest only in securities described in clause (i), (ii) or (iii) above, (v) Investments made in accordance with the investment policies set forth on Schedule I, or (vi) repurchase agreements with respect to securities described in clause (i) above entered into with an office of a bank or trust company meeting the criteria specified in clause (iii) above; provided in each case that such Investment matures within two years from the date of acquisition thereof by the Company or a Subsidiary. "TERMINATION DATE" means December 21, 2002, or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "TYPE" has the meaning set forth in Section 1.03. "UNFUNDED LIABILITIES" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "WHOLLY-OWNED SUBSIDIARY" means any Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by the Company (or if such term is used with reference to any other Person, by such other Person). SECTION 1.2. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes in accordance with generally accepted accounting principles) with the most recent audited consolidated financial statements of the Company and its Consolidated Subsidiaries delivered to the Banks provided that, if the Company notifies the Administrative Agent that the Company wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Administrative Agent notifies the Company that the Required Banks wish to 16 22 amend Article 5 for such purpose), then the Company's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Banks. For purposes of Sections 5.08, 5.09, 5.10, and 5.17 and related definitions, only the percentage of Debt, net income, interest expense, rental expense, income taxes, Intangible Assets and equity of Magellan equal to the percentage of the equity of Magellan held directly or indirectly by the Company at the relevant time shall be included in such computations. SECTION 1.3. Types of Borrowings. The term "Borrowing" denotes the aggregation of Loans of one or more Banks to be made to a Borrower pursuant to Article 2 on the same date, all of which Loans are of the same Type (subject to Article 8) and, except in the case of Base Rate Loans, have the same initial Interest Period. The "Type" of a Loan refers to the determination whether such Loan is a Euro-Dollar Loan or a Base Rate Loan. ARTICLE 2 THE CREDITS SECTION 2.1. Commitments to Lend. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Loans to any Borrower from time to time prior to the Termination Date in amounts such that the Exposure of such Bank at such time shall not exceed the amount of its Commitment at such time. Each Borrowing under this Section shall be in an aggregate principal amount of $1,000,000 or any larger multiple thereof (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.03(d)) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, prepay Loans to the extent permitted by Section 2.10 and reborrow at any time under this Section. SECTION 2.2. Method of Borrowing. (a) The Borrower shall give the Administrative Agent notice (a "NOTICE OF BORROWING") not later than Noon (New York City time) on (x) the date of each Base Rate Borrowing and (y) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing; specifying: (i the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, 17 23 (ii the aggregate amount of such Borrowing, (iii the Type of such Borrowing, and (iv in the case of a Euro-Dollar Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. (b Upon receipt (or deemed receipt) of a Notice of Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (c Not later than 1:00 P.M. (New York City time) on the date of each Borrowing, each Bank shall make available its ratable share of such Borrowing, in Federal or other immediately available funds, to the Administrative Agent at its address specified in or pursuant to Section 10.01. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent will make the funds so received from the Banks available to the Borrower at the Administrative Agent's aforesaid address. (d Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Administrative Agent such Bank's share of such Borrowing, the Administrative Agent may assume that such Bank has made such share available to the Administrative Agent on the date of such Borrowing in accordance with subsection 2.02(c) and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at the Federal Funds Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.3. Letters of Credit. (a The LC Bank agrees, subject to the terms and conditions hereof, to issue sight letters of credit hereunder from time to time upon the request of any Borrower (such letters of credit issued, the "LETTERS OF CREDIT"); provided that, immediately after each such Letter of Credit is issued, 18 24 the Letter of Credit Liabilities of such Borrower shall not exceed its Available LC Amount. Each Letter of Credit shall be issued in an amount equal to or greater than $100,000. Upon the date of issuance by the LC Bank of a Letter of Credit, the LC Bank shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the LC Bank, a participation in such Letter of Credit and the related Letter of Credit Liabilities equal to such Bank's Percentage. The Borrower shall pay to the LC Bank issuance fees in the amounts and at the times as agreed between the Borrower and the LC Bank. (b Notice of Issuance. The Borrower shall give the LC Bank at least three Domestic Business Days' prior notice (effective upon receipt) specifying the date each Letter of Credit is to be issued, and describing the proposed terms of such Letter of Credit and the nature of the transactions proposed to be supported thereby. Upon receipt of such notice the LC Bank shall promptly notify the Administrative Agent, and the Administrative Agent shall promptly notify each Bank, of the contents thereof and of the amount of such Bank's participation in such proposed Letter of Credit (determined in accordance with Section 2.03(a)). The issuance by the LC Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Article 3, be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory to the LC Bank and that the Borrower shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the LC Bank shall have reasonably requested. No Letter of Credit shall have a term extending beyond the fifth Domestic Business Day prior to the Termination Date. (c Reimbursement of Payments. Upon receipt from the beneficiary of any Letter of Credit of any demand for payment or other drawing under such Letter of Credit, the LC Bank shall notify the Administrative Agent and the Administrative Agent shall promptly notify the Borrower and each other Bank as to the amount to be paid as a result of such demand or drawing and the payment date. If at any time the LC Bank shall make a payment to a beneficiary of a Letter of Credit in respect of a drawing under such Letter of Credit, each Bank will pay to the Administrative Agent, for the account of the LC Bank, immediately upon the LC Bank's demand at any time during the period commencing after such payment until reimbursement therefor in full by the Borrower, an amount equal to such Bank's Percentage multiplied by the amount of such payment, together with interest on such amount for each day from the date of the LC Bank's demand for such payment (or, if such demand is made after 3:00 P.M. (New York City time) on such date, from the next succeeding Domestic Business Day) to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Federal Funds Rate for such period. The LC Bank shall reimburse each Bank 19 25 for any such payments made for a draw honored under the Letter of Credit as a result of the LC Bank's willful misconduct or gross negligence in honoring a draw which does not conform to the terms of the Letter of Credit together with interest thereon at a rate of interest per annum equal to the Federal Funds Rate for each day from the date on which the Bank made payment to the LC Bank until the date the LC Bank repays such amount in full. (d Reimbursement Unconditional. The Borrower shall be irrevocably and unconditionally obligated forthwith to reimburse the LC Bank for any amounts paid by the LC Bank upon any drawing under any Letter of Credit on the date of such payment by the LC Bank, without presentment, demand, protest or other formalities of any kind; provided that the Borrower shall not hereby be precluded from asserting any claim for direct (but not consequential) damages suffered by the Borrower to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of such LC Bank in determining whether a request presented under any Letter of Credit complied with the terms of such Letter of Credit or (ii) such Bank's failure to pay under any Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of the Letter of Credit. All such amounts paid by the LC Bank and remaining unpaid by the Borrower shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day. The LC Bank will pay to each Bank ratably in accordance with its Commitment all amounts (including interest) received from the Borrower for application in payment, in whole or in part, of the Reimbursement Obligations in respect of any Letter of Credit, but only to the extent such Bank has made payment to the LC Bank in respect of such Letter of Credit pursuant to Section 2.03(c). (e Indemnification. The Borrower hereby indemnifies and holds harmless each Bank and Agent from and against any and all claims and damages, losses, liabilities, costs or expenses which such Bank or Agent may incur by reason of or in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit, including, without limitation, any claims, damages, losses, liabilities, costs or expenses which the LC Bank may incur by reason of or in connection with the failure of any other Bank to fulfill or comply with its obligations to the LC Bank hereunder (but nothing herein contained shall affect any rights the Borrower may have against such defaulting Bank); provided that the Borrower shall not be required to indemnify any Bank or Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of such Bank or Agent in determining whether a request presented under any Letter of Credit complied with the terms of such Letter of Credit or (ii) such Bank's failure to pay under any Letter of Credit after the presentation to 20 26 it of a request strictly complying with the terms and conditions of the Letter of Credit. Nothing in this Section is intended to limit the obligations of the Borrower under any other provision of this Agreement. (f Limited Liability of the LC Bank. The Borrower assumes all risks of the acts or omissions of any beneficiary and any transferee of any Letter of Credit with respect to its use of such Letter of Credit. The Banks, the LC Bank and their respective officers and directors shall not be liable or responsible for, and the obligations of each Bank to make payments, and of the Borrower to reimburse the LC Bank for payments, pursuant to this Section shall not be excused by, any action or inaction of any Bank or the LC Bank related to: (i) the use which may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (ii) the validity, sufficiency or genuineness of documents presented under any Letter of Credit, or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) payment by the LC Bank against presentation of documents to the LC Bank which do not comply with the terms of any Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; or (iv) any other circumstances whatsoever in making or failing to make or notifying or failing to notify the LC Bank that it is required to make any payment under any Letter of Credit. Notwithstanding the foregoing, the Borrower shall have a claim against the LC Bank and the LC Bank shall be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Borrower which were caused by (i) the LC Bank's willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit comply with the terms thereof or (ii) the LC Bank's willful failure to pay, or to notify any Bank that it is required to pay, under any Letter of Credit after the presentation to the LC Bank by any beneficiary (or a successor beneficiary to whom such Letter of Credit has been transferred in accordance with its terms) of documents strictly complying with the terms and conditions of such Letter of Credit. Subject to the preceding sentence, the LC Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary unless any beneficiary (or a successor beneficiary to whom such Letter of Credit has been transferred in accordance with its terms) and the Borrower shall have notified the LC Bank that such documents do not comply with the terms and conditions of such Letter of Credit. Each Bank shall, ratably in accordance with its Commitment, indemnify the LC Bank (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the LC Bank's gross negligence or willful misconduct) that the LC Bank may suffer or incur in 21 27 connection with this Agreement or any action taken or omitted by the LC Bank hereunder. (g Letter of Credit Commission. The Borrower agrees to pay to the Administrative Agent for the account of each Bank, ratably in proportion to the Percentage of such Bank, a letter of credit commission with respect to each Letter of Credit, computed for each day from and including the date of issuance of such Letter of Credit up to but excluding the last day a drawing is available under such Letter of Credit, at the Letter of Credit Commission Rate on the undrawn amount of such Letter of Credit on such day. Such commission shall be payable quarterly in arrears on each Quarterly Payment Date and on the Termination Date or, if earlier, the date of effectiveness of the termination of the Commitments in their entirety. SECTION 2.4. Notes. (a The Loans of each Bank to each Borrower shall be evidenced by a single Note of such Borrower payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans to such Borrower. (b Each Bank may, by notice to a Borrower and the Administrative Agent, request that its Loans of a particular Type to such Borrower be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant Type. Each reference in this Agreement to a "Note" or the "Notes" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c Upon receipt of each Bank's Note pursuant to Section 3.01(b), the Administrative Agent shall mail such Note to such Bank. Each Bank shall record the date and amount of each Loan made by it to each Borrower and the date and amount of each payment of principal made with respect thereto, and prior to any transfer of its Note of any Borrower, shall endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan to such Borrower then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrowers hereunder or under the Notes or any other Financing Documents. Each Bank is hereby irrevocably authorized by each Borrower so to endorse its Note and to attach to and make a part of any Note a continuation of any such schedule as and when required. 22 28 SECTION 2.5. Maturity of Loans. Each Loan shall mature, and the outstanding principal amount thereof shall be due and payable (together with accrued interest thereon), on the Termination Date. SECTION 2.6. Interest Rates. (a Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the sum of the Base Rate Margin plus the Base Rate, in each case for such day. Such interest shall be payable quarterly in arrears on each Quarterly Payment Date and, with respect to the principal amount of any Base Rate Loan converted to a Euro-Dollar Loan, on the date such amount is so converted. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof. The "ADJUSTED LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means a rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means the average (rounded upward, if necessary, to the next highest 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Reference Banks in the London Interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. "EURO-DOLLAR RESERVE PERCENTAGE" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve system in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of 23 29 liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the Euro-Dollar Reserve Percentage. (c Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Loan on the day before such payment was due and (ii) the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Administrative Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause 8.01(a) or 8.01(b) shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). SECTION 2.7. Commitment Fees. The Company shall pay to the Administrative Agent for the account of each Bank a commitment fee at the Commitment Fee Rate (determined in accordance with the Pricing Schedule) on the daily amount by which such Bank's Commitment exceeds such Bank's Exposure to all Borrowers. Such commitment fee shall accrue from and including the Effective Date to but excluding the Termination Date. Such commitment fee shall be payable quarterly in arrears on each Quarterly Payment Date and on the Termination Date or, if earlier, the date of effectiveness of the termination of the Commitments in their entirety. SECTION 2.8. Participation Fees. The Company shall pay to the Administrative Agent on the Effective Date for the account of the Banks a participation fee in an amount equal to .25% of the aggregate amount of the Commitments in effect on such date under this Amended Agreement, which participation fee shall be payable to the Banks ratably in proportion to their respective Commitments as in effect on the Effective Date under this Amended Agreement. 24 30 SECTION 2.9. Optional Termination of the Commitments. The Company may, upon at least three Domestic Business Days' notice to the Administrative Agent, terminate the Commitments at any time, if no Loans and no Letters of Credit are outstanding at such time. If the Commitments are so terminated, all accrued commitment fees shall be payable on the effective date of such termination. Other than as set forth in the first sentence of this Section, at no time may the Company reduce or terminate any Commitments. SECTION 2.10. Mandatory Termination of Commitments. The Commitments shall terminate on the Termination Date. SECTION 2.11. Optional Prepayments. (a Subject in the case of any Euro-Dollar Borrowing, to Section 2.13, the Borrower may, upon at least one Domestic Business Day's notice to the Administrative Agent, prepay any Group of Base Rate Loans or upon at least three Euro-Dollar Business Days' notice to the Administrative Agent, prepay any Group of Euro-Dollar Loans, in each case in whole at any time, or from time to time in part in amounts aggregating $1,000,000 or any larger multiple thereof by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group of Loans. (b Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.12. General Provisions as to Payments. (a The Borrowers shall make each payment of principal of, and interest on, the Loans and of commissions and fees hereunder, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other immediately available funds, to the Administrative Agent at its address referred to in Section 10.01. The Administrative Agent will promptly distribute to each Bank its ratable share of each such payment received by the Administrative Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Base Rate Loans or fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If 25 31 the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b Unless the Administrative Agent shall have received notice from a Borrower prior to the date on which any payment is due from such Borrower to the Banks hereunder that such Borrower will not make such payment in full, the Administrative Agent may assume that such Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that such Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. SECTION 2.13. Funding Losses. If a Borrower makes any payment of principal with respect to any Euro-Dollar Loan or any Euro-Dollar Loan is converted to a Base Rate Loan (pursuant to Article 2, 6 or 8 or otherwise, except pursuant to Section 8.02) on any day other than the last day of an Interest Period applicable thereto, or the end of an applicable period fixed pursuant to Section 2.06(c), or if the Borrower fails to borrow, prepay, convert or continue any Euro-Dollar Loans after notice has been given to any Bank in accordance with Section 2.02(a), 2.05(c), 2.11(b) or 2.16 the Company shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or conversion or failure to borrow, prepay, convert or continue; provided that such Bank shall have delivered to the Company a certificate as to the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. SECTION 2.14. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and all fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.15. Withholding Tax Exemption. At least five Domestic Business Days prior to the first date on which interest or any fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under 26 32 the laws of the United States of America or a state thereof agrees that it will deliver to each of the Company and the Administrative Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Company and the Administrative Agent two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Company or the Administrative Agent, in each case certifying that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date in which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Company and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. SECTION 2.16. Method of Electing Interest Rates. (a The Loans included in each Borrowing shall initially be of the Type specified by the Borrower in the applicable Notice of Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the Type of Loans in each Group of Loans, subject in each case to the provisions of Article 8, as follows: (i if such Loans are Base Rate Loans, the Borrower may, subject to subsection (d), elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; and (ii if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans as of any Domestic Business Day or, subject to subsection (d), to continue such Loans as Euro-Dollar Loans for an additional Interest Period as of any Euro-Dollar Business Day, further subject to Section 2.13 in the case of any such conversion or continuation effective on any day other than the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "NOTICE OF INTEREST RATE ELECTION") to the Administrative Agent not later than 12:00 Noon (New York City time) on the third Euro-Dollar Business Day before the conversion or 27 33 continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each at least $1,000,000 (unless such portion is comprised of Base Rate Loans). If no such notice is timely received before the end of an Interest Period for any Group of Euro-Dollar Loans, the Borrower shall be deemed to have elected that such Group of Loans be converted to Base Rate Loans at the end of such Interest Period. (b Each Notice of Interest Rate Election shall specify: (i the Group of Loans (or portion thereof) to which such notice applies; (ii the date on which the conversion or continuation selected in such notice is to be effective; (iii if the Loans comprising such Group are to be converted, the new Type of Loans and, if the Loans being converted are to be Euro-Dollar Loans, the duration of the next succeeding Interest Period applicable thereto; and (iv if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Administrative Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. (d) The Borrower shall not be entitled to elect to convert any Loans to, or continue any Loans for an additional Interest Period as, Euro-Dollar Loans if a Default shall have occurred and be continuing when the Borrower delivers notice of such election to the Administrative Agent. ARTICLE 3 28 34 CONDITIONS SECTION 3.1. Effectiveness. This Amended Agreement shall become effective on and as of the date when the Administrative Agent shall have received all of the following (except Sections 2.13 and 10.03, which shall become effective when the Administrative Agent shall have received the documents specified in paragraph (a) below): (a counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party); (b duly executed Notes of each Borrower for the account of each Bank dated on or before the Effective Date and complying with the provisions of Section 2.04; (c an opinion of Hogan & Hartson L.L.P., special counsel for the Borrowers, substantially in the form of Exhibit B hereto and covering such additional matters relating to the transactions contemplated by the Financing Documents as the Required Banks may reasonably request; (d an opinion of Davis Polk & Wardwell, special counsel for the Administrative Agent and the Collateral Agent, substantially in the form of Exhibit C hereto and covering such additional matters relating to the transactions contemplated by the Financing Documents as the Required Banks may reasonably request; (e certificates of insurance reasonably satisfactory to it evidencing compliance with Section 5.03; (f evidence satisfactory to it that all amounts owing by the Company to Deutsche Bank, AG pursuant to that certain Note dated July 8, 1996 in the principal amount of $25,000,000 shall have been paid in full and such Note shall have been canceled; and (g all documents it may reasonably request relating to the existence of the Borrowers, the corporate authority for and the validity of the Financing Documents, and any other matters reasonably relevant hereto, all in form and substance reasonably satisfactory to the Administrative Agent; 29 35 provided that this Agreement shall not become effective or be binding on any party hereto unless the foregoing conditions are satisfied not later than December 31, 1998. On the Effective Date the Existing Agreement will be automatically amended and restated in its entirety to read as set forth herein. On and after the Effective Date the rights and obligations of the parties hereto shall be governed by this Amended Agreement; provided that rights and obligations of the parties hereto with respect to the period prior to the Effective Date shall continue to be governed by the provisions of the Existing Agreement. On the Effective Date the Commitment of each Bank shall be the amount set forth opposite the name of such Bank on the signature pages of this Amended Agreement. The Notes delivered to each Bank under the Existing Agreement shall become void on the Effective Date and, upon receiving its new Notes delivered pursuant to subsection (b), each Bank will cancel its original Notes and return them to the Company. No failure of a Bank so to cancel and return its original Note shall affect the validity of its new Notes. The Administrative Agent shall promptly notify the Company and the Banks of the effectiveness of this Amended Agreement, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.2. Transitional Provisions. (a Each Loan outstanding under the Existing Agreement on the Effective Date shall mature on the Termination Date. (b The interest rates determined in accordance with Section 2.06 of this Amended Agreement shall be effective on the Effective Date; provided that, the interest rate applicable to each Euro-Dollar Loan outstanding on the Effective Date for each day during the then current Interest Period applicable thereto shall be the rate per annum equal to the sum of the Euro-Dollar Margin (as defined in this Amended Agreement) for such day plus the Adjusted London Interbank Offered Rate applicable to such Loan for such Interest Period (as determined pursuant to Section 2.06 of the Existing Agreement). (c On the Effective Date, in the case of any Group of Base Rate Loans then outstanding, and at the end of the then current Interest Period with respect thereto in the case of any Group of Euro-Dollar Loans then outstanding, the Borrower shall prepay such Group in its entirety and, to the extent the Borrower elects to do so and subject to the conditions specified in this Article 3, the Borrower shall reborrow Loans from the Banks in proportion to their respective Commitments after giving effect hereto, until such time as all outstanding Loans are held by the Banks in such proportion. SECTION 3.3. All Credit Events. The obligation of any Bank to make a Loan on the occasion of any Borrowing and the obligation of the LC Bank to 30 36 issue a Letter of Credit on the occasion of a request therefor by any Borrower are each subject to the satisfaction of the following conditions: (a receipt (or deemed receipt) by the Administrative Agent of a Notice of Borrowing as required by Section 2.02 or receipt by the LC Bank of a request for issuance of a Letter of Credit as required by Section 2.03, as the case may be; (b the fact that, immediately before and after such Credit Event, no Default shall have occurred and be continuing; (c the fact that the representations and warranties of the Borrowers contained in Article 4 of this Agreement (except, in the case of any Borrowing subsequent to the Effective Date, the representations and warranties contained in Sections 4.06(a) and 4.06(b)) and Section 2 of the respective Security Agreements shall be true on and as of the date of such Credit Event; and (d the fact that, immediately after such Credit Event, the aggregate Exposures of all Banks in respect of all Borrowers will not exceed the aggregate amount of the Commitments. Each Credit Event hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Credit Event as to the facts specified in clauses 3.03(b), 3.03(c) and 3.03(d). SECTION 3.4. First Borrowing by Each Borrower Subsidiary. The obligation of each Bank to make a Loan on the occasion of the first Borrowing by each Borrower Subsidiary is subject to the satisfaction of the following further conditions: (a) receipt by the Agent for the account of each Bank of a duly executed Note of such Borrower Subsidiary, dated on or before the date of such Borrowing complying with the provisions of Section 2.04. (b) receipt by the Agent of an opinion of counsel for such Borrower Subsidiary acceptable to the Agent, substantially in the form of Exhibit L hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (c) receipt by the Agent of counterparts of a Subsidiary Security Agreement executed by such Borrower Subsidiary and each Lockbox 31 37 Letter referred to in such Subsidiary Security Agreement duly executed by the parties thereto; (d) receipt by the Agent of a duly executed Perfection Certificate (as defined in the Subsidiary Security Agreement to which such Borrower Subsidiary is a party) and evidence satisfactory to the Collateral Agent that the security interest created by such Subsidiary Security Agreement constitutes a perfected first priority Lien to the extent a Lien may be created thereunder; and (e) receipt by the Agent of all documents which it may reasonably request relating to the existence of such Borrower Subsidiary, the corporate authority for and the validity of the Election to Participate of such Eligible Subsidiary, this Agreement, the Subsidiary Security Agreement and the Notes of such Borrower Subsidiary, and any of the matters relevant thereto, all in form and substance satisfactory to the Agent. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE CREDIT PARTIES Each Borrower represents and warrants that: SECTION 4.1. Corporate Existence and Power. Each Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and each has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.2. Corporate and Governmental Authorization No Contravention. The execution, delivery and performance by each Borrower of the Financing Documents to which it is a party are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of (except as contemplated herein) or filing with (except as contemplated herein or by the Security Agreements), any governmental body, agency or official and do not contravene, or constitute a default under, any provision of (i) any applicable law, rule or regulation, (ii) the certificate of incorporation or by-laws of any Borrower, (iii) any Material Debt instrument binding upon any Borrower or (iv) any judgment, injunction, order, decree or other material agreement or instrument binding upon any Borrower or, except as contemplated by the Security 32 38 Agreements, result in the creation or imposition of any Lien on any asset of any Borrower or any of their respective Subsidiaries. SECTION 4.3. Binding Effect. (i) This Agreement constitutes, (ii) each of the Subsidiary Security Agreements and the Notes, when executed and delivered in accordance with this Amended Agreement will constitute and (iii) the Company Security Agreement constitutes a valid and binding agreement or obligation of each Borrower signatory hereto or thereto, as the case may be, subject to applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and general principles of equity. SECTION 4.4. Lien Enforceable. (a) (i) Each Subsidiary Security Agreement, when executed and delivered in accordance with this Agreement, will create and (ii) the Company Security Agreement creates, in favor of the Collateral Agent for the ratable benefit of the Secured Parties, a valid and binding first priority Lien on the Collateral referred to therein. (b) The information set forth in the Perfection Certificate delivered by the Company as of the date of this Amended Agreement is true and correct as of the Effective Date. SECTION 4.5. Assignments Valid. The assignments and notices of assignment substantially in the form of Exhibits G-2 and G-3, respectively, when completed by the Borrower and duly acknowledged by each governmental authority or agency described therein, will constitute valid assignments of the monies due or to become due under the government contracts described therein under the Assignment of Claims Act. SECTION 4.6. Financial Information. (a) The consolidated balance sheet of the Company and its Consolidated Subsidiaries as of December 31, 1997 and the related consolidated statements of operations and cash flows for the fiscal year then ended, reported on by KPMG Peat Marwick LLP, copies of which have been delivered to each of the Banks, fairly present in all material respects, in conformity with generally accepted accounting principles, the consolidated financial position of the Company and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Company and its Consolidated Subsidiaries as of September 30, 1998 and the related unaudited consolidated statements of operations and cash flows for the three months then ended, copies of which have been delivered to each of the Banks, fairly present in all material respects, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in 33 39 subsection (a), the consolidated financial position of the Company and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such three month period (subject to normal year-end adjustments). (c) Since September 30, 1998 there has been no material adverse change in the business, financial position or results of operations of the Company and its Consolidated Subsidiaries, taken as a whole, and no event has taken place which is reasonably likely to have a such material adverse effect in the future. SECTION 4.7. Litigation. Except as to any matter that has been disclosed prior to the date hereof in writing by the Company to the Banks, there is no action, suit or proceeding pending against, or to the knowledge of any Borrower threatened against the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, financial position or results of operations of the Company and its Consolidated Subsidiaries, taken as a whole, or which in any manner draws into question the validity of any of the Financing Documents. SECTION 4.8. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multi-employer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. SECTION 4.9. Environmental Matters. Except as to any matter that has been disclosed prior to the date hereof in writing by the Company to the Banks, (i) the Company and each of its Consolidated Subsidiaries have obtained all permits, licenses and other authorizations that are required under all Environmental Laws, except to the extent failure to have any such permit, license or authorization would not have a material adverse effect on the business, financial position or results of operations of the Company and its Consolidated Subsidiaries, taken as a whole and (ii) the Company and its Consolidated Subsidiaries are in compliance with the terms and conditions of all such permits, licenses and authorizations, and 34 40 are also in compliance with all other provisions of any applicable Environmental Law or any order, judgment, injunction, notice or demand letter issued or entered thereunder, except to the extent failure to comply would not have a material adverse effect on the business, financial position or results of operations of the Company and its Consolidated Subsidiaries, taken as a whole. SECTION 4.10. Taxes. The Company and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any of its Subsidiaries other than taxes or assessments the validity of which the Company or the relevant Subsidiary is contesting in good faith by appropriate proceedings and is maintaining adequate reserves with respect thereto in accordance with generally accepted accounting principles. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Company, adequate. SECTION 4.11. Subsidiaries. (a) Each of the Company's corporate Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. (b) Each Borrower Subsidiary is a Wholly-Owned Subsidiary of the Company, unless such Borrower Subsidiary has been merged with and into the Company as permitted by the proviso in Section 5.15. SECTION 4.12. Full Disclosure. No information heretofore or hereafter furnished by any Borrower to the Agents or any Bank for purposes of or in connection with this Agreement, the other Financing Documents or any transaction contemplated hereby or thereby contains or, taken together with all such information so furnished, will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. ARTICLE 5 COVENANTS 35 41 Each Borrower agrees for itself and each of its Subsidiaries that so long as any Bank has any Commitment hereunder or any amount payable under any Financing Document remains unpaid: SECTION 5.1. Information. The Company will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of operations and cash flows for such fiscal year, together with consolidating balance sheets, statements of operations and operating cash flows for such fiscal year for each of the Company's Consolidated Subsidiaries in the form currently prepared by the Company, setting forth in each case in comparative form the figures for the previous fiscal year, all such consolidated statements reported on in a manner acceptable to the Securities and Exchange Commission by KPMG Peat Marwick or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Company, a consolidated balance sheet of the Company and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of operations and cash flows for such quarter and for the portion of the Company's fiscal year ended at the end of such quarter, together with consolidating balance sheets, statements of operations and operating cash flows for such quarter and the portion of the Company's fiscal year ended at the end of such quarter for each of the Company's Consolidated Subsidiaries in the form currently prepared by the Company, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Company's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation in all material respects and generally accepted accounting principles by the chief financial officer or the chief accounting officer of the Company; (c) simultaneously with the delivery of each set of financial statements referred to in clauses 5.01(a) and 5.01(b) above, a certificate of the chief financial officer or the treasurer of the Company (i) setting forth in reasonable detail the calculations required to establish whether the Company and, if applicable, each other Borrower, is in compliance with the requirements of Sections 5.07 through 5.13, inclusive, and Section 5.17, on the date of such financial statements and (ii) stating whether any 36 42 Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrowers are taking or propose to take with respect thereto; (d) simultaneously with the delivery of each set of financial statements referred to in clause 5.01(a) above, a statement of the firm of independent public accountants that reported on such statements whether anything has come to their attention to cause them to believe the Company or if applicable, any of the other Borrowers, was not in compliance with the requirements of Sections 5.07 through 5.13, inclusive, and Section 5.17 on the date of such financial statements; (e) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (f) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Company shall have filed with the Securities and Exchange Commission; (g) within five (5) days after any executive officer obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the treasurer of the Company setting forth the details thereof and the action which the Borrowers are taking or propose to take with respect thereto (for purposes of this Section, "executive officer" shall mean any of the President, Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Treasurer, Controller and General Counsel of the Company and the President of any Borrower); (h) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan that might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other 37 43 than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement that has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Company setting forth details as to such occurrence and action, if any, which the Company or applicable member of the ERISA Group is required or proposed to take; and (i) from time to time such additional information regarding the financial position or business of the Company and its Subsidiaries as the Collateral Agent or the Administrative Agent, at the request of any Bank, may reasonably request. SECTION 5.2. Payment of Obligations. Each Borrower will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, at or before maturity or in accordance with customary trade practices, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each of their respective Subsidiaries to maintain, in accordance with and to the extent required by generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 5.3. Maintenance of Property; Insurance. (a) Each Borrower will keep, and will cause each of its Subsidiaries to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) Each Borrower will maintain, and will cause each of its Subsidiaries to maintain: (i) at all times, physical damage insurance on all real and personal property owned by it on an all risks basis covering the repair and replacement cost of all such property and consequential loss coverage for business interruption and extra expense; 38 44 (ii) at all times, public liability insurance (including products/completed operations liability coverage) in an amount not less than $10,000,000, and (c) from time to time, such other insurance coverage in such amounts and with respect to such risks as it shall have determined in its reasonable discretion to be necessary or advisable in the conduct of its business. All such insurance will be provided by financially sound and reputable insurers. The Company will deliver to the Banks (i) upon request of any Bank through the Administrative Agent from time to time full information as to the insurance carried, (ii) within five (5) days of receipt of notice from any insurer a copy of any notice of cancellation or material change in coverage from that existing on the date of this Amended Agreement (other than any notice of increase in the amount of any such coverage from the amount in effect on the date of this Amended Agreement) and (iii) forthwith, notice of any cancellation or nonrenewal of coverage by any Borrower or any of its Subsidiaries with respect to any insurance such Borrower must maintain, and must cause its Subsidiaries to maintain, pursuant to this subsection. (d) Prior to the Effective Date, each Borrower has caused the Collateral Agent to be named as an additional insured party and the loss payee (to the extent that the insurance policy is of a type that provides for a loss payee) on each insurance policy (the "DESIGNATED INSURANCE POLICIES") such Borrower is required to maintain pursuant to this Section and which is in existence on the Effective Date, other than any such policy, or portion thereof, solely with respect to equipment. Each Borrower will deliver to the Collateral Agent, upon request, the insurance policies for each Designated Insurance Policy. Each Designated Insurance Policy includes and shall include effective waivers by the insurer of all claims for insurance premiums against the Collateral Agent or any other Secured Party, provides and will provide that (i) all insurance proceeds (other than any insurance proceeds with respect to any mission success insurance policy (a "Mission Success Policy")) in excess of $1,000,000 per claim for which the Collateral Agent is loss payee shall be adjusted with and payable to the Collateral Agent, (ii) all insurance proceeds with respect to any Mission Success Policy in excess of $1,000,000 per claim for which the Collateral Agent is loss payee shall be payable to the Collateral Agent and the Collateral Agent shall have the right to attend all meetings relating to the adjustment of any such claim and shall be provided with all information relating to such claim provided by the Borrower to the insurance company with which such claim is being adjusted and any additional information the Collateral Agent may reasonably request relating to such claim, (iii) the insurer shall notify the Collateral Agent of any failure by the 39 45 Borrower to pay any premiums or other amounts due on any insurance policy and (iv) no cancellation or termination of such Designated Insurance Policy shall be effective until at least thirty (30) days after receipt by the Collateral Agent of written notice thereof; provided that, solely with respect to any Mission Success Policy, such Policy may provide that no cancellation or termination of such Policy shall be effective until at least fifteen (15) days after receipt by the Collateral Agent of written notice thereof. All insurance proceeds payable to the Collateral Agent pursuant to this Section shall be deposited in the Insurance Account. Each Borrower agrees that it will (x) give prior notice to the Collateral Agent of any meeting referred to in clause (ii) of this subsection, promptly upon request, provide the Collateral Agent with all information referred to in clause (ii) of this subsection and (z) not agree to any adjustment with respect to any claim described in clause (ii) of this subsection without the prior written consent of the Collateral Agent, which consent shall not be unreasonably withheld. (e) Each Borrower will cause the Collateral Agent to be named as an additional insured party and the loss payee (to the extent that the insurance policy is of a type that provides for a loss payee) on each Designated Insurance Policy such Borrower acquires after the Effective Date pursuant to this Section; provided that, nothing in this subsection shall be construed to require the Company to cause the Collateral Agent to be named as an additional insured party and the loss payee on any portion of any mission success insurance being obtained by the Company or any of its Subsidiaries on behalf of a customer as to which such customer is named loss payee. Each such insurance policy shall include each of the waivers and provisions described in Section 5.03(d). SECTION 5.4. Conduct of Business and Maintenance of Existence. Each Borrower will continue, and will cause each of its Subsidiaries to continue, to engage in business of the same general type as now conducted by it, and will preserve, renew and keep in full force and effect, and will cause each of its Subsidiaries to preserve, renew and keep in full force and effect its corporate existence and rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing contained in this Section shall prohibit any transaction expressly permitted under Section 5.15. SECTION 5.5. Compliance with Laws. Each Borrower will comply, and will cause each of its Subsidiaries to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. SECTION 5.6. Inspection of Property, Books and Records. Each Borrower will keep, and will cause each of its Subsidiaries to keep, proper books of record 40 46 and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each of its Subsidiaries to permit, representatives of any Agent or any Bank, at such Agent's or Bank's expense, to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times during normal business hours, upon reasonable notice and as often as may reasonably be desired by such Agent or such Bank. SECTION 5.7. Investments. Neither the Company nor any Subsidiary will make, acquire or hold any Investment in any Person other than: (a) Investments in any Borrower; (b) Investments (other than (i) Investments described in clause (a) above and (ii) the ORBCOMM Global Guaranty)) in an aggregate principal amount not exceeding $5,000,000 in direct or indirect Subsidiaries of the Company immediately after such Investment is made or acquired; (c) Temporary Cash Investments; (d) Investments made by the Company, any of its Wholly-Owned Subsidiaries or OCC in an aggregate principal amount not exceeding $110,000,000, in any entity or entities through which the Company, any of its Wholly-Owned Subsidiaries or OCC will develop, construct, operate and/or market the ORBCOMM low-earth orbit satellite communications system; (e) Investments (other than Investments described in clause (b) above) made or acquired or committed to be made or acquired by MDA prior to the date MDA was acquired by the Company and listed on Schedule III; (f) any payments made pursuant to the ORBCOMM Global Guaranty; (g) Investments in Orbital Imaging (i) made on or prior to June 15, 1997; provided that (A) the aggregate amount of such Investments ("ROLLOVER INVESTMENTS") does not exceed the aggregate amount of Investments made by the Company in the Orbital Imaging Project on or prior to December 1, 1996 and (B) neither the Company nor any of its 41 47 Subsidiaries shall contribute any cash or assets in connection with, or as consideration for, the making of any such Rollover Investment and (ii) in an aggregate principal amount not exceeding $80,000,000 (in addition to Investments described in clause (i)); (h) Investments in an aggregate amount not exceeding $38,000,000 consisting of capital stock of Engineering Technologies, Inc. and CTA Commercial Systems Inc. purchased by the Company pursuant to an Asset Acquisition Agreement dated as of July 11, 1997 between CTA INCORPORATED and the Company; (i) Investments by the Company or any of its Subsidiaries constituting "vendor financing" under contracts entered into in the ordinary course of business; (j) Investments (x) made by the Company on or before the effective date of the Ashtech Merger (as defined in Amendment No. 1 to the Existing Agreement dated as of December 19, 1997 among the Company, the Original Banks, the Administrative Agent and the Collateral Agent) consisting of subordinated unsecured intercompany loans to Magellan in an aggregate principal amount not in excess of $10,000,000 and (y) made by the Company after the effective date of the Ashtech Merger consisting of subordinated unsecured intercompany loans to Magellan in an aggregate principal amount not in excess of $35,000,000, but in each case solely if such Investments are evidenced by an intercompany note issued by Magellan for the account of the Company and in form and substance satisfactory to the Collateral Agent and such intercompany note is subject to a perfected first priority Lien in favor of the Collateral Agent for the benefit of the Banks; (k) (i) Investments by the Company or any of its Subsidiaries in an aggregate amount not to exceed $50,000,000 and consisting of shares of capital stock of CCI International N.V. ("CCI"), a company formed and existing under the laws of the Netherlands Antilles, made prior to March 31, 1999, (ii) Investments (other than Investments permitted pursuant to clause (i)) in an aggregate amount up to $50,000,000 and consisting of shares of capital stock of CCI made on any date after March 31, 1999 and on or prior to June 31, 2000; provided that (1) prior to making any such Investment, the aggregate amount of Investments permitted pursuant to clause (i) has been made and (2) on any date (an "INVESTMENT DATE") immediately after giving effect to any such proposed Investment, the Company is in pro forma compliance with the covenants set forth in Sections 5.08, 5.09 and 5.10, after giving effect to such proposed 42 48 Investment (and for such purposes, "Consolidated EBITDA" and "Earnings Available for Fixed Charges" shall be calculated for the period of four consecutive fiscal quarters most recently ended on or prior to such Investment Date, adjusted to give effect to such proposed Investment), (iii) Investments by the Company or any of its Subsidiaries consisting of warrants exercisable for the capital stock of CCI; provided that (1) such warrants are acquired contemporaneously with the making of any Investment permitted by clause (ii), (2) no cash consideration is paid by the Company or any of its Subsidiaries for the acquisition of any such warrants and (3) such warrants are substantially on the terms described by the Company to the Banks prior to June 18, 1998 and (iv) Investments by the Company or any of its Subsidiaries in CCI constituting "vendor financing" substantially on the terms described by the Company to the Banks prior to June 18, 1998; and (l) any Investment (other than any Investment in direct or indirect Subsidiaries of the Company immediately after such Investment is made or acquired) not otherwise permitted by the foregoing clauses of this Section 5.07 if, immediately after such Investment is made or acquired, the aggregate net book value of all Investments permitted by this clause (l) does not exceed 12% of Consolidated Tangible Net Worth. SECTION 5.8. Minimum Consolidated Net Worth. Consolidated Net Worth at the last day of any fiscal quarter will not be less than (i) $476,100,000 plus (ii) 50% of Consolidated Net Income for each fiscal quarter of the Company ended on or after September 30, 1998, which such Consolidated Net Income is positive (but with no deduction on account of any fiscal quarter for which Consolidated Net Income is negative) plus (iii) 100% of the aggregate amount by which Consolidated Net Worth shall have been increased by reason of the issuance and sale after September 30, 1998 and on or prior to such date of any capital stock or the conversion or exchange of any Debt of the Company into or with capital stock of the Company consummated after September 30, 1998 and on or prior to such date. SECTION 5.9. Leverage. The Consolidated Leverage Ratio will at no time during any period set forth below exceed the ratio set forth below opposite such period:
PERIOD RATIO Effective Date-3/30/00 3.75:1 3/31/00 and thereafter 3.50:1
43 49 SECTION 5.10. Consolidated Fixed Charge Ratio. At the last day of any fiscal quarter, the ratio of Earnings Available for Fixed Charges to Consolidated Fixed Charges, in each case for the four consecutive fiscal quarters then ended, will not be less than the ratio set forth below opposite the period in which such last day falls:
PERIOD RATIO Effective Date-12/30/98 1.10:1 12/31/98-12/30/99 1.25:1 12/31/99 and thereafter 1.50:1
SECTION 5.11. Consolidated Loss Ratio. The Consolidated Loss Ratio will not at any time, for the calendar month then most recently ended, exceed .5%. SECTION 5.12. Consolidated Delinquency Ratio. The Consolidated Delinquency Ratio will not at any time, for the two consecutive calendar months then most recently ended, exceed 35%. SECTION 5.13. Consolidated DSO Ratio. The Consolidated DSO Ratio will not at any time, for the three consecutive calendar months then most recently ended, exceed 80 days. SECTION 5.14. Negative Pledge. Neither the Company nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except the following (each a "PERMITTED LIEN"): (a) Liens existing or provided for pursuant to a contract existing as of the Effective Date and listed on Schedule II; (b) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary and not created in contemplation of such event; (c) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset; provided that such Lien attaches to such asset concurrently with or within 120 days after the acquisition thereof; (d) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Company or a Subsidiary and not created in contemplation of such event; 44 50 (e) any Lien existing on any asset prior to the acquisition thereof by the Company or a Subsidiary and not created in contemplation of such acquisition; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section; provided that such Debt is not increased and is not secured by any additional assets; (g) Liens arising in the ordinary course of its business which do not secure Debt or Derivatives Obligations and do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (h) Liens created pursuant to any of the Security Agreements; (i) Liens on assets other than the Collateral securing Debt (other than the Loans and the Letter of Credit Liabilities)(other than Liens permitted by subsection (t) hereunder), in an aggregate amount not exceeding $75,000,000; (j) Liens imposed by any governmental authority for taxes, assessments, governmental charges, duties or levies not yet due or which are being contested in good faith and by appropriate proceedings; provided adequate reserves with respect thereto are maintained on the books of the Company and its Consolidated Subsidiaries in accordance with generally accepted accounting principles; (k) carriers', warehousemen's, mechanics', transporters, materialmen's, repairmen's or other like Liens arising in the ordinary course of business; provided any such Lien is either (A) discharged within five (5) days of the date when payment of the obligation secured by such Lien is due or (B) is being contested in good faith and by appropriate proceedings; (l) Liens securing judgments for an amount not exceeding $5,000,000 and for a period not resulting in an Event of Default under Section 6.01(k); (m) pledges or deposits under worker's compensation, unemployment insurance and other social security legislation; 45 51 (n) deposits to secure the performance of bids, trade contracts (other than for Debt), leases, statutory obligations, surety and appeal bonds, performance bonds and other similar obligations incurred in the ordinary course of business; (o) Liens on any such asset imposed under the Federal Acquisition Regulations to secure advance payments made by the Government under contracts; (p) Liens existing or provided for pursuant to a contract to which any Borrower becomes a party as a result of a novation of a contract described in clause 5.14(a); (q) Liens on assets of Magellan securing Debt and other obligations of Magellan under the Magellan Financing; (r) solely until the first anniversary of the effective date of the Ashtech Merger, Liens on shares of capital stock of Magellan held by the Company to secure contingent indemnity obligations of the Company under the Agreement and Plan of Merger dated as of November 28, 1997 among the Company, Ashtech Inc. and Magellan; provided that the aggregate value (determined in accordance with the Escrow Agreement attached as Exhibit C to such Merger Agreement) of such shares subject to such Liens shall not exceed at any time $1,500,000; (s) Liens on cash and cash equivalents securing Derivatives Obligations; provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $3,000,000; and (t) Liens on the Dulles highbay facility located at 21830 Atlantic Boulevard, Dulles, VA 20166-6801, owned by the Company securing Debt in an aggregate amount not exceeding $15,000,000. SECTION 5.15. Consolidations, Mergers and Sales of Assets. The Company will not (a) consolidate or merge with or into any other Person or (b) sell, lease or otherwise transfer, directly or indirectly, all or any substantial part of the assets of the Company and its Subsidiaries, taken as a whole, to any other Person; provided that nothing contained herein shall prohibit the Company from merging any of its Subsidiaries with and into the Company. SECTION 5.16. Use of Proceeds. The proceeds of the Loans made and the Letters of Credit issued under this Agreement will be used by the Borrowers for general corporate purposes, including refinancing of existing Debt, working 46 52 capital purposes and the funding of acquisitions and, to the extent such funds are not required by the Borrowers for refinancing of existing Debt, working capital purposes or the funding of any such acquisitions, for advances to the Company, its Subsidiaries and any entity that is a Subsidiary on the date hereof. SECTION 5.17. Subsidiary Debt. Total Debt of all of the Company's Subsidiaries (excluding (i) Loans and Letter of Credit Liabilities hereunder and, (ii) Debt of a Subsidiary to the Company or to a Wholly-Owned Subsidiary of the Company) will at no time exceed 50% of Consolidated Tangible Net Worth. For purposes of this Section, any preferred stock of a Subsidiary held by a Person other than the Company or a Wholly-Owned Subsidiary of the Company shall be included, at the higher of its voluntary or involuntary liquidation value, in the "Debt" of such Subsidiary. SECTION 5.18. Restricted Payments. Neither the Company nor any Subsidiary will declare or make any Restricted Payment. ARTICLE 6 DEFAULTS SECTION 6.1. Events of Default. If one or more of the following events ("EVENTS OF DEFAULT") shall have occurred and be continuing: (a) any principal of any Loan or any Reimbursement Obligation shall not be paid when due; (b) any interest on any Loan, any fees or commissions or any other amount payable under any Financing Document, shall not be paid within one (1) Domestic Business Day after the due date thereof; (c) any Borrower shall fail to observe or perform any covenant or agreement contained in Sections 5.01(g) and 5.07 to 5.18 inclusive; (d) any Borrower shall fail to observe or perform any covenant or agreement contained in any Financing Document (other than those covered by clauses 6.01(a), 6.01(b) or 6.01(c) above) for thirty (30) days after written notice thereof has been given to the Company by the Administrative Agent at the request of any Bank; (e) any representation, warranty, certification or statement made by any Borrower in any Financing Document, or in any certificate, financial statement or other document delivered pursuant thereto shall 47 53 prove to have been incorrect in any material respect when made (or deemed made); (f) any Borrower or any of its Subsidiaries shall fail to make any payment in respect of any Material Debt beyond any notice, grace or cure period applicable with respect thereto; (g) any event or condition (other than an event or condition described in Section 6.01(f)) shall occur which results in the acceleration of the maturity of any Material Debt or the accelerated termination of binding commitments to lend monies or extend credit in any other form to the Borrower or any Subsidiary in an aggregate amount in excess of $10,000,000 or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or the maker of any such commitment, as the case may be, or any Person acting on such holder's or maker's behalf, to accelerate the maturity of such Debt or terminate any such commitment prior to the scheduled termination thereof; (h) the Company or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (i) an involuntary case or other proceeding shall be commenced against the Company or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Company or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (j) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $5,000,000 which it shall 48 54 have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $5,000,000; (k) a judgment or order for the payment of money in excess of $5,000,000 shall be rendered by a court of competent jurisdiction against the Company and/or any of its Subsidiaries and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Company or the relevant Subsidiary shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; (l) any Person or group of Persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of common stock of the Company; or, during any period of 12 consecutive calendar months, individuals who were directors of the Company on the first day of such period shall cease to constitute a majority of the board of directors of the Company; or, except as permitted by the proviso in Section 5.15, any Borrower Subsidiary shall cease to be a Wholly-Owned Subsidiary of the Company; or (m) the Lien created by any Security Agreement shall at any time and for any reason not constitute a valid and perfected Lien on the Collateral referred to therein subject to no prior or equal Lien other than a Permitted Lien; then, and in every such event, the Administrative Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice 49 55 to the Company terminate the Commitments and they shall thereupon terminate, (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Company declare the Notes of any or all of the Borrowers (together with accrued interest thereon) to be, and such Notes shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Borrower and (iii) if requested by Banks having more than 50% in aggregate amount of the LC Exposures, by notice to the Company declare an amount (the "AGGREGATE LC AMOUNT") equal to the sum of the maximum amount which may at any time be drawn under all Letters of Credit at the time outstanding issued upon request of each Borrower (the "BORROWER LC AMOUNT") (whether or not a beneficiary shall have presented, or shall be entitled at such time to present, the drafts or other documents required to draw under any such Letter of Credit) to be, and the Aggregate LC Amount shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Borrower; provided that in the case of any of the Events of Default specified in clause 6.01(h) or 6.01(i) above with respect to any Borrower, without any notice to any Borrower or any other act by any Agent or Bank, the Commitments shall thereupon terminate, and the Notes of all Borrowers (together with accrued interest thereon) and the Aggregate LC Amount shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Borrower. Each Borrower LC Amount, when received by the Administrative Agent, shall be deposited in the Borrower's Collateral Account, as cash collateral for the Reimbursement Obligations of the Borrower in the event of any drawing under any Letter of Credit issued upon request of such Borrower. Upon any drawing under any such Letter of Credit, the Collateral Agent shall apply such amounts held in the Collateral Account to such Reimbursement Obligations. SECTION 6.2. Notice of Default. The Administrative Agent shall give notice to the Company under Section 6.01(d) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE 7 THE AGENTS SECTION 7.1. Appointment and Authorization. Each Bank irrevocably appoints and authorizes each Agent to take such action as agent on its behalf and to exercise such powers under the Financing Documents as are delegated to such 50 56 Agent by the terms thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.2. Agents and Affiliates. Each of the Agents in its individual capacity shall have the same rights and powers under the Financing Documents as any other Bank and may exercise or refrain from exercising the same as though it were not an Agent and each of the Agents in its individual capacity and their respective Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Company or any Subsidiary or Affiliate of the Company as if it were not an Agent. SECTION 7.3. Action by Agents. The obligations of each Agent under the Financing Documents are only those expressly set forth therein. Without limiting the generality of the foregoing, no Agent shall be required to take any action with respect to any Default, except, in the case of the Administrative Agent, as expressly provided in Article 6 and in the case of the Collateral Agent, as expressly provided for in the Security Agreements. SECTION 7.4. Consultation with Experts. Each Agent may consult with legal counsel (who may be counsel for a Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.5. Liability of Agents. None of the Agents, their respective Affiliates nor any of their respective directors, officers, agents, or employees shall be liable to any Bank or any other Agent for any action taken or not taken by it in connection with the Financing Documents (i) with the consent or at the request of the Required Banks (or such greater number as may be required by Section 10.05) or (ii) in the absence of its own gross negligence or willful misconduct. None of the Agents, their respective Affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with the Financing Documents or any borrowing or the issuance of any letter of credit hereunder; (ii) the performance or observance of any of the covenants or agreements of any Borrower, (iii) the satisfaction of any condition specified in Article 3 hereof, except, in the case of the Administrative Agent, receipt of items required to be delivered to the Administrative Agent; (iv) the validity, effectiveness or genuineness of the Financing Documents or any other instrument or writing furnished in connection therewith or (v) the existence or sufficiency of the Collateral. No Agent shall incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which 51 57 may be a bank wire, telex, facsimile or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.6. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify each Agent, their respective Affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitee's gross negligence or willful misconduct) that such indemnitee may suffer or incur in connection with the Financing Documents or any action taken or omitted by such indemnitee thereunder. SECTION 7.7. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.8. Successor Agents. Any Agent may resign at any time by giving written notice thereof to the Banks and the Company. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. ARTICLE 8 CHANGE IN CIRCUMSTANCES 52 58 SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair. If prior to the first day of any Interest Period for any Euro-Dollar Loan: (a) the Administrative Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the London interbank market for such Interest Period, or (b) Banks holding 50% or more of the aggregate amount of the affected Euro-Dollar Loans advise the Administrative Agent that the Adjusted London Interbank Offered Rate as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Banks of funding such Euro-Dollar Loans for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Company and the Banks, whereupon until the Administrative Agent notifies the Company that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make Euro-Dollar Loans or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended and (ii) each outstanding Euro-Dollar Loan, shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Administrative Agent at least one Domestic Business Day before the date of any Euro-Dollar Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, such Borrowing shall instead be made as a Base Rate Borrowing. SECTION 8.2. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans to any Borrower and such Bank shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Banks and the Company, whereupon until such Bank notifies the Company and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and 53 59 will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such day. SECTION 8.3. Increased Cost and Reduced Return. (a) If on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject any Bank (or its Euro-Dollar Lending Office) to any tax, duty or other charge with respect to its Euro-Dollar Loans, its Notes or its obligation to make Euro-Dollar Loans, its letters of credit or its obligation to issue or participate in any letters of credit, or shall change the basis of taxation of payments to any Bank (or its Euro-Dollar Lending Office) of the principal of or interest on its Euro-Dollar Loans or any other amounts due under this Agreement in respect of its Euro-Dollar Loans or its obligation to make Euro-Dollar Loans or its letters of credit or its obligation to issue or participate in any letters of credit, (except for changes in the rate of tax on the overall net income of such Bank or its Euro-Dollar Lending Office imposed by the jurisdiction in which such Bank's principal executive office or Euro-Dollar Lending Office is located); or (ii) shall impose, modify or deem applicable any reserve, special deposit, insurance assessment or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System but excluding any such requirement included in an applicable Euro-Dollar Reserve Percentage) against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Euro-Dollar Lending Office) or shall impose on any Bank (or its Euro-Dollar Lending Office) or the London interbank market any other condition affecting its Euro-Dollar Loans, its Notes or its obligation to make Euro-Dollar Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Euro-Dollar Lending Office) of making or maintaining its Euro-Dollar Loans or 54 60 issuing or participating in any Letters of Credit, or to reduce the amount of any sum received or receivable by such Bank (or its Euro-Dollar Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank which demand shall set forth in reasonable detail the basis for such request (with a copy to the Administrative Agent), the Company shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency (other than as contemplated by Section 8.03(a)), has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank which demand shall set forth in reasonable detail the basis for such request (with a copy to the Administrative Agent), the Company shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Company and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 8.4. Base Rate Loans Substituted for Affected Euro-Dollar Loans. If (i) the obligation of any Bank to make, or to continue or convert outstanding Loans as or to, Euro-Dollar Loans to any Borrower has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) and the Borrower shall, by at least five Euro-Dollar 55 61 Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Company that the circumstances giving rise to such suspension or demand for compensation no longer apply all Loans which would otherwise be made by such Bank as (or continued as or converted to) Euro-Dollar Loans shall instead be Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks). If such Bank notifies the Company that the circumstances giving rise to such suspension or demand for compensation no longer exist, the principal amount of each such Base Rate Loan shall be converted into Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Banks. ARTICLE 9 GUARANTY SECTION 9.1. The Guaranty. Each Guarantor hereby jointly, severally and unconditionally guarantees the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of the principal of and interest on each Note issued by any Borrower pursuant to this Agreement, and the full and punctual payment of all other amounts payable by any Borrower under any Financing Document to which such Borrower is a party. Upon failure by any Borrower to pay punctually any such amount, each Guarantor shall forthwith on demand pay the amount not so paid at the place and in the manner specified in this Agreement and the Banks need not proceed to first preserve, utilize or exhaust any right or remedy against any Borrower or any other Guarantor or any security for any obligation of any Borrower under any Financing Document held by the Banks. SECTION 9.2. Guaranty Unconditional. Subject to Section 9.05, the joint and several obligations of each Guarantor hereunder shall be unconditional and absolute and, without limiting the generality of the foregoing, each Guarantor shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of any other Borrower under any Financing Document, by operation of law or otherwise; (ii) any modification or amendment of or supplement to any Financing Document; 56 62 (iii) any release, non-perfection or invalidity of any direct or indirect security for any obligation of any other Borrower under any Financing Document; (iv) any change in the corporate existence, structure or ownership of any other Borrower or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any other Borrower or its assets or any resulting release or discharge of any obligation of any other Borrower contained in any Financing Document; (v) the existence of any claim, defense, set-off or other rights which such Guarantor may have at any time against any other Borrower, any Agent, any Bank or any other Person, whether in connection herewith or any unrelated transactions; provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; or (vi) any other act or omission to act or delay of any kind by any other Borrower, any Agent, any Bank or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of such Guarantor's obligations hereunder. SECTION 9.3. Discharge Only upon Payment in Full; Reinstatement . Each Guarantor's obligations hereunder shall remain in full force and effect until the Commitments shall have terminated, all Letters of Credit shall have expired, the principal of and interest on the Notes, the Reimbursement Obligations, and all other amounts payable by any Borrower under this Agreement or any other Financing Document shall have been paid in full. If at any time any payment of the principal of or interest on any Note or any other amount payable by any Borrower under this Agreement or any other Financing Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of such Borrower or otherwise, each Guarantor's obligations hereunder with respect to such payment shall be reinstated at such time as though such payment had been due but not made at such time. SECTION 9.4. Waiver by the Guarantor. Each Guarantor irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against any other Borrower or any other Person. 57 63 SECTION 9.5. Limit of Liability. The obligations of each Borrower Subsidiary as a Guarantor hereunder shall be limited to an aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance under Section 548 of the United States Bankruptcy Code or any comparable provisions of any applicable state law. SECTION 9.6. Subrogation. Upon making any payment with respect to any Borrower hereunder, the Guarantor making such payment shall be subrogated to the rights of the payee against the Borrower with respect to such payment; provided that such Guarantor shall not enforce or accept any payment by way of subrogation until all amounts of principal of and interest on the Notes and all other amounts payable by all Borrowers under the Financing Documents have been paid in full. SECTION 9.7. Stay of Acceleration. In the event that acceleration of the time for payment of any amount payable by any Borrower under any Financing Document to which such Borrower is a party is stayed upon insolvency, bankruptcy or reorganization of such Borrower, all such amounts otherwise subject to acceleration under the terms of this Agreement shall nonetheless be payable by each Guarantor hereunder forthwith on demand by the Administrative Agent made at the request of the Required Banks. ARTICLE 10 MISCELLANEOUS SECTION 10.1. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of any Borrower or Agent, at its address or facsimile number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or telex or facsimile number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address or telex or facsimile number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Company. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in or pursuant to this Section and the appropriate answerback is received, (ii) if given by reputable overnight courier, one (1) Domestic Business Day after being delivered to such courier, (iii) if given by certified mail (return receipt requested), three (3) Domestic Business Days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by 58 64 any other means, when received at the address specified in this Section; provided that notices to the Administrative Agent under Article 2 or Article 8 and notices to the LC Bank under Section 2.03(b) shall not be effective until received. SECTION 10.2. No Waiver. No failure or delay by any Agent or any Bank in exercising any right, power or privilege under any of the Financing Documents shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies therein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 10.3. Expenses; Documentary Taxes; Indemnification. (a) The Company shall pay (i) all reasonable out-of-pocket expenses of the Agents, including reasonable fees and disbursements of special counsel for the Agents and any local counsel for the Agents, in connection with (x) the preparation of the Financing Documents, (y) any waiver or consent under the Financing Documents or (z) any amendment of the Financing Documents or any Default or alleged Default thereunder and (ii) if an Event of Default occurs, all reasonable out-of-pocket expenses incurred by any Agent or Bank, including reasonable fees and disbursements of counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. The Company shall indemnify each Bank against any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of the Financing Documents. (b) The Company agrees to indemnify each Bank and hold each Bank harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by any Bank (or by any Agent in connection with its actions as Agent) in connection with any investigative, administrative or judicial proceeding (whether or not such Bank shall be designated a party thereto) relating to or arising out of the Financing Documents, the Collateral or any transaction relating thereto; provided that no Bank shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 10.4. Sharing of Set-Offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to the Note of any Borrower held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to the Note of such Borrower held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations 59 65 in the Notes of such Borrower held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes of such Borrower held by the Banks shall be shared by the Banks pro rata; provided that if the Bank purchasing such participations (the "SHARING BANK") should subsequently be required to refund such payment to such Borrower, then each Bank from whom a participation was purchased shall pay to the Sharing Bank its pro rata share of the participations purchased together with its pro rata share of interest on such amount if and to the extent the Sharing Bank is required to pay interest on any refunded amount; provided further that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of a Borrower other than its indebtedness hereunder. Each Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note in respect of which it is an obligor acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of such Borrower in the amount of such participation. SECTION 10.5. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrowers and the Required Banks (and, if the rights or duties of the LC Bank or either Agent are affected thereby, by it); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for termination of any Commitment, (iv) amend any provision of Article 9 hereof, or (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement or the Notes. SECTION 10.6. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that no Borrower may assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "PARTICIPANT") participating interests in its Commitment or 60 66 any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrowers and the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrowers and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrowers hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clauses (i), (ii), (iii) or (iv) of Section 10.05 without the consent of the Participant. (c) Any Bank may at any time assign to one or more banks or other institutions (each an "ASSIGNEE") all, or a proportionate part of all, of its rights and obligations with respect to its Commitment (and corresponding Loans and Letter of Credit Liabilities), and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit F hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Company, the LC Bank and the Administrative Agent (which consents shall not be unreasonably withheld); provided that (i) if an Assignee is another Bank or an Affiliate of such transferor Bank, no such consent shall be required, and (ii) immediately after giving effect to any such assignment, (x) the transferor Bank's Commitment is equal to either $0 or at least $3,000,000 and (y) the Assignee's Commitment is at least equal to $3,000,000. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection, the transferor Bank, the Administrative Agent and the Borrowers shall make appropriate arrangements so that, if required, new Notes are issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $3,000. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to the Company and the Administrative Agent certification as to exemption from deduction or 61 67 withholding of any United States federal income taxes in accordance with Section 2.15. (d) Any Bank may at any time assign all or any portion of its rights under the Financing Documents to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. SECTION 10.7. Collateral. Each of the Banks represents to each Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 10.8. Proprietary Information. The Administrative Agent and each Bank shall keep confidential any information provided by or on behalf of any Borrower or any of their respective Subsidiaries and marked as confidential or proprietary; provided, that nothing herein shall prevent the Administrative Agent or any Bank from disclosing such information (i) to its officers, directors, employees, agents, attorneys and accountants in accordance with customary banking practices, (ii) upon the order of a court or administrative agency, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over such party, (iv) that has become publicly available without breach of any agreement between the parties hereto, (v) as necessary for the exercise of any remedy under any Financing Document or (vi) subject to provisions similar to those contained in this Section, to any prospective Participant or Assignee. SECTION 10.9. Governing Law; Submission to Jurisdiction. Except as otherwise provided for in the Security Agreements, each of the Financing Documents shall be governed by and construed in accordance with the laws of the State of New York. Each Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement, any other Financing Document or the transactions contemplated hereby or thereby. Each Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. SECTION 10.10. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement and the other Financing Documents constitute the entire 62 68 agreement and understanding among the parties hereto and supersede any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. SECTION 10.11. Severability. If any provision hereof is invalid or unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Agents and the Banks in order to carry out the intentions of the parties hereto as nearly as may be possible, and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. SECTION 10.12. WAIVER OF JURY TRIAL. EACH OF THE BORROWERS, THE AGENTS AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER FINANCING DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 63 69 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. ORBITAL SCIENCES CORPORATION By: /s/ Kenneth H. Sunshine ------------------------------------------ Title: Vice President & Treasurer 21700 Atlantic Boulevard Dulles, VA 20166 Facsimile number: (703) 406-3509 Commitment: AGENT: $29,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Diana H. Imhof ------------------------------------------ Title: Vice President CO-SYNDICATION AGENTS: $29,000,000 THE BANK OF NOVA SCOTIA, New York Agency By: /s/ James R. Trimble ------------------------------------------ Title: Senior Relationship Manager $29,000,000 NATIONSBANK, N.A. By: /s/ Michael Brick ------------------------------------------ Title: Vice President 64 70 OTHER BANKS: $28,000,000 FIRST UNION COMMERCIAL CORPORATION By: /s/ Michael Landini ------------------------------------------ Title: Vice President $25,000,000 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By: /s/ Jon D. Storck ------------------------------------------ Title: Vice President By: /s/ Sangita Gupte ------------------------------------------ Title: Associate $20,000,000 KEYBANK, N.A. By: /s/ Marianne T. Meil ------------------------------------------ Title: Vice President $15,000,000 BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: /s/ Catherine Moeser ------------------------------------------ Title: Vice President $15,000,000 WACHOVIA BANK, N.A. By: /s/ Roberts A. Bass ------------------------------------------ Title: Vice President 65 71 $10,000,000 CHEVY CHASE BANK By: /s/ Steven Hass ------------------------------------------ Title: Vice President - - --------------------- Total Commitments - - --------------------- $200,000,000 66 72 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By: /s/ Diana H. Imhof ------------------------------------------ Title: Vice President 60 Wall Street New York, New York 10260-0060 Facsimile number: (212) 648-5018 67 73 PRICING SCHEDULE Each of "Commitment Fee Rate", "Euro-Dollar Margin", "Base Margin" and "Letter of Credit Commission Rate" means, for any day, the rate per annum set forth below in the row opposite such term and in the column corresponding to the Pricing Level that applies for such day:
Pricing Level Level IA Level Level Level Level Level I II III IV V Commitment Fee Rate 0.375% 0.375% 0.375% 0.50% 0.50% 0.750% Euro-Dollar 1.50% 1.75% 2.00% 2.50% 3.00% 3.25% Margin Base 0.50% 0.75% 1.00% 1.50% 2.00% 2.25% Margin Letter of Credit 1.50% 1.75% 2.00% 2.50% 3.00% 3.25% Commission Rate
For purposes of this Schedule, the following terms have the following meanings, subject to the last sentence of this Pricing Schedule: "Level IA Pricing" applies for any day if (i) such day falls on or after June 21, 1999 and (ii) on such day, the Loans are rated BB+ or higher by S&P and Ba1 or higher by Moody's. "Level IA Pricing" shall apply (and shall be the only Pricing Level that applies) on any day on which the conditions set forth in the immediately preceding sentence are satisfied, regardless of whether any other Pricing Level would otherwise apply on such day. "Level I Pricing" applies for any day if, on such day, the Company's senior unsecured long-term debt is rated BB+ or higher by S&P and Ba1 or higher by Moody's. "Level II Pricing" applies for any day if, on such day, (i) the Company's senior unsecured long-term debt is rated BB or higher by S&P or Ba2 or higher by Moody's and (ii) Level I Pricing does not apply. 74 "Level III Pricing" applies for any day if, on such day, (i) the Company's senior unsecured long-term debt is rated BB- or higher by S&P and Ba3 or higher by Moody's and (ii) neither Level I Pricing nor Level II Pricing applies. "Level IV Pricing" applies for any day if, on such day, (i) the Company's senior unsecured long-term debt is rated B+ or higher by S&P and B1 or higher by Moody's and (ii) none of Level I Pricing, Level II Pricing or Level III Pricing applies. "Level V Pricing" applies for any day if no other Pricing Level applies for such day. "Pricing Level" refers to the determination of which of Level IA, Level I, Level II, Level III, Level IV, or Level V applies for any day. The credit ratings to be utilized for purposes of this Schedule (other than with respect to Pricing Level 1A) are those assigned to the senior unsecured long-term debt securities of the Company without third-party credit enhancement, and any rating assigned to any other debt security of the Company shall be disregarded. The credit ratings to be utilized for purposes of Pricing Level 1A are those assigned to the Loans, and any rating assigned to any other senior secured long-term debt securities of the Company shall be disregarded; provided that an "implied rating" of the Loans may be utilized for purposes of determining Pricing Level 1A, so long as the Company shall have delivered to the Administrative Agent on or prior to the first date on which such implied rating is to be utilized a letter from each of Moody's and S&P duly executed by each of them, setting forth the implied rating of the Loans assigned by such rating agency and stating that such rating is an "implied rating". The ratings in effect for any day are those in effect at the close of business on such day. Notwithstanding the foregoing until such time as the senior unsecured long-term debt securities of the Company are rated by Moody's, the Pricing Level that exists on any day shall be determined solely with reference to the rating by S&P, provided that in no event may Level IA Pricing or Level I Pricing apply unless the required ratings from both S&P and Moody's are in effect. 2 EX-10.18 4 AMENDED & RESTATED 1997 STOCK OPTION PLAN 1 EXHIBIT 10.18 ORBITAL SCIENCES CORPORATION 1997 STOCK OPTION AND INCENTIVE PLAN 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. 2 "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. 2 3 "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. 3 4 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 5,000,000 (authorized shares adopted by the Board of Directors on January 20, 1999). (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 4 5 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). 5 6 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 3,000 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 750,000 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. 6 7 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. 7 8 (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) 8 9 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 9 10 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. 10 11 (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 11 12 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. 12 13 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 13 EX-10.21 5 1998 MAGELLAN STOCK OPTION PLAN 1 EXHIBIT 10.21 MAGELLAN CORPORATION 1998 STOCK OPTION AND INCENTIVE PLAN, AS AMENDED 1. PURPOSE OF PLAN The purpose of this 1998 Stock Option and Incentive Plan (the "Plan") is to advance the interests of Magellan Corporation ("Magellan") and its stockholders by enabling Magellan and Participating Companies (as defined below) to attract and retain highly talented employees, directors and consultants who are in a position to make significant contributions to the success of Magellan, to reward them for their contributions to the success of Magellan, and to encourage them, through stock ownership, to increase their proprietary interest in Magellan and their personal interest in its continued success and progress. The Plan provides for the award of Magellan stock options and Magellan 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 Magellan 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. "Company" or "Magellan" means Magellan Corporation, a Delaware corporation, or any successor thereof. "Effective Date" means January 28, 1998, the date of adoption of the Plan by the Board. "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 2 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 the 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. In each case, Fair Market Value shall be determined in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations. "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. "Option Termination Date" is defined in Section 10(b) 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, Orbital Sciences Corporation, 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 1998 Stock Option and Incentive Plan. "Restricted Stock" means shares of Stock awarded to a Grantee pursuant to Section 12 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). 2 3 "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), other than Orbital Sciences Corporation, 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 3 4 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 with respect to any grants to directors of the Company under Sections 8 and 12. Except to the extent otherwise specified by the Board 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 Board in such delegation, the authority so delegated shall be in addition to, and not in lieu of, the authority of the Board to make awards under the Plan. 4. SHARES SUBJECT TO THE PLAN (a) Availability. 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 19,900,000. (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 11(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, reverse stock split or combination of shares, exchange of shares, distribution payable in capital stock, 4 5 recapitalization, reclassification of stock or other change in Magellan'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 AND TERM OF PLAN (a) The Plan shall be effective as of the Effective Date, subject to approval of the Plan within one year of the Effective Date by the stockholders of the Company. Upon approval of the Plan by the stockholders of Magellan as set forth above, all Grants made under the Plan on or after the Effective Date shall be fully effective as if Magellan'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. (b) The Plan shall terminate upon the earliest of (i) the expiration of a ten (10) year period measured from the Effective Date, (ii) in connection with a Terminating Transaction in accordance with Section 15, or (iii) as the Board may determine in accordance with Section 18. 6. AWARD AGREEMENT Each Grant pursuant to the Plan shall be evidenced by an Award Agreement, to be executed by Magellan 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 determined by the Board in its sole discretion, but in no event shall the option exercise price be less than the Fair Market Value of the Stock on the Grant date in the case of an Incentive Stock Option (or 110% of the Fair Market Value in the case of an Incentive Option granted to a ten-percent stockholder, including a ten-percent (10%) stockholder of Parent) or less than eighty-five percent (85%) of the Fair Market Value in the case of a Nonstatutory Stock Option. 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 to any Participating Company whose participation in 5 6 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. 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 fifty-percent (50%) of the aggregate number of shares of Stock set forth under Section 4(c) during a ten-year period. 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. 10. VESTING AND TERMINATION OF OPTIONS (a) Vesting of Discretionary Options. Subject to the other provisions of this Section 10, 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, provided that the Board shall not impose a vesting schedule that is more restrictive than twenty-percent (20%) per year over five years from the date of grant. 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) 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 (10%) stockholder (including a ten-percent (10%) stockholder of Parent), 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. (c) 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 13 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 6 7 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 10 (c)(i) if such Participating Company ceases to be a Participating Company, unless such Grantee is an employee, director or consultant 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 13 below), options that are exercisable on the date the optionee's service as a consultant 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. (d) 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. (e) 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. (f) 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. 7 8 11. 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 11(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. 12. 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. Magellan shall issue, in the name of each Grantee to whom Restricted Stock has been granted, stock certificates representing the total number of 8 9 shares of Restricted Stock granted to the Grantee. The Secretary of Magellan shall hold such certificates for the Grantee's benefit until such time as the restrictions lapse or the Restricted Stock is forfeited to Magellan. (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 Magellan, 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 Magellan 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 Magellan, 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. 13. FORFEITURE CONDITIONS Subject to applicable law, 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 9 10 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. 14. 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. 15. 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 15(a) 10 11 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. 16. 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. 17. 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 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. 18. 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 11 12 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. 19. FINANCIAL STATEMENTS The Company shall deliver annually to each Grantee a balance sheet and income statement of the Company. This section shall not apply to any Grantee who is a member of the Board or a key employee whose duties in connection with the Company assure such person access to equivalent information. 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. 12 13 * * * The Plan was duly adopted by the Board of Directors of the Company as of January 28, 1998. ---------------------------------------- Leslie C. Seeman Vice President, General Counsel and Secretary of the Company 13 EX-10.22 6 LETTER AGREEMENT 1 Exhibit 10.22 [ORBITAL LETTERHEAD] July 28, 1997 Robert R. Lovell 162 Wilton Creek Road Hartfield, Virginia 23071 Dear Bob: This letter confirms my verbal offer to you to join Orbital Sciences Corporation as Executive Vice President and General Manager of our Space Systems Group, with responsibilities that include executive management and related duties of our satellite and space support services businesses based in Dulles and McLean, Virginia, and Germantown and Greenbelt, Maryland. You would report to me, be based at our headquarters in Dulles, Virginia, and assume this position upon the closing of Orbital's acquisition of CTA Incorporated's space business. The compensation package that I propose for this position is outlined below. Your compensation package would consist of several elements. First, your base salary would be at the rate of $300,000 per year, paid on a bi-weekly basis and reviewed on an annual basis. Second, as a senior executive, you would participate in our management incentive plan, which provides an annual performance bonus in January of each year of up to 50% of base salary, based on overall company and operating group performance during the year. Third, you would be granted options to purchase 50,000 shares of Orbital common stock at fair market value on the date of grant in accordance with the terms of Orbital's 1997 Stock Option and Incentive Plan. In addition, as we discussed, you would participate in a special new business incentive plan, as outlined in Exhibit A hereto, and would be eligible for stock option grants in our International Satellite Holdings, Inc. subsidiary when it is established later this year. Fourth, in recognition of the fact that you will be living temporarily in the Northern Virginia area away from your home in Hartfield, Virginia, you will receive a housing allowance of $2,000 per month. Fifth, you would be eligible for Orbital's standard Change of Control Agreement and Indemnification Agreement, copies of which are attached hereto. You also would be eligible for Orbital's deferred salary profit-sharing plan (our "401(k) Plan"), to which the company annually contributes an amount up to 4% of your salary, dependent upon company performance. In addition, Orbital will match your voluntary 2 Robert R. Lovell July 28, 1997 Page Two tax-deferred contributions to the plan with an amount up to 4% of your salary. (Employee tax-deferred contributions to the plan are currently limited by law to $9,500 per year.) In addition, Orbital provides life, medical, dental and disability insurance programs for employees and eligible dependents. Our leave policy consists of four weeks per year of combined annual and sick leave, and we also recognize ten annual holidays. If these terms are acceptable, please forward your acknowledgment to us by signing below. Bob, I am very excited about the prospect of you joining our team and helping to make the company the world's leading space enterprise in the 21st Century. All of us at Orbital look forward to working with you in the years ahead. With best regards, David W. Thompson President and Chief Executive Officer Enclosures ACCEPTANCE: /s/ ROBERT R. LOVELL - - ---------------------------------- --------------- Robert R. Lovell (Date) 3 Exhibit A SPECIAL NEW BUSINESS INCENTIVE PLAN Special cash bonuses paid (shared 1/2 by Robert R. Lovell and 1/2 by Ricardo de Bastos) as follows: 1/4% for first $25 million (after initial $100 million) in SSG-generated, firm backlog new business booked in each July 1 - June 30 12-month period 3/8% for next $50 million in SSG-generated, firm backlog new business booked in each July 1 - June 30 12-month period 1/2% for next $75 million in SSG-generated, firm backlog new business booked in each July 1 - June 30 12-month period (Maximum bonus = $625,000 per year/$312,500 per person) Notes: 1. If another Orbital division is responsible for bringing in new business that includes a satellite order, only that satellite is credited under the Incentive Plan. 2. If SSG is responsible for bringing in new business that includes launch vehicles, ground stations, or other products other than satellites, all such other products are also credited under the Incentive Plan. 3. For the purposes of this Plan, sales made by ISH shall be considered in the same fashion as sales made directly by SSG (as in (2.) above). EX-10.23 7 FORM OF 1998 INDEMNIFICATION AGREEMENT 1 Exhibit 10.23 FORM OF OFFICER INDEMNIFICATION AGREEMENT This Indemnification Agreement is made and entered into as of __________________, 19___, by and between ORBITAL SCIENCES CORPORATION (the "Corporation") and (the "Officer"). W I T N E S S E T H: WHEREAS, the Officer has agreed to serve as an officer of the Corporation; and WHEREAS, the Corporation wishes to indemnify the Officer against certain liabilities and expenses that may be incurred in connection with the Officer's service on behalf of the Corporation. NOW THEREFORE, the parties hereto agree, subject to the terms and conditions hereof, as follows: 1. Indemnification Agreement. a. Third Party Actions. The Corporation shall indemnify and hold harmless the Officer in the event that the Officer was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in right of the Corporation) by reason of the fact that the Officer (A) is or was a director, officer, employee or agent of (i) the Corporation or (ii) any subsidiary of the Corporation or any corporation, partnership or other entity affiliated with the Corporation (each of the foregoing being hereinafter referred to as an "Affiliate") or (B) is or was serving at the request of the Corporation or any Affiliate as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan of the Corporation or any Affiliate) against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the Officer in connection with such action, suit or proceeding if the Officer acted in good faith and in a manner the Officer reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the Officer's conduct was unlawful; provided, however, that the foregoing shall not require the Corporation to indemnify or advance expenses to any person in connection with any action, suit, proceeding, claim or counterclaim initiated by or on behalf of such person. b. Actions By or In Right of the Corporation. The Corporation shall, to the full extent permitted by applicable law as then in effect, indemnify and hold harmless the Officer in the event that the Officer was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in right of the Corporation to procure a judgment in its favor by reason of the fact that the Officer (A) is or was a director, officer, employee or agent of the Corporation or any Affiliate or (B) is or was serving at the request of 2 the Corporation or any Affiliate as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan of the Corporation or any Affiliate) against expenses (including attorneys' fees) actually and reasonably incurred by the Officer in connection with the defense or settlement of such action or suit if the Officer acted in good faith and in a manner the Officer reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which the Officer shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such action was brought shall determine that the Officer is entitled to be indemnified. c. Nature of Right; Non-Exclusivity; Survival. The indemnification provided by this Agreement shall be a contract right of the Officer and shall not be deemed exclusive of and shall be in addition to, and not in lieu of, any other rights to which the Officer may be entitled under any provision of the Corporation's Certificate of Incorporation or By-Laws or pursuant to any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in the Officer's official capacity and as to action in another capacity while holding such office. The indemnification and advancement of expenses provided by this Agreement shall continue as to the Officer when the Officer has ceased to be a director, officer, employee or agent of the Corporation and shall inure to the benefit of the Officer's heirs, executors and administrators. 2. Advancement of Expenses; Procedures; Presumptions. In furtherance, but not in limitation of the foregoing provisions, the following procedures and presumptions shall apply with respect to the advancement of expenses and the right to indemnification under this Agreement: a. Advancement of Expenses. All reasonable expenses incurred by the Officer in defending an action, suit or proceeding for which indemnification may be had under Section 1(a) shall be advanced to the Officer by the Corporation within ten (10) days after submission by the Officer to the Corporation of each statement requesting such advance and setting forth in reasonable detail such expenses, whether prior to or after final disposition of such action, suit or proceeding; provided, however, that if required by law at the time such advancement of expenses is to be made, then no such advancement shall be made except upon receipt of an undertaking by or on behalf of the Officer, in form and substance satisfactory to the Corporation, to repay any amounts advanced to the Officer pursuant to this Section 2(a) if it shall ultimately be determined that the Officer is not entitled to be indemnified by the Corporation with respect to the matter for which such advancement was made. b. Procedure for Determination of Entitlement to Indemnification. To obtain indemnification under this Agreement, the Officer shall submit to the Secretary of the Corporation a written request therefor, including such documentation and information as is reasonably available to the Officer and reasonably necessary to determine whether and to what extent the Officer is entitled to indemnification (the "Supporting Documentation"). The determination of the Officer's entitlement to indemnification shall be made by the Corporation's Board of Directors (the "Board") or in such other manner as required by law as then in effect not later than sixty (60) days after receipt by the Corporation of the Officer's written request for indemnification together with the Supporting Documentation. The Secretary of the Corporation -2- 3 shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Officer has requested indemnification. c. Presumptions and Effect of Certain Proceedings. Except as otherwise expressly provided in this Agreement, the Officer shall be presumed to be entitled to indemnification under this Agreement upon submission of a written request for indemnification together with the Supporting Documentation in accordance with Section 2(b) hereof, and thereafter the Corporation shall have the burden of proof to overcome such presumption in reaching a contrary determination. In any event, if a determination of the Officer's entitlement to indemnification shall not have been made within sixty (60) days after receipt by the Corporation of the Officer's written request therefor together with the Supporting Documentation, the Officer shall be deemed to be entitled to indemnification and shall be entitled to such indemnification unless (A) the Officer misrepresented or failed to disclose a material fact in making the request for indemnification or (B) such indemnification is prohibited by applicable law as then in effect. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, adversely affect the right of the Officer to indemnification or create a presumption that the Officer did not act in good faith and in a manner which the Officer reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal action or proceeding, that the Officer had reasonable cause to believe that his or her conduct was unlawful. 3. Notification and Defense of Claim. Promptly after receipt of notice of the commencement of any action, suit or proceeding, the Officer shall, if a claim for indemnification in respect thereof is to be made against the Corporation under this Agreement, notify the Corporation of the commencement thereof, but the omission so to notify the Corporation will not relieve the Corporation from any liability that the Corporation may have to the Officer under this Agreement unless the Corporation is materially prejudiced thereby. With respect to any such action, suit or proceeding as to which the Officer notifies the Corporation of the commencement thereof: a. The Corporation will be entitled to participate therein at its own expense; b. Except as otherwise provided below, the Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to the Officer. After notice from the Corporation to the Officer of the Corporation's election to assume the defense thereof, the Corporation will not be liable to the Officer under this Agreement for any legal or other expenses subsequently incurred by the Officer in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. The Officer shall have the right to employ the Officer's own counsel in any such action, suit or proceeding, but the fees and disbursements of such counsel incurred after notice from the Corporation of the Corporation's assumption of the defense thereof shall be at the expense of the Officer unless (i) the employment of counsel by the Officer has been authorized by the Corporation, (ii) the Officer shall have reasonably concluded that there may be a conflict of interest between the Corporation and the Officer in the conduct of the defense of such action, suit or proceeding, (iii) such action, suit or proceeding seeks penalties or other relief against the Officer with respect to which the Corporation could not provide monetary indemnification to the Officer (such as injunctive relief or incarceration) or (iv) the Corporation -3- 4 shall not in fact have employed counsel to assume the defense of such action, suit or proceeding, in each of which cases the reasonable fees and disbursements of the Officer's counsel shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Corporation, or which involves penalties or other relief against the Officer of the type referred to in clause (iii) above; and c. The Corporation shall not be liable to indemnify the Officer under this Agreement for any amounts paid in settlement of any action, suit or proceeding entered into without the Corporation's written consent. The Corporation shall not settle any action, suit or proceeding in any manner that would impose any penalty or limitation on the Officer without the Officer's written consent. Neither the Corporation nor the Officer will unreasonably withhold consent to any proposed settlement. 4. Expenses of Enforcing Agreement or Other Indemnification Rights. The Corporation agrees to pay all out-of-pocket expenses of the Officer (including reasonable fees and expenses of the Officer's counsel) in connection with any action brought by the Officer to enforce any provision of this Agreement or in connection with any action brought by the Officer to enforce the Officer's right to indemnification under applicable law as then in effect or under the Corporation's or any Affiliate's Certificate of Incorporation or By-Laws, as either may be amended from time to time, in any case only if and to the extent that the Officer prevails in such action. 5. Corporation's Right to Indemnification. Nothing in this Agreement shall diminish, limit or otherwise restrict or modify in any way the Corporation's right to indemnification or contribution from the Officer or the Officer's obligation to indemnify or hold harmless the Corporation under any agreement, instrument, commitment or understanding now or hereafter in effect. 6. Amendments and Waiver. a. No amendment, modification or discharge of this Agreement, and no waiver hereunder, shall be valid or binding unless set forth in writing and duly executed by both of the parties hereto. Neither the waiver by any of the parties hereto of a breach of or a default under any of the provisions of this Agreement, nor the failure of any of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any of such provisions, rights or privileges hereunder. No delay or failure on the part of any party in exercising any right, power or privilege under this Agreement or under any other instruments given in connection with or pursuant to this Agreement shall impair any such right, power or privilege or be construed as a waiver of any default or any acquiescence therein. No single or partial exercise of any such right, power or privilege shall preclude the further exercise of such right, power or privilege, or the exercise of any other right, power or privilege. b. No amendment or repeal of the Corporation's or any Affiliate's Certificate of Incorporation or By-Laws shall adversely affect or deny to the Officer the rights of indemnification provided herein with respect to any action, suit or proceeding relating to any act -4- 5 or omission, or alleged act or omission, of the Officer that occurs before such amendment or repeal; and the provisions of this Agreement shall apply to any such action, suit or proceeding whenever commenced, including any such action, suit or proceeding commenced after any such amendment or repeal of the Corporation's or any Affiliate's Certificate of Incorporation or By-Laws. 7. Subrogation. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Officer, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution and delivery of such documents as may be necessary, in the reasonable judgment of the Corporation, to enable the Corporation effectively to bring suit to enforce such rights. 8. No Duplication of Payment. The Corporation shall not be liable under this Agreement to make any payment in connection with any claim made against the Officer to the extent the Officer has otherwise actually received payment (under any provision of applicable law as then in effect, under any provision of the Certificate of Incorporation or By-Laws of the Corporation or any Affiliate, under any insurance policy or otherwise) of amounts otherwise indemnifiable hereunder. 9. Severability. If, at any time subsequent to the date hereof, any provisions of this Agreement shall be held by any court of competent jurisdiction to be illegal, void or unenforceable, such provision shall be of no force and effect; but the illegality or unenforceability of such provision shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement. 10. Governing Law; Headings. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such state without giving effect to the conflicts of laws principles thereof. The section and other headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11. Benefit; Assignment; Binding Effect. It is the explicit intention of the parties hereto that no person or entity other than the parties hereto is or shall be entitled to bring any action to enforce any provision of this Agreement against either of the parties hereto, and that the covenants, undertakings and agreements set forth in this Agreement shall be solely for the benefit of, and shall be enforceable only by, the parties hereto or their respective successors and assigns as permitted hereunder. The Officer may not assign the Officer's rights under this Agreement. The Officer may not attempt to have any other person or entity assume the Officer's obligations under this Agreement without the prior written consent of the Corporation. The rights and obligations of the Corporation under this Agreement may be freely assigned to any person or entity as long as the obligations of the Corporation hereunder are satisfied in full. Subject to the foregoing provisions restricting assignment of this Agreement, this Agreement shall be binding upon and shall inure to the benefit of the Officer and the Corporation and their respective successors and permitted assigns. -5- 6 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement or have caused this Agreement to be executed and delivered as of the day and year first above written. ORBITAL SCIENCES CORPORATION: OFFICER: By ----------------------------- ---------------------------- -6- EX-10.24 8 FORM OF 1998 EXECUTIVE EMPLOYMENT AGREEMENMT 1 Exhibit 10.24 FORM OF EXECUTIVE EMPLOYMENT AGREEMENT Date Address Dear : Orbital Sciences Corporation and its subsidiaries (together, the "Company") consider the maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its stockholders. In this connection, the Company recognizes that the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. Accordingly, the Company's Board of Directors (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from the possibility of a change in control of the Company. This letter agreement (the "Agreement") sets forth the severance benefits that the Company agrees will be provided to you in the event your employment with the Company terminates following a "Change in Control" (as defined in Section 2 hereof) under the circumstances described below. This Agreement is not an employment contract nor does it alter your status as an at-will employee of the Company. No benefit shall be payable under this Agreement except on termination of your employment with the Company as a result of a Change in Control (as defined below). 1. Term. This Agreement shall commence on the date hereof and shall remain in effect so long as you are employed as an executive officer of the Company, provided, however, that in the event of a Change in Control, this Agreement shall remain in full force and effect for a 24-month period commencing on the date of the Change in Control regardless of whether you remain an executive officer of the Company during such 24-month period. 2. Change in Control. For purposes of this Agreement, a Change in Control shall mean: (a)the acquisition by any individual, entity or group (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange 2 Page 2 Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of 30% or more of either (i) the then outstanding shares of common stock of the Company or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; (b)within any 24-month period, the persons who were directors of the Company immediately prior thereto (the "Incumbent Board") shall cease to constitute a majority of the Board of Directors of the Company or of its successor by merger, consolidation or sale of assets. For this purpose, the Incumbent Board includes any new director whose (i) election to the Board resulted from a vacancy caused by the retirement, death or disability of a director and was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (ii) nomination to the Board was approved by a committee of the Board whose majority consisted of directors who were directors in office at the beginning of the period; or (c)the consummation by the Company of a reorganization, merger, consolidation or sale or disposition of all or substantially all the assets of the Company (other than any such transaction initiated by the action of the Board) (a "Business Combination"), the result of which is that (i) the stockholders of the Company at the time of the execution of the agreement to effect the Business Combination own less than 60% of the total equity of the surviving or resulting entity entitled to vote generally in the election of directors, (ii) a Person (excluding any corporation resulting from the Business Combination) becomes the beneficial owner of 20% or more of the then outstanding shares of common stock of the corporation resulting from such Business Combination or (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Board of Directors of the Company at the time of execution of the initial agreement or other action of the Board that provided for such Business Combination. Notwithstanding the above, a Change in Control shall not be deemed to occur as a result of a transaction where either you, individually or as an officer, director or 5% stockholder or partner of any entity, or any employee benefit plan (or related trust) of the Company (a) becomes the beneficial owner of securities representing 30% or more of the combined voting power of the Company 's then outstanding securities, or (b) enters into an agreement with the Company providing for the merger, consolidation, or sale or transfer of all or substantially all the assets of the Company. In addition, a Change in Control shall not be deemed to occur where you enter into an employment agreement with the Company, any Person whose acquisition of the 3 Page 3 Company's securities resulted in the Change in Control or any entity resulting from a Business Combination. 3. Termination Following Change in Control. If a Change in Control as described in Section 2 occurs, you shall be entitled to the benefits provided in Section 4 of this Agreement if your employment is terminated by the Company for Disability or Cause, as described below, or by you for Good Reason, as described below. (i) Disability. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from your duties with the Company on a full-time basis for nine consecutive months, and within 30 days after written notice of termination is given you shall not have returned to the full-time performance of your duties, the Company may terminate your employment for "Disability." (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination on (A) the willful and continued failure by you substantially to perform your duties with the Company in accordance with the instructions of the Board or the executive officers to whom you report (other than any such failure resulting from your incapacity due to physical or mental illness), after a demand for substantial performance is delivered to you by the Board which specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (B) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be considered "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clause (A) or (B) of the first sentence of this Subsection and specifying the particulars thereof in detail. (iii) Good Reason. You shall be entitled to terminate your employment for Good Reason in connection with a Change in Control. For purposes of this Agreement, "Good Reason" shall mean: (A) without your written consent, the assignment to you of any position (including status, offices, titles and reporting requirements), authorities, duties and responsibilities, that are not at least commensurate in all material respects with the most significant of those held, exercised and assigned by you at any time during the 180-day period immediately preceding a Change in Control, or any other action by the Company 4 Page 4 that results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by you; (B) a reduction by the Company in your annual base salary ("Annual Base Salary"), which for the purposes of this Agreement shall mean an amount at least equal to 12 times the highest monthly base salary paid or payable, including any base salary that has been earned but deferred, to you by the Company in respect of the 12-month period immediately preceding the month in which the Change of Control occurs; (C) the Company's requiring you to be based anywhere other than the office of the Company in which you are based prior to the Change in Control or any office or location within a 50 mile radius of such office, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (D) the failure by the Company to continue in effect any compensation plan in which you participate, or to provide you with plans substantially similar, including but not limited to any stock purchase plan, stock option plan, incentive compensation, bonus, and other plan in which you were participating at the time of the Change in Control, or the failure by the Company to continue your participation therein; (E) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's retirement, pension, 401(k), deferred compensation, life insurance, medical, health, accident, disability or other benefit plans in which you were participating at the time of a Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits enjoyed by you at the time of the Change in Control, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; (F) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (G) any termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(iv) hereof (and, if applicable, Section 3(ii) hereof); and for purposes of this Agreement, no such purported termination shall be effective. 5 Page 5 (iv) Notice of Termination. Any termination by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof, and if by the Company for Cause, shall not be effective unless such notice includes the information set forth in Section 3(ii) hereof. (v) Date of Termination, etc. "Date of Termination" shall mean (A) if your employment is terminated by reason of death or Disability, the date of your death or 30 days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such 30 day period), as the case may be, (B) if your employment is terminated by the Company for Cause or for any other reason, the date specified in the Notice of Termination which shall not be less than 30 days from the date such Notice of Termination is given, and (C) if you terminate your employment for "Good Reason," the date such Notice of Termination is given or any later date specified therein. 4. Benefits Upon Termination or During Disability. (i) During any period that you fail to perform your duties hereunder as a result of incapacity due to physical or mental illness, and in the event your employment is terminated pursuant to Section 3(i) hereof, your benefits shall be determined in accordance with the Company's insurance and benefit programs then in effect. (ii) If your employment shall be terminated for Cause, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to you under this Agreement. (iii) If your employment shall be terminated immediately prior to or any time after a Change in Control (a) by the Company for any reason other than for Cause or Disability or (b) by you for Good Reason, then you shall be entitled to all the benefits provided below: (A) The Company shall pay you on the Date of Termination your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given. (B) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay to you, not later than 15 days following the Date of Termination, a lump sum payment equal to two times the sum of (a) your Annual Base Salary and (b) the sum of any incentive, annual and other cash bonuses, paid to you for the 12-month period immediately preceding the month in which the Change in Control occurred. 6 Page 6 (C) The Company shall also immediately fully vest you in all your account balances under the Company's retirement, deferred compensation and pension plans (the "Plans"); provided, however, that should the Company be unable to provide for such vesting under the terms of any such Plans, the Company shall pay to you in the manner and as directed by you, an amount that equals on an after-tax basis the value of any amounts that were not vested or would otherwise be forfeited by you under the Plans upon your termination of employment with the Company. (D) The Company shall also allow you the opportunity to surrender to the Company any then outstanding vested and unvested options (whether exercisable or not) to purchase Common Stock of the Company and any of its subsidiaries and affiliates that you own and that you did not previously surrender or convert in the transaction that resulted in the Change in Control, and the Company shall promptly pay to you in consideration therefor a cash payment equal to the difference between the respective exercise price for such options and the higher of the (a) highest price paid in connection with the transaction that resulted in the Change in Control or (b) then current fair-market value. (E) The Company shall also pay to you all reasonable legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement) upon presentation to the Company of a reasonably detailed invoice for such expenses, whether or not you have already made payment for such expenses. (F) For a 24-month period after such termination, the Company shall arrange to provide you with life, disability, accident and health insurance benefits substantially similar to those you were receiving immediately prior to the Notice of Termination, provided, however, that should the Company be unable to provide for any such benefits under the terms of the benefit plans, or by law, the Company shall pay you an amount equal to the premiums the Company would have paid for such benefits under such plans. (G) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise. (H) In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you under any of the Company's plans or agreements relating to retirement benefits. 7 Page 7 (iv) All payments required to be made by the Company hereunder to you shall be subject to the withholding of such amounts relating to Federal, state, local or foreign taxes as the Company reasonably may determine it should withhold pursuant to any applicable law or regulation. Notwithstanding any other provision of this Agreement or of any other agreement, contract or understanding heretofore or hereafter entered into by you and the Company, you shall not have any right to receive any payment or other benefit under this Agreement if such payment or benefit, taking into account all other payments to or benefits received by you, would cause any payment to you under this Agreement to be considered a "parachute payment" within the meaning of Section 280G(b)(2) of the Internal Revenue Code (a "Parachute Payment"). In the event that the receipt of any such payment or benefit under this Agreement would cause you to be considered to have received a Parachute Payment under this Agreement, then you shall have the right, in your sole discretion, to designate those payments or benefits under this Agreement which should be reduced or eliminated so as to avoid having the payment to you under this Agreement be deemed to be a Parachute Payment. 5. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all its business and/or assets to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement no later than ten days prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled under section 4(iii), except that for purposes of implementing the foregoing, a date ten days prior to the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "the Company" shall mean the Company, as hereinbefore defined and any successor to its business and/or assets that assumes and agrees to perform this Agreement by executing and delivering the agreement provided for in this paragraph 5, by operation of law, or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If you should die while any amount would still be payable to you hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or if there is no such designee, to your estate. 6. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by registered mail, return receipt requested, postage prepaid, addressed (i) if to the Company, to Orbital Sciences Corporation, 21700 Atlantic Boulevard, Dulles, 8 Page 8 Virginia 20166, Attn: Secretary of the Company, and (ii) if to you, to the address set forth on the first page of this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement, and this Agreement supersedes all prior agreements between the Company and you with respect to the subject matter herein. The validity, interpretation construction and performance of this Agreement shall be governed by the local laws of the Commonwealth of Virginia (regardless of the laws that might otherwise govern under principles of conflicts of law). 8. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Washington, D.C. in accordance with the domestic rules of the American Arbitration Association then in effect. Pending the resolution of such dispute or controversy, the Company will continue to pay you your full base salary in effect when the notice giving rise to the dispute was given and you will continue as a participant in all incentive compensation, stock option, retirement, deferred compensation, pension, life, disability, health and accident plans in which you were participating when the notice giving rise to dispute was given, unless you have already received all benefits payable under Section 4(iii) of this Agreement. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 9 Page 9 If this Agreement correctly sets forth our agreement on the subject matter hereof, kindly sign both of the enclosed copies, keeping one for your files and returning the other to the Company. Sincerely, ORBITAL SCIENCES CORPORATION - - ----------------------------- By: David W. Thompson President and Chief Executive Officer Agreed to: - - ----------------------------- Name: Date: EX-11 9 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
THREE-MONTH PERIOD ENDED DECEMBER 31, 1998 ASSUMING BASIC DILUTION (2) ----------------------- ------------------ Weighted average of outstanding shares 36,885,745 36,885,745 Common equivalent shares: Outstanding stock options N/A 1,094,486 Other potentially dilutive securities: Convertible Notes (1) N/A 3,571,429 ----------------------- ------------------ Shares used in computing net income per common share 36,885,745 41,551,660 ======================= ================== Net income $ (19,551,000) $(19,551,000) Adjustments assuming dilution: Interest expense adjustment, net of applicable taxes N/A 1,198,000 ----------------------- ------------------ Net income $ (19,551,000) $(18,353,000) ======================= ================== Net income per common share ($0.53) ($0.53) ======================= ==================
YEAR ENDED DECEMBER 31, 1998 ASSUMING BASIC DILUTION (2) ------------------ ------------------ Weighted average of outstanding shares 35,624,888 35,624,888 Common equivalent shares: Outstanding stock options N/A 1,140,270 Other potentially dilutive securities: Convertible Notes (1) N/A 3,571,429 ------------------ ------------------ Shares used in computing net income per common share 35,624,888 40,336,587 ================== ================== Net income $ (6,372,000) $ (6,372,000) Adjustments assuming dilution: Interest expense adjustment, net of applicable taxes N/A 2,682,000 ------------------ ------------------ Net income $ (6,372,000) $ (3,690,000) ================== ================== Net income per common share $ (0.18) $ (0.18) ================== ==================
Notes: (1)- On September 16, 1997, the company sold $100 million of 5% convertible subordinated notes due October 2002. The notes are convertible at the option of the holders into Orbital common stock at a conversion price of $28.00 per share. (2)- Subsidiary stock options that enable holders to obtain subsidiary's common stock pursuant to effective stock option plans are included in computing the subsidiary's earnings per share, to the extent dilutive. Those earnings per share data are included in the company's per share computations based on the company's holdings of the subsidiary's stock. For the three months and year ended December 31, 1998, all such subsidiary stock options were anti-dilutive. EX-13.1 10 ORBCOMM GLOBAL, L.P. FINANCIAL STATEMENTS 1 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- ORBCOMM GLOBAL, L.P. Independent Auditors' Report.............................. 41 Consolidated Balance Sheets as of December 31, 1998 and 1997................................................... 42 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 1998, 1997 and 1996 and Total Accumulated During Development Stage through December 31, 1998.............................. 43 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 and Total Cash Flows During Development Stage through December 31, 1998..... 44 Consolidated Statements of Partners' Capital for the period June 30, 1993 (date of inception) to December 31, 1998............................................... 45 Notes to Consolidated Financial Statements................ 46 ORBCOMM USA, L.P. Independent Auditors' Report.............................. 54 Balance Sheets as of December 31, 1998 and 1997........... 55 Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 and Total Accumulated During Development Stage through December 31, 1998............ 56 Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 and Total Cash Flows During Development Stage through December 31, 1998............ 57 Statements of Partners' Capital for the period June 30, 1993 (date of inception) to December 31, 1998.......... 58 Notes to Financial Statements............................. 59 ORBCOMM INTERNATIONAL PARTNERS, L.P. Independent Auditors' Report.............................. 62 Balance Sheets as of December 31, 1998 and 1997........... 63 Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 and Total Accumulated During Development Stage through December 31, 1998............ 64 Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 and Total Cash Flows During Development Stage through December 31, 1998............ 65 Statements of Partners' Capital for the period June 30, 1993 (date of inception) to December 31, 1998.......... 66 Notes to Financial Statements............................. 67 ORBITAL COMMUNICATIONS CORPORATION Independent Auditors' Report.............................. 70 Consolidated Balance Sheets as of December 31, 1998 and 1997................................................... 71 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996....................... 72 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996....................... 73 Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 1998, 1997, 1996 and 1995..... 74 Notes to Consolidated Financial Statements................ 75 TELEGLOBE MOBILE PARTNERS Independent Auditors' Report.............................. 81 Consolidated Balance Sheets as of December 31, 1998 and 1997................................................... 82 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 1998, 1997 and 1996 and Total Accumulated During Development Stage Through December 31, 1998.............................. 83 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 and Total Cash Flows During Development Stage Through December 31, 1998..... 84 Consolidated Statement of Partners' Capital for the period July 21, 1993 (date of inception) to December 31, 1998................................................... 85 Notes to Consolidated Financial Statements................ 86 ORBCOMM CORPORATION Independent Auditors' Report.............................. 91 Balance Sheet as of December 31, 1998..................... 92 Note to Financial Statement............................... 93
40 2 INDEPENDENT AUDITORS' REPORT The Partners ORBCOMM Global, L.P.: We have audited the accompanying consolidated balance sheets of ORBCOMM Global, L.P. and subsidiaries (a development stage enterprise) as of December 31, 1998 and 1997, and the related consolidated statements of operations and comprehensive loss, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1998 and for the period from June 30, 1993 (date of inception) to December 31, 1998. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ORBCOMM Global, L.P. and subsidiaries (a development stage enterprise) as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 and for the period June 30, 1993 (date of inception) to December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Washington, DC March 30, 1999 41 3 ORBCOMM GLOBAL, L.P. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------- 1998 1997 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 3,799 $ 16,106 Investments............................................... 390 22,756 Other receivables......................................... 248 1,931 Inventory................................................. 6,688 2,160 -------- -------- Total Current Assets................................... 11,125 42,953 Mobile Communications Satellite System, net................. 327,946 263,379 Other assets, net........................................... 4,690 5,527 Investments in and advances to affiliates................... 2,150 4,777 Investment in ORBCOMM Japan, Ltd............................ 333 333 Goodwill.................................................... 390 0 -------- -------- TOTAL ASSETS...................................... $346,634 $316,969 ======== ======== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES: Current portion of long-term debt......................... $ 1,190 $ 1,087 Accounts payable -- Orbital Sciences Corporation.......... 50,800 21,100 Accounts payable and accrued liabilities.................. 19,255 17,160 -------- -------- Total Current Liabilities.............................. 71,245 39,347 Revenue participation accrued interest...................... 599 14 Long-term debt.............................................. 170,000 171,190 -------- -------- Total Liabilities...................................... 241,844 210,551 COMMITMENTS AND CONTINGENCIES PARTNERS' CAPITAL: Teleglobe Mobile Partners................................. 56,520 57,834 Orbital Communications Corporation........................ 48,270 48,584 -------- -------- Total Partners' Capital................................ 104,790 106,418 -------- -------- TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $346,634 $316,969 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 42 4 ORBCOMM GLOBAL, L.P. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS)
TOTAL ACCUMULATED DURING DEVELOPMENT YEARS ENDED STAGE DECEMBER 31, THROUGH ------------------------------ DECEMBER 31, 1998 1997 1996 1998 -------- -------- -------- ------------ REVENUES: Product sales................................... $ 1,262 $ 517 $ 268 $ 2,047 Distribution fees............................... 0 0 100 1,000 Other........................................... 0 10 52 62 -------- -------- -------- --------- Total revenues............................... 1,262 527 420 3,109 EXPENSES: Cost of product sales........................... 1,242 517 268 2,027 Depreciation.................................... 11,048 7,348 6,198 24,594 Engineering expenses............................ 17,007 8,160 5,453 30,620 Marketing, administrative and other expenses.... 34,961 12,070 6,933 54,023 -------- -------- -------- --------- Total expenses............................... 64,258 28,095 18,852 111,264 -------- -------- -------- --------- Losses from operations....................... (62,996) (27,568) (18,432) (108,155) OTHER INCOME AND EXPENSES: Interest income................................. 914 5,378 3,861 10,212 Interest expense and other financial charges.... (2,814) (833) (307) (3,954) Equity in net losses of affiliates.............. (4,732) (8,413) (4,602) (18,601) -------- -------- -------- --------- NET LOSS.......................................... (69,628) (31,436) (19,480) (120,498) OTHER COMPREHENSIVE INCOME: Unrealized holding gains on investments, net.... 0 0 88 88 Less: reclassification adjustments for net holding gains on sales of investments included in net loss..................................... 0 (88) 0 (88) -------- -------- -------- --------- COMPREHENSIVE LOSS................................ $(69,628) $(31,524) $(19,392) $(120,498) ======== ======== ======== =========
The accompanying notes are an integral part of these consolidated financial statements. 43 5 ORBCOMM GLOBAL, L.P. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
TOTAL CASH FLOWS DURING DEVELOPMENT YEARS ENDED STAGE DECEMBER 31, THROUGH -------------------------------- DECEMBER 31, 1998 1997 1996 1998 -------- --------- --------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss...................................... $(69,628) $ (31,436) $ (19,480) $(120,498) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES: Depreciation.................................. 11,048 7,348 6,198 24,594 Amortization of financing fees................ 837 833 307 1,977 Equity in net losses of affiliates............ 4,732 8,413 4,602 18,601 Decrease (increase) in other receivables...... 1,683 (661) (1,270) (248) Increase in inventory......................... (4,528) (409) (1,304) (6,688) Increase in accounts payable -- Orbital Sciences Corporation....................... 0 0 573 4,648 Increase in accounts payable and accrued liabilities................................ 2,095 3,510 7,471 19,255 Increase in revenue participation accrued interest................................... 585 14 0 599 -------- --------- --------- --------- NET CASH USED IN OPERATING ACTIVITIES.......................... (53,176) (12,388) (2,903) (57,760) -------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.......................... (45,915) (84,241) (69,242) (306,388) Increase in amount due from affiliates........ (2,105) (16,356) (1,608) (20,730) Investment in ORBCOMM Japan, Ltd.............. 0 (333) 0 (333) Purchase of investments....................... (7,228) (47,125) (136,532) (190,885) Proceeds from sale of investments............. 29,594 120,893 40,007 190,494 Other......................................... (390) 0 0 (390) -------- --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES.......................... (26,044) (27,162) (167,375) (328,232) -------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of long-term debt....................................... 0 0 164,475 169,475 Repayment of long-term debt................... (1,087) (992) (905) (3,809) Partners' contributions....................... 68,000 0 62,733 227,800 Financing fees paid........................... 0 (222) (940) (3,675) -------- --------- --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................ 66,913 (1,214) 225,363 389,791 -------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................... (12,307) (40,764) 55,085 3,799 CASH AND CASH EQUIVALENTS: Beginning of period........................... 16,106 56,870 1,785 0 -------- --------- --------- --------- CASH AND CASH EQUIVALENTS: End of period................................. $ 3,799 $ 16,106 $ 56,870 $ 3,799 ======== ========= ========= ========= SUPPLEMENTAL CASH FLOW DISCLOSURE: Interest paid................................. $ 23,965 $ 24,060 $ 347 $ 48,797 ======== ========= ========= ========= Non-cash capital expenditures................. 29,700 16,452 0 46,152 ======== ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 44 6 ORBCOMM GLOBAL, L.P. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (IN THOUSANDS)
TELEGLOBE ORBITAL MOBILE COMMUNICATIONS PARTNERS CORPORATION ------------------------------------ ------------------------------------ ACCUMULATED ACCUMULATED OTHER OTHER PARTNERS COMPREHENSIVE PARTNERS COMPREHENSIVE CAPITAL INCOME TOTAL CAPITAL INCOME TOTAL TOTAL -------- -------------- -------- -------- -------------- -------- -------- Capital contributions.................. $ 10,000 $ 0 $ 10,000 $ 38,149 $ 0 $ 38,149 $ 48,149 Net loss............................... 0 0 0 0 0 0 0 Financing fees......................... (242) 0 (242) (242) 0 (242) (484) -------- ---- -------- -------- ---- -------- -------- PARTNERS' CAPITAL, DECEMBER 31, 1993..... 9,758 0 9,758 37,907 0 37,907 47,665 Capital contributions.................. 0 0 0 10,853 0 10,853 10,853 Net loss............................... (4) 0 (4) (5) 0 (5) (9) -------- ---- -------- -------- ---- -------- -------- PARTNERS' CAPITAL, DECEMBER 31, 1994..... 9,754 0 9,754 48,755 0 48,755 58,509 Capital contributions.................. 24,750 0 24,750 13,315 0 13,315 38,065 Net income............................. 27 0 27 28 0 28 55 Financing fees......................... (1,014) 0 (1,014) (1,014) 0 (1,014) (2,028) -------- ---- -------- -------- ---- -------- -------- PARTNERS' CAPITAL, DECEMBER 31, 1995..... 33,517 0 33,517 61,084 0 61,084 94,601 Capital contributions.................. 49,775 0 49,775 12,958 0 12,958 62,733 Net loss............................... (9,740) 0 (9,740) (9,740) 0 (9,740) (19,480) Unrealized holding gains on investments, net..................... 0 44 44 0 44 44 88 -------- ---- -------- -------- ---- -------- -------- PARTNERS' CAPITAL, DECEMBER 31, 1996..... 73,552 44 73,596 64,302 44 64,346 137,942 Net loss............................... (15,718) 0 (15,718) (15,718) 0 (15,718) (31,436) Reclassification adjustments for net holding gains on sales of investments included in net loss................. 0 (44) (44) 0 (44) (44) (88) -------- ---- -------- -------- ---- -------- -------- PARTNERS' CAPITAL, DECEMBER 31, 1997..... 57,834 0 57,834 48,584 0 48,584 106,418 Capital contributions.................. 33,500 0 33,500 34,500 0 34,500 68,000 Net loss............................... (34,814) 0 (34,814) (34,814) 0 (34,814) (69,628) -------- ---- -------- -------- ---- -------- -------- PARTNERS' CAPITAL, DECEMBER 31, 1998..... $ 56,520 $ 0 $ 56,520 $ 48,270 $ 0 $ 48,270 $104,790 ======== ==== ======== ======== ==== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 45 7 ORBCOMM GLOBAL, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) NATURE OF OPERATIONS Organization In 1993, Orbital Communications Corporation ("OCC"), a majority-owned subsidiary of Orbital Sciences Corporation ("Orbital"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), a partnership established by affiliates of Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P. ("ORBCOMM" or the "Company"), a Delaware limited partnership. Each of OCC and Teleglobe Mobile holds a 50% partnership interest in the Company, with the result that the approval of both OCC and Teleglobe Mobile is generally necessary for the Company to act. OCC and Teleglobe Mobile also formed two marketing partnerships, ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners, L.P. ("ORBCOMM International"), to market services using the ORBCOMM low-Earth orbit satellite communications system (the "ORBCOMM System") in the United States and internationally, respectively. In 1995, the Company became a 98% general partner in ORBCOMM USA, reducing OCC's direct partnership interest to 2% and eliminating Teleglobe Mobile's direct partnership interest entirely. Simultaneously, the Company became a 98% general partner in ORBCOMM International, reducing Teleglobe Mobile's direct partnership interest to 2% and eliminating OCC's direct partnership interest entirely. In October 1998, the Company purchased the assets of Dolphin Software Systems Inc. and established two wholly owned subsidiaries. Dolphin Information Services Inc. ("Dolphin") distributes outside Canada software products that enable our customers to better access and manage information obtained from or regarding their remote or mobile assets (collectively, the "Dolphin Software"). Dolphin Software Services, ULC ("Dolphin ULC") develops, and distributes within Canada, the Dolphin Software. The value attributed to assets acquired from Dolphin Software Systems Inc. is not material to the Company's total assets. The ORBCOMM System Description ORBCOMM was created for the design, development, construction, integration, testing and operation of the ORBCOMM System. The space assets currently consist of a constellation of 28 on-orbit satellites. The ground and control assets consist of gateways strategically located throughout the world and the facilities to monitor and manage all network elements to ensure continuous, consistent operations in the provision of quality service. In addition, ORBCOMM operates a network control center, which is designed to support the full constellation of ORBCOMM System satellites. The subscriber assets consist of various models of subscriber units, some of which are intended for general use, while others are designed to support specific applications. The System Charge OCC is obligated to pay to the Company a system charge that is equal to 23% of ORBCOMM USA's total service revenues (the "Output Capacity Charge") minus 1.15% of total aggregate revenues, defined as the aggregate of ORBCOMM USA's and ORBCOMM International's total service revenues ("Total Aggregate Revenues"), for a calendar quarter in consideration of the construction and financing of the ORBCOMM System assets by the Company. Teleglobe Mobile is obligated to pay to the Company a system charge that is equal to 23% of ORBCOMM International's total service revenues (the "International Output Capacity Charge") minus 1.15% of Total Aggregate Revenues for a calendar quarter in consideration of the Company's grant to Teleglobe Mobile of the right to market, sell, lease and franchise all ORBCOMM System output capacity outside the United States. If the Output Capacity Charge as described above is less than 46 8 ORBCOMM GLOBAL, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) NATURE OF OPERATIONS -- (CONTINUED) 1.15% of Total Aggregate Revenues, then OCC is not required to pay and does not owe any portion of the system charge to ORBCOMM. If the International Output Capacity Charge as described above is less than 1.15% of Total Aggregate Revenues, then Teleglobe Mobile is not required to pay and does not owe any portion of the system charge to ORBCOMM. Regulatory Status Construction and operation of communications satellites in the United States requires licenses from the Federal Communications Commission (the "FCC"). OCC has been granted full operational authority for the ORBCOMM System by the FCC. Similar licenses are required from foreign regulatory authorities to permit ORBCOMM System services to be offered outside the United States. Primary responsibility for obtaining licenses outside the United States will reside with entities who become international licensees. Risks and Uncertainties The Company's operations are subject to certain risks and uncertainties that are inherent in satellite communication companies and development stage enterprises. The Company expects to have continuing losses for the next several quarters and is dependent upon additional financing to fund operations, complete construction of additional system capacity and to further develop its marketing infrastructure. Although they are not required to do so, the Partners are continuing to fund the financing needs of the Company. Given the inherent technical, commercial, regulatory and financial risks within the space communications industry, it is possible that the recoverability of the ORBCOMM system could be adversely affected. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Company expects to emerge from its development stage by the first half of 1999. The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with generally accepted accounting principles in the United States. They include the accounts of the Company and two of its subsidiaries, Dolphin and Dolphin ULC. All significant intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of 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 as well as 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. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Investments The Company maintains two investment portfolios characterized by management's intentions as to future investment activity. Investments classified as "held-to-maturity" are not intended to be sold prior to maturity 47 9 ORBCOMM GLOBAL, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) and are carried at cost. Investments not intended to be held until maturity or traded to capitalize on market gains are classified as "available-for-sale" and are carried at fair value with temporary unrealized gains (losses) charged directly to partners' capital. Investments maturing after one year are classified as long-term investments. The Company uses the average cost method in determining the basis of investments sold when computing realized gains (losses). Inventory Inventory is stated at the lower of cost, determined on the specific identification basis, or market and primarily represents subscriber communicators available for sale to customers. Depreciation and Recoverability of Long-Lived Assets The Company depreciates its operational assets over the estimated economic useful life using the straight-line method as follows: Space Segment Assets: generally 8 years Ground Segment Assets: 3 to 10 years
The Company's policy is to review its long-lived assets, including its Mobile Communications Satellite System, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognizes impairment losses when the sum of the expected future cash flows is less than the carrying amount of the assets. With regard to satellites, the Company recognizes impairment losses on a satellite-by-satellite basis. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Given the inherent technical and commercial risks within the space communications industry, it is possible that the Company's current estimate for recovery of the carrying amount of its assets may change. Other Assets, net Other assets principally consist of deferred debt issuance costs. These costs are amortized as a component of interest expense and other financial charges over the term of the related debt. Investments in Affiliates The Company uses the equity method of accounting for its investments in and earnings of affiliates in which the Company has the ability to exercise significant influence over, but not control, such affiliates' operations. In accordance with the equity method of accounting, the Company's carrying amount of an investment in affiliates is initially recorded at cost, and is increased to reflect its share of the affiliates' income and reduced to reflect its share of the affiliates' losses. The Company's investment is also increased to reflect contributions to, and decreased to reflect distributions received from, affiliates. Investments in which the Company does not have the ability to exercise significant influence over operating and financial policies are accounted for under the cost method of accounting. Pursuant to the terms of the relevant partnership agreements: (i) Teleglobe Mobile and OCC share equal responsibility for the operational and financial affairs of ORBCOMM; (ii) Teleglobe Mobile controls the operational and financial affairs of ORBCOMM International; and (iii) OCC controls the operational and financial affairs of ORBCOMM USA. Since the Company is unable to control, but is able to exercise significant influence over ORBCOMM International's and ORBCOMM USA's operating and financial 48 10 ORBCOMM GLOBAL, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) policies, the Company is accounting for its investments in OBCOMM International and ORBCOMM USA using the equity method of accounting. However, since the Company is unable either to control or to exercise significant influence over ORBCOMM Japan's operating and financial policies, the Company is accounting for its investment in ORBCOMM Japan using the cost method of accounting. Each year, the Company reviews the underlying value of its investments by comparing their carrying amount to their net recoverable amount. The determination of the net recoverable amount consists of evaluating forecasted income and cash flows. Any permanent impairment of such value would be written off to expense. Goodwill Goodwill, which represents the excess costs over the fair value of identifiable assets acquired from Dolphin Software Systems Inc. at the date of acquisition, will be amortized on a straight-line basis over 10 years, starting January 1, 1999. Each year, the Company reviews the underlying value of its goodwill by comparing its carrying amount to its net recoverable amount. The determination of the net recoverable amount consists of evaluating forecasted income and cash flows. Any permanent impairment of such value would be written off to expense. Partners' Capital In accordance with the Partnership Agreement, Teleglobe Mobile and OCC are both general and limited partners in the Company. Therefore, limited and general partner accounts are combined into one single capital account and presented as such in the consolidated balance sheets and consolidated statements of partners' capital. Revenue Recognition Revenues are generally recognized when products are shipped or when customers have accepted the products, depending on contractual terms. Service revenues are generally recognized as such services are rendered. Distributions fees and license fees from service license or similar agreements are recognized ratably over the term of the agreements. Foreign Currency Translation The Company has determined the functional currency of its Canadian subsidiary, Dolphin ULC, to be the U.S. dollar. Consequently, Dolphin ULC's financial statements are remeasured into U.S. dollars on the following basis: -- monetary assets and liabilities are remeasured at the current exchange rate; -- all non-monetary items that reflect prices from past transactions are remeasured using historical exchange rates, while all non-monetary items that reflect prices from current transactions are remeasured using the current exchange rate; and -- revenues and expenses are remeasured at the average exchange rates prevailing at the time the transactions occurred, except those expenses related to non-monetary items, which are remeasured at historical exchange rates. Translation gains/losses resulting from the remeasurement process are reported on the consolidated statements of operations under "Other Income and Expenses". 49 11 ORBCOMM GLOBAL, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Income Taxes As a partnership, Federal and state income taxes are the direct responsibility of each partner. Accordingly, no income taxes have been recorded within the accompanying consolidated financial statements. Segment Information Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segment of an Enterprise and Related Information", establishes standards for reporting financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company's operations for 1998 are a single segment, and further segmentation under SFAS No. 131 is not required. Comprehensive Income As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive loss consists of net loss and net unrealized gains on securities and is presented in the consolidated statements of operations and comprehensive loss. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior years' consolidated financial statements have been reclassified to conform with the requirements of SFAS No. 130. Recent Accounting Pronouncements Computer Software -- In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Development or Obtained for Internal Use". SOP 98-1 must be adopted no later than January 1, 1999, and defines internal-use software and requires that the cost of such software be capitalized and amortized over its useful life. Presently, the Company's policy is to capitalize the costs of computer software developed or obtained for internal use. Based on the Company's current policy, SOP 98-1 is not expected to have an impact on the Company's consolidated results of operations or financial condition. Cost of Start-Up Activities -- In April 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of Start-Up Activities", to provide guidance to all non-governmental entities on financial reporting of costs of start-up activities. SOP 98-5 must be adopted no later than January 1, 1999, and requires that costs of start-up activities be expensed as incurred. Based on the Company's current policy for costs of start-up activities, SOP 98-5 is not expected to have an impact on the Company's consolidated results of operations or financial condition. Reclassification of Prior Years' Balances Certain amounts in the prior years' consolidated financial statements have been reclassified to conform with the current year presentation. (3) INVESTMENTS Included in cash and cash equivalents is $5,420,000 of commercial paper as of December 31, 1997 (none as of December 31, 1998). The fair value of the commercial paper approximated carrying value. 50 12 ORBCOMM GLOBAL, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) INVESTMENTS -- (CONTINUED) The following table sets forth the aggregate costs and fair values and gross unrealized gains of available-for-sale and held-to-maturity short-term investments as of December 31, 1998 and 1997:
DECEMBER 31, 1998 DECEMBER 31, 1997 (IN THOUSANDS) (IN THOUSANDS) ------------------------------ --------------------------------- UNREALIZED UNREALIZED COST GAINS FAIR VALUE COST GAINS FAIR VALUE ---- ---------- ---------- ------- ---------- ---------- AVAILABLE-FOR-SALE - - ---------------------------------------------- Commercial Paper.............................. $ 0 $0 $ 0 $ 1,278 $ 0 $ 1,278 ---- -- ---- ------- ------ ------- Total available-for-sale investments........ 0 0 0 1,278 0 1,278 ---- -- ---- ------- ------ ------- HELD-TO-MATURITY - - ---------------------------------------------- U.S. Treasury Notes........................... 390 5 395 21,478 1,841 23,319 ---- -- ---- ------- ------ ------- Total held-to-maturity investments.......... 390 5 395 21,478 1,841 23,319 ---- -- ---- ------- ------ ------- TOTAL INVESTMENTS........................... $390 $5 $395 $22,756 $1,841 $24,597 ==== == ==== ======= ====== =======
Unrealized gains on held-to-maturity investments represent accrued interest income as of December 31, 1998 and 1997, respectively. As of December 31, 1998, all Treasury Notes held mature within one year. (4) MOBILE COMMUNICATIONS SATELLITE SYSTEM The Mobile Communications Satellite System comprises the following assets:
DECEMBER 31, (IN THOUSANDS) -------------------- 1998 1997 -------- -------- Space assets......................................... $288,648 $225,942 Ground assets........................................ 63,892 50,983 -------- -------- Total................................................ 352,540 276,925 Less accumulated depreciation........................ (24,594) (13,546) -------- -------- Total, net........................................... $327,946 $263,379 ======== ========
During construction of the Mobile Communications Satellite System, the Company is capitalizing substantially all construction costs. The Company also is capitalizing the portion of the engineering direct labor costs that relates to hardware and system design development and coding of the software products that enhance the operation of the Mobile Communications Satellite System. For the years ended December 31, 1998, 1997, and 1996, $5,041,000, $4,641,000 and $1,244,000, respectively, of such costs have been capitalized. For the years ended December 31, 1998, 1997 and 1996, total interest expenses were $24,550,000, $24,060,000 and $10,030,000, respectively, of which $22,573,000, $24,060,000 and $10,030,000 have been capitalized as a part of the historical cost of the Mobile Communications Satellite System. (5) LONG-TERM DEBT In August 1996, the Company and ORBCOMM Global Capital Corp. issued $170,000,000 aggregate principal amount of 14% Senior Notes due 2004 with Revenue Participation Interest (the "Old Notes"). All the Old Notes were exchanged for an equal principal amount of registered 14% Series B Senior Notes due 2004 with Revenue Participation Interest (the "Notes"). Revenue Participation Interest represents an aggregate amount equal to 5% of the ORBCOMM System revenues generated from August 1996 and is payable on the Old Notes and the Notes on each interest payment date subject to certain covenant 51 13 ORBCOMM GLOBAL, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) LONG-TERM DEBT -- (CONTINUED) restrictions. The Notes are fully and unconditionally guaranteed on a joint and several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM International, except that the guarantees are non-recourse to the shareholders and/or partners of the guarantors, limited only to the extent necessary for each such guarantee not to constitute a fraudulent conveyance under applicable law. On the closing of the Old Notes, the Company used $44,800,000 of the net proceeds from the sale of the Old Notes to purchase a portfolio of U.S. Government securities to provide for payment in full of interest on the Old Notes and Notes through August 15, 1998. All of this investment portfolio was used to pay semi-annual interest that was due on the Notes in 1997 and 1998. The Company also has a $5,000,000 secured note with a financial institution of which $1,190,000 was outstanding as of December 31, 1998 as the current portion of long-term debt. As of December 31, 1997 $2,277,000 was outstanding of which $1,087,000 and $1,190,000 were due in 1998 and 1999, respectively. The note bears interest at 9.2% per annum and is secured by equipment located at certain of the U.S. gateway Earth stations and the network control center, and is guaranteed by Orbital. (6) RELATED PARTY TRANSACTIONS The Company paid Orbital $5,641,000, $41,843,000 and $56,177,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Payments were made for work performed pursuant to the ORBCOMM System Design, Development, and Operations Agreement, the ORBCOMM System Procurement Agreement (the "Procurement Agreement") and the Administrative Services Agreement (for provision of ongoing administrative support to the Company). Additionally, Orbital has deferred $50,800,000 and $21,100,000 as of December 31, 1998 and 1997, respectively, and has indicated that it will continue to defer invoicing of certain amounts under the Procurement Agreement until other funding arrangements for the Company are secured. The Company paid ORBCOMM Canada Inc., a majority owned subsidiary of Teleglobe, $208,000 pursuant to a consulting agreement dated March 18, 1998, in consideration for services provided by an employee of ORBCOMM Canada. The Company sold $1,008,000, $487,000 and $268,000 of product to ORBCOMM USA and ORBCOMM International for the years ended December 31, 1998, 1997 and 1996, respectively (none in 1995). Certain provisions of the Partnership Agreement require ORBCOMM to reimburse OCC for OCC's repurchase of shares of OCC common stock acquired pursuant to the OCC 1998 Stock Option Plan ("Stock Option Plan"). During 1997 and 1996, ORBCOMM reimbursed OCC approximately $598,000 and $1,100,000, respectively, under the Stock Option Plan (none during 1998). In 1996, Orbital contributed approximately $100,000 to OCC to repurchase such shares (none in 1998 and 1997). (7) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's cash and cash equivalents, receivables, accounts payable and current portion of long term debt approximates fair value since all such instruments are short-term in nature. 52 14 ORBCOMM GLOBAL, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED) Fair value for the Company's long-term debt is determined based on quoted market rates. The table set below compares the carrying and the fair value of the Company's long-term debt as of December 31, 1998 and 1997.
DECEMBER 31, 1998 DECEMBER 31, 1997 (IN THOUSANDS) (IN THOUSANDS) --------------------- --------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- Long-term debt.............................. $170,000 $175,100 $170,000 $183,600
(8) COMMITMENTS AND CONTINGENCIES System Procurement Agreement Pursuant to the System Procurement Agreement with Orbital, the Company's remaining obligation to purchase satellites, launch services and ground system is approximately $31,500,000. Lease Commitments In 1998, ORBCOMM entered into a six-year operating lease agreement for approximately 21,500 square feet of office space. ORBCOMM has an option to renew the lease for another five-year period immediately upon the expiration of the original operating lease. Rental expense for 1998, 1997 and 1996 amounted to $2,074,000, $951,000 and $393,000, respectively, of which $939,000, $825,000 and $393,000, respectively, were paid to Orbital as part of the Administrative Services Agreement. The future minimum rental payments under non-cancelable operating leases are as follows:
PERIODS IN THOUSANDS ------- ------------ 1999........................................................ $1,769 2000........................................................ 1,852 2001........................................................ 1,866 2002........................................................ 1,916 2003........................................................ 842 Thereafter.................................................. 624 ------ Total minimum lease commitments........................... $8,869 ======
(9) SUBSEQUENT EVENTS From January 1, 1999 to March 30, 1999, OCC and Teleglobe Mobile paid to the Company an additional $20,950,000 and $21,950,000 in capital contributions, respectively. The Company has negotiated a new procurement agreement with Orbital under which it will procure, at a minimum, eight additional satellites and two separate Pegasus launch vehicles, at a total cost of approximately $70,000,000. In addition, the Company has the option under this agreement to procure up to 22 additional satellites and associated launch services using the Pegasus launch vehicle. Amounts due under this agreement are payable by the Company as work is performed by Orbital. In late February 1999, the Company consummated the purchase of additional shares of ORBCOMM Japan, Ltd., our International Licensee for Japan, increasing our equity interest in ORBCOMM Japan, Ltd. to approximately 32%. 53 15 INDEPENDENT AUDITORS' REPORT The Partners ORBCOMM USA. L.P.: We have audited the accompanying balance sheets of ORBCOMM USA. L.P. (a development stage enterprise) as of December 31, 1998 and 1997, and the related statements of operations, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1998 and for the period from June 30, 1993 (date of inception) to December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ORBCOMM USA. L.P. (a development stage enterprise) as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998 and for the period June 30, 1993 (date of inception) to December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Washington, D.C. March 30, 1999 54 16 ORBCOMM USA, L.P. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------ 1998 1997 -------- ------- ASSETS CURRENT ASSETS: Accounts receivable....................................... $ 220 $ 65 Prepaid contract costs.................................... 991 123 -------- ------- TOTAL ASSETS...................................... $ 1,211 $ 188 ======== ======= LIABILITIES AND PARTNERS' CAPITAL LIABILITIES: Accounts payable and accrued liabilities.................. $ 717 $ 803 -------- ------- Total Current Liabilities.............................. 717 803 Amount due to affiliates.................................. 13,342 8,635 -------- ------- Total Liabilities...................................... 14,059 9,438 COMMITMENTS AND CONTINGENCIES PARTNERS' CAPITAL: ORBCOMM Global, L.P....................................... (12,591) (9,065) Orbital Communications Corporation........................ (257) (185) -------- ------- Total Partners' Capital................................ (12,848) (9,250) -------- ------- TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $ 1,211 $ 188 ======== =======
The accompanying notes are an integral part of these financial statements. 55 17 ORBCOMM USA, L.P. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS (IN THOUSANDS)
TOTAL ACCUMULATED DURING DEVELOPMENT YEARS ENDED STAGE DECEMBER 31, THROUGH -------------------------------------- DECEMBER 31, 1998 1997 1996 1998 ------------ ------- ------- ------------ REVENUES: Product sales................................ $ 580 $ 127 $ 229 $ 936 Contract revenues............................ 0 0 0 4,203 Service revenues............................. 179 45 11 235 ------- ------- ------- -------- Total revenues....................... 759 172 240 5,374 EXPENSES: Cost of sales................................ 798 383 262 1,443 Marketing expenses........................... 3,559 5,173 2,984 16,789 ------- ------- ------- -------- Total expenses....................... 4,357 5,556 3,246 18,232 ------- ------- ------- -------- NET LOSS....................................... $(3,598) $(5,384) $(3,006) $(12,858) ======= ======= ======= ========
The accompanying notes are an integral part of these financial statements. 56 18 ORBCOMM USA, L.P. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
TOTAL CASH FLOWS DURING DEVELOPMENT YEARS ENDED STAGE DECEMBER 31, THROUGH -------------------------------- DECEMBER 31, 1998 1997 1996 1998 ------------ ------- ------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................ $(3,598) $(5,384) $(3,006) $(12,858) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES: Increase in accounts receivable................. (155) (11) (54) (220) Increase in prepaid contract costs.............. (868) (123) 0 (991) Increase (decrease) in accounts payable and accrued liabilities.......................... (86) 461 133 717 ------- ------- ------- -------- NET CASH USED IN OPERATING ACTIVITIES... (4,707) (5,057) (2,927) (13,352) ------- ------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in amount due to affiliates............ 4,707 5,057 2,917 13,342 Partners' contributions......................... 0 0 0 10 ------- ------- ------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES............................ 4,707 5,057 2,917 13,352 ------- ------- ------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS......... 0 0 (10) 0 CASH AND CASH EQUIVALENTS: Beginning of period............................. 0 0 10 0 ------- ------- ------- -------- CASH AND CASH EQUIVALENTS: End of period................................... $ 0 $ 0 $ 0 $ 0 ======= ======= ======= ========
The accompanying notes are an integral part of these financial statements. 57 19 ORBCOMM USA, L.P. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF PARTNERS' CAPITAL (IN THOUSANDS)
TELEGLOBE ORBITAL ORBCOMM MOBILE COMMUNICATIONS GLOBAL, PARTNERS CORPORATION L.P. TOTAL --------- -------------- -------- -------- Capital contributions......................... $2 $ 8 $ 0 $ 10 Net loss...................................... 0 0 0 0 -- ----- -------- -------- PARTNERS' CAPITAL, DECEMBER 31, 1993............ 2 8 0 10 Net loss...................................... 0 0 0 0 -- ----- -------- -------- PARTNERS' CAPITAL, DECEMBER 31, 1994............ 2 8 0 10 Capital transfer.............................. (2) (8) 10 0 Net loss...................................... 0 (17) (853) (870) -- ----- -------- -------- PARTNERS' CAPITAL, DECEMBER 31, 1995............ 0 (17) (843) (860) Net loss...................................... 0 (60) (2,946) (3,006) -- ----- -------- -------- PARTNERS' CAPITAL, DECEMBER 31, 1996............ 0 (77) (3,789) (3,866) Net loss................................... 0 (108) (5,276) (5,384) -- ----- -------- -------- PARTNERS' CAPITAL, DECEMBER 31, 1997............ 0 (185) (9,065) (9,250) Net loss................................... 0 (72) (3,526) (3,598) -- ----- -------- -------- PARTNERS' CAPITAL, DECEMBER 31, 1998............ $0 $(257) $(12,591) $(12,848) == ===== ======== ========
The accompanying notes are an integral part of these financial statements. 58 20 ORBCOMM USA, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (1) NATURE OF OPERATIONS Organization In 1993, Orbital Communications Corporation ("OCC"), a majority-owned subsidiary of Orbital Sciences Corporation ("Orbital"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), a partnership established by affiliates of Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P. ("ORBCOMM" or the "Company"), a Delaware limited partnership. Each of OCC and Teleglobe Mobile holds a 50% partnership interest in the Company, with the result that the approval of both OCC and Teleglobe Mobile is generally necessary for the Company to act. OCC and Teleglobe Mobile also formed two marketing partnerships, ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners, L.P. ("ORBCOMM International"), to market services using the ORBCOMM low-Earth orbit satellite communications system (the "ORBCOMM System") in the United States and internationally, respectively. In 1995, the Company became a 98% general partner in ORBCOMM USA, reducing OCC's direct partnership interest to 2% and eliminating Teleglobe Mobile's direct partnership interest entirely. Simultaneously, the Company became a 98% general partner in ORBCOMM International, reducing Teleglobe Mobile's direct partnership interest to 2% and eliminating OCC's direct partnership interest entirely. The ORBCOMM System Description ORBCOMM was created for the design, development, construction, integration, testing and operation of the ORBCOMM System. The space assets currently consist of a constellation of 28 on-orbit satellites. The ground and control assets consist of gateways strategically located throughout the world and the facilities to monitor and manage all network elements to ensure continuous, consistent operations in the provision of quality service. In addition, ORBCOMM operates a network control center, which is designed to support the full constellation of ORBCOMM System satellites. The subscriber assets consist of various models of subscriber units, some of which are intended for general use, while others are designed to support specific applications. The System Charge Pursuant to the terms of the system charge agreement between OCC and ORBCOMM USA, ORBCOMM USA has agreed to pay OCC an output capacity charge that is a quarterly fee equal to 23% of its total service revenues for such calendar quarter in exchange for the exclusive right to market, sell, lease and franchise all ORBCOMM System output capacity in the United States and for the exclusive use of the system assets in the United States. For the year ended December 31, 1998, the output capacity charge was $41,000 and is included as part of cost of sales (none in 1997 and 1996). Regulatory Status Construction and operation of communications satellites in the United States requires licenses from the Federal Communications Commission (the "FCC"). OCC has been granted full operational authority for the ORBCOMM System by the FCC. Similar licenses are required from foreign regulatory authorities to permit ORBCOMM System services to be offered outside the United States. Primary responsibility for obtaining licenses outside the United States will reside with entities who become international licensees. 59 21 ORBCOMM USA, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Company and ORBCOMM USA expect to emerge from their development stage by the first half of 1999. The accompanying financial statements have been prepared on the accrual basis of accounting in conformity with generally accepted accounting principles in the United States. Use of Estimates The preparation of 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 as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Pursuant to banking arrangements, ORBCOMM USA has no cash or cash equivalents in accordance with the zero balance agreement with ORBCOMM. However, ORBCOMM considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Prepaid Contract Costs Prepaid contract costs consist primarily of advance payments to manufacturers for assembling asset monitoring subscriber communicators. Income Taxes As a partnership, Federal and state income taxes are the direct responsibility of each partner. Accordingly, no income taxes have been recorded within the accompanying financial statements. Revenue Recognition ORBCOMM USA provides subscriber communicator hardware to commercial customers. Revenues are recognized when products are shipped or when customers have accepted the products, depending on contractual terms. Service revenues are recognized as such services are rendered. Segment Information Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segment of an Enterprise and Related Information", establishes standards for reporting financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. ORBCOMM USA's operations for 1998 are a single segment, and further segmentation under SFAS No. 131 is not required. (3) RELATED PARTY TRANSACTIONS As of December 31, 1998 and 1997, ORBCOMM USA had a payable of $13,660,000 and $8,635,000, respectively, to ORBCOMM for amounts advanced to support ORBCOMM USA's efforts to establish commercial and government markets in the United States. ORBCOMM USA is currently in development stage, and still obtains funds to support operations through non-interest bearing advances from ORBCOMM. 60 22 ORBCOMM USA, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (3) RELATED PARTY TRANSACTIONS -- (CONTINUED) As of December 31, 1998, ORBCOMM USA had a receivable of $318,000 from ORBCOMM International (none as of December 31, 1997). ORBCOMM USA purchased $757,000, $383,000 and $262,000 of product from ORBCOMM for the years ended December 31, 1998, 1997 and 1996, respectively (none in 1995). (4) COMMITMENTS AND CONTINGENCIES Long-Term Debt In August 1996, the Company and ORBCOMM Global Capital Corp. issued $170,000,000 aggregate principal amount of 14% Senior Notes due 2004 with Revenue Participation Interest (the "Old Notes"). All of the Old Notes were exchanged for an equal principal amount of registered 14% Series B Senior Notes due 2004 with Revenue Participation Interest (the "Notes"). Revenue Participation Interest represents an aggregate amount equal to 5% of the ORBCOMM System revenues generated from August 1996 and is payable on the Old Notes and the Notes on each interest payment date subject to certain covenant restrictions. The Notes are fully and unconditionally guaranteed on a joint and several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM International, except that the guarantees are non-recourse to the shareholders and/or partners of the guarantors, limited only to the extent necessary for each such guarantee not to constitute a fraudulent conveyance under applicable law. On the closing of the Old Notes, the Company used $44,800,000 of the net proceeds from the sale of the Old Notes to purchase a portfolio of U.S. Government securities to provide for payment in full of interest on the Old Notes and Notes through August 15, 1998. All of this investment portfolio was used to pay semi-annual interest that was due on the Notes in 1997 and 1998. 61 23 INDEPENDENT AUDITORS' REPORT The Partners ORBCOMM International Partners, L.P.: We have audited the accompanying balance sheets of ORBCOMM International Partners, L.P. (a development stage enterprise) as of December 31, 1998 and 1997, and the related statements of operations, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1998 and for the period from June 30, 1993 (date of inception) to December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ORBCOMM International Partners, L.P. (a development stage enterprise) as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998 and for the period June 30, 1993 (date of inception) to December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Washington, DC March 30, 1999 62 24 ORBCOMM INTERNATIONAL PARTNERS, L.P. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------- 1998 1997 -------- -------- ASSETS CURRENT ASSETS: Accounts receivable....................................... $ 1,023 $ 0 Deferred and prepaid contract costs....................... 20,879 19,580 ------- ------- TOTAL ASSETS...................................... $21,902 $19,580 ======= ======= LIABILITIES AND PARTNERS' CAPITAL LIABILITIES: Accounts payable and accrued liabilities.................. $ 530 $ 1,200 Deferred revenue.......................................... 20,094 13,270 ------- ------- Total Current Liabilities.............................. 20,624 14,470 Amount due to affiliates.................................. 7,389 9,990 ------- ------- Total Liabilities...................................... 28,013 24,460 COMMITMENTS AND CONTINGENCIES PARTNERS' CAPITAL: Teleglobe Mobile Partners................................. (122) (98) ORBCOMM Global, L.P....................................... (5,989) (4,782) ------- ------- Total Partners' Capital................................ (6,111) (4,880) ------- ------- TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $21,902 $19,580 ======= =======
The accompanying notes are an integral part of these financial statements. 63 25 ORBCOMM INTERNATIONAL PARTNERS, L.P. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS (IN THOUSANDS)
TOTAL ACCUMULATED DURING DEVELOPMENT YEARS ENDED STAGE DECEMBER 31, THROUGH ----------------------------------- DECEMBER 31, 1998 1997 1996 1998 ------- ------- ------- ------------ REVENUES: Product sales............................. $10,943 $ 56 $ 8 $11,007 EXPENSES: Cost of product sales..................... 10,943 104 6 11,053 Marketing expenses........................ 1,231 3,152 1,692 6,075 ------- ------- ------- ------- Total expenses......................... 12,174 3,256 1,698 17,128 ------- ------- ------- ------- NET LOSS.................................... $(1,231) $(3,200) $(1,690) $(6,121) ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. 64 26 ORBCOMM INTERNATIONAL PARTNERS, L.P. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
TOTAL CASH FLOWS DURING DEVELOPMENT YEARS ENDED STAGE DECEMBER 31, THROUGH ---------------------------- DECEMBER 31, 1998 1997 1996 1998 ------- -------- ------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss......................................... $(1,231) $ (3,200) $(1,690) $ (6,121) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Decrease (increase) in accounts receivable....... (1,023) 15 (15) (1,023) Increase in deferred and prepaid contract costs......................................... (1,299) (15,709) (3,871) (20,879) Increase (decrease) in accounts payable and accrued liabilities........................... (670) 472 728 530 Increase in deferred revenue..................... 6,824 7,123 6,147 20,094 ------- -------- ------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................. 2,601 (11,299) 1,299 (7,399) ------- -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease (increase) in amount due from an affiliate..................................... 0 1,309 (1,309) 0 ------- -------- ------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............................. 0 1,309 (1,309) 0 ------- -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in amount due to affiliates.................................... (2,601) 9,990 0 7,389 Partners' contributions.......................... 0 0 0 10 ------- -------- ------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............................. (2,601) 9,990 0 7,399 ------- -------- ------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS.......... 0 0 (10) 0 CASH AND CASH EQUIVALENTS: Beginning of period.............................. 0 0 10 0 ------- -------- ------- -------- CASH AND CASH EQUIVALENTS: End of period.................................... $ 0 $ 0 $ 0 $ 0 ======= ======== ======= ========
The accompanying notes are an integral part of these financial statements. 65 27 ORBCOMM INTERNATIONAL PARTNERS, L.P. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF PARTNERS' CAPITAL (IN THOUSANDS)
ORBITAL TELEGLOBE ORBCOMM COMMUNICATIONS MOBILE GLOBAL, CORPORATION PARTNERS L.P. TOTAL -------------- --------- ------- ------- Capital transfer............................... $ 8 $ 2 $ 0 $ 10 Net loss....................................... 0 0 0 0 --- ----- ------- ------- PARTNERS' CAPITAL, DECEMBER 31, 1993............. 8 2 0 10 Net loss....................................... 0 0 0 0 --- ----- ------- ------- PARTNERS' CAPITAL, DECEMBER 31, 1994............. 8 2 0 10 Net loss....................................... 0 0 0 0 Capital transfer............................... (8) (2) 10 0 --- ----- ------- ------- PARTNERS' CAPITAL, DECEMBER 31, 1995............. 0 0 10 10 Net loss....................................... 0 (34) (1,656) (1,690) --- ----- ------- ------- PARTNERS' CAPITAL, DECEMBER 31, 1996............. 0 (34) (1,646) (1,680) Net loss....................................... 0 (64) (3,136) (3,200) --- ----- ------- ------- PARTNERS' CAPITAL, DECEMBER 31, 1997............. 0 (98) (4,782) (4,880) Net loss....................................... 0 (24) (1,207) (1,231) --- ----- ------- ------- PARTNERS' CAPITAL, DECEMBER 31, 1998............. $ 0 $(122) $(5,989) $(6,111) === ===== ======= =======
The accompanying notes are an integral part of these financial statements. 66 28 ORBCOMM INTERNATIONAL PARTNERS, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (1) NATURE OF OPERATIONS Organization In 1993, Orbital Communications Corporation ("OCC"), a majority-owned subsidiary of Orbital Sciences Corporation ("Orbital"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), a partnership established by affiliates of Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P. ("ORBCOMM" or the "Company"), a Delaware limited partnership. Each of OCC and Teleglobe Mobile holds a 50% partnership interest in the Company, with the result that the approval of both OCC and Teleglobe Mobile is generally necessary for the Company to act. OCC and Teleglobe Mobile also formed two marketing partnerships, ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners, L.P. ("ORBCOMM International"), to market services using the ORBCOMM low-Earth orbit satellite communications system (the "ORBCOMM System") in the United States and internationally, respectively. In 1995, the Company became a 98% general partner in ORBCOMM USA, reducing OCC's direct partnership interest to 2% and eliminating Teleglobe Mobile's direct partnership interest entirely. Simultaneously, the Company became a 98% general partner in ORBCOMM International, reducing Teleglobe Mobile's direct partnership interest to 2% and eliminating OCC's direct partnership interest entirely. The ORBCOMM System Description ORBCOMM was created for the design, development, construction, integration, testing and operation of the ORBCOMM System. The space assets currently consist of a constellation of 28 on-orbit satellites. The ground and control assets consist of gateways strategically located throughout the world and the facilities to monitor and manage all network elements to ensure continuous, consistent operations in the provision of quality service. In addition, ORBCOMM operates a network control center, which is designed to support the full constellation of ORBCOMM System satellites. The subscriber assets consist of various models of subscriber units, some of which are intended for general use, while others are designed to support specific applications. The System Charge Pursuant to the terms of the international system charge agreement between ORBCOMM, Teleglobe Mobile and ORBCOMM International, ORBCOMM International has agreed to pay Teleglobe Mobile an international output capacity charge that is a quarterly fee equal to 23% of its total service revenues for such calendar quarter in exchange for the exclusive right to market, sell, lease and franchise all ORBCOMM System output capacity outside the United States and for the exclusive use of the system assets outside the United States. No such charge has been incurred. Regulatory Status Construction and operation of communications satellites in the United States requires licenses from the Federal Communications Commission (the "FCC"). OCC has been granted full operational authority for the ORBCOMM System by the FCC. Similar licenses are required from foreign regulatory authorities to permit ORBCOMM System services to be offered outside the United States. Primary responsibility for obtaining licenses outside the United States will reside with entities who become international licensees. 67 29 ORBCOMM INTERNATIONAL PARTNERS, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Company and ORBCOMM International expect to emerge from their development stage by the first half of 1999. The accompanying financial statements have been prepared on the accrual basis of accounting in conformity with generally accepted accounting principles in the United States. Use of Estimates The preparation of 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 as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Pursuant to banking arrangements, ORBCOMM International has no cash and cash equivalents in accordance with the zero balance agreement with ORBCOMM. However, ORBCOMM considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Deferred and Prepaid Contract Costs Deferred and prepaid contract costs consist primarily of work-in-process for construction of gateway Earth stations for sale to international licensees. Revenue Recognition Revenues under the gateway procurement contracts with international licensees or the sale of subscriber communicator hardware are generally recognized when contracts are completed, products are shipped or when customers have accepted the products or services, depending on contractual terms. License fees from service license or similar agreements are recognized ratably over the term of the agreements. Income Taxes As a partnership, Federal and state income taxes are the direct responsibility of each partner. Accordingly, no income taxes have been recorded within the accompanying financial statements. Segment Information Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segment of an Enterprise and Related Information", establishes standards for reporting financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. ORBCOMM International's operations for 1998 are a single segment, and further segmentation under SFAS No. 131 is not required. (3) RELATED PARTY TRANSACTIONS As of December 31, 1998 and 1997, ORBCOMM International had a payable of $7,071,000 and $9,990,000, respectively, to ORBCOMM for amounts advanced to support ORBCOMM International's efforts to establish commercial markets outside the United States. ORBCOMM International is currently in development stage, and still obtains funds to support operations through non-interest bearing advances from ORBCOMM. 68 30 ORBCOMM INTERNATIONAL PARTNERS, L.P. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (3) RELATED PARTY TRANSACTIONS -- (CONTINUED) As of December 31, 1998, ORBCOMM International had a payable of $318,000 to ORBCOMM USA (none as of December 31, 1997). ORBCOMM International purchased $251,000, $104,000 and $6,000 of product from ORBCOMM for the years ended December 31, 1998, 1997 and 1996, respectively (none in 1995). As of December 31, 1997, ORBCOMM International had a payable of $87,000 to Teleglobe Canada Inc., an affiliate of Teleglobe Mobile, for a contracted employee to provide international marketing services (none as of December 31, 1998). (4) COMMITMENTS AND CONTINGENCIES Long-Term Debt In August 1996, the Company and ORBCOMM Global Capital Corp. issued $170,000,000 aggregate principal amount of 14% Senior Notes due 2004 with Revenue Participation Interest (the "Old Notes"). All of the Old Notes were exchanged for an equal principal amount of registered 14% Series B Senior Notes due 2004 with Revenue Participation Interest (the "Notes"). Revenue Participation Interest represents an aggregate amount equal to 5% of the ORBCOMM System revenues generated from August 1996 and is payable on the Old Notes and the Notes on each interest payment date subject to certain covenant restrictions. The Notes are fully and unconditionally guaranteed on a joint and several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM International, except that the guarantees are non-recourse to the shareholders and/or partners of the guarantors, limited only to the extent necessary for each such guarantee not to constitute a fraudulent conveyance under applicable law. On the closing of the Old Notes, the Company used $44,800,000 of the net proceeds from the sale of the Old Notes to purchase a portfolio of U.S. Government securities to provide for payment in full of interest on the Old Notes and Notes through August 15, 1998. All of this investment portfolio was used to pay semi-annual interest that was due on the Notes in 1997 and 1998. Construction of Gateways In October 1996, ORBCOMM International entered into agreements with certain manufacturers for the construction of twenty gateway Earth stations around the globe. During 1998, installation and final acceptance of gateways in South Korea, Japan and Italy occurred. Additionally, as of December 31, 1998 and 1997, ORBCOMM International had $20,879,000 and $19,580,000, respectively, of deferred and prepaid contract costs of which $12,718,000 and $11,016,000, respectively, represent advance payments to those manufacturers. Total commitments under these manufacturing agreements approximate $22,000,000. Included in deferred and prepaid contract costs is the portion of engineering direct labor costs that relates to the construction of gateways. As of December 31, 1998 and 1997, $1,114,000 and $1,609,000, respectively, of such costs had been included in deferred and prepaid contract costs. (5) SERVICE LICENSE OR SIMILAR AGREEMENTS As of December 31, 1998, ORBCOMM International had signed 12 service license or similar agreements ("SLAs") with international licensees, eight of which had associated gateway procurement contracts and software license agreements. The SLAs authorize the international licensees to use the ORBCOMM System to provide two-way data and messaging communications services. As of December 31, 1998 and 1997, $30,868,000 and $13,270,000, respectively, had been received under these agreements and the associated gateway procurement agreements, of which $20,094,000 and $13,270,000, respectively, were recorded as deferred revenue. ORBCOMM International is obligated to construct and deliver eight gateways to certain international licensees under certain of these agreements (see note 4). 69 31 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Orbital Communications Corporation: We have audited the accompanying consolidated balance sheets of Orbital Communications Corporation and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orbital Communications Corporation and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Washington, D.C. February 16, 1999, except as to note 9 which is as of March 15, 1999 70 32 ORBITAL COMMUNICATIONS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------- 1998 1997 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 10 $ 34 Accounts receivable....................................... 269 65 Other current assets...................................... 978 123 -------- ------- Total current assets................................... 1,257 222 Investments in affiliates................................... 56,111 54,663 -------- ------- TOTAL ASSETS...................................... $ 57,368 $54,885 ======== ======= LIABILITIES AND STOCKHOLDERS' DEFICIT LIABILITIES: Accounts payable and accrued expenses..................... $ 724 $ 806 Promissory notes.......................................... 0 331 -------- ------- Total current liabilities.............................. 724 1,137 Due to affiliates......................................... 123,677 84,160 -------- ------- Total liabilities...................................... 124,401 85,297 Non-controlling interest in net assets of consolidated subsidiary................................................ (6,296) (4,533) COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock, par value $0.01; 8,000,000 shares authorized; 4,783,892 and 4,751,292 shares issued; 4,688,320 and 4,656,720 shares outstanding, respectively........................................... 48 48 Additional paid-in capital................................ 452 350 Treasury stock, at cost, 95,572 and 94,572 shares, respectively........................................... (770) (730) Accumulated deficit....................................... (60,467) (25,547) -------- ------- Total stockholders' deficit............................ (60,737) (25,879) -------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT....... $ 57,368 $54,885 ======== =======
See accompanying notes to the consolidated financial statements. 71 33 ORBITAL COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 -------- -------- ------- SERVICE REVENUES............................................ $ 759 $ 172 $ 240 EXPENSES: Costs of product sales.................................... 775 383 265 Marketing, administrative and other expenses.............. 3,617 5,202 2,959 -------- -------- ------- Total expenses......................................... 4,392 5,585 3,224 -------- -------- ------- Loss from operations................................... (3,633) (5,413) (2,984) OTHER INCOME AND (EXPENSES): Equity in net losses of affiliates........................ (33,050) (13,004) (8,268) Non-controlling interest in net losses of consolidated subsidiary............................................. 1,763 2,639 1,473 -------- -------- ------- Loss before provision for income taxes.................... (34,920) (15,778) (9,779) Provision for income taxes................................ 0 0 0 -------- -------- ------- NET LOSS.................................................... $(34,920) $(15,778) $(9,779) ======== ======== =======
See accompanying notes to the consolidated financial statements. 72 34 ORBITAL COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(34,920) $(15,778) $ (9,779) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES: Equity in net losses of affiliates........................ 33,050 13,004 8,268 Non-controlling interest in net losses of consolidated subsidiary............................................. (1,763) (2,639) (1,473) Decrease (increase) in accounts receivable................ (204) (36) 873 Decrease (increase) in other current assets............... (855) (123) 0 Increase (decrease) in accounts payable and accrued liabilities............................................ (82) 301 (18) -------- -------- -------- NET CASH USED IN OPERATING ACTIVITIES............. (4,774) (5,271) (2,129) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in affiliates................................. (34,498) 0 (12,958) -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES............. (34,498) 0 (12,958) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock to employees........... 102 141 124 Purchases of treasury stock, net of reimbursement from ORBCOMM Global, L.P.................................... (40) (575) (104) Repayments of promissory notes............................ (331) (166) 0 Net borrowings from affiliates............................ 39,517 5,763 15,209 -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES......... 39,248 5,163 15,229 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (24) (108) 142 CASH AND CASH EQUIVALENTS: Beginning of year......................................... 34 142 0 -------- -------- -------- CASH AND CASH EQUIVALENTS: End of year............................................... $ 10 $ 34 $ 142 ======== ======== ========
See accompanying notes to the consolidated financial statements. 73 35 ORBITAL COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL TREASURY STOCK ACCUMULATED ------------------ PAID-IN --------------- EARNINGS SHARES AMOUNT CAPITAL SHARES AMOUNT (DEFICIT) TOTAL --------- ------ ---------- ------ ------ ----------- -------- BALANCE, DECEMBER 31, 1995............ 4,663,122 $47 $ 86 3,012 $ (51) $ 10 $ 92 Shares issued to employees............ 67,270 0 124 0 0 0 124 Treasury stock purchased............ 0 0 0 47,760 (104) 0 (104) Net loss............................ 0 0 0 0 0 (9,779) (9,779) --------- --- ---- ------ ----- -------- -------- BALANCE, DECEMBER 31, 1996............ 4,730,392 47 210 50,772 (155) (9,769) (9,667) Shares issued to employees.......... 20,900 1 140 0 0 0 141 Treasury stock purchased............ 0 0 0 43,800 (575) 0 (575) Net loss............................ 0 0 0 0 0 (15,778) (15,778) --------- --- ---- ------ ----- -------- -------- BALANCE, DECEMBER 31, 1997............ 4,751,292 48 350 94,572 (730) (25,547) (25,879) Shares issued to employees.......... 32,600 0 102 0 0 0 102 Treasury stock purchased............ 0 0 0 1,000 (40) 0 (40) Net loss............................ 0 0 0 0 0 (34,920) (34,920) --------- --- ---- ------ ----- -------- -------- BALANCE, DECEMBER 31, 1998............ 4,783,892 $48 $452 95,572 $(770) $(60,467) $(60,737) ========= === ==== ====== ===== ======== ========
See accompanying notes to the consolidated financial statements. 74 36 ORBITAL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) NATURE OF OPERATIONS Organization Orbital Communications Corporation ("OCC") is a majority owned and controlled subsidiary of Orbital Sciences Corporation ("Orbital") and is included in Orbital's consolidated financial statements. In 1993, OCC and Teleglobe Mobile Partners ("Teleglobe Mobile"), a partnership established by affiliates of Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P. ("ORBCOMM"), a Delaware limited partnership, and two marketing partnerships, ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners, L.P. ("ORBCOMM International"). Each of OCC and Teleglobe Mobile is a 50% general partner in ORBCOMM, and ORBCOMM is a 98% general partner in each of the two marketing partnerships. Additionally, OCC is a 2% general partner in ORBCOMM USA, and Teleglobe Mobile is a 2% general partner in ORBCOMM International. Directly and indirectly, OCC currently holds and controls 51% and 49% of ORBCOMM USA and ORBCOMM International, respectively. Pursuant to the terms of the relevant partnership agreements: (i) OCC and Teleglobe Mobile share equal responsibility for the operational and financial affairs of ORBCOMM; (ii) OCC controls and consolidates the operational and financial affairs of ORBCOMM USA; and (iii) Teleglobe Mobile controls the operational and financial affairs of ORBCOMM International. Since OCC is unable to control, but is able to exercise significant influence over ORBCOMM's and ORBCOMM International's operating and financial policies, OCC is accounting for its investments in ORBCOMM and ORBCOMM International using the equity method of accounting. The ORBCOMM System Description ORBCOMM was formed for the design, development, construction, integration, testing and operation of the ORBCOMM low-Earth orbit satellite communications system (the "ORBCOMM System"). The ORBCOMM System comprises three operational segments: (i) a space segment consisting of a constellation of 28 LEO satellites; (ii) a ground and control segment consisting of a network control center which serves as the global control for the satellites' gateway Earth stations which send signals to and receive signals from the satellites, and (iii) a subscriber segment consisting of gateway control centers which serve as message switching systems that process the message traffic. ORBCOMM USA has been granted the exclusive right to market, sell, lease and franchise the ORBCOMM System output capacity in the U.S. and the exclusive use of the ORBCOMM System assets in the U.S. The System Charge In consideration for the construction and financing of the ORBCOMM System assets by ORBCOMM, OCC is obligated to pay ORBCOMM a system charge equal to a contracted percentage of ORBCOMM USA's total service revenues (the "Output Capacity Charge") minus a percentage of aggregate system service revenues, defined as the total of ORBCOMM USA and ORBCOMM International total system service revenues. If the Output Capacity Charge is less than 1.15% of the aggregate system service revenues as described above, OCC is not required to pay any portion of the system charge to ORBCOMM. Regulatory Status Construction and operation of communications satellites in the United States requires licenses from the Federal Communications Commission (the "FCC"). OCC has been granted full operational authority for the ORBCOMM System by the FCC. Similar licenses are required from foreign regulatory authorities to permit ORBCOMM System services to be offered outside the United States. Primary responsibility for obtaining licenses outside the United States will reside with the entities that become international licensees. 75 37 ORBITAL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Preparation of Consolidated Financial Statements The preparation of 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 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. Actual results could differ from these estimates. Certain reclassifications have been made to the 1997 and 1996 consolidated financial statements to conform to the 1998 consolidated financial statement presentation. Principles of Consolidation The consolidated financial statements include the accounts of OCC and ORBCOMM USA. All material transactions and accounts between consolidated entities have been eliminated. Revenue Recognition ORBCOMM USA provides subscriber communicator hardware to commercial customers. Revenues are recognized when products are shipped or when customers have accepted the products, depending on contractual terms. Service revenues are recognized when rendered. Income Taxes OCC is included in Orbital's consolidated Federal income tax returns. OCC determines its provision for income taxes as if it were filing on a separate return basis. OCC recognizes income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Cash and Cash Equivalents OCC considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Investments in Affiliates OCC uses the equity method of accounting for its investments in and equity in earnings (losses) of affiliates in which OCC has the ability to significantly influence, but not control such affiliate's operations. In accordance with the equity method of accounting, OCC's carrying amount of such investments is initially recorded at cost and is increased to reflect its share of the affiliates' income and is reduced to reflect its share of the affiliates' losses. OCC's investments are also increased to reflect contributions to, and decreased to reflect distributions from, each affiliate. Any excess of the amount of OCC's investment and the amount of OCC's underlying equity in each affiliate's net assets is amortized over a period of twenty years. OCC's policy is to review its long-lived assets, including investments in affiliates, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. OCC recognizes an impairment loss when the sum of expected future cash flows is less than the carrying amount of the asset. 76 38 ORBITAL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Fair Value of Financial Instruments The carrying value of OCC's current assets and current liabilities approximate fair value since all such instruments are short-term in nature. Stock Based Compensation OCC accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which requires companies to (i) recognize as expense the fair value of all stock-based awards on the date of grant, or (ii) continue to apply the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and provide pro forma net income (loss) data for employee stock option grants as if the fair-value-based method defined in SFAS 123 had been applied. OCC has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123. (3) INVESTMENTS IN AFFILIATES At December 31, 1998 and 1997, OCC had approximately $56,111,000 and $54,663,000, respectively in investments in affiliates relating to ORBCOMM. At December 31, 1998 and 1997, ORBCOMM had $346,634,000 and $316,969,000 in total assets, $241,844,000 and $210,551,000 in total liabilities and $104,790,000 and $106,418,000 of total partners' capital, respectively. The difference between OCC's investment in ORBCOMM and the amount of OCC's underlying equity in ORBCOMM is primarily due to ORBCOMM accounting for its interests in ORBCOMM USA using the equity method of accounting, while OCC consolidates its interests in ORBCOMM USA. ORBCOMM recorded $1,262,000 and $527,000 in revenues and $69,628,000 and $31,436,000 in net losses for the years ended December 31, 1998 and 1997, respectively. Based on its current assessment of the overall business prospects of the ORBCOMM partnerships and the ORBCOMM System, OCC currently believes its investments in ORBCOMM and ORBCOMM International are fully recoverable. If in the future, the ORBCOMM business is not successful, OCC may be required to expense part or all of its investments. (4) RELATED PARTY TRANSACTIONS OCC obtains virtually all of its funding for its operations and for its capital investments in ORBCOMM from Orbital via a non-interest bearing intercompany borrowing arrangement. As of December 31, 1998 and 1997, OCC owed Orbital $110,287,000 and $75,513,000, respectively, none of which is currently payable. As of December 31, 1998 and 1997 OCC owed ORBCOMM $48,000 and $12,000, respectively. ORBCOMM USA currently obtains all of its funding from ORBCOMM via a non-interest bearing intercompany borrowing arrangement. As of December 31, 1998 and 1997, ORBCOMM USA owed ORBCOMM $13,342,000 and $8,635,000, respectively, none of which is currently payable. (5) INCOME TAXES OCC had no current or deferred provision for income taxes for the years ended December 31, 1998, 1997, and 1996. 77 39 ORBITAL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) INCOME TAXES -- (CONTINUED) The differences between the actual taxes and taxes computed at the U.S. Federal income tax rate of 35% are summarized as follows:
YEARS ENDED DECEMBER 31, ------------------ 1998 1997 1996 ---- ---- ---- U.S. Federal statutory rate............................ (35%) (34%) (34%) Change in valuation allowance.......................... 35% 34% 34% ---- ---- ---- Effective rate......................................... 0% 0% 0% ==== ==== ====
The tax effects of significant temporary differences at December 31, 1998 and 1997 are as follows:
DECEMBER 31, (IN THOUSANDS) ------------------- 1998 1997 -------- -------- Deferred Tax Assets: Net operating loss carryforward and other............. $ 35,994 $ 12,127 Valuation allowance................................... (21,283) (8,119) -------- -------- Tax assets net................................ 14,711 4,008 Deferred Tax Liabilities: Book/Tax difference attributable to partnership items.............................................. (14,711) (4,008) -------- -------- Net deferred tax assets....................... $ 0 $ 0 ======== ========
OCC provides a valuation allowance against its net deferred tax assets given the trend of taxable losses in prior years. (6) COMMITMENTS AND CONTINGENCIES In August 1996, ORBCOMM and ORBCOMM Global Capital Corp. issued $170,000,000 senior unsecured notes due in 2004 (the "Notes") to institutional investors. The Notes bear interest at a fixed rate of 14% and provide for noteholder participation in future ORBCOMM service revenues. The Notes are fully and unconditionally guaranteed on a joint and several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM International. The guarantees are non-recourse to OCC's shareholders (including Orbital) and Teleglobe Mobile's partners (including Teleglobe and Technology Resources Industries Bhd.). (7) STOCK OPTION PLAN OCC adopted a stock option plan in 1992 (the "OCC Plan"). The OCC Plan provides for grants of incentive and non-qualified stock options to purchase OCC common stock to officers and employees of OCC, ORBCOMM, ORBCOMM USA, ORBCOMM International and Orbital. Under the terms of the ORBCOMM Plan, incentive stock options may not be granted at less than 100% of the fair market value at the date of grant and non-qualified options may not be granted at less than 85% of the fair market value of OCC common stock at the date of grant as determined by a committee consisting of two OCC Board members and two members appointed by Teleglobe Mobile. The options vest at a rate set forth by the Board of Directors in each individual option agreement, generally in one-fourth increments over a four-year period. Certain provisions of the OCC Plan require OCC to repurchase, with cash or promissory notes, the common stock acquired pursuant to the options. The total amount of cash for stock repurchases and promissory note repayments is restricted to $1,000,000 per year, in accordance with the terms of the Notes 78 40 ORBITAL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) STOCK OPTION PLAN -- (CONTINUED) (See Note 6). During 1998 and 1997, OCC repurchased 1,000 and 43,800 common shares by paying $41,000 and $829,000 in cash, respectively. Promissory notes totaling $331,000 were also issued in 1997. The 1997 promissory notes were repaid in 1998. These repurchases were funded by (i) reimbursements from ORBCOMM pursuant to the terms of the Restated Agreement of Limited Partnership of ORBCOMM Global, L.P. and (ii) contributions from Orbital. The following two tables summarize information regarding options under the OCC Plan for the last three years:
WEIGHTED OUTSTANDING NUMBER OPTION PRICE AVERAGE AND OF SHARES PER SHARE EXERCISE PRICE EXERCISABLE --------- --------------- -------------- ----------- OUTSTANDING AT DECEMBER 31, 1995............................ 545,900 $ 1.50 -- 14.00 $ 5.56 411,086 Granted......................... 154,500 $17.00 -- $25.00 $20.50 Exercised....................... (67,270) $ 1.50 -- $13.00 $ 2.43 Canceled or Expired............. (34,300) $ 1.50 -- $17.00 $13.81 --------- --------------- ------ OUTSTANDING AT DECEMBER 31, 1996............................ 598,830 $ 1.50 -- $25.00 $ 9.40 393,903 Granted......................... 284,500 $26.50 $26.50 Exercised....................... (20,900) $ 1.50 -- $25.00 $ 6.68 Canceled or Expired............. (112,600) $ 1.50 -- $25.00 $14.86 --------- --------------- ------ OUTSTANDING AT DECEMBER 31, 1997............................ 749,830 $ 1.50 -- $26.50 $15.22 415,804 Granted......................... 305,300 $26.50 -- $39.75 $32.37 Exercised....................... (32,600) $ 1.50 -- $13.00 $ 3.15 Canceled or Expired............. (17,700) $ 1.50 -- $26.50 $23.94 --------- --------------- ------ OUTSTANDING AT DECEMBER 31, 1998............................ 1,004,830 $ 1.50 -- $39.75 $20.40 520,864 ========= =============== ======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------ ----------------------------------- NUMBER WEIGHTED AVERAGE NUMBER RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE EXERCISE PRICES AT DEC. 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE AT DEC. 31, 1998 EXERCISE PRICE - - --------------- ---------------- ---------------- ---------------- ---------------- ---------------- $ 1.50 -- $13.00.. 345,530 4.10 $ 4.96 345,530 $ 4.96 $17.00 -- $25.00.. 77,500 7.19 $20.35 43,750 $19.97 $26.50 -- $39.75.. 581,800 8.83 $29.58 131,584 $26.50 - - --------------- --------- ---- ------ ------- ------ $ 1.50 -- $39.75.. 1,004,830 7.08 $20.40 520,864 $11.66 =============== ========= ==== ====== ======= ======
(8) STOCK BASED COMPENSATION OCC uses the Black-Scholes option-pricing model to determine the pro forma impact of stock option grants under SFAS 123 on OCC's net loss. The model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the option being valued, and requires certain assumptions, such as the expected amount of time an option will be outstanding until it is exercised or it expires, to calculate the weighted-average fair value per share of stock options granted. This information and the assumptions used in the option pricing model for 1998, 1997 and 1996 respectively, are as follows: volatility 30%; dividend yield, zero percent; average expected life, 4.5 years; risk free interest rate, 5.4%, 6.1% and 5.6%; additional shares available, 56,925, 48,878 and 20,778; and weighted-average exercise price per option grant, $32.37, $26.50 and $20.50. 79 41 ORBITAL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) STOCK BASED COMPENSATION -- (CONTINUED) Had the company determined compensation cost based on the fair value at the grant date for its stock options in accordance with the fair value method prescribed by SFAS 123, OCC's net loss would have been $36,666,000, $16,460,000 and $10,200,000 for the years ended December 31, 1998, 1997 and 1996, respectively. (9) SUBSEQUENT EVENTS For the period from January 1, 1999 through March 15, 1999, OCC paid $18,450,000 in additional capital contributions to ORBCOMM. 80 EX-21 11 SUBSIDIARIES OF THE COMPANY 1 Exhibit 21 ================================================================================ SUBSIDIARIES ================================================================================ ORBITAL SCIENCES CORPORATION ORBITAL COMMUNICATIONS CORPORATION ORBITAL SERVICES CORPORATION ORBITAL COMMERCIAL SYSTEMS, INC. ORBITAL INTERNATIONAL, INC. ORBITAL INTERNATIONAL SERVICES, INC. ORBITAL SPACE SYSTEMS, INC. ORBLINK LLC ENGINEERING TECHNOLOGIES, INC ORBITAL IMAGING CORPORATION MACDONALD, DETTWILER AND ASSOCIATES, LTD. ACCESS BC INFORMATION SERVICES, LTD. MACDONALD DETTWILER INFORMATION SERVICES, LTD. MACDONALD DETTWILER SERVICES, LTD. MACDONALD DETTWILER HOLDINGS, INC. MACDONALD DETTWILER TECHNOLOGIES LTD. MACDONALD DETTWILER PTY. LTD. MACDONALD DETTWILER TECHNOLOGIES INC. MACDONALD DETTWILER LIMITED TRIATHLON MAPPING CORP. NIES MAPPING GROUP, INC. EARTH OBSERVATION SCIENCES LIMITED IOTEK INCORPORATED MAGELLAN CORPORATION MAGELLAN DIS, INC. MAGELLAN SISTEMAS DE MEXICO MAGELLAN FOREIGN SALES CORPORATION ASHTECH USVI ASHTECH EUROPE LTD ASHTECH A/O 2 ================================================================================ SUBSIDIARIES (CONTINUED) ================================================================================ ORBCOMM GLOBAL, L.P. ORBCOMM USA L.P. ORBCOMM INTERNATIONAL PARTNERS, L.P. DOLPHIN INFORMATION SERVICES, INC DOLPHIN SOFTWARE SERVICES ULC ORBCOMM CORPORATION ORBCOMM GLOBAL CAPITAL CORP EX-23.1 12 CONSENT OF KPMG LLP 1 Exhibit 23.1 Accountants' Consent The Board of Directors Orbital Sciences Corporation: We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 33-84296, 33-62277, 33-64517, 333-53585, 333-69887, 333-69885, and 333-27999) and Form S-3 (No. 33-42271) of Orbital Sciences Corporation of our reports dated February 16, 1999, except as to note 12, which is as of March 18, 1999, relating to the consolidated balance sheets of Orbital Sciences Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, and the related consolidated financial statement schedule, and our report dated March 30, 1999 relating to the balance sheets of ORBCOMM Global, L.P. (a development stage enterprise) as of December 31, 1998 and 1997, and the related statements of income and expenses, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1998, and for the period from June 30, 1993 (inception) to December 31, 1998, which reports appear in the December 31, 1998, annual report on Form 10-K of Orbital Sciences Corporation. KPMG LLP McLean, Virginia March 30, 1999 EX-27 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AT AND FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000820736 ORBITAL SCIENCES CORP /DE/ 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 23,021 2,665 226,979 (21,570) 64,710 314,057 260,525 (103,450) 972,738 250,727 181,281 0 0 370 510,203 972,738 734,277 734,277 546,721 546,721 0 2,699 3,982 (1,829) 4,543 (6,372) 0 0 0 (6,372) (0.18) (0.18)
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