<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 8-K/A
CURRENT REPORT
AMENDMENT NO. 2
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 7, 1999
--------------------------
ORBITAL SCIENCES CORPORATION
DELAWARE 0-18287 06-1209561
(State of incorporation) (Commission File Number) (I.R.S. Employer I.D. No.)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166
(703) 406-5000
(Address and telephone number
of principal executive offices)
================================================================================
<PAGE> 2
EXPLANATORY NOTE:
Orbital Sciences Corporation ("Orbital") hereby amends and restates in
its entirety Item 7 of Orbital's Current Report on Form 8-K dated May 7, 1999
and filed with the Securities and Exchange Commission on May 24, 1999 as
follows:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired (filed herewith)
(i) Combined Financial Statements of Robotics Division of Spar
Aerospace Limited and Spar Operations & Engineering
Corporation, together with Independent Auditors' Report, as
of December 31, 1998 and 1997 and for each of the years in
the two-year period ended December 31, 1998; and
(b) Pro Forma Financial Information (filed herewith)
(i) As of and for the three-month period ended March 31, 1999;
and
(ii) For the year ended December 31, 1998.
(c) Exhibits. The following exhibits were previously filed as part of
this report:
10.1 Asset Acquisition Agreement dated as of March 18, 1999
between MacDonald Dettwiler and Associates Ltd ("MDA") and
Spar Aerospace Limited ("Spar").
10.2 Promissory Note dated May 7, 1999 from MacDonald, Dettwiler
Space and Advanced Robotics Ltd. in favor of Spar.
10.3 Guaranty dated May 7, 1999 from Orbital Sciences Corporation
and MDA in favor of Spar.
The following exhibit is filed herewith:
23.2 Consent of Ernst & Young, LLP
<PAGE> 3
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORBITAL SCIENCES CORPORATION
Date: July 21, 1999 By: /s/ Jeffrey V. Pirone
----------------------------------
Jeffrey V. Pirone
Executive Vice President and
Chief Financial Officer
<PAGE> 4
COMBINED FINANCIAL STATEMENTS
ROBOTICS DIVISION OF SPAR
AEROSPACE LIMITED AND
SPAR OPERATIONS &
ENGINEERING
CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
DECEMBER 31, 1998 AND 1997
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Orbital Sciences Corporation
We have audited the accompanying combined balance sheets of the ROBOTICS
DIVISION OF SPAR AEROSPACE LIMITED AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited] [collectively, the
"Division"] as of December 31, 1998 and 1997 and the related combined statements
of income and net investment by Spar Aerospace Limited and cash flows for the
years then ended. These financial statements are the responsibility of the
management of Spar Aerospace Limited and the Division's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform an 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, these combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Division as of December 31, 1998 and 1997 and the combined results of its
operations and its combined statements of cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
As disclosed in note 1 to the combined financial statements, the Robotics
Division is a component of Spar Aerospace Limited and has no separate legal
status or existence. Transactions with other divisions and affiliates of Spar
Aerospace Limited are described in note 9 to the combined financial statements.
Toronto, Canada,
June 25, 1999. Ernst & Young, LLP
Chartered Accountants
<PAGE> 6
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
COMBINED BALANCE SHEETS
[See basis of presentation - note 1]
<TABLE>
<CAPTION>
As of December 31
1998 1997
$ $
- ----------------------------------------------------------------------------------------------
[Cdn. $000's]
<S> <C> <C>
ASSETS
CURRENT
Cash -- 187
Accounts receivable [notes 3 and 11] 38,437 24,443
Work-in-process 336 158
Prepaid expenses 259 299
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 39,032 25,087
- ----------------------------------------------------------------------------------------------
Capital assets, net [note 4] 8,750 6,507
Investment in Radarsat International Inc. (298) (298)
- ----------------------------------------------------------------------------------------------
47,484 31,296
==============================================================================================
LIABILITIES AND NET INVESTMENT BY
SPAR AEROSPACE LIMITED
CURRENT
Overdraft 47 --
Accounts payable 10,921 4,484
Accrued liabilities 5,520 6,437
Customer advance payments and unearned revenue 20,166 2,899
Warranty provision and other 3,058 1,300
Deferred income taxes [note 6] 240 2,174
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 39,952 17,294
- ----------------------------------------------------------------------------------------------
Long-term liabilities [note 5] 19,500 34,500
- ----------------------------------------------------------------------------------------------
Commitments and contingencies [note 8]
NET INVESTMENT BY SPAR AEROSPACE LIMITED [note 7] (11,968) (20,498)
- ----------------------------------------------------------------------------------------------
47,484 31,296
==============================================================================================
</TABLE>
See accompanying notes
<PAGE> 7
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
COMBINED STATEMENTS OF INCOME AND NET INVESTMENT
BY SPAR AEROSPACE LIMITED
<TABLE>
<CAPTION>
Years ended December 31
1998 1997
$ $
- --------------------------------------------------------------------------------------------------------
[Cdn. $000's]
<S> <C> <C>
REVENUES [notes 9 and 11] 128,036 106,572
Cost of revenues [notes 8 and 10] 102,532 76,196
- --------------------------------------------------------------------------------------------------------
25,504 30,376
- --------------------------------------------------------------------------------------------------------
EXPENSES
Administrative and selling [note 9] 7,818 10,547
Research and development costs [note 10] 1,920 3,164
Depreciation 2,388 2,242
Restructuring recovery [note 5] (13,000) --
Other 9 --
- --------------------------------------------------------------------------------------------------------
(865) 15,953
- --------------------------------------------------------------------------------------------------------
Income before the following 26,369 14,423
- --------------------------------------------------------------------------------------------------------
Interest and other income 2 --
Foreign exchange gain (loss) 6 (4)
- --------------------------------------------------------------------------------------------------------
Income before income taxes 26,377 14,419
Provision for income taxes [note 6] 4,550 4,948
- --------------------------------------------------------------------------------------------------------
NET INCOME FOR THE YEAR 21,827 9,471
Net investment by Spar Aerospace Limited, beginning of year (20,498) (13,660)
Additional investment by Spar Aerospace Limited (13,297) (16,309)
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT BY SPAR AEROSPACE LIMITED, END OF YEAR (11,968) (20,498)
========================================================================================================
</TABLE>
See accompanying notes
<PAGE> 8
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31
1998 1997
$ $
- --------------------------------------------------------------------------------------------------------
[Cdn. $000's]
<S> <C> <C>
OPERATING ACTIVITIES
Net income for the year 21,827 9,471
Add (deduct) items not involving cash
Depreciation 2,388 2,242
Deferred income taxes (1,934) (174)
Restructuring recovery (13,000) --
- --------------------------------------------------------------------------------------------------------
9,281 11,539
Net change in non-cash working capital balances [note 13] 10,413 6,530
- --------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 19,694 18,069
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (4,631) (2,036)
Increase in investment in Radarsat International Inc. -- 405
- --------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (4,631) (1,631)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Investment by Spar Aerospace Limited (13,297) (16,309)
Decrease in long-term liabilities (2,000) (500)
- --------------------------------------------------------------------------------------------------------
CASH USED IN FINANCING ACTIVITIES (15,297) (16,809)
- --------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH DURING THE YEAR (234) (371)
Cash, beginning of year 187 558
- --------------------------------------------------------------------------------------------------------
CASH (OVERDRAFT), END OF YEAR (47) 187
========================================================================================================
</TABLE>
See accompanying notes
<PAGE> 9
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
NOTES TO COMBINED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars]
December 31, 1998 and 1997
1. BASIS OF PRESENTATION
[a] The Robotics Division of Spar Aerospace Limited and Spar Operations &
Engineering Corporation carry on the business of the design, assembly,
manufacture, marketing and support of robotic systems for space and
entertainment applications.
[b] The accompanying financial statements combine the accounts of the
Robotics Division of Spar Aerospace Limited and Spar Operations &
Engineering Corporation [a wholly-owned subsidiary of Spar Aerospace
Limited] [collectively, the "Division"] and have been prepared by
management in accordance with accounting principles generally accepted
in the United States ["U.S. GAAP"] for purposes of the acquisition
described in note 14. All significant inter-company transactions and
balances have been eliminated upon combination. Certain expenses which
were previously incurred by Spar Aerospace Limited on behalf of the
Division have been reflected in these combined financial statements as
if the Division had been a separate legal entity [note 9].
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue is accrued using the percentage-of-completion method relative to total
costs incurred as the work is performed. A provision is made for the total
anticipated loss when the estimate of total costs on a contract indicates a
loss. Revisions to cost and profit estimates during the course of the work are
reflected in the period in which the need for the revisions becomes known. Some
contracts contain incentive and/or penalty provisions based on performance
relative to established targets. Such awards or penalties are included in
revenues or cost estimates when amounts can be reasonably determined.
Provisions for potential warranty claims are provided for at the time revenues
are recognized based on warranty terms and claims experience.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
1
<PAGE> 10
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
NOTES TO COMBINED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars]
December 31, 1998 and 1997
WORK-IN-PROCESS
Work-in-process is valued at the lower of cost of components, purchased parts,
direct labour plus an applicable share of overhead expenses properly chargeable
to production or net realizable value.
CAPITAL ASSETS
Capital assets are stated at cost less accumulated depreciation. Depreciation is
provided using the straight-line method to amortize the cost of the assets over
their estimated useful lives as follows:
Leasehold improvements over term of the lease
Machinery and equipment 10% - 33 1/3%
Computer equipment 33 1/3%
INVESTMENT IN RADARSAT INTERNATIONAL INC.
The Division exercises significant influence but not control of its investment
in Radarsat International Inc. ["Radarsat"] and therefore accounts for its
investment using the equity method of accounting. Losses from operations have
been recorded as a reduction to the investment. As of December 31, 1998 Spar
Aerospace Limited has provided a guarantee for bank indebtedness of $298,000
[1997 - $298,000].
INCOME TAXES
The Division accounts for income taxes by the liability method under SFAS 109.
Under this 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. Deferred tax
assets and liabilities are measured using enacted tax rates expected to be
applied 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. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
The Robotics Division of Spar Aerospace Limited's operations are included in
Spar Aerospace Limited's income tax return. Spar Aerospace Limited's income tax
provision has been allocated to the Robotics Division as if the Robotics
Division filed separate income tax returns. As there has been no formal tax
sharing arrangement between Spar Aerospace Limited and the Robotics Division,
the Division's current income tax liability has been reflected as an adjustment
to net investment by Spar Aerospace Limited. Spar Operations and Engineering
Corporation's current income tax liability has been reflected as income taxes
payable.
EMPLOYEES' POST RETIREMENT COSTS AND OBLIGATIONS
Employees of the Division are members of various defined benefit pension plans.
Pension costs are recognized on an as funded basis.
2
<PAGE> 11
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
NOTES TO COMBINED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars]
December 31, 1998 and 1997
The Division provides certain health care, dental care and life insurance
benefits to eligible retirees and their dependents pursuant to such plans
materialized by Spar Aerospace Limited. The cost of providing these benefits is
expensed as incurred.
FOREIGN CURRENCY EXCHANGE
Transactions denominated in foreign currencies are translated into Canadian
dollars at the approximate prevailing rate at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are translated
at rates prevailing at the period end and the resulting foreign exchange gains
and losses are recorded in income in the period incurred. Non-monetary assets
and liabilities and related revenue and expense items are translated at
historical rates in the period incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, overdraft and accounts payable and accrued
liabilities reported in the combined balance sheets approximate their fair value
given the relatively short periods to maturity of these instruments.
USE OF ESTIMATES
The preparation of these combined financial statements requires management's
best estimates related to events whose outcome will not be fully resolved until
future periods. The Division's revenues are derived primarily from long-term
fixed price contracts, some of which are subject to significant technology risk.
The preparation of these combined financial statements is based on management's
estimates of revenues and the costs required to complete the projects. These
estimates are subject to periodic adjustment and these adjustments could have a
material impact on income. Revenues under such contracts may include incentive
payments for specialized performance and costs may include performance-related
penalties.
3
<PAGE> 12
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
NOTES TO COMBINED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars]
December 31, 1998 and 1997
PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ["FASB"] has issued SFAS 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133 was
initially to be effective for financial statements for fiscal years beginning
after June 15, 1999. On May 19, 1999, FASB voted to delay the effective date of
SFAS 133 by one year. SFAS 133 is expected to have no impact on the Division.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
1998 1997
$ $
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables, net 21,371 12,313
Customer holdbacks 1,416 2,872
Contract costs and profit margin in excess of billings 15,650 9,258
- --------------------------------------------------------------------------------------------
38,437 24,443
============================================================================================
</TABLE>
The allowance for doubtful accounts was nil in 1998 and 1997.
Customer holdbacks amounting to $1,046,000 as of December 31, 1998 [1997 -
$2,169,000] are anticipated to be received in 1999 through 2005 [1997 - 1998
through 2005].
4
<PAGE> 13
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
NOTES TO COMBINED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars]
December 31, 1998 and 1997
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
Capital assets consist of the following:
1998
-----------------------------------------------
NET
ACCUMULATED BOOK
COST DEPRECIATION VALUE
$ $ $
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Leasehold improvements 6,081 4,218 1,863
Machinery and equipment 13,867 11,775 2,092
Computer equipment 20,798 16,003 4,795
- ------------------------------------------------------------------------------------------
40,746 31,996 8,750
==========================================================================================
<CAPTION>
1997
-----------------------------------------------
NET
ACCUMULATED BOOK
COST DEPRECIATION VALUE
$ $ $
- ------------------------------------------------------------------------------------------
Leasehold improvements 5,720 3,550 2,170
Machinery and equipment 13,630 11,411 2,219
Computer equipment 16,765 14,647 2,118
- ------------------------------------------------------------------------------------------
36,115 29,608 6,507
==========================================================================================
</TABLE>
5. LONG-TERM LIABILITIES
In 1996, the Division recorded a $35,000,000 provision for future committed
costs of excess space at the Division's leased facility in Brampton, Ontario, of
which $32,500,000 was classified as a non-current liability.
In 1998, the Division recorded a $13,000,000 recovery representing a partial
recovery of the $35,000,000 restructuring provision recorded in 1996 for
estimated future committed costs of excess space at the Division's leased
facility in Brampton, Ontario. The recovery is due to the configuration of the
Division's Robotics business which requires more workspace than previously
estimated.
5
<PAGE> 14
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
NOTES TO COMBINED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars]
December 31, 1998 and 1997
6. INCOME TAXES
For the years ended December 31, 1998 and 1997, the Division has computed its
income taxes in accordance with the provisions of SFAS 109 as if it had been
operating as a stand-alone entity. The significant components of the provision
for income taxes include the following:
<TABLE>
<CAPTION>
1998 1997
$ $
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Current 6,484 5,122
Deferred (reduction) (1,934) (174)
- ------------------------------------------------------------------------------------------
Provision for income taxes 4,550 4,948
==========================================================================================
Income taxes differ from the amounts computed by applying the Canadian federal
and provincial income tax rate of 45% to income before income taxes as a result
of the following:
1998 1997
$ $
- ------------------------------------------------------------------------------------------
Income taxes at Canadian statutory income tax rate of 45% 11,870 6,489
Manufacturing and processing deduction (1,325) (1,398)
Permanent differences (5,995) (143)
- ------------------------------------------------------------------------------------------
Provision for income taxes 4,550 4,948
==========================================================================================
The tax effects of temporary differences that give rise to significant
components of the deferred tax assets and liabilities include the following:
1998 1997
$ $
- ------------------------------------------------------------------------------------------
Deferred tax assets:
Non-deductible provisions 1,346 383
Deferred revenue on long-term contracts 245 --
Deferred tax liabilities:
Deferred revenue on long-term contracts -- (1,070)
Investment tax credits (1,244) (1,008)
Capital assets (587) (479)
- ------------------------------------------------------------------------------------------
Net deferred tax liability (240) (2,174)
==========================================================================================
</TABLE>
6
<PAGE> 15
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
NOTES TO COMBINED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars]
December 31, 1998 and 1997
7. NET INVESTMENT BY SPAR AEROSPACE LIMITED
Because the Division's operations are conducted as a division of Spar Aerospace
Limited, and not as a distinct legal entity, there are no capital accounts for
the Division. The Division's operations are funded out of operating cash flows
and by Spar Aerospace Limited. Operating cash flows and funds provided by Spar
Aerospace Limited are reflected in the net investment by Spar Aerospace Limited
account. Funds provided by Spar Aerospace Limited represent a significant source
of funding which, if the Division had been a stand-alone entity, would have been
financed at fair market rates of interest. No interest expense has been charged
by Spar Aerospace Limited and, accordingly, the accompanying combined financial
statements do not reflect interest expense that would otherwise be incurred if
the Division had borrowed money as a stand-alone entity.
Transactions and other charges and credits between the Division and Spar
Aerospace Limited are described in note 9.
8. COMMITMENTS AND CONTINGENCIES
[a] CONTINGENT LIABILITY
In prior years, the Division received assistance under the Government of
Canada's former Defense Industry Productivity Program. As a result, revenue -
based royalties may be repayable in future years. The repayment is program
specific and is calculated based on 1 - 2% of revenues over the first ten years
the Division generates sales. No amounts have been paid to date. As of December
31, 1998 and 1997, no amount has been accrued.
7
<PAGE> 16
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
NOTES TO COMBINED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars]
December 31, 1998 and 1997
[b] LEASE COMMITMENTS
The future minimum annual lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
$
- ------------------------------------------------------------------------
<S> <C>
1999 3,798
2000 3,890
2001 3,890
2002 3,890
2003 3,890
Thereafter 31,296
- ------------------------------------------------------------------------
50,654
========================================================================
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Division provides certain administrative services and information support
systems to the corporate office and other divisions and affiliates of Spar
Aerospace Limited. Administrative and selling expenses are net of recoveries in
the amount of $1,428,000 [1997 - $2,299,022] and cost of revenues include
reserves in the amount of $3,792,000 [1997 - $3,979,000] from Spar Aerospace
Limited for such services. The corporate office and other divisions and
affiliates of Spar Aerospace Limited incur on behalf of its business units
certain costs for insurance, legal and other services. The amount allocated to
the Division and included in administrative and selling expenses amounted to
$900,000 [1997 - $850,000]. These transactions have been recorded at their
exchange amounts.
The Division also uses engineering services provided by Spar Aerospace Limited's
Space Systems and Products Division. Costs in the amount of $28,649,000 [1997 -
$19,192,000] relating to these services are included in cost of revenues and are
based on cost plus 5% mark-up for general and administrative costs plus a 4% to
12% fee. These transactions have been recorded at their exchange amounts.
Division management believes that the methodologies used to allocate and charge
intercompany costs to the Division are reasonable.
No interest expense has been charged by Spar Aerospace Limited on its net
investment and accordingly the accompanying combined financial statements do not
reflect interest expense that would otherwise be incurred if the Division had
borrowed money as a stand-alone entity.
10. INVESTMENT TAX CREDITS
Investment tax credits earned during the year have been applied to reduce the
cost of revenues by $3,000,000 [1997 - $1,900,000] and research and development
costs by $3,000,000 [1997 - $1,900,000].
8
<PAGE> 17
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
NOTES TO COMBINED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars]
December 31, 1998 and 1997
11. REVENUE AND ACCOUNTS RECEIVABLE RISK
CONCENTRATION
The Division derived 84% of its revenue for 1998 and 1997, directly or
indirectly from contracts with the Canadian government.
The Division has 31% and 61% receivable from one significant customers as of
December 31, 1998 and 1997, respectively.
12. GEOGRAPHIC SALES INFORMATION
The table below provides information pertaining to the Division's revenues by
geographic area:
<TABLE>
<CAPTION>
1998 1997
$ $
- -------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Canada 111,980 94,152
United States 13,724 8,237
Other 2,332 4,183
- -------------------------------------------------------------------------------
128,036 106,572
===============================================================================
</TABLE>
9
<PAGE> 18
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
NOTES TO COMBINED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars]
December 31, 1998 and 1997
13. STATEMENTS OF CASH FLOWS
The net change in non-cash working capital balances related to operations
consists of the following:
<TABLE>
<CAPTION>
1998 1997
$ $
- --------------------------------------------------------------------------------------
<S> <C> <C>
Accounts receivable (13,994) 5,912
Work-in-process (178) (58)
Prepaid expenses 40 6
Accounts payable 6,437 (516)
Accrued liabilities (917) 2,687
Customer advance payments and unearned revenue 17,267 (301)
Warranty provision and other 1,758 (1,200)
- --------------------------------------------------------------------------------------
10,413 6,530
======================================================================================
</TABLE>
14. SUBSEQUENT EVENTS
Pursuant to an asset purchase agreement dated March 18, 1999, MacDonald,
Dettwiler and Associates Ltd. ["MDA"] closed the purchase from Spar Aerospace
Limited on May 7, 1999, of the Division as described in note 1[b] for total
proceeds of approximately $63.0 million subject to post closing adjustments
based on net asset balances.
Effective January 29, 1999, EMS Technologies, Inc. "EMS" purchased the Space
Systems and Products Division of Spar Aerospace Limited. In connection with this
agreement, EMS agreed to provide engineering services for certain contracts held
by the Division at cost plus a 5% mark-up for general and administrative costs
plus a 4% to 12% fee.
EMS and MDA have also agreed to share the costs, 2/3 and 1/3 respectively,
required to complete the implementation of the Enterprise Resource Planning
system being implemented by the Division and EMS.
15. YEAR 2000 ISSUE [UNAUDITED]
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Division's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Division determined that it will be required
to modify or replace significant portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Division presently believes that with modifications to existing
software and conversions to new software, the Year 2000 Issue will not pose
10
<PAGE> 19
ROBOTICS DIVISION OF SPAR AEROSPACE LIMITED
AND SPAR OPERATIONS & ENGINEERING CORPORATION
[a wholly-owned subsidiary of Spar Aerospace Limited]
NOTES TO COMBINED FINANCIAL STATEMENTS
[Tabular amounts in thousands of Canadian dollars]
December 31, 1998 and 1997
significant operational problems for its computer system. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Division.
The Division has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Division's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. The Division's total year 2000 project cost and
estimates to complete include the estimated costs and time associated with the
impact of third party Year 2000 Issues based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Division's systems rely will be timely converted and would not have an
adverse effect on the Division's systems. The Division has determined it has no
exposure to contingencies related to the Year 2000 Issue for the products it has
sold.
The Division will utilize both internal and external resources to reprogram, or
replace, and test the software for Year 2000 modifications. The Division
anticipates completing the Year 2000 project no later than October 1999, which
is prior to any anticipated impact on its operating systems. The total cost of
the Year 2000 project is estimated at $6.9 million and is being funded through
operating cash flows. Of the total project cost, approximately $4.9 million is
attributable to the purchase of new software which will be capitalized. The
remaining $2.0 million, which will be expensed as incurred, is not expected to
have a material effect on the results of operations. To date, the Division has
incurred approximately $5.3 million ($1.2 million expensed and $4.1 million
capitalized for new systems), related to the assessment of, and preliminary
efforts on, its Year 2000 project and the development of a modification plan
purchase of new systems and systems modifications.
The costs of the project and the date on which the Division believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
11
<PAGE> 20
ORBITAL SCIENCES CORPORATION
PRO FORMA FINANCIAL INFORMATION
On May 7, 1999, MacDonald, Dettwiler and Associates Ltd. ("MDA"), a
wholly owned subsidiary of Orbital Sciences Corporation ("Orbital"), purchased
all the assets, including the stock of certain subsidiaries, and assumed certain
liabilities relating to the space robotics business (the "Robotics Division") of
Spar Aerospace Inc. ("SPAR") for approximately $43,000,000.
The following pro forma financial information consists of the unaudited
pro forma condensed consolidated statements of operations for the three months
ended March 31, 1999 and the year ended December 31, 1998 and the unaudited pro
forma condensed consolidated balance sheet as of March 31, 1999.
The unaudited pro forma condensed consolidated balance sheet gives effect
to the acquisition as if it occurred on March 31, 1999. The Robotics Division's
balances as of March 31, 1999 were converted from Canadian dollars to U.S.
dollars using the exchange rate on that date of 1.51. The unaudited pro forma
condensed consolidated statements of operations for the three months ended March
31, 1999 and for the year ended December 31, 1998 give effect to the acquisition
as if it occurred on January 1, 1998. The Robotics Division's results of
operations for the three months ended March 31, 1999 and year ended December 31,
1999 were converted from Canadian dollars to U.S. dollars using the average
exchange rates during the periods of 1.51 and 1.48, respectively.
The acquisition will be accounted for as a purchase transaction in
accordance with generally accepted accounting principles. Accordingly, the
purchase price has been allocated to assets and liabilities acquired from SPAR
based on preliminary estimates of their fair values. The final allocation of
purchase price will be adjusted during the year following closing of the
acquisition as appraisals and other studies are completed.
The following unaudited pro forma financial information does not purport
to represent what Orbital's consolidated financial position or results of
operations would actually have been had the acquisition occurred on March 31,
1999 or January 1, 1998 or to project Orbital's consolidated financial position
or results of operations for any future date or periods indicated. The unaudited
pro forma information should be read in conjunction with the financial
statements of Orbital and Robotics Division and the related notes thereto.
Certain reclassifications have been made to the historical Robotics
Division financial information to conform to the presentation of the historical
Orbital financial statement presentation.
<PAGE> 21
ORBITAL SCIENCES CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(THOUSANDS)
<TABLE>
<CAPTION>
Historical
Orbital Sciences Historical Pro Forma Pro Forma
Corporation Robotics Division Adjustments Results
----------------- ----------------- ------------- -------------
ASSETS
------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,856 $ - $ (10,855)(1) $ 3,001
Restricted cash and short-term investments, at market 7,387 - - 7,387
Receivables, net 278,039 29,894 - 307,933
Inventories, net 66,419 17 - 66,436
Deferred income taxes and other assets 14,412 322 - 14,734
--------------- --------------- -------------- -------------
TOTAL CURRENT ASSETS 380,113 30,233 (10,855) 399,491
PROPERTY, PLANT AND EQUIPMENT, NET 164,482 5,945 - 170,427
INVESTMENTS IN AND ADVANCES TO AFFILIATES, NET 253,734 (197) 1,986 (2) 255,523
EXCESS OF PURCHASE PRICE OVER
NET ASSETS ACQUIRED, NET 228,486 - 52,434 (8) 280,920
DEFERRED INCOME TAXES AND OTHER ASSETS 29,639 - 29,639
--------------- --------------- -------------- -------------
TOTAL ASSETS $ 1,056,454 $ 35,981 $ 43,565 $ 1,136,000
=============== =============== ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings and current portion of
long-term obligations $ 26,098 $ - $ 20,843 (1) $ 46,941
Accounts payable 74,139 6,188 - 80,327
Accrued expenses 103,122 7,457 5,712 (3) 117,086
795 (4)
Deferred revenues 116,550 19,001 135,551
--------------- --------------- -------------- -------------
TOTAL CURRENT LIABILITIES 319,909 32,646 27,350 379,905
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION 225,091 - 10,000 (1) 235,091
OTHER LIABILITIES 1,205 12,662 662 (5) 10,755
(3,774)(6)
--------------- --------------- -------------- -------------
TOTAL LIABILITIES 546,205 45,308 34,238 625,751
NON-CONTROLLING INTERESTS IN
NET ASSETS OF CONSOLIDATED SUBSIDIARIES 13,113 - - 13,113
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock -- -- - --
Common Stock 372 - - 372
Additional paid-in capital 492,647 (9,327) 9,327 (7) 492,647
Cumulative translation adjustment (6,900) - - (6,900)
Retained earnings 11,017 - - 11,017
--------------- --------------- -------------- -------------
TOTAL STOCKHOLDERS' EQUITY 497,136 (9,327) 9,327 497,136
--------------- --------------- -------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,056,454 $ 35,981 $ 43,565 $ 1,136,000
=============== =============== ============== =============
</TABLE>
See Accompanying Notes to the Unaudited Pro Forma Consensed Consolidated
Financial Information (Pro Forma Adjustments - Balance Sheet)
<PAGE> 22
ORBITAL SCIENCES CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Historical
Orbital Sciences Historical Pro Forma Pro Forma
Corporation Robotics Division Adjustments Results
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
REVENUES $ 204,338 $ 16,230 $ - $ 220,568
COSTS OF GOODS SOLD 158,027 12,644 79 (2) 170,275
(475) (3)
----------------- ---------------- ----------------- ----------------
GROSS PROFIT 46,311 3,586 396 50,293
RESEARCH AND DEVELOPMENT EXPENSES 10,002 287 - 10,289
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 29,813 1,532 - 31,345
AMORTIZATION OF EXCESS OF PURCHASE PRICE OVER
NET ASSETS ACQUIRED 2,860 - 437 (1) 3,297
----------------- ---------------- ----------------- ----------------
INCOME FROM OPERATIONS 3,636 1,767 (41) 5,362
NET INVESTMENT INCOME (EXPENSE) (1,088) (5) (617) (4) (1,710)
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES (20,600) - - (20,600)
NON-CONTROLLING INTERESTS IN (EARNINGS) LOSSES
OF CONSOLIDATED SUBSIDIARIES 3,479 - - 3,479
----------------- ---------------- ----------------- ----------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (14,573) 1,762 (658) (13,469)
PROVISION FOR INCOME TAXES 1,298 705 (263) (5) 1,740
----------------- ---------------- ----------------- ----------------
NET INCOME (LOSS) $ (15,871) $ 1,057 $ (395) $ (15,209)
================= ================ ================= ================
NET INCOME (LOSS) PER COMMON SHARE $ (0.43) $ (0.41)
SHARES USED IN COMPUTING NET INCOME (LOSS)
PER COMMON SHARE 37,138,029 37,138,029
================= ================
</TABLE>
See Accompanying Notes to the Unaudited Pro Forma Consensed Consolidated
Financial Information (Pro Forma Adjustments - Statements of Operations)
<PAGE> 23
ORBITAL SCIENCES CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Historical
Orbital Sciences Historical Pro Forma Pro Forma
Corporation Robotics Division Adjustments Results
------------ ---------------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES $ 734,277 $ 86,511 $ - $ 820,788
COSTS OF GOODS SOLD 546,721 69,278 314 (7) 614,417
(1,896)(8)
------------ ------------ ----------- ------------
GROSS PROFIT 187,556 17,233 1,582 206,371
RESEARCH AND DEVELOPMENT EXPENSES 44,597 1,297 - 45,894
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 109,727 6,902 - 116,629
AMORTIZATION OF EXCESS OF PURCHASE PRICE OVER
NET ASSETS ACQUIRED 7,939 - 1,747 (6) 9,686
RESTRUCTURING RECOVERY - (8,784) 8,784 (7) -
------------ ------------ ----------- ------------
INCOME FROM OPERATIONS 25,293 17,818 (8,949) 34,162
NET INVESTMENT INCOME (EXPENSE) 2,567 5 (2,468)(9) 104
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES (45,092) - - (45,092)
NON-CONTROLLING INTERESTS IN (EARNINGS) LOSSES
OF CONSOLIDATED SUBSIDIARIES 10,610 - - 10,610
GAIN ON SALE OF SUBSIDIARY EQUITY 4,793 4,793
------------ ------------ ----------- ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (1,829) 17,823 (11,417) 4,577
PROVISION FOR INCOME TAXES 4,543 3,074 (895)(10) 6,722
------------ ------------ ----------- ------------
NET INCOME (LOSS) $ (6,372) $ 14,749 $ (10,522) $ (2,145)
============ ============ =========== ============
NET INCOME (LOSS) PER COMMON SHARE $ (0.18) $ (0.06)
SHARES USED IN COMPUTING NET INCOME (LOSS)
PER COMMON SHARE 35,624,888 35,624,888
============ ============
</TABLE>
See Accompanying Notes to the Unaudited Pro Forma Consensed Consolidated
Financial Information (Pro Forma Adjustments - Statements of Operations)
<PAGE> 24
ORBITAL SCIENCES CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN 000'S)
The acquisition has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to assets
acquired and liabilities assumed from SPAR based on preliminary estimates of
their fair value. The final allocation of purchase price will be determined
during the year following closing of the acquisition as appraisals and other
studies are completed. As a result of the final allocation, a portion of the
purchase price may be allocated to other identified tangible and intangible
assets and liabilities, which may have estimated useful lives different than the
thirty year estimated useful life used for the excess of the purchase price over
net assets acquired. Accordingly, actual amortization expense may differ
materially from the amounts included in the unaudited pro forma condensed
consolidated statements of operations.
PRO FORMA ADJUSTMENTS - BALANCE SHEET
The following adjustments have been reflected in the March 31, 1999
unaudited pro forma condensed consolidated balance sheet to reflect the impact
of the acquisition as if it had closed on March 31, 1999:
1) The purchase price consisted of $20,855 in cash and a one-year note
payable to SPAR for $20,843 bearing interest at 8%. The note was recorded
as short-term debt. Orbital funded the cash due at closing with $10,855
in cash on hand and $10,000 drawn from the company's primary credit
facility, which was recorded as long-term debt.
2) To record the fair value of Robotic's investment in Radarsat
International, Ltd.
3) To adjust long-term contract commitments to fair value based on contract
values remaining and estimated costs to complete.
4) To accrue for estimated transaction fees, including legal, accounting and
investment banking fees paid to third parties.
5) The Robotics Division historically participated in SPAR's defined benefit
plans and post-retirement health benefit plan. Subsequent to the
acquisition, the Robotics Division will adopt separate plans for its
employees, giving credit for length of service under SPAR's prior plans.
This adjustment remeasures the projected benefit obligations and fair
value of plan assets and records the net liabilities associated with the
defined benefit and post-retirement health plans.
6) At March 31, 1999, the Robotics Division had a $12,662 unfavorable lease
restructuring reserve on its balance sheet that was initially established
in 1996. This adjustment remeasures the unfavorable lease commitment as
of March 31, 1999, reducing the balance by $3,744 to its estimated fair
value.
7) To reverse the net deficit of assets over liabilities.
8) To record the excess of purchase price over the estimated fair value of
the assets acquired and liabilities assumed.
<PAGE> 25
ORBITAL SCIENCES CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN 000'S)
PRO FORMA ADJUSTMENTS - STATEMENTS OF OPERATIONS
The following adjustments have been reflected in the unaudited pro forma
condensed consolidated statement of operations for the three months ended March
31, 1999 to reflect the impact of the acquisition as if it had closed on January
1, 1998:
1) We anticipate that goodwill will be amortized on a straight-line basis
over thirty years, however the final amortization period will be
determined as appraisals and other studies are completed. This
adjustment records three months of amortization expense based on
a thirty-year amortization period.
2) This adjustment records three months of amortization for the reduction to
the unfavorable lease commitment.
3) The unfavorable long-term contract commitments will be amortized as work
is completed on the underlying contracts. This adjustment reduces cost of
goods sold for three months of amortization.
4) This adjustment records three months of interest expense using an average
borrowing rate of 8% on the $31,562 in total debt incurred to fund the
purchase price.
5) To record the income tax expense adjustment associated with the pro forma
adjustments using the effective rate for the period.
The following adjustments have been reflected in the pro forma condensed
consolidated statement of operations for the year ended December 31, 1998 to
reflect the impact of the acquisition as if it had closed on January 1, 1998:
6) We anticipate that goodwill will be amortized on a straight-line basis
over thirty years, however the final amortization period will be
determined as appraisals and other studies are completed. This
adjustment records twelve months of amortization expense based on
a thirty-year amortization period.
7) This adjustment records twelve months of amortization for the reduction
to the unfavorable lease commitment. Additionally, during 1998 the
Robotics Division recorded a $8,784 recovery of the lease restructuring
provision it initially recorded in 1996. Had the acquisition occurred at
January 1, 1998, the Company would have remeasured the lease
restructuring reserve at that time. Accordingly, the $8,784 recovery
would not have been included in income during 1998. The recovery
included in income has been reversed for the pro forma condensed
consolidated statement of operations for the year ended December 31,
1998.
8) The unfavorable long-term contract commitments will be amortized as work
is completed on the underlying contracts. This adjustment reduces cost of
goods sold for twelve months of amortization.
9) This adjustment records twelve months of interest expense using an
average borrowing rate of 8% on the $31,562 in total debt incurred to
fund the purchase price.
<PAGE> 26
ORBITAL SCIENCES CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN 000'S)
10) To record the income tax expense adjustment associated with the pro forma
adjustments using the effective tax rate for the period. The effective
tax rate calculation excludes the lease restructuring recovery.
The unaudited condensed consolidated pro forma statements of operations for the
three months ended March 31, 1999 and year ended December 31, 1998 do not
include any pro forma adjustments to reflect potential cost savings achieved by
combining duplicative functions at the Robotics Division with MDA or Orbital.
<PAGE> 27
EXHIBIT INDEX
The following exhibits are filed as part of this report.
Exhibit
No. Description
23.2 Consent of Ernst & Young, LLP
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the use of our report dated June 25, 1999 on the Combined
Financial Statements of the Robotics Division of Spar Aerospace Limited and Spar
Operations & Engineering Corporation for the years ended December 31, 1997 and
1998 included in the Current Report on Form 8-K/A of Orbital Sciences
Corporation filed with the Securities and Exchange Commission.
Dated: July 21, 1999
Toronto, Canada ERNST & YOUNG, LLP
