<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended
JUNE 30, 1998
ORBITAL SCIENCES CORPORATION
Commission file number 0-18287
DELAWARE 06-1209561
---------------------------------------- ---------------------------
(State of Incorporation) (IRS Identification number)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166 (703) 406-5000
---------------------------------------- ---------------------------
(Address of principal executive offices) (Telephone number)
The registrant has (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days.
As of July 31, 1998, 36,766,746 shares of the registrant's common stock were
outstanding.
<PAGE> 2
EXPLANATORY NOTE
Orbital Sciences Corporation ("Orbital") has determined to restate its
consolidated financial statements for the years ended December 31, 1998, 1997,
1996 and 1995 and its condensed consolidated quarterly financial statements for
1998, 1997, 1996 and 1995. This amendment includes in Item 1 such restated
condensed consolidated financial statements and related footnotes thereto for
the three and six months ended June 30, 1998 and 1997, and other information
relating to such restated condensed consolidated financial statements. Item 2
includes Orbital's amended and restated discussion and analysis of financial
condition and results of operations.
Except for Items 1 and 2 and Exhibits 11 and 27, no other information included
in the original report on Form 10-Q is amended by this amendment. Exhibit 11,
Computation of Earnings per Share, has been intentionally omitted from this
filing as it is not required for this Form 10-Q/A. For current information
regarding risks, uncertainties and other factors that may affect Orbital's
future performance, please see "Outlook: Issues and Uncertainties" included in
Item 7 of Orbital's Annual Report on Form 10-K for the year ended December 31,
1999.
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PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
(RESTATED) (RESTATED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 45,757 $ 6,391
Short-term investments, at market 439 8,735
Receivables, net 213,877 206,417
Inventories, net 36,398 59,239
Deferred income taxes and other assets 10,203 5,889
--------- ---------
TOTAL CURRENT ASSETS 306,674 286,671
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation
and amortization of $91,041 and $79,319, respectively 130,087 125,327
INVESTMENTS IN AND ADVANCES TO AFFILIATES 161,896 130,402
GOODWILL, less accumulated amortization of $24,478 and $19,794, respectively 209,060 207,523
DEFERRED INCOME TAXES AND OTHER ASSETS 26,273 27,962
--------- ---------
TOTAL ASSETS $ 833,990 $ 777,885
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term obligations $ 16,079 $ 29,767
Accounts payable 40,493 36,218
Accrued expenses 84,553 98,018
Deferred revenues 55,602 69,467
--------- ---------
TOTAL CURRENT LIABILITIES 196,727 233,470
DUE TO JOINT VENTURE PARTNER 15,593 --
LONG-TERM OBLIGATIONS, net of current portion 156,109 200,194
OTHER LIABILITIES 1,174 2,443
--------- ---------
TOTAL LIABILITIES 369,603 436,107
NON-CONTROLLING INTERESTS IN NET ASSETS OF CONSOLIDATED SUBSIDIARIES 18,738 27,794
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01; 10,000,000 shares authorized, Series A Special Voting
Preferred Stock, none and one share authorized and outstanding, respectively -- --
Common Stock, par value $.01; 80,000,000 shares authorized, 36,901,818 and
32,481,719 shares outstanding, respectively after deducting 20,877 shares held in treasury 368 325
Additional paid-in capital 487,164 326,187
Accumulated other comprehensive loss (5,322) (4,671)
Accumulated deficit (36,561) (7,857)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 445,649 313,984
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 833,990 $ 777,885
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
------------------------------
1998 1997
------------ ------------
(RESTATED) (RESTATED)
<S> <C> <C>
REVENUES $ 181,926 $ 90,263
Costs of goods sold 138,379 67,824
------------ ------------
GROSS PROFIT 43,547 22,439
Research and development expenses 12,016 7,603
Selling, general and administrative expenses 27,930 23,244
Amortization of goodwill 2,278 742
------------ ------------
INCOME (LOSS) FROM OPERATIONS 1,323 (9,150)
Net investment income (expense) (802) 323
Equity in earnings (losses) of affiliates (14,579) (690)
Non-controlling interests in (earnings) losses of
consolidated subsidiaries 6,075 563
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (7,983) (8,954)
Provision for income taxes 1,390 11,320
------------ ------------
NET LOSS $ (9,373) $ (20,274)
============ ============
NET LOSS PER COMMON AND DILUTIVE SHARE $ (0.26) $ (0.62)
============ ============
Shares used in computing net loss per common and dilutive share 35,979,989 32,688,563
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------
1998 1997
------------ ------------
(RESTATED) (RESTATED)
<S> <C> <C>
REVENUES $ 367,953 $ 203,536
Costs of goods sold 273,436 151,079
------------ ------------
GROSS PROFIT 94,517 52,457
Research and development expenses 22,634 15,623
Selling, general and administrative expenses 55,170 41,566
Amortization of goodwill 4,539 1,483
------------ ------------
INCOME (LOSS) FROM OPERATIONS 12,174 (6,215)
Net investment income (expense) (2,865) 747
Equity in earnings (losses) of affiliates (44,310) (2,067)
Non-controlling interests in (earnings) losses of
consolidated subsidiaries 9,057 1,184
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (25,944) (6,351)
Provision for income taxes 2,760 11,616
------------ ------------
NET LOSS $ (28,704) $ (17,967)
============ ============
NET LOSS PER COMMON AND DILUTIVE SHARE $ (0.83) $ (0.55)
============ ============
Shares used in computing net loss per common and dilutive share 34,408,545 32,753,415
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
--------- ---------
(RESTATED) (RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (28,704) $ (17,967)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization expenses 17,353 12,115
Equity in losses of affiliates 44,310 2,067
Non-controlling interests in losses of consolidated subsidiaries (9,057) (1,184)
Deferred tax valuation adjustment -- 10,898
Foreign currency translation adjustment (515) (323)
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in current and other non-current assets 4,262 784
Increase (decrease) in current and other non-current liabilities (36,430) 7,451
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (8,781) 13,841
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,879) (15,587)
Proceeds from sales of fixed assets -- 34,085
Purchases, sales and maturities of available-for-sale investment securities, net 8,160 1,631
Investments in and advances to affiliates (60,974) (72,307)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (70,693) (52,178)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (repayments) (3,316) (5,210)
Principal payments on long-term obligations (71,457) (3,129)
Net proceeds from issuances of long-term obligations 22,000 22,893
Net proceeds from issuances of common stock 161,020 919
Advances from joint venture partner 10,593 --
Proceeds from issuance of short-term bridge loan -- 25,000
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 118,840 40,473
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 39,366 2,136
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,391 27,923
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 45,757 $ 30,059
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(UNAUDITED)
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited interim financial
information reflects all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation thereof. Certain information and footnote
disclosure normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to instructions, rules and regulations prescribed by the Securities and Exchange
Commission ("the Commission"). Although the company believes that the
disclosures provided are adequate to make the information presented not
misleading, these unaudited interim condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and the footnotes thereto included in the company's Annual Report on Form 10-K/A
for the year ended December 31, 1997. Operating results for the three- and
six-month periods ended June 30, 1998 are not necessarily indicative of the
results expected for the full year.
Orbital Sciences Corporation is hereafter referred to as "Orbital" or the
"company."
(1) RESTATEMENT
Management has determined to restate its previously issued consolidated
financial statements for 1998 and 1997 with respect to its accounting treatment
for certain matters, including among other things, its accounting for equity
method investments, capitalized costs and certain other matters. Restatement
matters for equity method accounting include adjustments related to: revenue
recognized on sales to affiliates, preferred dividends paid to other affiliate
investors, calculation of ownership interest, capitalized interest on equity
method investments and gain recognition on an affiliate's warrant issuance. For
a full description of the restatement matters, refer to Notes 1A and 12 to the
company's consolidated financial statements included in the company's 1998
Annual Report on Form 10-K/A previously filed with the Commission.
The effect of the restatement matters on the company's previously reported
revenues, gross profit, income (loss) from operations, net income (loss) and net
income (loss) per common and dilutive share for the periods is as follows:
7
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<TABLE>
<CAPTION>
(In thousands, except share data) QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------- ----------------
<S> <C> <C>
1998 RESTATED:
Revenues $ 181,926 $ 367,953
Gross profit 43,547 94,517
Income from operations 1,323 12,174
Net loss (9,373) (28,704)
Net loss per common and dilutive share (0.26) (0.83)
1998 AS PREVIOUSLY REPORTED IN AMENDMENT NO. 1:
Revenues $ 184,516 $ 370,675
Gross profit 50,851 102,225
Income from operations 8,251 21,616
Net income 5,998 10,473
Net income per common share 0.17 0.31
Net income per dilutive share 0.17 0.31
1997 RESTATED:
Revenues $ 90,263 $ 203,536
Gross profit 22,439 52,457
Loss from operations (9,150) (6,215)
Net loss (20,274) (17,967)
Net loss per common and dilutive share (0.62) (0.55)
1997 AS PREVIOUSLY REPORTED:
Revenues $ 142,226 $ 264,338
Gross profit 39,673 73,351
Income from operations 11,005 17,052
Net income 5,603 10,697
Net income per common share 0.17 0.33
Net income per dilutive share 0.17 0.33
</TABLE>
(2) INVENTORIES
Inventories consist of components inventory, work-in-process inventory and
finished goods inventory and are generally stated at the lower of cost or net
realizable value on a first-in, first-out, or specific identification basis, net
of allowances for estimated obsolescence. Components and raw materials are
purchased to support future production efforts. Work-in-process inventory
consists primarily of (i) costs incurred under long-term fixed-price contracts
accounted for using the percentage- of-completion method of accounting applied
on a units of delivery basis and (ii) partially assembled commercial products,
and generally includes direct production costs and certain allocated indirect
costs (including an allocation of general and administrative costs).
Work-in-process inventory has been reduced by contractual progress payments
received. Finished goods inventory consists of fully assembled commercial
products awaiting shipment.
(3) EARNINGS PER SHARE
Net income per common share is calculated using the weighted average number of
common shares outstanding during the periods. Net income per common share
assuming dilution is calculated using the weighted average number of common and
common equivalent shares outstanding during the periods, plus the effects of an
assumed conversion of the company's convertible notes, after giving effect to
all net income adjustments that would result from the assumed conversion.
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In periods of net loss, the assumed conversion of convertible notes and the
exercise of stock options are anti-dilutive. Accordingly, fully diluted
per-share losses are the same as basic losses per share disclosed in the
accompanying statements of operations. If the company had reported net income,
the number of shares used in calculating diluted earnings per share would have
been 40,815,134 and 39,284,011, for the three and six months ended June 30,
1998, respectively and 32,743,578 and 32,753,689 for the three and six months
ended June 30, 1997, respectively.
(4) INCOME TAXES
The company has recorded its interim income tax provision based on estimates of
the company's effective tax rate expected to be applicable for the full fiscal
year. Estimated effective rates recorded during interim periods may be
periodically revised, if necessary, to reflect current estimates.
(5) RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 condensed consolidated
financial statements to conform to the 1998 condensed consolidated financial
statement presentation.
(6) COMPREHENSIVE LOSS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income."
Disclosure requirements with respect to comprehensive income, as of and for the
six months ended June 30, 1998 and 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
(Restated) (Restated)
<S> <C> <C>
Comprehensive loss:
Net loss, as reported $(28,704) $(17,967)
Unrealized losses on
short-term investments (136) (20)
Translation adjustments (515) (323)
-------- --------
Total $(29,355) $(18,310)
======== ========
Accumulated differences between
net loss, as reported and
comprehensive loss:
Beginning of period $ (4,671) $ (3,681)
Unrealized losses on
short-term investments (136) (20)
Translation adjustments (515) (323)
-------- --------
End of period $ (5,322) $ (4,024)
======== ========
</TABLE>
(7) COMMON STOCK
In April 1998, the company sold 3,450,000 shares of its common stock in a public
offering at $45.81 per share, generating net proceeds to the company of
approximately $150,000,000 after deducting underwriters' discounts and other
offering expenses.
9
<PAGE> 10
(8) COMMITMENTS AND SUBSEQUENT EVENTS
In June 1998, the company signed a satellite and launch vehicle procurement
contract with CCI International N.V. ("CCI") valued at approximately
$480,000,000. Subject to negotiation of definitive documentation, the company
may also provide CCI with up to $100,000,000 in equity, debt and/or vendor
financing, with an option to invest up to an additional $50,000,000.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Certain statements included in this discussion relating to future revenues,
sales, expenses, growth rates, net income, new business, operational
performance, schedules, sources and uses of funds, "Year 2000" issues, and the
performance of the company's affiliates, Orbital Imaging Corporation
("ORBIMAGE") and ORBCOMM Global L.P. ("ORBCOMM"), are forward-looking statements
that involve known and unknown risks, uncertainties and other factors that may
cause the actual results, performance, achievements or investments of the
company to differ materially from any future results, performance, achievements
or investments expressed or implied by such forward-looking statements. Such
factors include: general and economic business conditions, launch results,
product performance, risks associated with government contracts, the
introduction of products and services by competitors, risks associated with
acquired businesses, availability of required capital, the ability of customers
and suppliers to assess timely and accurately "Year 2000" issues, market
acceptance of new products and technologies, described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Outlook: Issues and Uncertainties" incorporated in the company's Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1997.
The company's products and services are grouped into three business sectors:
Space and Ground Infrastructure Systems, Satellite Access Products and Satellite
Services. Space and Ground Infrastructure Systems include launch vehicles,
satellites, electronics and sensor systems, and satellite ground systems. The
company's Satellite Access Products sector consists of recreational,
high-precision and automotive satellite-based navigation products, satellite
communications products and transportation management systems. The company's
Satellite Services sector includes satellite-based, two-way mobile data
communications services and satellite-based imagery services, conducted through
the company's ORBCOMM and ORBIMAGE affiliates, respectively. The company does
not control the operational and financial affairs of ORBCOMM or ORBIMAGE, and
consequently their financial results are not consolidated with the company's
RECENT DEVELOPMENTS. The company's stock began trading on the New York Stock
Exchange in early July 1998 under the ticker symbol "ORB." The company's stock
had previously traded on the Nasdaq National Market under the symbol "ORBI."
In April 1998, the company sold 3,450,000 shares of its common stock in a public
offering at $45.81 per share, generating net proceeds of approximately
$150,000,000 (see Liquidity and Capital Resources).
In July 1998, ORBCOMM Corporation announced that it elected to postpone its
proposed initial public offering of common stock. ORBCOMM Corporation was
organized for the sole purpose of investing in and acting as a general partner
of ORBCOMM. Orbital, through its subsidiary Orbital Communications Corporation,
and Teleglobe Mobile Partners, an affiliate of Teleglobe Inc., the existing
fifty-percent partners in ORBCOMM, each has reaffirmed its commitment to
11
<PAGE> 12
provide funding to ORBCOMM while considering options for future financing at
ORBCOMM (see Liquidity and Capital Resources).
In June 1998, the company signed a satellite and launch vehicle procurement
contract with CCI International N.V. ("CCI") valued at approximately
$480,000,000. Subject to negotiation of definitive documentation, the company
may also provide CCI with up to $100,000,000 in equity, debt and/or vendor
financing, with an option to invest up to an additional $50,000,000.
The company has made a preliminary assessment of potential "Year 2000" issues
with respect to various financial and operational computer-related systems. The
company has developed an initial corrective action plan that includes (i)
reprogramming affected software when appropriate and feasible, (ii) obtaining
vendor-provided software upgrades when available and (iii) completely replacing
affected systems when necessary. The company currently expects that identified
"Year 2000" affected systems will be corrected by the end of 1998. There can be
no assurance that the company has identified all "Year 2000" affected systems or
that its corrective action plan will be timely and successful. While the company
has not determined to date that "Year 2000" issues will materially impact its
customers or suppliers, it continues to assess risks associated with such third
parties and will develop corrective plans accordingly as more information
becomes available.
Certain of the 1998 and 1997 financial information has been restated. See note 1
to the condensed consolidated financial statements.
REVENUES. Orbital's revenues for the three-month periods ended June 30, 1998 and
1997 were $181,926,000 and $90,263,000 respectively. Revenues for the six-month
periods ended June 30, 1998 and 1997 were $367,953,000 and $203,536,000
respectively.
Space and Ground Infrastructure Systems. Revenues from the company's Space and
Ground Infrastructure Systems sector totaled $153,111,000 and $70,560,000 for
the three months ended June 30, 1998 and 1997, respectively. Revenues from this
sector totaled $309,320,000 and $167,920,000 for the six months ended June 30,
1998 and 1997, respectively.
Revenues from the company's launch vehicles increased to $47,828,000 in the
second quarter of 1998 from $27,799,000 in the second quarter of 1997, and to
$93,736,000 for the six months ended June 30, 1998 from $54,853,000 for the six
months ended June 30, 1997. The increase in revenues in 1998 as compared to 1997
is attributable to a number of factors, including (i) increased work performed
under contracts received for the company's Taurus launch vehicle, (ii) a
significant increase in new orders received during 1997 for the company's
Pegasus and suborbital launch vehicles and (iii) increased work performed on the
X-34 reusable launch vehicle.
For the three months ended June 30, 1998, satellite revenues were $54,020,000 as
compared to $3,943,000 for the three months ended June 30, 1997. Satellite
revenues were $115,552,000 for the six months ended June 30, 1998 as compared to
$28,745,000 for the six months ended June 30, 1997. The increase in 1998
revenues is due to increased sales on the procurement agreement with ORBIMAGE.
In addition, revenues during 1998 included sales generated by the satellite
business acquired from CTA INCORPORATED in August 1997 of approximately
$13,282,000 and $29,872,000, respectively, for the three- and six-month periods
ended June 30, 1998.
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<PAGE> 13
Revenues from electronics and sensor systems increased to $29,464,000 for the
three months ended June 30, 1998 from $22,128,000 for the three months ended
June 30, 1997, and to $56,812,000 for the six months ended June 30, 1998 from
$50,194,000 for the six months ended June 30, 1997. The increase in 1998
revenues is primarily due to work performed in 1998 on new orders for defense
electronics products received during the second half of 1997.
Revenues from the company's ground systems products were $21,799,000 for the
three months ended June 30, 1998 as compared to $16,690,000 for the three months
ended June 30, 1997. Ground systems products revenues were $43,220,000 for the
six months ended June 30, 1998 as compared to $34,128,000 for the six months
ended June 30, 1997. The increase in 1998 revenues is primarily due to work
performed on orders received in 1997 for new satellite ground systems and system
upgrades.
Revenues under procurement agreements with ORBCOMM and ORBIMAGE were $27,119,000
and $15,621,000, respectively, for the three months ended June 30, 1998 and
1997. Revenues from sales to ORBCOMM and ORBIMAGE were $70,545,000 and
$27,224,000, respectively, for the six months ended June 30, 1998 and 1997.
Satellite Access Products. Revenues from sales of navigation, communications and
transportation management systems and products increased to $28,556,000 for the
three months ended June 30, 1998 from $19,889,000 for the three months ended
June 30, 1997. Satellite access products revenues were $58,310,000 for the six
months ended June 30, 1998 as compared to $35,535,000 for the six months ended
June 30, 1997. The three- and six-month periods ended June 30, 1998 included
approximately $11,661,000 and $22,665,000, respectively, of sales generated by
the company's high-precision navigation products that were acquired as a result
of the December 1997 merger of Ashtech Inc. ("Ashtech") with the company's
subsidiary, Magellan Corporation ("Magellan").
GROSS PROFIT/COSTS OF GOODS SOLD. Costs of goods sold include the costs of
personnel, materials, subcontracts and overhead related to sales of commercial
products and revenue earned under various long-term development and production
contracts. Gross profit depends on a number of factors, including the company's
mix of contract types and costs incurred thereon in relation to estimated costs.
The company's gross profit for the second quarter of 1998 was $43,547,000 as
compared to $22,439,000 in the second quarter of 1997. The company's gross
profit for the first half of 1998 was $94,517,000 as compared to $52,457,000 for
the first half of 1997. Gross profit as a percentage of revenues ranged between
24% and 26% for the three- and six-month periods ended June 30, 1998 and 1997.
Space and Ground Infrastructure Systems. Gross profit from the company's Space
and Ground Infrastructure Systems sector was $41,985,000 (or 27% of sector
revenues) and $16,535,000 (or 23% of sector revenues) for the three months ended
June 30, 1998 and 1997, respectively. Gross profit for this sector was
$84,421,000 (or 27% of sector revenues) and $41,467,000 (or 25% of sector
revenues) for the six months ended June 30, 1998 and 1997, respectively. Gross
profit margins from the company's space and ground infrastructure systems for
the three and six month periods ended June 30, 1998 were generally consistent
with comparable 1997 periods.
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<PAGE> 14
Satellite Access Products. Gross profit for satellite access products was
$2,283,000 (or 8% of sector revenues) and $5,456,000 (or 27% of sector revenues)
for the three months ended June 30, 1998 and 1997, respectively, and $12,391,000
(or 21% of sector revenues) and $11,051,000 (or 31% of sector revenues) for the
six months ended June 30, 1998 and 1997, respectively. The overall decrease
during the 1998 periods is due to the fact that during the second quarter of
1998 Magellan recognized approximately $12,500,000 of charges for inventory
obsolescence relating to consumer navigation products. Magellan continues to
face changing market conditions placing significant pressure on individual
product life-times and inventory levels.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses represent
Orbital's self-funded product development activities and exclude direct
customer-funded development. Research and development expenses for the three
months ended June 30, 1998 and 1997 were $12,016,000 (or 7% of revenues) and
$7,603,000 (or 8% of revenues), respectively. Research and development expenses
were $22,634,000 (or 6% of revenues) and $15,623,000 (or 8% of revenues) for the
six months ended June 30, 1998 and 1997, respectively. Research and development
expenses for the second quarter of 1998 included approximately $2,000,000 of
costs related to identifying and correcting anomalies experienced on certain
ORBCOMM satellites. Current year expenses also included increased research and
development efforts for satellite access products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include the costs of marketing, advertising, promotional
and other selling expenses as well as the costs of the finance, administrative
and general management functions of the company. Selling, general and
administrative expenses for the three months ended June 30, 1998 and 1997 were
$27,930,000 (or 15% of revenues) and $23,244,000 (or 26% of revenues),
respectively. Selling, general and administrative expenses for the six months
ended June 30, 1998 and 1997 were $55,170,000 (or 15% of revenues) and
$41,566,000 (or 20% of revenues), respectively. The decrease in selling, general
and administrative expenses as a percentage of revenues during 1998 as compared
to 1997 was primarily attributable to substantial revenue growth, particularly
in launch vehicles and satellite systems, with only a modest growth in selling,
general and administrative expenses.
INTEREST INCOME AND INTEREST EXPENSE. Interest income for the periods reflects
interest earnings on cash equivalents and short-term investments. Interest
expense includes the cost of borrowings on Orbital's convertible subordinated
notes, revolving credit facilities and other secured and unsecured debt.
Interest income and interest expense was $1,425,000 and $2,227,000,
respectively, for the three months ended June 30, 1998 as compared to interest
income and interest expense of $630,000 and $307,000, respectively, for the
three months ended June 30, 1997. The company's interest income and interest
expense for the first six months of 1998 was $1,875,000 and $4,740,000,
respectively, while for the first six months of 1997, the company incurred
interest income and interest expense of $986,000 and $239,000, respectively.
Interest expense has been reduced by capitalized interest of $2,762,000 and
$1,909,000 for the three months ended June 30, 1998 and 1997, respectively, and
by $5,130,000 and $3,408,000 for the six months ended June 30, 1998 and 1997,
respectively.
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES AND NON-CONTROLLING INTERESTS IN
(EARNINGS) LOSSES OF CONSOLIDATED SUBSIDIARIES. Equity in earnings (losses) of
affiliates net of non-controlling interests in (earnings) losses of consolidated
subsidiaries were ($8,504,000) and
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<PAGE> 15
($127,000) for the three months ended June 30, 1998 and 1997, respectively, and
were ($35,253,000) and ($883,000) for the six months ended June 30, 1998 and
1997, respectively. These amounts primarily represent (i) elimination of
proportionate profits or losses on sales of infrastructure products to ORBCOMM
and ORBIMAGE, (ii) the company's pro rata share of ORBCOMM's, ORBCOMM
International Partners, L.P.'s and ORBIMAGE's current period earnings and losses
(iii) preferred dividends and beneficial conversion rights to other investors at
ORBIMAGE and (iv) non-controlling stockholders' pro rata share of ORBCOMM USA
L.P.'s and Magellan's current period earnings and losses. The increase in total
losses during 1998 is primarily due to losses at ORBCOMM.
PROVISION FOR INCOME TAXES. The company recorded an income tax provision of
$1,390,000 and $11,320,000 for the three months ended June 30, 1998 and 1997,
respectively and of $2,760,000 and $11,616,000 for the six months ended June 30,
1998 and 1997, respectively. The 1997 tax provision includes a deferred tax
provision of approximately $10,898,000 relating to the ORBIMAGE preferred stock
transaction. The company records its interim income tax provisions based on
estimates of the company's effective tax rate expected to be applicable for the
full fiscal year. Estimated effective rates recorded during interim periods may
be periodically revised, if necessary, to reflect current estimates.
LIQUIDITY AND CAPITAL RESOURCES
The company's growth has required substantial capital to fund expanding working
capital needs, investments in ORBCOMM and ORBIMAGE, certain business
acquisitions, new business initiatives, research and development and capital
expenditures. The company has funded these requirements to date, and expects to
fund its 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. The company expects to continue to
pursue potential acquisitions and equity investments that it believes would
enhance its businesses and to fund such transactions through cash generated by
operations, existing cash and loan facilities, the issuance of equity and/or
debt securities and asset-based financings.
In April 1998, the company sold 3,450,000 shares of its common stock in a public
offering, generating net proceeds of approximately $150,000,000 (the
"Offering"). Orbital plans to use the net proceeds from the Offering for (i)
investments in ORBCOMM, new projects or emerging space-related businesses, such
as CCI, (ii) expanded research and development for new products, (iii)
acquisitions of businesses and/or product lines complementary to the company's
existing businesses, and (iv) for other general corporate purposes.
In July 1998, ORBCOMM Corporation announced that it elected to postpone its
proposed initial public offering of common stock. Orbital, through its
subsidiary Orbital Communications Corporation, and Teleglobe Mobile Partners, an
affiliate of Teleglobe Inc., the existing fifty-percent partners in ORBCOMM,
each has reaffirmed its commitment to provide funding to ORBCOMM while
considering options for future financing at ORBCOMM. Orbital expects to fund its
share of ORBCOMM's capital needs through existing resources, including credit
facilities. If such funding is required, the company currently estimates that
its share of such funding could be as much as $20,000,000 through the remainder
of 1998.
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<PAGE> 16
Cash, cash equivalents and short-term investments were $46,196,000 at June 30,
1998, and the company had total debt obligations outstanding of approximately
$172,188,000 at June 30, 1998. The outstanding debt is comprised of the
company's convertible subordinated notes, advances under the company's line of
credit facilities, secured and unsecured notes, and asset-based financings.
The company's primary revolving credit facility provides for total borrowings
from an international syndicate of six banks of up to $100,000,000. No
borrowings were outstanding under the facility at June 30, 1998. Borrowings are
secured by contract receivables, and the facility prohibits the payment of cash
dividends, contains certain covenants with respect to the company's working
capital, fixed charge ratio, leverage ratio and consolidated net worth, and
expires in August 2001. The company (or its subsidiaries) also maintains
additional, smaller revolving credit facilities, under which approximately
$1,400,000 was outstanding at June 30, 1998 at a weighted average interest rate
of 10%. Additional borrowing capacity on these other agreements is approximately
$28,000,000 at June 30, 1998. The company used approximately $94,250,000 of
proceeds from the Offering to pay down outstanding borrowings on these credit
facilities.
The company's operations used net cash of approximately $8,781,000 during the
first half of 1998. The company provided $15,000,000 in capital and $21,513,000
in vendor financing (approximately one-half of which has been advanced to
Orbital by an affiliate of Teleglobe Inc.) to ORBCOMM during the first half of
1998. In addition, during the first half of 1998, the company invested
$17,879,000 in capital expenditures for various satellite and launch vehicle
equipment and other production, manufacturing, test and office equipment.
Orbital plans to consolidate its offices and its satellite-related engineering,
manufacturing and operations facilities. The company anticipates that the new
construction will be conducted in two phases during 1998-1999 and 2000-2001. To
finance the expansion, Orbital is currently pursuing various financing
alternatives, including third-party debt financings and "built-to-suit"
agreements. Consequently, the company does not expect to spend a material amount
of cash to finance this construction.
Orbital expects that its capital needs for the remainder of 1998 will be
provided by working capital, cash flows from operations, existing credit
facilities, and operating lease arrangements.
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<PAGE> 17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY- HOLDERS
(a) The annual meeting of stockholders of the Company was held on
April 23, 1998.
(b) Not applicable.
(c)(i) Election of five directors, each serving for a three-year term
ending in 2001:
Fred C. Alcorn
Votes: For: 30,436,192
Withheld: 78,595
Lennard A. Fisk
Votes: For: 30,439,976
Withheld: 74,811
Jack L. Kerrebrock
Votes: For: 30,431,280
Withheld: 83,507
David W. Thompson
Votes: For: 30,438,551
Withheld: 76,236
James R. Thompson
Votes: For: 30,436,366
Withheld: 78,421
(ii) Proposal to approve the adoption of an amendment to the Orbital
Sciences Corporation 1997 Stock Option and Incentive Plan increasing the
number of shares of Common Stock authorized for issuance from 1,600,000 to
3,200,000.
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Votes:
For: 21,839,679 Against: 8,533,649
Abstain: 141,459
(iii) Proposal to ratify the selection of KPMG Peat Marwick LLP as the
Company's independent accountants for the fiscal year ending December 31,
1998.
Votes:
For: 30,361,359 Against: 86,901
Abstain: 66,526
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - A complete listing of exhibits required is given in the Exhibit
Index that precedes the exhibits filed with this report.
(b) Reports on Form 8-K
(i) On April 13, 1998, the Company filed a Current Report on Form 8-K,
dated April 1, 1998, disclosing its Pegasus launch and the current
status of testing of ORBCOMM satellites and its INDOSTAR-1 satellite.
(ii) On April 28, 1998, the Company filed a Current Report on Form 8-K,
dated April 21, 1998, disclosing the financial results of the Company
for the quarter ended March 31, 1998.
(iii) On May 6, 1998, the Company filed a Current Report on Form 8-K, dated
May 4, 1998, disclosing its selection as a space segment contractor
of CCI and announcing the termination of its discussions with Mobile
Communications Holdings, Inc.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORBITAL SCIENCES CORPORATION
DATED: June 28, 2000 By: /s/ Jeffrey V. Pirone
-------------------------------------------
Jeffrey V. Pirone, Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.1.3 Amendment No. 3 to Second Amended and Restated Credit and
Reimbursement Agreement dated as of June 18, 1998, among
Orbital Sciences Corporation, Morgan Guaranty Trust Company
of New York and the Banks listed therein (previously filed).
27 Financial Data Schedule (such schedule is furnished for the
information of the Securities and Exchange Commission and is
not to be deemed "filed" as part of the Form 10-Q/A, or
otherwise subject to the liabilities of Section 18 of the
Securities Act of 1934) (transmitted herewith).
</TABLE>
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