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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
For the fiscal year ended December 31, 1997
Commission file number 0-18287
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ORBITAL SCIENCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 06-1209561
(State of Incorporation of Registrant) (I.R.S. Employer I.D. No.)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166
(Address of principal executive offices)
(703) 406-5000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 (quoted on the Nasdaq National Market)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing sales price as reported on the Nasdaq
National Market on March 6, 1998 was approximately $1,390,090,721.
As of March 24, 1998, 33,035,347 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for fiscal
year ended December 31, 1997 (the "Annual Report") are incorporated by
reference in Parts I and II of this Report. Portions of the registrant's
definitive Proxy Statement dated March 24, 1998 (the "Proxy Statement") are
incorporated by reference in Part III of this Report.
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EXPLANATORY NOTE
Orbital Sciences Corporation ("Orbital") has determined to restate its
consolidated financial statements for the years ended December 31, 1997, 1996
and 1995 and its condensed consolidated quarterly financial statements for 1997,
1996 and 1995. This Amendment includes in Item 8 such restated financial
statements as of December 31, 1997 and 1996 and for the years in the three-year
period ended December 31, 1997, and other information relating to such restated
financial statements, including Business (Item 1), Selected Financial Data (Item
6) and Management's Discussion and Analysis of Financial Condition and Results
of Operation (Item 7). Information regarding the effect of the restatements on
Orbital's results of operations is included in the Notes to Financial Statements
included in Item 8 of this Amendment.
Except for Items 1, 6, 7 and 8 and Exhibits 11 and 27, no other
information included in the original report on Form 10-K is amended by this
Amendment. 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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ORBITAL SCIENCES CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K/A
FOR YEAR ENDED DECEMBER 31, 1997
<TABLE>
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PART I Page
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<S> <C>
Item 1.Business................................................................... 1
Item 2.Properties................................................................. 10
Item 3.Legal Proceedings.......................................................... 10
Item 4.Submission of Matters to a Vote of Security Holders........................ 11
Item 4A.Executive Officers of the Registrant...................................... 11
PART II
Item 5.Market for Registrant's Common Equity...................................... 13
Item 6.Selected Financial Data.................................................... 14
Item 7.Management's Discussion and Analysis of Financial Condition
and Results of operations.................................................. 15
Item 8.Financial Statements and Supplementary Data................................ 23
Item 9.Changes in and Disagreements with Accountants.............................. 53
PART III
Item 10.Directors and Executive Officers of the Registrant........................ 53
Item 11.Executive Compensation.................................................... 53
Item 12.Security Ownership of Certain Beneficial Owners and Management............ 53
Item 13.Certain Relationships and Related Transactions............................ 54
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 54
</TABLE>
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Pegasus(R) is a registered trademark and service mark of Orbital Sciences
Corporation; Taurus(R) is a registered trademark of Orbital Sciences
Corporation; Orbital(SM) is a service mark of Orbital Sciences Corporation;
OrbView(R) and ORBIMAGE(R) are registered service marks of Orbital Imaging
Corporation; ORBCOMM(R) is a registered service mark of ORBCOMM Global, L.P.;
and PathMaster(TM) is a trademark of Magellan Corporation.
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ITEM 1. BUSINESS
BACKGROUND
Orbital Sciences Corporation (together with its subsidiaries, "Orbital"
or the "Company") is a leading space and information systems company that
designs, manufactures, operates and markets a broad range of space-related
products and services. Orbital's products and services are grouped into three
general business sectors: Space and Ground Infrastructure Systems, Satellite
Access Products and Satellite Services. Space and Ground Infrastructure Systems
include launch vehicles, satellites and related space systems, electronics and
sensor systems, and ground systems and software. Satellite Access Products
include satellite-based navigation and communications products and
transportation management systems. Satellite Services include satellite-based
two-way mobile data communications and satellite-based imagery services.
Orbital operates launch vehicle, satellite and electronics engineering,
manufacturing and test facilities in Dulles and McLean, Virginia, Germantown
and Greenbelt, Maryland and Chandler, Arizona; a launch vehicle and satellite
integration and test facility at Vandenberg Air Force Base, California; a space
sensors and instruments facility in Pomona, California; a ground systems
facility in Vancouver, British Columbia; and facilities for its navigation and
communications products in Sunnyvale and San Dimas, California and Rochester
Hills, Michigan.
Orbital was incorporated in Delaware in 1987 to consolidate the assets,
liabilities and operations of Space Systems Corporation and Orbital Research
Partners, L.P. Since 1988, the Company has expanded its space-based product
lines and services through a number of acquisitions. For example, in 1994,
Orbital acquired Fairchild Space and Defense Corporation ("Fairchild") and
Magellan Corporation ("Magellan"). The Fairchild acquisition enhanced Orbital's
satellite system and subsystem development and production capabilities and
expanded Orbital's existing product lines by adding various sophisticated
electronics products. Through the Magellan acquisition, Orbital expanded its
product lines into the commercial and consumer markets for hand-held receivers
for Global Positioning System ("GPS") satellite-based navigation and
positioning. In 1995, Orbital acquired MacDonald, Dettwiler and Associates Ltd.
("MDA"), a leading supplier of commercial, satellite-imaging ground stations
and related information processing software.
During 1997, Orbital completed several acquisitions. In July, the Company
acquired the GPS automotive navigation product line from Rockwell International
Corporation ("Rockwell"). In August, Orbital purchased the space systems and
communications service businesses of CTA INCORPORATED ("CTA"), broadening
Orbital's satellite production capabilities and enhancing its transportation
management systems. In December, Magellan merged with Ashtech Inc. ("Ashtech"),
a privately-held developer and supplier of high-performance GPS and related
satellite-based navigation products, components and technologies. After the
merger, Orbital and former Ashtech security holders own approximately 66% and
34%, respectively, of Magellan.
In 1992, Orbital established a wholly owned subsidiary, Orbital Imaging
Corporation ("ORBIMAGE"), to develop and operate commercial Earth imaging
satellites and to market the products derived from such satellites. ORBIMAGE
raised equity in private placements of preferred stock in 1997 and 1998, and as
a result Orbital owns approximately 60% of ORBIMAGE. Based on certain rights
granted to the preferred equity investors, Orbital does not control ORBIMAGE's
operational or financial affairs and therefore does not consolidate its results
of operations. See "Description of Orbital's Products and Services -- Satellite
Services."
In 1993, the Company's majority-owned subsidiary, Orbital Communications
Corporation ("OCC"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), an
affiliate of Teleglobe Inc., formed ORBCOMM Global, L.P. ("ORBCOMM"), for the
design, development, construction, integration, testing and operation of a
low-Earth orbit satellite communications system (the "ORBCOMM System"). OCC and
Teleglobe Mobile are each 50% general partners in ORBCOMM, and have contributed
to ORBCOMM $75,275,000 and $84,525,000, respectively, through December 31,
1997. At December 31, 1997, OCC and Teleglobe Mobile each had a remaining
commitment to fund $15,000,000 to ORBCOMM, of which each had funded $7,500,000
through March 23, 1998. Additionally, OCC is a 2% general partner in ORBCOMM
USA, L.P. ("ORBCOMM USA") and Teleglobe Mobile is a 2% general partner in
ORBCOMM International Partners, L.P. ("ORBCOMM International"), two
partnerships formed to market the ORBCOMM System. ORBCOMM is a 98% general
partner in each of the two marketing partnerships. Orbital does not control
ORBCOMM's operational or financial affairs and therefore does not consolidate
its results of operations.
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For more information related to ORBCOMM and ORBIMAGE, see "Description of
Orbital's Products and Services -- Satellite Services."
DESCRIPTION OF ORBITAL'S PRODUCTS AND SERVICES
The Company's products and services are grouped into three general
business sectors: Space and Ground Infrastructure Systems, Satellite Access
Products and Satellite Services. Orbital's overall business is not seasonal
to any significant extent.
SPACE AND GROUND INFRASTRUCTURE SYSTEMS
The Company's Space and Ground Infrastructure Systems currently include
launch vehicles, satellites and related space systems, electronics and sensor
systems, and ground systems and software.
LAUNCH VEHICLES. The Company has developed and produces the Pegasus and
Taurus space launch vehicles that place small satellites into Earth orbit.
Orbital's Pegasus launch vehicle is launched from beneath the Company's
Lockheed L-1011 aircraft to deploy satellites weighing up to 1,000 pounds into
low-Earth orbit. The Taurus launch vehicle is a ground-launched derivative of
the Pegasus vehicle that can carry payloads weighing up to 3,000 pounds into
low-Earth orbit and payloads weighing up to 800 pounds into geosynchronous
orbit.
Each of Orbital's five Pegasus missions in 1997 and one Pegasus mission
in 1998 was successful, bringing the Company's total number of Pegasus missions
to 20, with an approximate 90% success rate. The 1997 Pegasus launches included
a mission for the Spanish national space agency that was the first ever space
launch conducted from Western Europe, a successful launch of ORBIMAGE's
OrbView-2 remote imaging satellite, and the successful launch of ORBCOMM's
first plane of eight communications satellites. In February 1998, the Pegasus
successfully launched a satellite for the National Aeronautics and Space
Administration ("NASA") and a satellite for Teledesic Corporation
("Teledesic"). Orbital has successfully completed its first two Taurus
missions, most recently launching a U.S. Navy satellite and two ORBCOMM
satellites in February 1998.
Customers for Pegasus launch services have included NASA, the U.S. Air
Force, ORBCOMM, ORBIMAGE, the Defense Advanced Research Projects Agency
("DARPA") and the national space agency of Brazil. Customers for Taurus launch
vehicles have included the U.S. Air Force, the U.S. Navy, South Korea's space
agency and ORBCOMM.
Under a contract with NASA, Orbital is designing and constructing three
X-34 unmanned reusable launch vehicles that are being designed to be launched
from the Company's L-1011 aircraft. The X-34 will test and demonstrate advanced
reusable launch system technologies and materials as part of NASA's program
that is focused on the development of next-generation, lower cost reusable
launch vehicles. The Company has completed the fundamental design of the X-34
and has begun vehicle fabrication and construction.
The Company also produces suborbital launch vehicles, which place
payloads into a variety of high-altitude trajectories but, unlike space launch
vehicles, do not place payloads into orbit around the Earth. The Company's
suborbital launch products include suborbital vehicles and their principal
subsystems, payloads carried by such vehicles and related launch support
installations and systems used in their assembly and operation. Customers
typically use the Company's suborbital launch vehicles to launch scientific and
other payloads above the atmosphere and for defense-related applications such
as target signature and interceptor experiments. The Company's primary
customers for suborbital launch vehicles are various branches of the U.S.
military. Orbital conducted six successful suborbital launches in 1997 and,
since 1982, the Company has performed almost 100 suborbital missions, with an
approximate 97% success rate. During 1997, Orbital won a major suborbital
contract with the U.S. Air Force to combine surplus government ballistic
missile equipment with Pegasus and Taurus launch vehicle technology to conduct
up to 24 space launches and suborbital missions over the next several years.
Additionally, in 1998, the Company was one of three companies awarded a
suborbital launch contract by the U.S. Army with the potential for up to 300
suborbital missions over the next 10 years, to be allocated by the U.S. Army
among the three companies.
SATELLITES AND RELATED SPACE SYSTEMS. The Company designs and produces
small and medium-class satellites to be used in low-Earth orbit ("LEO")and
small geosynchronous orbit ("GEO") satellites. The Company's satellites are
used by various commercial and governmental customers on a wide range of
commercial, scientific and military missions. Since 1982, Orbital (including
two predecessor companies) has built and delivered more
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than 50 satellites. In addition, the Company is in the process of designing
small and medium-class satellites to be used in medium-Earth orbit ("MEO"). In
many cases, Orbital's small satellites have been designed to be integrated with
and launched by the Pegasus or Taurus launch vehicles, in order to reduce the
cost of the overall system.
Fifteen Orbital satellites were deployed during 1997 and in 1998 through
the date hereof, including ORBIMAGE's OrbView-2 multispectral imaging satellite
and ten ORBCOMM communications satellites. Orbital is in the process of
constructing 24 additional communications satellites for ORBCOMM and two
additional remote imaging satellites for ORBIMAGE. Orbital's medium satellites,
such as NASA's TOPEX/Poseidon and the National Oceanic and Atmospherics
Administration's Landsat 4 and Landsat 5 satellites, have been in space for a
number of years and are used to gather various scientific data, such as ocean
topography and Earth imaging information. As a result of the CTA acquisition,
Orbital's first GEO satellite was successfully deployed in November 1997. This
GEO satellite, owned and operated by MediaCitra Indostar, will provide
direct-to-home television in Indonesia.
Customers for Orbital's satellites have included ORBCOMM, ORBIMAGE, Johns
Hopkins University, NASA, the U.S. Air Force and Teledesic. An Orbital
satellite was also recently selected by the Canadian Space Agency for a remote
imaging satellite project. In 1997, Orbital was selected as the satellite
manufacturer to build 17 communications satellites for the Mobile
Communications Holdings, Inc. ("MCHI") "Ellipso" global voice satellite
communications system. The Company and MCHI are currently in the early stage of
negotiations for a definitive procurement agreement. In connection with such
procurement agreement, the Company and MCHI are also discussing a possible
investment by Orbital in MCHI and/or vendor financing alternatives, which could
potentially be significant in amount.
Orbital also designs and manufactures satellite command and data
handling, attitude control and structural subsystems for a variety of
government and commercial customers, and provides a broad range of spacecraft
design and engineering services as well as specialized analytical engineering
services for NASA, the Jet Propulsion Laboratory, the Department of Defense
("DoD"), the Department of Energy and other customers.
ELECTRONICS AND SENSOR SYSTEMS. Orbital develops, manufactures and
markets defense electronics products, including advanced avionics and data
management systems for aircraft flight operations and ground support
applications. These systems collect, process and store mission-critical data
for, among other things, mission planning and flight operations, and manage
on-board equipment for strategic and tactical aircraft and similar military
platforms. The primary customers for data management systems are the U.S. Navy,
the U.S. Air Force and various DoD prime contractors and foreign governments.
The Company is the leading supplier of certain avionics systems and products,
including mission data equipment for the U.S. Navy and data transfer equipment
and digital terrain systems for the U.S. Air Force and foreign military
customers. In addition, the Company provides stores management systems,
including weapons arming and firing functions for use on tactical aircraft and
helicopters. The avionics systems and products are deployed on a number of
platforms, including the F-4, F-14, F-15, F-16, F-18 and F-22 aircraft and the
LAMPS helicopter.
Orbital also produces satellite-borne scientific sensors and instruments,
such as atmospheric ozone monitoring instruments and environmental sensors. For
example, the Company's instruments have successfully operated in space,
measuring ozone concentrations around the world. Orbital has also developed and
produced an atmospheric monitoring system for use on the proposed International
Space Station, and sensors performing similar functions for U.S. Navy nuclear
submarines. Orbital is developing sensors for the DoD for use in the detection
of the presence of chemical or biological weapons. In addition, Orbital's
commercial base of sensor products includes the manufacturing and marketing of
sensors that analyze fuel properties in the chemical, biotechnology,
pharmaceutical and steel industries.
GROUND SYSTEMS AND SOFTWARE. Orbital is the leading supplier of turn-key
commercial satellite imaging ground stations and is a major provider of
advanced image processing software used in such stations. During 1997, Orbital
introduced the Fast TRACS mobile satellite ground station, which is a fully
transportable satellite ground station that can be rapidly deployed and easily
activated. In recent years, the Company's ground systems have also expanded to
include software-intensive products designed for air and sea transportation
systems, along with a variety of military applications, including naval
mine-hunting operations, artillery command and control, radar deception and
logistics support.
The Company develops, provides and upgrades commercial satellite remote
imaging ground stations and related information-processing software. Of
approximately 30 major
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non-military imaging satellite ground stations around the world, Orbital has
been the prime contractor or a major supplier in the construction of 25 ground
stations in 20 countries. These ground stations are designed to receive and
process data from the major civil and commercial Earth observation satellites
currently in operation. Orbital also develops and markets software that
generates and processes imagery from satellites and airborne sensors. Customers
for the Company's ground stations and Earth information systems include the
European and Canadian space agencies as well as ORBIMAGE, EarthWatch
Incorporated ("EarthWatch") and various other commercial and government
customers in the United States, Japan, Korea, Saudi Arabia, Brazil, China,
Malaysia, Taiwan and the Philippines.
The Company also produces automated aeronautical information and air
traffic control systems. Faster and less expensive to operate than traditional
manual systems, automated aeronautical information systems provide pilots and
other users with aeronautical and meteorological information on a timely basis.
Customers for the Company's aeronautical information systems products include
military and civil aviation authorities in various countries such as Australia,
Belgium, Canada, Norway, Malaysia and Switzerland.
SATELLITE ACCESS PRODUCTS
The Company's Satellite Access Products include the satellite-based
navigation, positioning and communications products of its Magellan subsidiary,
as well as certain of its transportation management systems.
SATELLITE NAVIGATION, POSITIONING AND COMMUNICATIONS PRODUCTS.
Traditionally, Magellan's product line primarily consisted of inexpensive
satellite-based navigation and positioning products for commercial and consumer
markets, including recreational marine and aviation customers and outdoor
recreational customers such as campers, hunters and hikers. In December 1997,
Orbital completed the merger of Ashtech with its Magellan subsidiary. With the
addition of the Ashtech product lines, Magellan now also develops and
manufactures GPS products that are used for professional and other
high-precision industrial applications, such as guiding aircraft under
low-visibility conditions, monitoring movements of the Earth's surface for
researchers, precision surveying for construction projects and urban planning,
and natural resource management. In addition, some of Magellan's
higher-performance products incorporate technology that provides access to both
the U.S. GPS satellites and GLONASS, the comparable Russian satellite
navigation system, which improves performance and accuracy.
In connection with the Ashtech merger, Orbital entered into a
stockholders' agreement with certain substantial holders of Ashtech securities
(the "Ashtech Holders"). The Ashtech Holders were granted certain rights with
respect to Magellan, including, among others, the right to (i) designate two
members of Magellan's seven-member board of directors and (ii) demand
registration of their Magellan common stock after the earlier of 180 days after
an initial public offering of the common stock of Magellan or December 31,
1999.
In July 1997, Magellan entered the emerging market for GPS-based
automotive navigation products with the purchase of the PathMaster product line
from Rockwell. PathMaster uses GPS information to provide electronic map
guidance to individual motorists. The PathMaster system is currently in use in
approximately 8,000 Hertz rental cars and the product design is being enhanced
with more functionality and features to address broader private passenger
vehicle and rental car markets.
Magellan also provides satellite telephones used with the INMARSAT
satellite system and has developed technology and products for the ORBCOMM
satellite data network, including a hand-held messaging communicator combining
data communication and GPS features for ORBCOMM customers.
TRANSPORTATION MANAGEMENT SYSTEMS. In addition, Orbital produces
satellite-related vehicle location and fleet management systems that have been
used primarily for metropolitan mass transit operators. The ORBTRAC
transportation management systems combine GPS vehicle tracking technology with
local-area wireless terrestrial communications to help manage public bus and
light rail systems, provide for voice and data communications and transmit
precise GPS-based location information in emergency situations. Customers for
Orbital's transportation management systems include the metropolitan mass
transit authorities in Chicago, Oakland, New York City and Baltimore, as well
as a number of other state and municipal transit systems and vehicle fleets.
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SATELLITE SERVICES
In Orbital's Satellite Services sector, the Company's ORBCOMM and
ORBIMAGE affiliates are developing satellite-based services to address markets
for global two-way mobile data communications and digital imagery of the
Earth's land surface, oceans, atmosphere and weather conditions.
ORBCOMM COMMUNICATIONS SERVICES. The ORBCOMM System is designed to
provide continuous low-cost monitoring, tracking and messaging communications
coverage over most of the Earth's surface. The system is intended to be a
reliable, cost-effective method of providing fixed asset monitoring, mobile
asset tracking and data messaging services to a broad range of industrial and
commercial customers around the world, enabling customers to collect data from
multiple locations, track assets on a global basis and transmit and receive
messages outside the coverage area of terrestrial services. It is designed to
permit subscribers to use inexpensive communicators to send and receive short
messages, high-priority alerts and other information, such as the location and
condition of automobiles, trucks, railcars, industrial equipment, shipping
vessels and other remote assets. The Company expects that the ability to send
and receive data and messages without the geographic limitations of existing
terrestrial communications systems will stimulate the growth of new markets for
satellite-based monitoring, tracking and messaging communications and will be
used to supplement terrestrial-based communications systems by providing
relatively low-cost wide-area geographic coverage in areas these systems are
unable to reach.
The ORBCOMM System is planned to consist of a constellation of up to 36
small LEO satellites, with a satellite control center that operates and
positions the satellites, fixed and mobile communicators used by subscribers to
transmit messages to and receive messages from the satellites, and the regional
ground gateway systems that transmit and control the flow of data and message
communications and other information for the system. A gateway generally
consists of an Earth-tracking station that sends signals to and receives
signals from the satellites and a message switching system that processes the
message traffic.
Since early 1996, ORBCOMM has been providing limited commercial service
in the United States, primarily in monitoring and tracking applications,
through its first two satellites that were launched in 1995. A plane of eight
satellites was launched on a Pegasus launch vehicle in December 1997, and two
additional satellites were launched on Orbital's Taurus rocket in February
1998. These satellites are expected to be placed into commercial service in the
second quarter of 1998. To date in the in-orbit check-out process, certain of
these satellites are generating lower than expected solar power levels,
although the Company and ORBCOMM anticipate that such power levels will be
sufficient to meet planned service requirements, and certain of these
satellites have experienced anomalies in certain radio transmitters. The
Company and ORBCOMM believe they have determined the causes of the lower power
level and radio transmitter anomalies, which they believe will be corrected in
future ORBCOMM satellites, and are developing procedures to minimize the
effects of and/or bypass these anomalies on the existing in-orbit ORBCOMM
satellites. There can be no assurance that the Company and ORBCOMM will be
successful in their efforts or, if unsuccessful, that ORBCOMM's commercial
operations would not be adversely affected.
The next 16 ORBCOMM satellites are expected to be launched by mid-1998,
at which time ORBCOMM will begin offering global service to its customers.
ORBCOMM is scheduled to expand its real-time global service with the launch of
eight additional satellites in mid-1999. Under the ORBCOMM System Procurement
Agreement between Orbital and ORBCOMM (the "ORBCOMM Procurement Agreement"),
Orbital is completing construction of, and will launch, the remaining 24
satellites, all on a fixed-price basis. Consistent with industry practices for
similar contracts, the ORBCOMM Procurement Agreement contains certain
performance incentives with respect to the satellites and their launches.
There are currently four operational U.S. gateway Earth stations located
in New York, Washington, Arizona and Georgia. Gateways are also planned to be
owned and operated by ORBCOMM licensees in strategic locations around the
world. For example, a gateway Earth station located in Italy has successfully
completed acceptance testing and is now in pre-commercial service, and gateway
Earth stations are under construction in South Korea and Japan. ORBCOMM has
agreements with several manufacturers, including Magellan, for the development
and manufacture of hand-held communicators and various types of industrial
communicators that monitor fixed and mobile assets. Subscriber communication
manufacturers also include Panasonic and Scientific Atlanta.
Orbital developed the "ORBCOMM" concept in 1990, and formed the ORBCOMM
partnership in 1993 with Teleglobe Mobile for the design, development,
construction, integration,
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testing and operation of the ORBCOMM System. OCC and Teleglobe Mobile each hold
a 50% interest in ORBCOMM and have invested approximately $75,000,000 and
$85,000,000, respectively, through December 31, 1997. OCC and Teleglobe Mobile
also formed two marketing partnerships, ORBCOMM USA and ORBCOMM International,
each with the exclusive right to market the ORBCOMM System in the U.S. and
internationally, respectively.
Pursuant to the terms of the partnership agreements, (i) OCC and
Teleglobe Mobile share equal responsibility for the operational and financial
affairs of ORBCOMM, (ii) OCC indirectly holds a 51% interest in ORBCOMM USA,
with the result that OCC controls the operational and financial affairs of
ORBCOMM USA, and (iii) Teleglobe Mobile indirectly holds a 51% interest in
ORBCOMM International, with the result that Teleglobe Mobile controls the
operational and financial affairs of ORBCOMM International. Since OCC is unable
to control, but is able to exercise significant influence over, ORBCOMM's and
ORBCOMM International's operating and financial policies, the Company accounts
for its investments in ORBCOMM and ORBCOMM International using the equity
method of accounting. Since OCC is able to control the operational and
financial affairs of ORBCOMM USA, the Company consolidates ORBCOMM USA's
results of operations.
In accordance with the equity method of accounting, Orbital recognizes
100% of the revenues earned and costs incurred on sales of products and
services to ORBCOMM. The Company also recognizes as equity in earnings (losses)
of affiliates its proportionate share of ORBCOMM's profits and losses. ORBCOMM
is currently capitalizing substantially all system construction costs,
including amounts paid to Orbital. To the extent ORBCOMM capitalizes its
purchases from Orbital, the Company eliminates as equity in earnings (losses)
of affiliates approximately 50% (the Company's current equity ownership in
ORBCOMM)of its profits from sales to ORBCOMM.
The Company believes that ORBCOMM, which has a highly leveraged capital
structure, will require additional funding in 1998, and ORBCOMM is currently in
the process of exploring financing alternatives to complete the construction of
the ORBCOMM System and to fund its initial operations. Such alternatives
include, but are not limited to, additional capital contributions from its
existing partners, vendor financing, equity or debt transactions and other
strategic alternatives. There can be no assurance that any financing will be
completed or be available on terms commercially acceptable to ORBCOMM. Orbital
is committed to provide up to an additional $15,000,000 to ORBCOMM, of which
$7,500,000 has been funded so far in 1998. In addition, Orbital has provided
approximately $24,000,000 in vendor financing to ORBCOMM (one-half of which has
been advanced to Orbital by an affiliate of Teleglobe Inc.) and expects this
amount to increase.
Orbital anticipates that start-up of the ORBCOMM System will produce
substantial operating losses for several more years. The ORBCOMM System is
subject to various technological risks and limitations inherent in any
satellite-based communications system. Even if the ORBCOMM System is fully
constructed and operational, there can be no assurance that an adequate market
will develop for ORBCOMM services, that ORBCOMM will achieve profitable
operations or that Orbital will recover its past or anticipated investment in
ORBCOMM.
ORBIMAGE IMAGERY SERVICES. ORBIMAGE operates, and is further developing,
a fleet of satellites that collect, process and distribute digital imagery of
the Earth's surface (land and oceans), the atmosphere and weather conditions.
Small Earth-viewing satellites and related sensors and instruments placed in
low-Earth orbits are planned to offer cost-efficient image collection and
processing, together with daily global coverage and high-resolution imaging
quality.
In April 1995, ORBIMAGE launched its first satellite, OrbView-1, which
provides dedicated weather-related imagery and meteorological products to NASA
and other U.S. government-related users. ORBIMAGE's second satellite,
OrbView-2, was launched in August 1997 on a Pegasus vehicle and is used by
ORBIMAGE to deliver high-quality multi-spectral (color and infra-red) ocean
imagery and land surface imagery to government and commercial customers.
ORBIMAGE is in the process of completing the design of two high-resolution
imaging satellites, OrbView-3 and OrbView-4, which are being developed to
provide high-spatial resolution and, in the case of OrbView-4, hyper-spectral
(enhanced color and infra-red) imagery. OrbView-3 and OrbView-4 are scheduled
to be launched in 1999 and 2000, respectively. The Company believes that
OrbView-3 and OrbView-4 will be among the first commercial satellites with
high-resolution imagery capability and that OrbView-4 will be the world's first
satellite with commercially available hyper-spectral capability.
Under the ORBIMAGE System Procurement Agreement between Orbital and
ORBIMAGE (the "ORBIMAGE Procurement Agreement"), Orbital is designing,
manufacturing and providing the launch service for the OrbView-3 and OrbView-4
satellites, and is constructing the related ground segment, generally on a
fixed-price basis. Consistent with industry practices for
6
<PAGE> 10
similar contracts, the ORBIMAGE Procurement Agreement contains certain
performance incentives with respect to the satellites. Orbital also provides
ORBIMAGE with general, administrative and technical support pursuant to an
Administrative Services Agreement. These services are provided on a
cost-reimbursable basis or, in some cases, a cost plus fee basis.
In February 1998, ORBIMAGE completed a private financing of $150,000,000
of units consisting of 11 5/8% Senior Notes due 2005 and warrants to purchase
an aggregate of approximately 3% of ORBIMAGE's outstanding common stock.
Concurrently, the existing preferred stockholders in ORBIMAGE exercised an
option to purchase additional preferred stock of ORBIMAGE, resulting in net
proceeds to ORBIMAGE of approximately $21,000,000.
At December 31, 1997, Orbital owned approximately 100% of ORBIMAGE's
outstanding common stock and approximately 75% of the total voting interest in
ORBIMAGE (which reflects the voting interest of preferred stockholders on an
"as if" converted basis), with the remainder owned by a group of preferred
stockholders. As a result of certain rights granted to the preferred
stockholders, including the right to elect certain directors and have such
directors participate in significant management decisions, Orbital does not
control the operational and financial affairs of ORBIMAGE. In accordance with
the equity method of accounting, Orbital recognizes 100% of the revenues earned
and costs incurred on sales of products and services to ORBIMAGE. The Company
also recognizes as equity in earnings (losses) of affiliates its proportionate
share (based on Orbital's current common equity ownership) of ORBIMAGE's net
income available to common stockholders. To the extent ORBIMAGE capitalizes its
purchases from Orbital, the Company eliminates as equity in earnings (losses)
of affiliates its proportionate share (based on Orbital's current common equity
ownership) of profits from sales to ORBIMAGE.
In addition the preferred stockholders have certain demand registration
rights with respect to their shares after June 30, 2002. As of December 31,
1997, Orbital had invested approximately $55 million in ORBIMAGE. Orbital
anticipates that ORBIMAGE will incur operating losses at least in the near
term. There can be no assurance that an adequate market will develop for
ORBIMAGE's products and services, that it will achieve profitable operations or
that Orbital will recover its investment in ORBIMAGE.
* * * *
Financial information about the Company's products and services, domestic
and foreign operations and export sales is included in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" set forth in
Item 7 below and the notes to the Company's consolidated financial statements
set forth below in Item 8, and is incorporated herein by reference.
COMPETITION
Orbital believes that competition for sales of its products and services
is based on performance and other technical features, reliability, scheduling,
customization and price.
The primary domestic competition for the Pegasus and Taurus launch
vehicles comes from the Athena launch vehicles developed by Lockheed Martin
Corporation ("Lockheed"). In addition, Pegasus may face competition from launch
systems derived from U.S. government surplus ballistic missiles. The Israeli
Shavit vehicle and other potential foreign launch vehicles could also pose
competitive challenges to Pegasus, although U.S. government policy currently
prohibits the launch of foreign vehicles from U.S. territory. Competition for
Taurus could come from surplus Titan II launch vehicles, although a very
limited inventory remains, and from the Russian Cosmos SL-8 launch vehicle.
Competition to Pegasus and Taurus vehicles also exists in the form of partial
or secondary ("piggyback") payload capacity on larger boosters such as the
Ariane, Atlas and Delta launch vehicles. Orbital's primary competitors in the
suborbital launch vehicle product line are Coleman Research Corporation,
Lockheed and Space Vector Corporation.
The Company's satellites and satellite subsystems products compete with
products and services produced or provided by government entities and numerous
private entities, including TRW Inc., Ball Aerospace and Technology
Corporation, Lockheed, GM Hughes Electronics Corporation ("Hughes"), Spar
Aerospace Limited and Spectrum Astro, Inc. The Company's airborne and
ground-based electronics systems, including defense-oriented data management
systems, defense-oriented avionics products and imagery processing systems,
aviation systems and space sensors and instruments face competition from
several established manufacturers, including Smiths Industries, Lockheed
Sanders and Honeywell Inc. The Company's main competitors in the area of
satellite ground stations include
7
<PAGE> 11
Datron Systems Inc., Matra Marconi Space N.V. and Raytheon Corp. The Company's
Satellite Access Products primarily face competition from Trimble Navigation
Ltd., Garmin International, Lowrance Electronics, Philips Automotive
Electronics, Alpine Electronics and several other producers. The main
competitors with Orbital's transportation management systems are Rockwell,
Harris Corporation and TMS (Raytheon).
ORBCOMM, which provides satellite-based data communications services, may
face competition from numerous existing and proposed satellite-based and
terrestrial systems providing data communications services. ORBIMAGE may face
competition from U.S. and foreign governmental entities, and private entities
including Space Imaging EOSAT, EarthWatch and SPOT Image, that provide or are
seeking to provide satellite-based or aerial imagery products.
Many of the Company's competitors are larger and have substantially
greater resources than the Company. Furthermore, the possibility exists that
other domestic or foreign companies or governments, some with greater
experience in the space industry and greater financial resources than Orbital,
will seek to produce products or services that compete with those of the
Company. Any such foreign competitor could benefit from subsidies from, or
other protective measures by, its home country.
RESEARCH AND DEVELOPMENT
The Company expects to continue to invest in product-related research and
development, to conceive and develop new products and services, to enhance
existing products and services and to seek customer and, where appropriate,
strategic partner investments in these products and services. Orbital's
research and development expenses, excluding direct customer-funded
development, were approximately $33.1 million, $23.1 million and $28.6 million,
respectively, for the fiscal years ended December 31, 1997, 1996 and 1995.
PATENTS AND TRADEMARKS
Orbital relies, in part, on patents, trade secrets and design and
production know-how to develop and maintain its competitive position and
technological advantage. The Company holds U.S. and foreign patents relating to
the Pegasus vehicle, U.S. patents relating to certain components of the ORBCOMM
satellites, U.S. patents relating to certain of its GPS products, as well as
patents for other systems and products produced by the Company. The Company
also has various pending patent applications relating to Pegasus, the ORBCOMM
System and its GPS products along with other products. Certain of the
trademarks and service marks used in connection with the Company's products and
services have been registered with the U.S. Patent and Trademark Office, the
Canadian Intellectual Property Office and certain other foreign trademark
authorities.
COMPONENTS, RAW MATERIALS AND CARRIER AIRCRAFT
Orbital purchases a significant percentage of its product components,
including rocket propulsion motors, structural assemblies, electronic equipment
and computer chips, from third parties. Orbital also occasionally obtains from
the U.S. government parts and equipment that are used in the production of the
Company's products or in the provision of the Company's services. Orbital has
not experienced material difficulty in obtaining product components or
necessary parts and equipment and believes that alternative sources of supply
would be available, although increased costs and possible delays could be
incurred in securing alternative sources of supply. The Company's ability to
launch its Pegasus vehicle, the X-34 vehicle and certain new suborbital
vehicles depends on the availability of an aircraft with the capability of
carrying and launching such launch vehicles. In June 1997, Orbital purchased
the modified Lockheed L-1011 used for its Pegasus vehicle. Prior to that date,
Orbital had leased the L-1011 since 1991 from a commercial lending institution.
In the event that the L-1011 were to be unavailable, Orbital would experience
significant delays, expenses and loss of revenues as a result of having to
acquire and modify a new carrier aircraft.
U.S. GOVERNMENT CONTRACTS
During 1997, 1996 and 1995, approximately 42%, 45% and 40%, respectively,
of the Company's total annual revenues were derived from contracts with the
U.S. government and its agencies or from subcontracts with the U.S.
government's prime contractors. Most of Orbital's U.S. government contracts are
funded incrementally on a year-to-year basis.
8
<PAGE> 12
Changes in government policies, priorities or funding levels through agency or
program budget reductions by the U.S. Congress or executive agencies or the
imposition of budgetary constraints could materially adversely affect Orbital's
financial condition or results of operations. Agencies within the U.S.
government and commercial customers to which sales by the Company accounted for
ten percent or more of the Company's consolidated 1997 revenues were NASA and
DoD.
The accuracy and appropriateness of Orbital's direct and indirect costs
and expenses under its contracts with the U.S. government are subject to
extensive regulation and audit by the Defense Contract Audit Agency or by other
appropriate agencies of the U.S. government. These agencies have the right to
challenge Orbital's cost estimates or allocations with respect to any such
contract. Additionally, a substantial portion of payments to the Company under
U.S. government contracts are provisional payments that are subject to
potential adjustment upon audit by such agencies. Orbital believes that any
adjustments likely to result from inquiries or audits of its contracts will not
have a material adverse impact on its financial condition or results of
operations. Since Orbital's inception, it has not experienced any material
adjustments as a result of any such inquiries or audits.
Orbital's major contracts with the U.S. government fall into three
categories: firm fixed-price contracts, fixed-price incentive fee contracts and
cost-plus-fee contracts. Under firm fixed-price contracts, work performed and
products shipped are paid for at a fixed price without adjustment for actual
costs incurred in connection with the contract. Risk of loss due to increased
cost, therefore, is borne by the Company, although some of this risk may be
passed on to subcontractors. Under fixed-price government contracts, Orbital
may receive progress payments, generally in an amount equal to between 80% and
95% of monthly costs and profits, or it may receive milestone payments upon the
occurrence of certain program achievements, with final payments occurring at
project completion.
Fixed-price incentive fee contracts provide for sharing by the customer
and the Company of unexpected costs incurred or savings realized within
specified limits, and may provide for adjustments in price depending on actual
contract performance other than costs. Costs in excess of the negotiated
maximum (ceiling) price and the risk of loss by reason of such excess costs are
borne by the Company, although some of this risk may be passed on to
subcontractors. Under a cost-plus-fee contract, Orbital recovers its actual
allowable costs incurred and receives a fee consisting of a base amount that is
fixed at the inception of the contract and/or an award amount that is based on
the U.S. government's subjective evaluation of the Company's performance in
terms of the criteria stated in the contract.
All of Orbital's U.S. government contracts and, in general, its
subcontracts with the U.S. government's prime contractors provide that such
contracts may be terminated at will by the U.S. government or the prime
contractor (at the request of the U.S. government), respectively. Furthermore,
any of these contracts may become subject to a government-issued stop work
order under which the Company would be required to suspend production. In the
event of a termination at will, Orbital would normally be entitled to recovery
of the purchase price for delivered items, reimbursement for allowable costs
for work in process and an allowance for reasonable profit thereon or
adjustment for loss if completion of performance would have resulted in a loss.
The Company from time to time experiences contract suspensions and
terminations.
REGULATION
The ability of Orbital to pursue its business activities is regulated by
various agencies and departments of the U.S. government and, in certain
circumstances, the governments of other countries. Commercial space launches
require licenses from the U.S. Department of Transportation (the "DoT") and
operation by Orbital of its L-1011 aircraft requires licenses from certain
agencies of the DoT, including the Federal Aviation Administration.
Construction, launch and operation of commercial communications satellites,
including the satellite-based two-way data communications network to be
provided by ORBCOMM, require licenses from the U.S. Federal Communications
Commission (the "FCC") and frequently require the approval of international and
individual country regulatory authorities. ORBCOMM has its necessary FCC
regulatory authority to operate its system but still must obtain certain
foreign regulatory approvals. In addition, commercial remote imagery satellite
systems such as ORBIMAGE require licenses from the U.S. Department of Commerce
(the "DoC") and the FCC for the construction, launch and operation of remote
imaging satellites. ORBIMAGE has its DoC remote sensing licenses and has filed
an application with the FCC for a license to construct, launch and operate the
OrbView-3 and OrbView-4 satellites. Exports of Orbital's products, services and
technical information frequently require licenses from the U.S. Department of
State or the DoC.
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<PAGE> 13
There can be no assurance that the Company will continue to be successful in
its efforts to obtain necessary licenses or regulatory approvals. The inability
of the Company, ORBCOMM or ORBIMAGE to secure any necessary licenses or
approvals could have a material adverse effect on the financial condition or
results of operations of the Company.
BACKLOG
Orbital's contract backlog is attributable to its Space and Ground
Infrastructure Systems business. The Company's firm backlog at December 31,
1997 and 1996 was approximately $1,040,000,000 and $710,000,000, respectively.
As of December 31, 1997, approximately 50% of the Company's backlog was with
the U.S. government and its agencies or from subcontracts with the U.S.
government's prime contractors. Firm backlog consists of aggregate contract
values for firm product orders, excluding the portion previously included in
operating revenues on the basis of percentage of completion accounting, and
including government contract orders not yet funded in the amounts of
approximately $435,000,000 and $265,000,000 as of December 31, 1997 and 1996,
respectively. Approximately $550,000,000 of backlog is currently scheduled to
be performed beyond 1998. Firm backlog excludes unexercised contract options
and undefinitized contracts having an aggregate potential contract value at
December 31, 1997 of approximately $1,900,000,000.
EMPLOYEES
As of December 31, 1997, Orbital had nearly 4,000 full-time permanent
employees. The Company does not have any collective bargaining agreements with
its employees and believes its employee relations are good.
ITEM 2. PROPERTIES
Orbital owns or leases over 1.5 million square feet of office,
engineering and manufacturing space in various locations throughout the world.
In 1993, Orbital entered into a 12-year lease agreement for approximately
100,000 square feet of office and engineering space in Dulles, Virginia, which
serves as its corporate headquarters. The Company owns an approximately 59,200
square-foot satellite development facility on land adjacent to the Dulles
office facility for engineering and manufacturing space. Orbital also leases
approximately 73,000 square feet of office, engineering and manufacturing space
in McLean, Virginia; 350,000 square feet of office, engineering and
manufacturing space in Germantown, Maryland; 310,000 square feet of office,
engineering and manufacturing space in Chandler, Arizona; 181,000 square feet
of office and engineering space in Richmond, British Columbia; 135,000 square
feet of office, engineering and manufacturing space in Pomona, California;
75,000 square feet of office, engineering and manufacturing space in San Dimas,
California; and 74,000 square feet of office, engineering and manufacturing in
Sunnyvale, California. The Company leases or owns other smaller facilities,
offices or manufacturing space around the United States, including Huntsville,
Alabama; Edwards Air Force Base, California; Vandenberg Air Force Base,
California; Beltsville, Greenbelt and Lanham, Maryland; Rochester Hills,
Michigan; and Plano, Texas. The Company also leases or owns smaller facilities,
offices or manufacturing space in locations around the world including Canada,
England, Russia and Indonesia. Although completion of the Company's existing
and pending contracts may in the future require additional manufacturing
capacity, Orbital believes that its existing facilities are adequate for its
near-term requirements.
ITEM 3. LEGAL PROCEEDINGS
On October 10, 1996, Thomas van der Heyden, a former employee of CTA,
filed a lawsuit in the Circuit Court for Montgomery County, Maryland against
CTA and certain of its subsidiaries alleging that such companies breached a
profit sharing agreement with respect to the satellite contract for PT
MediaCitra Indostar, and initially seeking $30 million in compensatory damages
and $150 million in punitive damages. The dispute is now in arbitration. As a
result of the CTA acquisition, Orbital acquired the stock of the subsidiaries
that are parties to the proceedings. Under the terms of the CTA acquisition,
CTA has agreed to indemnify Orbital against damages arising from the
arbitration proceeding. The case was heard by a board of arbitrators in
February 1998 and a decision is pending.
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<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter submitted to a vote of the Company's security holders
during the fourth quarter of 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of the
Executive Officers of Orbital as of March 1, 1998. All Executive Officers are
appointed annually and serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David W. Thompson...................... 43 Chairman of the Board, President and Chief Executive Officer
James R. Thompson...................... 61 Director, Executive Vice President and General Manager/Launch
Systems Group
Robert R. Lovell....................... 60 Executive Vice President and General Manager/Space Systems Group
Robert D. Strain....................... 41 Executive Vice President and General Manager/Electronics and Sensor
Systems Group
Daniel E. Friedmann.................... 41 Executive Vice President and General Manager/Systems Integration and
Software Group
Charles M. Boesenberg.................. 49 Executive Vice President and General Manager/Satellite Access Products
Group; President and Chief Executive Officer of Magellan
Michael D. Griffin..................... 48 Executive Vice President and Chief Technical Officer
Jeffrey V. Pirone...................... 37 Executive Vice President and Chief Financial Officer
Leslie C. Seeman....................... 45 Senior Vice President, General Counsel and Secretary
Antonio L. Elias....................... 48 Senior Vice President and General Manager/Advanced Programs Group
</TABLE>
David W. Thompson is co-founder of Orbital and has been Chairman of the
Board, President and Chief Executive Officer of the Company since 1982. Prior
to founding Orbital, Mr. Thompson was employed by Hughes Electronics
corporation as special assistant to the President of its Missile Systems Group
and by NASA at the Marshall Space Flight Center as a project manager and
engineer, and also worked at the Charles Stark Draper Laboratory on the Space
Shuttle's autopilot design. Mr. Thompson serves as Chairman of the Board and
Chief Executive Officer of ORBIMAGE, as Chairman of Magellan, and as a Director
of ORBCOMM, each an Orbital affiliate.
James R. Thompson (who is not related to David W. Thompson) has been
Executive Vice President and General Manager/Launch Systems Group since 1993
and a Director of the Company since 1992. Mr. Thompson was Executive Vice
President and Chief Technical Officer of Orbital from 1991 to 1993. He was
Deputy Administrator of NASA from 1989 to 1991. From 1986 until 1989, Mr.
Thompson was Director of NASA's Marshall Space Flight Center. He was Deputy
Director for Technical Operations at Princeton University's Plasma Physics
Laboratory from 1983 through 1986. Before that, he had a 20-year career with
NASA at the Marshall Space Flight Center. He is a director of SPACEHAB
Incorporated and Nichols Research Corp.
Robert R. Lovell has been Executive Vice President and General
Manager/Space Systems Group since 1997. From 1994 to 1997, he was Senior Vice
President for Special Projects at Orbital. Mr. Lovell previously served as
Executive Vice President and General Manager/Space Systems Group from 1993 to
1994. From 1990 to 1993, he was President/Space Systems Division of Orbital
and, from 1987 to 1989, he served as Vice President/Space Applications. From
1980 to 1987, Mr. Lovell was employed by NASA as Director of the Communications
Division in the Office of Space Science and Applications. Before that, he had
an 18-year career with NASA at the Lewis Research Center.
Robert D. Strain has been Executive Vice President and General
Manager/Electronics and Sensor Systems Group since 1996. From 1994 until 1996,
he was Vice President for Finance and Manufacturing at Orbital. Prior to that
he served in a variety of senior-level financial positions with Fairchild,
including Vice President of Finance, Treasurer and Controller. Before joining
Fairchild, Mr. Strain held several senior financial positions with NWL Control
Systems.
Daniel E. Friedmann has been Executive Vice President and General
Manager/Systems Integration and Software Group since 1996. He also continues to
serve as President and Chief Executive Officer of Orbital's Canadian
subsidiary, MDA, a position he has held since 1995. From 1992 to 1995, he
served as Executive Vice President and Chief Operating Officer of MDA. Between
1979 and 1992, he held a variety of positions at MDA, including serving as Vice
President of various divisions.
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<PAGE> 15
Charles M. Boesenberg has been President and Chief Executive Officer of
Magellan and Executive Vice President and General Manager, Satellite Access
Products since January 1998, upon the merger of Ashtech with Magellan. From
1994 until 1997, Mr. Boesenberg was President, Chief Executive Officer and a
director of Ashtech. From 1992 to 1994, Mr. Boesenberg was Chairman of the
Board, President and Chief Executive Officer of Central Point Software, Inc.
From 1991 to 1992, Mr. Boesenberg was President of MIPS Computer Systems, Inc.
("MIPS"), a semiconductor and computer systems company, now a subsidiary of
Silicon Graphics, Inc. He joined MIPS in 1989 as Executive Vice President of
Marketing. From 1987 to 1989, Mr. Boesenberg was Senior Vice President, U.S.
Sales and Marketing of Apple Computer, Inc.
Michael D. Griffin has been Executive Vice President and Chief Technical
Officer since 1997. From 1996 to 1997, Dr. Griffin served as Executive Vice
President and General Manager/Space Systems Group. Dr. Griffin joined Orbital
in 1995 when he was appointed Senior Vice President and Chief Technical
Officer. From 1994 to 1995, he was Senior Vice President for Program
Development at Space Industries International. From 1991 to 1994, he served as
Chief Engineer of NASA and, from 1989 to 1991, was Deputy Director for
Technology at the Strategic Defense Initiative Organization.
Jeffrey V. Pirone has been Executive Vice President and Chief Financial
Officer since January 1998, and was Senior Vice President and Chief Financial
Officer since 1996. From 1993 until 1996, Mr. Pirone served as Vice President
and Controller of Orbital. Mr. Pirone joined Orbital as Controller in 1991, and
prior to that was a Senior Manager at KPMG Peat Marwick LLP.
Leslie C. Seeman has been Senior Vice President of the Company since 1993
and General Counsel and Secretary of the Company since 1989. From 1989 to 1993,
Ms. Seeman was Vice President of the Company, and from 1987 to 1989, she was
Assistant General Counsel of Orbital. From 1984 to 1987, she was General
Counsel of Source Telecomputing Corporation, a telecommunications company.
Prior to that, she was an attorney at the law firm of Wilmer, Cutler and
Pickering.
Antonio L. Elias has been Senior Vice President and General
Manager/Advanced Programs Group since 1997. From 1996 until 1997, Dr. Elias
served as Senior Vice President and Chief Technical Officer of Orbital. From
1993 through 1995 he was Senior Vice President for Advanced Projects and was
Senior Vice President/Space Systems Division from 1990 to 1993. He was Vice
President/Engineering of Orbital from 1989 to 1990 and was Chief Engineer from
1986 to 1989. From 1980 to 1986, Dr. Elias was an Assistant Professor of
Aeronautics and Astronautics at Massachusetts Institute of Technology.
12
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On March 24, 1998, there were 1,351 Orbital stockholders of record. The
Company's Common Stock is traded on the Nasdaq National Market under the symbol
ORBI. The range of high and low sales prices of Orbital Common Stock for 1995
through 1997, as reported on the Nasdaq National Market, was as follows:
<TABLE>
<CAPTION>
1997 HIGH LOW
---------------------------------------
<S> <C> <C>
4th Quarter $30 3/4 $21
3rd Quarter $25 $15 7/8
2nd Quarter $18 $12 3/4
1st Quarter $19 1/4 $13 3/4
<CAPTION>
1996 HIGH LOW
---------------------------------------
<S> <C> <C>
4th Quarter $21 7/8 $16 1/4
3rd Quarter $20 $16
2nd Quarter $19 7/8 $13
1st Quarter $16 1/8 $11 3/4
<CAPTION>
1995 HIGH LOW
---------------------------------------
<S> <C> <C>
4th Quarter $16 5/8 $12 3/16
3rd Quarter $19 1/4 $16
2nd Quarter $22 $15 1/2
1st Quarter $20 1/2 $16 1/2
</TABLE>
Orbital has never paid any cash dividends on its Common Stock. The
Company presently intends to retain future earnings for working capital and
product development and therefore does not anticipate paying cash dividends on
the Common Stock at any time in the foreseeable future. In addition, the
Company is prohibited from paying cash dividends under an existing credit
facility.
13
<PAGE> 17
ITEM 6. FINANCIAL DATA
Management has determined to restate its previously issued consolidated
financial statements as of and for the years ended December 31, 1997, 1996 and
1995 with respect to certain matters described in Note 1A to the Company's
consolidated financial statements. The following selected consolidated
financial data should be read in conjunction with the consolidated financial
statements and notes thereto included in this Report. The consolidated
operating data and other data for the three-year period ended December 31, 1997
and the consolidated balance sheet data at December 31, 1997 and 1996 are
derived from and should be read in conjunction with the audited consolidated
financial statements and notes thereto included in this Report. The
consolidated operating data and other data for the years ended December 31,
1994 and 1993 and the consolidated balance sheet data at December 31, 1995,
1994 and 1993 are derived from consolidated financial statements not included
or incorporated by reference herein.
<TABLE>
<CAPTION>
Years ended December 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------------------------------------
(restated) (restated) (restated)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $ 546,008 $ 449,787 $ 359,840 $ 301,576 $ 300,184
Costs of goods sold 413,361 332,581 271,146 216,417 228,289
-------------------------------------------------------------------
Gross profit 132,647 117,206 88,694 85,159 71,895
Research and development expenses 33,140 23,068 28,558 17,259 19,703
Selling, general and administrative expenses 88,148 77,247 64,170 53,165 38,270
Amortization of goodwill 3,852 3,134 3,221 2,360 1,634
-------------------------------------------------------------------
Income (loss) from operations 7,507 13,757 (7,255) 12,375 12,288
Net investment income (expense) (990) (49) 1,131 (244) (44)
Equity in earnings (losses) of affiliates (25,094) (7,008) (644) (1,264) (2,436)
Non-controlling interests in (earnings) losses of
consolidated subsidiaries 2,638 1,473 427 -- --
Gain on issuance of subsidiary equity 21,810 -- -- -- --
Acquisition expenses (4,343) -- (3,441) (503) --
-------------------------------------------------------------------
Income (loss) before provision (benefit) for
income taxes, extraordinary items and
cumulative effect of accounting change 1,528 8,173 (9,782) 10,364 9,808
Provision (benefit) for income taxes 12,933 211 (6,569) 2,744 2,403
-------------------------------------------------------------------
Income (loss) before extraordinary item and
cumulative effect of accounting change (11,405) 7,962 (3,213) 7,620 7,405
Extraordinary item - gain on sale of assets,
net of tax -- 1,980 -- -- --
Cumulative effect of accounting change, net of tax -- -- (2,377) -- 200
-------------------------------------------------------------------
Net income (loss) $(11,405) $ 9,942 $ (5,590) $ 7,620 $ 7,605
===================================================================
NET INCOME (LOSS) PER COMMON SHARE (1):
Income (loss) before extraordinary items and
cumulative effect of accounting change $ (0.35) $ 0.27 $ (0.12) $ 0.33 $ 0.40
Extraordinary item - gain on sale of assets,
net of tax -- 0.07 -- -- --
Cumulative effect of accounting change -- -- (0.09) -- 0.01
-------------------------------------------------------------------
$ (0.35) $ 0.34 $ (0.21) $ 0.33 $ 0.41
===================================================================
Shares used in computing net income (loss)
per common share 32,283,138 29,137,361 26,207,746 23,191,553 18,728,980
===================================================================
NET INCOME (LOSS) PER COMMON SHARE, ASSUMING DILUTION (2):
Income (loss) before extraordinary items and
cumulative effect of accounting change $ (0.35) $ 0.30 $ (0.12) $ 0.32 $ 0.36
Extraordinary item-gain on sale of assets,
net of taxes -- 0.04 -- -- --
Cumulative effect of accounting change -- -- (0.09) -- 0.01
-------------------------------------------------------------------
$ (0.35) $ 0.34 $ (0.21) $ 0.32 $ 0.37
===================================================================
Shares used in computing net income (loss)
per common share, assuming dilution 32,283,138 31,616,119 26,207,746 27,309,336 22,343,402
===================================================================
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments $ 15,126 $ 33,750 $ 35,030 $ 40,345 $ 85,347
Net working capital 53,201 71,055 78,778 57,449 92,036
Total assets 777,885 509,613 472,900 441,042 367,979
Short-term borrowings 29,767 38,969 11,907 28,977 15,793
Long-term obligations, net 200,194 35,326 96,990 86,068 73,165
Stockholders' equity 313,984 323,795 238,166 206,943 169,389
-------------------------------------------------------------------
</TABLE>
(1) Net income (loss) per common share is calculated using the weighted
average number of shares outstanding during the periods.
(2) Net income (loss) per common share, assuming dilution, is calculated
using the weighted average number of shares and dilutive equivalent
shares outstanding during the periods, plus the effect of an assumed
conversion of the company's convertible subordinated notes.
14
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
With the exception of historical information, the matters discussed below
under the headings "Recent Developments," "Results of Operations" and
"Liquidity and Capital Resources" and in the report to stockholders include
forward-looking statements that involve risks and uncertainties, many of which
are beyond the company's control. The company wishes to caution readers that a
number of important factors, including those identified in the section
"Outlook: Issues and Uncertainties," may affect the company's actual results
and cause actual results to differ materially from those in any forward-looking
statement. References herein to "Orbital" or the "company" include Orbital
Sciences Corporation and its subsidiaries.
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, professional 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.
A significant portion of the company's space and ground infrastructure
systems revenues are generated under long-term contracts with various agencies
of the U.S. government, various foreign governments and commercial customers.
Orbital recognizes revenues on long-term contracts using the
percentage-of-completion method of accounting, under which revenues and profits
are recognized based on actual costs incurred in relation to total estimated
costs to complete the contract or specific delivery terms and conditions. To
the extent that estimated costs of completion are adjusted, revenue recognized
from a particular contract will be affected in the period of the adjustment.
The company is accounting for its investments in ORBCOMM Global, L.P.
("ORBCOMM") and in Orbital Imaging Corporation ("ORBIMAGE") using the equity
method of accounting. In accordance with the equity method of accounting,
Orbital recognizes 100% of the revenues earned and costs incurred on sales of
products and services to these entities. The company also recognizes as equity
in earnings (losses) of affiliates its proportionate share of ORBCOMM's and
ORBIMAGE's profits and losses based on the Company's percentage of partnership
interest and common equity ownership, respectively. ORBCOMM and ORBIMAGE are
currently capitalizing substantially all system construction costs, including
amounts paid to Orbital. To the extent ORBCOMM and ORBIMAGE capitalize their
purchases from Orbital, the company eliminates as equity in earnings (losses)
of affiliates the Company's share of its profits from sales to ORBCOMM and
ORBIMAGE based on the Company's percentage of common equity ownership and
partnership interest, respectively. Orbital controls, and therefore
consolidates the accounts of, ORBCOMM USA, L.P., a partnership that markets
ORBCOMM system services in the United States.
Certain of the 1997, 1996 and 1995 financial information has been
restated. See Notes 1A and 14 to the consolidated financial statements.
RECENT DEVELOPMENTS
Orbital's majority owned subsidiary, Magellan Corporation, merged with
Ashtech Inc. ("Ashtech") (the combined company is hereinafter referred to as
("Magellan") in December 1997. To effect the merger, Orbital paid former
Ashtech security holders approximately $80,000,000, consisting of $25,000,000
in cash and approximately 23,954,000 shares of Magellan common stock. Orbital
now owns a controlling interest of approximately 66% of Magellan. Orbital
recognized a gain of approximately $21,810,000 on the issuance of Magellan
common stock.
The company acquired substantially all the assets, including all the
stock of certain subsidiaries, and certain liabilities relating to the
satellite manufacturing and communications services businesses of CTA
Incorporated ("CTA") in August 1997. The financial results of the acquired
businesses have been included in the company's consolidated results from August
15, 1997 through December 31, 1997. As consideration, Orbital repaid
$27,000,000 of outstanding CTA debt and paid approximately $13,000,000 in cash,
which may be reduced subject to certain post-closing adjustments.
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<PAGE> 19
In July 1997, Orbital formed Magellan DIS Inc. ("DIS") to acquire from
Rockwell International Corporation ("Rockwell") the assets and certain
liabilities associated with Rockwell's automotive navigation product line.
Orbital paid approximately $3,550,000 in cash and issued Rockwell a $4,350,000
unsecured note, which bears interest at 6% and is repayable semi-annually over
three years. The stock of DIS was subsequently transferred to Magellan.
During September 1997, Orbital sold $100,000,000 of 5% convertible
subordinated notes due October 2002. The notes, which are non-callable for
three years, are convertible at the option of the holders into Orbital common
stock at a conversion price of $28.00 per share, subject to adjustment in
certain events.
In May and July 1997, ORBIMAGE completed private placements of 300,100
and 72,605 shares, respectively, of 12% cumulative convertible preferred stock,
raising gross proceeds of approximately $37,270,000. Also in May 1997, Orbital
purchased ORBIMAGE common stock. At December 31, 1997 Orbital owned 100% of
ORBIMAGE's outstanding common stock and approximately 75% of the total voting
interest in ORBIMAGE (which reflects the voting interest of preferred
stockholders on an "as if" converted basis). Orbital's total investment in and
advances to ORBIMAGE as of December 31, 1997 totaled $55,137,000. As a result
of certain rights provided to ORBIMAGE's preferred shareholders, Orbital no
longer controls ORBIMAGE's financial and operational affairs. Additionally,
Orbital had agreed to purchase up to approximately $42,000,000 in ORBIMAGE
preferred stock to the extent that ORBIMAGE could not obtain additional
third-party financing. In connection with certain ORBIMAGE financing
transactions consummated in February 1998, Orbital has been fully relieved of
this obligation (see "Liquidity and Capital Resources") and now owns
approximately 60% of the total voting interest in ORBIMAGE after giving effect
to the conversion of ORBIMAGE's convertible preferred stock.
The company had $158,934,000 in total consolidated export sales in 1997,
of which $68,563,000 were to Asian customers. Orbital had approximately
$18,204,000 outstanding in accounts receivable from Asian customers at December
31, 1997, $3,606,000 of which was paid in the first quarter of 1998. The
company has sought to reduce risks related to these accounts receivable and
future work commitments by obtaining letters of credit from certain customers,
and at December 31, 1997 had approximately $13,251,000 of letters of credit
with respect to such receivables. Existing backlog attributable to Asian
customers is not material to the company's operations. The company does not
have any material exposure to interest rate changes, commodity price changes,
foreign currency fluctuations, or similar market risks, although it does enter
into forward exchange contracts to hedge against specific foreign currency
fluctuations, principally with respect to the Canadian dollar.
The company has made a preliminary assessment of potential "Year 2000"
issues with respect to various computer-related systems. The company has
developed an initial corrective action plan that includes reprogramming
impacted software when appropriate and feasible, obtaining vendor-provided
software upgrades when available and completely replacing impacted systems when
necessary. The company currently expects that identified "Year 2000" impacted
systems will be corrected by the end of 1998, although there can be no
assurance that the company has identified all "Year 2000" impacted systems or
that its corrective action plan will be timely and successful. The company
believes that the costs to correct its systems will not materially affect its
results of operations or its financial condition. In addition, the company has
not received any indication to date that the impact of "Year 2000" issues on
its customers and suppliers will have a material adverse effect on the company.
RESULTS OF OPERATIONS
As noted above, certain of the 1997, 1996 and 1995 financial information
presented below has been restated. See note 1A to the consolidated financial
statements.
The following table shows the company's revenues, gross profits and gross
margins, by major product category within each business sector, for each of the
three years ended December 31, 1997:
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<PAGE> 20
<TABLE>
<CAPTION>
1997 (restated) 1996 (restated) 1995 (restated)
-------------------------------- ----------------------------- ------------------------------
GROSS GROSS GROSS
(DOLLARS IN THOUSANDS) REVENUES PROFIT MARGIN REVENUES PROFIT MARGIN REVENUES PROFIT MARGIN
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SPACE AND GROUND
INFRASTRUCTURE SYSTEMS $ 474,452 $ 114,653 24.2% $ 377,166 $ 93,899 24.9% $ 296,109 $ 65,360 22.1%
Launch Vehicles 120,203 26,516 22.1 103,687 18,769 18.1 67,803 7,462 11.0
Satellites (1) 175,450 42,472 24.2 101,891 22,625 22.2 82,849 10,431 12.6
Electronics and
Sensor Systems 100,554 26,263 26.1 92,070 26,608 28.9 71,983 24,597 34.2
Ground Systems 78,245 19,402 24.8 79,518 25,897 32.6 73,474 22,870 31.1
SATELLITE ACCESS PRODUCTS 71,384 18,205 25.5 71,188 25,134 35.3 52,531 20,085 38.2
SATELLITE SERVICES (2) 172 (211) N/A 1,433 (1,827) N/A 11,200 3,249 29.0
------------------------------------------------------------------------------------------------------
CONSOLIDATED TOTALS $ 546,008 $ 132,647 24.3% $ 449,787 $ 117,206 26.1% $ 359,840 $ 88,694 24.6%
======================================================================================================
</TABLE>
(1) Includes results from the CTA acquisition from August 15, 1997.
(2) Consolidates ORBIMAGE's results until May 8, 1997.
REVENUES
Orbital's consolidated revenues for the years ended December 31, 1997,
1996 and 1995 were $546,008,000, $449,787,000 and $359,840,000, respectively.
Space and Ground Infrastructure Systems. Revenues from the company's
space and ground infrastructure systems increased to $474,452,000 in 1997 from
$377,166,000 in 1996 and $296,109,000 in 1995.
Revenues from the company's launch vehicles increased to $120,203,000 in
1997, from $103,687,000 in 1996 and $67,803,000 in 1995. The increase in launch
vehicle revenues in 1997 can be attributed to new orders received since 1995.
The company had five consecutive successful Pegasus launches and six
consecutive successful suborbital launches in 1997. Additionally, more revenues
were generated in 1997 for work performed on the X-34 reusable launch vehicle
and on the company's Taurus launch vehicle contracts. The significant increase
in revenues in 1996 was attributable to revenues generated from the resumption
of production and launch of the Pegasus launch vehicle after a 1995 launch
failure and from work performed under new and existing contracts for the
company's Taurus launch vehicle.
Revenues from sales of satellites increased to $175,450,000 in 1997, from
$101,891,000 in 1996 and $82,849,000 in 1995. The significant increase in 1997
satellite revenues was primarily due to new satellite orders received in the
second half of 1996 and in 1997. Revenues in 1997 also included approximately
$54,090,000 of sales generated by the satellite business acquired from CTA. The
increase in 1996 revenues was primarily attributable to additional revenues
generated from new satellite orders from commercial and government customers
received in late 1995 and in 1996.
Electronics and sensor systems revenues increased to $100,554,000 in
1997, from $92,070,000 in 1996 and $71,983,000 in 1995. The increase in 1997
and 1996 revenues was primarily attributable to work performed on new avionics
and mission planning systems orders received in 1996 and 1997.
Ground systems revenues were $78,245,000, $79,518,000 and $73,474,000 in
1997, 1996 and 1995, respectively. The decrease in 1997 revenues from 1996
revenues was primarily due to the 1996 sale of a software-related business that
had generated 1996 revenues of approximately $15,755,000. The increase in
revenues in 1996 was primarily attributable to an increase in the number of
satellite ground system installations and upgrades.
Orbital's space and ground infrastructure systems sector revenues
included sales to ORBCOMM of approximately $57,988,000, $47,215,000 and
$49,187,000 in 1997, 1996 and 1995, respectively, and to ORBIMAGE of
approximately $30,079,000 in 1997. The company expects total 1998 sales to
ORBCOMM and ORBIMAGE to be less than those recorded in 1997, based on the
remaining work to be done under their respective procurement contracts.
Satellite Access Products. Revenues from sales of recreational and
automotive satellite-based navigation products, communications products and
transportation management systems were $71,384,000 for 1997 as compared to
$71,188,000 in 1996 and $52,531,000 in
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<PAGE> 21
1995. The year-to-year increases were due to an increase in the number of
products sold offset, in part, by lower average unit sales prices. Magellan's
revenues in 1997 were negatively impacted by increased competition in its
recreational and marine navigational markets.
Satellite Services. The company's satellite services businesses generated
revenues of $172,000, $1,433,000 and $11,200,000 for 1997, 1996 and 1995,
respectively. As a result of ORBIMAGE's private placement of preferred stock,
subsequent to May 8, 1997, Orbital no longer consolidates ORBIMAGE's operating
revenues, resulting in a decrease in 1997 satellite services revenues. Revenues
in 1996 included modest domestic ORBCOMM sales and ORBIMAGE sales of satellite
imagery to government customers. Revenues in 1995 primarily represented sales
of ground stations and network software to ORBCOMM; no such sales were made in
1997 or 1996.
GROSS PROFIT/COSTS OF GOODS SOLD
Costs of goods sold include the costs of personnel, materials,
subcontracts and overhead related to commercial products and under the
company's various development and production contracts. Orbital's costs of
goods sold for 1997, 1996 and 1995 were $413,361,000 (75.7% of revenues),
$332,581,000 (73.9% of revenues) and $271,146,000 (75.4% of revenues),
respectively. Gross profit depends on a number of factors, including the mix of
contract types and costs incurred thereon in relation to estimated costs. The
company's gross profit for 1997, 1996 and 1995 was $132,647,000 (24.3% of
revenues), $117,206,000 (26.1% of revenues) and $88,694,000 (24.6% of
revenues), respectively.
Space and Ground Infrastructure Systems. Gross profit from the company's
space and ground infrastructure systems sector was $114,653,000 (24.2% or
revenues), $93,899,000 (24.9% of revenues) and $65,360,000 (22.1% of revenues)
for 1997, 1996 and 1995, respectively. Gross profit margins from the space and
ground infrastructure systems sector for 1997 were generally consistent with
1996 margins. Gross profit margins were slightly higher in 1996 than in 1995
due to the inclusion of higher margins from a software-related business that
was sold in 1996.
Gross profit margins in this sector are impacted by management's periodic
assessments and reevaluations of programmatic risks included in estimated costs
to complete long-term contracts. During the fourth quarter of 1997, the company
recognized approximately $5,000,000 of contract costs related to increases in
estimated costs to complete certain launch vehicle and satellite contracts.
During 1997 and 1996, the company recognized an increase in gross profit of
$2,647,000 and $2,523,000, respectively, related to the write-off or expiration
of certain Canadian development loans no longer required or not expected to be
repaid. During 1996, profit margins decreased as a result of a Pegasus launch
failure and certain other unanticipated contract cost increases.
The decrease in gross profit margins in 1997 for the company's
electronics and sensor systems was largely due to the completion of a defense
sensors contract under which the company had traditionally achieved higher
gross margins.
Satellite Access Products. Gross profit from our satellite access
products sector was $18,205,000 (25.5% of sector revenues), $25,134,000 (35.3%
of revenues) and $20,085,000 (38.2% of sector revenues) for 1997, 1996 and
1995, respectively. The decrease in gross profit margins from 1996 to 1997 for
the company's satellite access products was due to lower unit sales prices for
satellite navigation products and certain fourth quarter reorganizational
charges at Magellan, leading to overall operating losses within this sector.
During 1997, Magellan recognized approximately $500,000 of charges for
inventory obsolescence relating to consumer navigation products.
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 during 1997, 1996 and 1995 were $33,140,000 (6.1% of
revenues), $23,068,000 (5.1% of revenues) and $28,558,000 (7.9% of revenues),
respectively. Research and development spending during 1997 and 1996 related
primarily to the development of new or improved satellite navigation and
communications products, improved launch vehicles, including enhancements to
the Taurus and Pegasus launch vehicles, and new satellite initiatives. Research
and development spending during 1995 reflected Orbital's continued development
of its Pegasus launch vehicle and costs related to an advanced reusable launch
vehicle development program.
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<PAGE> 22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include the costs of
marketing, advertising, promotion and other selling expenses, as well as the
costs of the finance, administrative and general management functions of the
company. Selling, general and administrative expenses for 1997, 1996 and 1995
were $88,148,000 (16.1% of revenues), $77,247,000 (17.2% of revenues) and
$64,170,000 (17.8% of revenues), respectively. In the fourth quarter of 1997,
Orbital recognized increases in allowances for receivables related to a certain
satellite construction contract of approximately $3,000,000. The continued
decrease in selling, general and administrative expenses as a percentage of
revenues in 1997 was primarily attributable to significant growth in space and
ground infrastructure systems revenues, along with only modest growth in
selling, general and administrative expenses attributable to those product
lines. Additionally, subsequent to May 1997 the company no longer consolidates
ORBIMAGE's administrative and marketing expenses.
NET INVESTMENT INCOME (EXPENSE)
Net investment income (expense) was ($990,000), ($49,000) and $1,131,000
for 1997, 1996 and 1995, respectively. Investment income reflected interest
earnings on short-term investments and realized gains and losses on
investments, reduced by interest expense on outstanding debt of $2,894,000,
$1,412,000 and $2,952,000 in 1997, 1996 and 1995, respectively. Interest
expense was net of capitalized interest of approximately $7,257,000, $8,156,000
and $6,685,000 in 1997, 1996 and 1995, respectively.
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES AND NON-CONTROLLING INTERESTS IN
(EARNINGS) LOSSES OF CONSOLIDATED SUBSIDIARIES
Equity in earnings (losses) of affiliates included Orbital's
proportionate share of ORBCOMM's and ORBIMAGE's net income or loss for the
year, and Orbital's elimination of proportionate profits or losses on sales to
these affiliates. In 1997, Orbital's share of ORBCOMM's and ORBIMAGE's net loss
was $13,004,000 and $5,393,000, respectively. In 1996, Orbital's share of
ORBCOMM's net loss was approximately $8,268,000. In 1995, Orbital's share of
ORBCOMM's net income was approximately $454,000. Non-controlling interests in
(earnings) losses of consolidated subsidiaries represent that portion of such
subsidiaries' losses allocable to other stockholders.
PROVISION (BENEFIT) FOR INCOME TAXES
The company recorded consolidated income tax provisions of $12,933,000
and $211,000 for 1997 and 1996, respectively. The company's effective tax rate
for these periods (846.4%) and 2.6% in 1997 and 1996, respectively was
primarily due to foreign taxes attributable to its Canadian operations. The
1997 tax provision includes a deferred tax provision of approximately
$10,898,000 relating to the ORBIMAGE preferred stock transaction.
The company recorded an income tax benefit of approximately $6,569,000 in
1995, primarily as a result of reducing the deferred tax valuation allowance
related to the realizability of certain tax credits and other tax assets, and
the carryback and recapture of previously paid U.S. Federal taxes and
management's determination that certain Canadian investment tax credit
carryforwards would be realized in the near future.
At December 31, 1997, Orbital had approximately $150,000,000 of U.S.
Federal net operating loss carryforwards (portions of which expire beginning in
2005) and $3,000,000 of U.S. Federal research and experimental tax credit
carryforwards that may be used through the year 2013, subject to certain annual
limitations and other restrictions, to reduce future U.S. Federal income tax
obligations. At December 31, 1997 and 1996, Orbital provided a reserve of
$66,889,000 and $54,432,000, respectively, against certain of its consolidated
deferred tax assets.
EXTRAORDINARY GAIN ON SALE OF ASSETS
In the fourth quarter of 1996, the company's wholly-owned subsidiary,
MacDonald, Dettwiler and Associates Ltd. (MDA), sold substantially all the
assets of The PSC Communications Group, Inc. for approximately $13,000,000,
resulting in a gain of approximately $3,600,000. The gain on sale of
$1,980,000, net of tax, has been recorded as an extraordinary item since the
assets were acquired through the acquisition of MDA in 1995, which was
accounted for as a pooling of interests.
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<PAGE> 23
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 requirements in the future, 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 loan facilities, the issuance of
equity and/or debt securities and asset-based financings.
Cash, cash equivalents and short-term investments were $15,126,000, and
the company had total debt obligations outstanding of approximately
$229,961,000, at December 31, 1997. The outstanding debt related primarily to
the convertible subordinated notes, advances under the company's line of credit
facilities, secured and unsecured notes, and asset-based financings. Cash and
cash equivalents at December 31, 1997 included approximately $6,162,000 of cash
reserved against outstanding letters of credit. Orbital's current ratio was 1.2
at December 31, 1997, compared to 1.5 at December 31, 1996.
In September 1997, Orbital completed the sale of $100,000,000 of 5%
convertible subordinated notes due October 2002. The notes, which are
non-callable for three years, are convertible at the option of the holders into
Orbital common stock at a conversion price of $28.00 per share, subject to
adjustment in certain events. The company used a portion of the proceeds from
the sale to pay down outstanding borrowings under its various credit facilities
and $10,000,000 on a long-term loan. The balance was invested in short-term
investments.
Orbital amended its $20,000,000 unsecured note agreement during the first
quarter of 1997 to facilitate compliance with certain financial covenants as
well as to permit the completion of the ORBIMAGE private equity financing. In
connection with this amendment, the interest rate on the note was increased
from 11.5% to 12%, effective March 31, 1997. The unsecured note contains
certain covenants with respect to fixed charge ratio, leverage ratio and
tangible net worth, and includes certain cross-default provisions.
The company issued $33,969,000 in secured notes in 1997. These notes are
collateralized by certain office, computer and test equipment located at the
company's Maryland, Arizona and Virginia facilities and by the company's L-1011
aircraft.
The company amended its primary credit facility to eliminate a term loan
and to increase the amount available under a revolving line of credit from
$65,000,000 to $100,000,000. In addition, two financial covenants under this
facility were amended to facilitate compliance by the company. At December 31,
1997, $47,750,000 was outstanding and $52,250,000 was available on the
facility. The interest rate charged under the facility is a variable rate based
on the prime rate or LIBOR. The weighted average interest rate on borrowings
outstanding under this facility at December 31, 1997 was 7.89%. The facility is
secured by accounts receivable, prohibits the payment of cash dividends,
contains certain covenants with respect to the company's working capital
levels, fixed charge ratio, leverage ratio and net worth, and expires in August
2001. The company also maintains a $25,000,000 unsecured credit facility, under
which approximately $3,500,000 was outstanding at an average interest rate of
6.8% at December 31, 1997. The company's operations used net cash of
approximately $20,881,000 during 1997. The company spent approximately
$37,200,000 on capital expenditures for various satellite, launch vehicle and
other production, test and office equipment during 1997.
On February 25, 1998, ORBIMAGE issued units consisting of $150,000,000 of
115/8% Senior Notes due 2005 (the "Notes") and warrants to purchase ORBIMAGE's
common stock, raising net proceeds of approximately $145,500,000. Net proceeds
from the sale of the units will be applied to (i) the procurement of two
high-resolution imagery satellites and related launch services and associated
ground system equipment, (ii) operating expenses and (iii) the first two years
of interest on the Notes. The Notes are non-recourse to Orbital. Concurrent
with this issuance, ORBIMAGE completed a private placement of 227,295 shares of
12% cumulative convertible preferred stock, raising net proceeds of
approximately $21,000,000. After these 1998 transactions, the company is no
longer contractually obligated to purchase additional shares of ORBIMAGE's
preferred stock.
The company expects that ORBCOMM will need additional funding during
1998. ORBCOMM's management is exploring various debt or equity placements in
both the private and public markets. If this funding cannot be raised from
third-party investors, or
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<PAGE> 24
cannot be raised in a timely manner, Orbital has a commitment to fund to
ORBCOMM an additional $7,500,000.
Orbital expects that its capital needs for 1998 will, in part, be
provided by working capital, cash flows from operations, existing credit
facilities, customer financings and operating lease arrangements. In addition,
to support further business expansion, the company is also considering equity
and debt financings.
OUTLOOK: ISSUES AND UNCERTAINTIES
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a safe harbor, in certain circumstances, for forward-looking statements made by
or on behalf of the company. The company and its representatives may from time
to time make written or verbal forward-looking statements, including statements
contained in our company's filings with the Securities and Exchange Commission
and in the report to stockholders. All statements that address operating
performance, events or developments that the company expects or anticipates
will occur in the future, including statements relating to the company's sales
and earnings growth or statements expressing general optimism about future
operating results, are forward-looking statements within the meaning of the
Act. The forward-looking statements are and will be based on management's
then-current views and assumptions regarding future events and operating
performance.
The following are some of the factors that could cause actual results to
differ materially from information contained in the company's forward-looking
statements:
Most of the products developed and manufactured by the company and its
affiliates are technologically advanced and sometimes novel systems that must
function under demanding operating conditions and are subject to significant
technological change and innovation. Orbital has occasionally experienced
product failures or problems. In addition to any costs resulting from product
warranties or required remedial action, product failures may result in
increased costs or loss of revenues due to postponement or cancellation of
subsequently scheduled operations or other product deliveries.
At December 31, 1997, approximately 50% of Orbital's total firm contract
backlog was derived from contracts with the U.S. government and its agencies or
from subcontracts with prime contractors to the U.S. government. Most of the
company's government contracts are funded incrementally on a year-to-year
basis. Changes in government policies, priorities or funding levels through
agency or program budget reductions by the U.S. Congress or executive agencies
could materially adversely affect Orbital's financial condition or results of
operations. Furthermore, contracts with the U.S. government may be terminated
or suspended by the U.S. government at any time, with or without cause. Such
contract suspensions or terminations could result in unreimbursable expenses or
charges or otherwise adversely affect the company.
The accuracy and appropriateness of Orbital's direct and indirect costs
and expenses under its contracts with the U.S. government are subject to
extensive regulation and audit by the Defense Contract Audit Agency or by other
appropriate agencies of the U.S. government. These agencies have the right to
challenge Orbital's cost estimates or allocations with respect to any such
contract. A substantial portion of payments to the company under U.S.
government contracts are provisional payments that are subject to potential
adjustment upon audit by such agencies.
Virtually all the company's products and services face significant
competition from existing competitors, many of whom are larger and have
substantially greater resources than the company. Furthermore, the possibility
exists that other domestic or foreign companies or governments will seek to
produce products or services that compete with those of the company. A foreign
competitor could benefit from subsidies from, or other protective measures by,
its home country.
The company has historically made strategic acquisitions of businesses
and routinely evaluates potential acquisition candidates that it believes would
enhance its business. The company also has historically pursued strategic
alliances through joint ventures, and routinely evaluates similar
opportunities. Such transactions commonly involve certain risks including,
among others, assimilating the acquired operations, technologies and personnel
and maintaining appropriate standards, controls, procedures and policies,
entering markets in which the company has little or no direct prior experience,
potentially losing key employees of acquired organizations and resolving
potential disputes with joint venture partners.
The recoverability of the company's investments in ORBCOMM and ORBIMAGE
depends
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on several factors including, among other things, the successful and timely
implementation of innovative and novel technologies involving complex systems
in a cost-effective manner, the establishment and expansion of commercial
markets and customer acceptance, and competition. If the company concludes at
any time that its investments are not recoverable, the company may be required
to expense part or all of such investments.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
<S> <C>
Independent Auditors' Report 24
Consolidated Statements of Operations 25
Consolidated Balance Sheets 26
Consolidated Statements of Stockholders' Equity 27
Consolidated Statements of Cash Flows 28
Notes to Consolidated Financial Statements 29
</TABLE>
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Orbital Sciences Corporation:
We have audited the accompanying consolidated balance sheets of Orbital
Sciences Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Orbital Sciences
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in note 1A, the accompanying consolidated balance sheets as of
December 31, 1997 and 1996, and the consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997 have been restated.
KPMG LLP
Washington, D.C.
February 4, 1998, except as to note 1A,
which is as of April 17, 2000
24
<PAGE> 28
CONSOLIDATED STATEMENTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------
(restated) (restated) (restated)
<S> <C> <C> <C>
Revenues $ 546,008 $ 449,787 $ 359,840
Costs of goods sold 413,361 332,581 271,146
----------------------------------------------------
Gross profit 132,647 117,206 88,694
Research and development expenses 33,140 23,068 28,558
Selling, general and administrative expenses 88,148 77,247 64,170
Amortization of goodwill 3,852 3,134 3,221
----------------------------------------------------
Income (loss) from operations 7,507 13,757 (7,255)
Net investment income (expense), net of interest expense of
$2,894, $1,412 and $2,952, respectively (990) (49) 1,131
Equity in earnings (losses) of affiliates (25,094) (7,008) (644)
Non-controlling interests in (earnings) losses of
consolidated subsidiaries 2,638 1,473 427
Gain on issuance of subsidiary equity 21,810 -- --
Acquisition expenses (4,343) -- (3,441)
----------------------------------------------------
Income (loss) before provision (benefit) for income taxes,
extraordinary item, and cumulative effect of accounting
change 1,528 8,173 (9,782)
Provision (benefit) for income taxes 12,933 211 (6,569)
----------------------------------------------------
Income (loss) before extraordinary item and cumulative
effect of accounting change (11,405) 7,962 (3,213)
Extraordinary item - gain on sale of assets, net of tax -- 1,980 --
Cumulative effect of accounting change, net of tax -- -- (2,377)
----------------------------------------------------
Net income (loss) $ (11,405) $ 9,942 $ (5,590)
====================================================
NET INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item and cumulative
effect of accounting change $ (0.35) $ 0.27 $ (0.12)
Extraordinary item - gain on sale of assets, net of tax -- 0.07 --
Cumulative effect of accounting change, net of tax -- -- (0.09)
----------------------------------------------------
$ (0.35) $ 0.34 $ (0.21)
====================================================
Shares used in computing net income (loss) per common share 32,283,138 29,137,361 26,207,746
====================================================
NET INCOME (LOSS) PER COMMON SHARE, ASSUMING DILUTION:
Income (loss) before extraordinary item and cumulative
effect of accounting change $ (0.35) $ 0.30 $ (0.12)
Extraordinary item - gain on sale of assets,
net of tax -- 0.04 --
Cumulative effect of accounting change, net of tax -- -- (0.09)
----------------------------------------------------
$ (0.35) $ 0.34 $ (0.21)
====================================================
Shares used in computing net income (loss)
per common share, assuming dilution 32,283,138 31,616,119 26,207,746
===================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE> 29
CONSOLIDATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------------------------------------------------------------------------------------------------------------------
(restated) (restated)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of $6,162 and $11,604, respectively $ 6,391 $ 27,923
Short-term investments, at market 8,735 5,827
Receivables, net 206,417 140,973
Inventories, net 59,239 27,159
Deferred income taxes and other current assets 5,889 5,952
------------------------------
TOTAL CURRENT ASSETS 286,671 207,834
------------------------------
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization of
$79,253 and $69,534, respectively 125,327 126,888
INVESTMENTS IN AFFILIATES, net 130,402 88,394
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED, less accumulated amortization of
$19,794 and $15,942, respectively 207,523 69,512
DEFERRED INCOME TAXES AND OTHER ASSETS 27,962 16,985
------------------------------
TOTAL ASSETS $777,885 $509,613
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term obligations $ 29,767 $ 38,969
Accounts payable 36,218 26,611
Accrued expenses 98,018 40,019
Deferred revenue 69,467 31,180
------------------------------
TOTAL CURRENT LIABILITIES 233,470 136,779
------------------------------
LONG-TERM OBLIGATIONS, net of current portion 200,194 35,326
OTHER LIABILITIES 2,443 15,523
------------------------------
TOTAL LIABILITIES 436,107 187,628
------------------------------
NON-CONTROLLING INTERESTS IN NET ASSETS OF CONSOLIDATED SUBSIDIARIES 27,794 (1,810)
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01; 10,000,000 shares authorized:
Series A Special Voting Preferred Stock, one share authorized and outstanding -- --
Class B Preferred Stock, 10,000 shares authorized, none and 10,000 shares outstanding -- --
Common Stock, par value $.01; 80,000,000 shares authorized, 32,481,719 and
32,160,598 shares outstanding, after deducting 20,877 and 15,735 shares held
in treasury, respectively 325 322
Additional paid-in capital 326,187 323,592
Unrealized gains on short-term investments 272 14
Cumulative translation adjustment (4,943) (3,681)
Retained earnings (accumulated deficit) (7,857) 3,548
------------------------------
TOTAL STOCKHOLDERS' EQUITY 313,984 323,795
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $777,885 $509,613
==============================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE> 30
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN
SHARES AMOUNT CAPITAL
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 24,257,322 $ 243 $ 210,030
Shares issued to employees and directors 300,011 3 1,857
Shares issued in private offering 2,000,000 20 32,366
Conversion of convertible debentures 208,696 2 2,914
Adjustment to recast year end of pooled company -- -- --
Transactions of pooled company -- -- 413
Translation adjustment -- -- --
Net loss -- -- --
Unrealized gains on short-term investments -- -- --
--------------------------------------------
BALANCE, DECEMBER 31, 1995 (Restated) 26,766,029 268 247,580
Shares issued to employees and directors 298,916 3 2,163
Shares issued in private offering 1,200,000 12 20,251
Conversion of convertible debentures 3,895,653 39 53,598
Translation adjustment -- -- --
Net Income -- -- --
Unrealized losses on short-term investments -- -- --
--------------------------------------------
BALANCE, DECEMBER 31, 1996 (Restated) 32,160,598 322 323,592
Shares issued to employees and directors, net 321,121 3 2,595
Translation adjustment -- -- --
Net Income -- -- --
Unrealized gains on short-term investments -- -- --
--------------------------------------------
BALANCE, DECEMBER 31, 1997 (Restated) 32,481,719 $ 325 $ 326,187
============================================
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
GAINS RETAINED
(LOSSES) CUMULATIVE EARNINGS
ON SHORT-TERM TRANSLATION (ACCUMULATED
INVESTMENTS ADJUSTMENT DEFICIT) TOTAL
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ (462) $ (3,111) $ 243 $ 206,943
Shares issued to employees and directors -- -- -- 1,860
Shares issued in private offering -- -- -- 32,386
Conversion of convertible debentures -- -- -- 2,916
Adjustment to recast year end of pooled company -- -- (1,047) (1,047)
Transactions of pooled company -- -- -- 413
Translation adjustment -- (245) -- (245)
Net loss -- -- (5,590) (5,590)
Unrealized gains on short-term investments 530 -- -- 530
--------------------------------------------------------
BALANCE, DECEMBER 31, 1995 (Restated) 68 (3,356) (6,394) 238,166
Shares issued to employees and directors -- -- -- 2,166
Shares issued in private offering -- -- -- 20,263
Conversion of convertible debentures -- -- -- 53,637
Translation adjustment -- (325) -- (325)
Net Income -- -- 9,942 9,942
Unrealized losses on short-term investments (54) -- -- (54)
--------------------------------------------------------
BALANCE, DECEMBER 31, 1996 (Restated) 14 (3,681) 3,548 323,795
Shares issued to employees and directors, net -- -- -- 2,598
Translation adjustment -- (1,262) -- (1,262)
Net Income -- -- (11,405) (11,405)
Unrealized gains on short-term investments 258 -- -- 258
--------------------------------------------------------
BALANCE, DECEMBER 31, 1997 (Restated) $ 272 $ (4,943) $ (7,857) $ 313,984
========================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27
<PAGE> 31
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------------
(restated) (restated) (restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $(11,405) $ 9,942 $ (5,590)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization expense 24,553 25,096 22,229
Equity in losses of affiliates 25,094 7,008 644
Non-controlling interests in losses of consolidated subsidiaries (2,638) (1,473) (427)
(Gain) loss on issuance of subsidiary stock and sale of fixed assets
and investments, net (21,810) 226 (2,196)
Cumulative effect of accounting change -- -- 2,377
Deferred Income taxes 11,650 -- --
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in receivables, net (16,863) (27,712) (739)
(Increase) decrease in inventories, net (26,602) 10,261 (12,082)
(Increase) decrease in other assets (7,903) 2,085 (8,763)
Decrease in accounts payable and accrued expenses (17,144) (9,318) (4,687)
Increase in deferred revenue 35,338 1,360 7,558
Increase (decrease) in other liabilities (13,151) (2,954) 942
-------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (20,881) 14,521 (734)
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (37,200) (39,844) (17,265)
Proceeds from sales of assets, net 34,682 9,518 293
Payments for business combinations, net of cash acquired (66,558) -- --
Purchases of available-for-sale investment securities (25,328) (5,623) (61,685)
Sales of available-for-sale investment securities 22,209 11,041 49,168
Maturities of available-for-sale investment securities 6,631 8,220 8,100
Investments in and advances to affiliates (75,564) (23,458) (20,201)
-------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (141,128) (40,146) (41,590)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (repayments) (3,700) 26,200 (17,483)
Principal payments on long-term obligations (20,237) (7,502) (5,749)
Net proceeds from issuance of long-term obligations 163,078 -- 20,000
Fees associated with conversion of debentures -- (2,571) --
Net proceeds from issuances of common stock 2,598 22,429 34,246
Adjustment to recast pooled company's year end -- -- (1,047)
-------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 141,739 38,556 29,967
-------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1,262) (325) (245)
-------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (21,532) 12,606 (12,602)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,923 15,317 27,919
-------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,391 $27,923 $ 15,317
===========================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Orbital Sciences Corporation (together with its subsidiaries, "Orbital"
or the "company"), a Delaware corporation, is an international space and
information systems company that designs, manufactures, operates and markets a
broad range of affordable products and services that are grouped into three
sectors: Space and Ground Infrastructure Systems, Satellite Access Products and
Satellite Services. Space and Ground Infrastructure Systems include launch
vehicles, satellites, electronics and sensors, and satellite ground systems;
Satellite Access Products include satellite-based navigation and communications
products and transportation management systems; and Satellite Services include
satellite-based two-way mobile data communications services and satellite-based
imagery services. Disaggregated financial information is presented in note 2.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Orbital,
all wholly and partially owned subsidiaries controlled by Orbital, and
partnerships in which Orbital directly or indirectly controls the general
partner interests. All material transactions and accounts among consolidated
entities have been eliminated in consolidation.
PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Certain
reclassifications have been made to the 1996 and 1995 financial statements to
conform to the 1997 financial statement presentation. All financial amounts are
stated in U.S. dollars unless otherwise indicated.
REVENUE RECOGNITION
Orbital recognizes revenues on long-term contracts using the
percentage-of-completion method of accounting. Accordingly, (i) revenues on
cost-plus-fee contracts are recognized to the extent of costs incurred plus a
proportionate amount of fee earned, and (ii) revenues on fixed-price contracts
are recognized based on costs incurred in relation to total estimated costs, or
based on specific delivery terms and conditions. To the extent that estimated
costs of completion are adjusted, revenue and profit recognized from a
particular contract will be affected in the period of the adjustment.
Anticipated contract losses are recognized as they become known. Revenues from
sales of access products and satellite services are generally recognized when
the product is shipped or the service is performed.
FOREIGN CURRENCY
Orbital's operating entities are in a number of countries and deal in a
number of foreign currencies. The financial results of foreign operations are
translated to U.S. dollars using year end exchange rates for assets and
liabilities and using weighted average exchange rates for revenues, expenses,
gains and losses.
Translation gains and losses relating to foreign operations that are
self-contained and integrated within a particular country or economic
environment, and therefore are not dependent on the U.S. dollar, are recognized
as a separate component of stockholders' equity until there is a realized
reduction in Orbital's net investment in the foreign operation. Translation
losses in 1997, 1996 and 1995 were approximately $1,262,000, $325,000 and
$245,000, respectively. Translation gains and losses relating to foreign
operations that are a direct and integral component or extension of Orbital's
domestic operations, and therefore are dependent on the U.S. dollar, are
reported currently as a component of net income.
Orbital enters into forward exchange contracts to hedge against foreign
currency fluctuations on certain receivables and payables (see note 6). Gains
and losses on contracts to hedge specific foreign currency commitments are
deferred and accounted for as part of the underlying transaction.
29
<PAGE> 33
RESEARCH AND DEVELOPMENT
Research and development expenses include self-funded product development
activities and exclude direct customer-funded development and are expensed as
incurred. Research and development expenses are allocated, when appropriate, to
U.S. government contracts under government-mandated cost accounting standards.
DEPRECIATION, AMORTIZATION AND RECOVERABILITY OF LONG-LIVED ASSETS
Depreciation and amortization are provided using the straight-line method
as follows:
<TABLE>
<S> <C>
Buildings 18 to 20 years
Machinery, equipment and software 3 to 10 years
Satellite systems Estimated useful life of satellite
Leasehold improvements Shorter of estimated useful life or lease term
</TABLE>
In 1995, the company adopted the provisions of Statement of Financial
Accounting Standards 121, "Accounting for the Impairment of Long-Lived Assets
to be Disposed of" ("SFAS 121"). The cumulative effect on 1995 earnings of
adopting SFAS 121 was approximately $2,377,000, net of tax benefit. Orbital's
policy is to review its long-lived assets, including excess of purchase price
over net assets acquired, investments in affiliates, and specialized equipment
used to support specific space-related products, for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The company recognizes an impairment loss when the sum of
expected future cash flows is less than the carrying amount of the asset. Given
the inherent technical and commercial risks within the space industry, it is
possible that the company's current estimate that it will recover the carrying
amount of its long-lived assets from future operations may change.
INCOME TAXES
The company recognizes income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect of a tax rate change on deferred tax assets and liabilities is
recognized as income in the period that includes the enactment date.
STOCK-BASED COMPENSATION
Prior to January 1, 1996, the company accounted for its stock option
plans in accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Pursuant to APB 25, compensation expense is recorded only to
the extent that the current market price of the underlying stock exceeded the
exercise price on the date of grant. On January 1, 1996, the company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which requires companies to (i)
recognize as expense the fair value of all stock-based awards on the date of
grant, or (ii) continue to apply the provisions of APB 25 and provide pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS 123 had been applied. The company has elected to continue to
apply the provisions of APB 25 and provide the pro forma disclosure in
accordance with the provisions of SFAS 123 (see note 13).
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"), which requires companies to present basic earnings per
share and diluted earnings per share, instead of the primary and fully diluted
earnings per share that had previously been required. The company adopted SFAS
128 in the fourth quarter of 1997 and, accordingly, has restated previously
reported quarterly data for 1997 (see note 14). The impact to prior years'
amounts was immaterial. Net income (loss) per common share is calculated using
the weighted average number of common shares outstanding during the periods.
Net income (loss) per common share assuming dilution is calculated using the
weighted average number of common shares and dilutive common equivalent shares
outstanding during the periods, plus the effects of an assumed conversion of
the company's convertible
30
<PAGE> 34
notes, after giving effect to all net income adjustments that would result from
the assumed conversion.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Orbital considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Investments in securities that
do not meet the definition of cash equivalents are classified as short-term
investments. Since Orbital does not intend to hold its investments in debt and
equity securities until maturity and does not actively trade the securities to
maximize trading gains, Orbital classifies these securities as
"available-for-sale" and, accordingly, reports such securities at fair value
plus accrued interest. Any temporary excess (deficiency) of market value over
(under) the underlying cost of the short-term investment is excluded from
current period earnings and is reported as unrealized gains (losses) as a
separate component of stockholders' equity. In addition, at December 31, 1997
and 1996, the company had approximately $6,162,000 and $11,604,000,
respectively, of cash restricted to support outstanding letters of credit.
INVENTORIES
Inventories consist of components and raw materials inventory,
work-in-process inventory and finished goods inventory and are generally stated
at the lower of cost or net realizable value on a first-in, first-out ("FIFO")
or specific identification basis. Inventories, net of allowances for
obsolescence of $10,900,000 and $5,100,000 in 1997 and 1996, respectively,
consisted of the following:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
----------------------------------------------------------------------
(RESTATED)
<S> <C> <C>
Components and raw materials $ 22,327 $ 19,090
Work-in-process 26,932 6,962
Finished goods 9,980 1,107
---------------------------
Total $ 59,239 $ 27,159
=======================================================================
</TABLE>
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 of $5,899,000 and
$26,696,000 at December 31, 1997 and 1996, respectively. Finished goods
inventory consists of fully assembled commercial products awaiting shipment.
SELF-CONSTRUCTED ASSETS AND INTERNALLY DEVELOPED SOFTWARE
The company self-constructs much of its ground and airborne support and
special test equipment used in the manufacture, production and delivery of many
of its space infrastructure products. Orbital capitalizes certain costs
incurred in constructing ground and airborne support and special test
equipment, product improvements and enhancements, and satellite systems.
Capitalized costs generally include direct construction costs and certain
allocated indirect costs, and exclude general and administrative and research
and development costs.
Pursuant to the requirements of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 86, "Software
Development Costs", the company capitalizes certain costs of developing product
software once technological feasibility has been established. Capitalized costs
generally include direct software coding costs and certain allocated indirect
costs, and exclude general and administrative and research and development
costs.
INVESTMENTS IN AFFILIATES
The company uses the equity method of accounting for its investments in
and equity in earnings (losses) of affiliates in which the company has the
ability to significantly influence, but not control, the affiliates'
operations. In accordance with the equity
31
<PAGE> 35
method of accounting, the company's carrying amount of an investment in an
affiliate is initially recorded at cost and is increased to reflect its
proportionate share of the affiliate's income and is reduced to reflect its
proportionate share of the affiliate's losses based on the company's common
stock or partnership interest, including all preferred dividends to other
investors in such entities. Orbital's investment is also increased to reflect
contributions to, and decreased to reflect distributions received from, the
affiliate. Any excess of the amount of Orbital's investment over the amount of
the underlying equity in each affiliate's net assets is amortized in a manner
similar to goodwill. The company capitalizes interest costs on equity method
investments when such affiliate has significant assets under construction and
has not yet commenced principal operations. During 1997, 1996 and 1995, the
company capitalized interest on investments in and advances to affiliates of
$6,828,000, $6,890,000, and $5,414,000, respectively. The company uses the cost
method of accounting for investments in affiliates in which it has no
significant influence.
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED
The company amortizes the excess of purchase price over net assets
acquired related to prior business combinations on a straight-line basis over
its estimated useful life, generally 10-40 years. Orbital periodically assesses
and evaluates the recoverability of such assets based on current facts and
circumstances and the operational performance of the acquired businesses.
ISSUANCES OF SUBSIDIARY EQUITY
The company, at times, may divest a portion or all its ownership in its
subsidiaries through the sale of such stock or through the issuance of
additional subsidiary stock. The company recognizes the difference between the
carrying amount of its interest in the subsidiary stock sold and the fair
market value of the stock as a gain or loss when the company believes the
realization of the gain or loss is assured. The company recognized a gain on
issuance of subsidiary equity of $21,810,000 in 1997 related to the issuance of
additional equity by the company's subsidiary, Magellan Corporation
("Magellan") in connection with its acquisition of Ashtech Inc. ("Ashtech").
WARRANTIES
The company occasionally accepts warranty clauses in its commercial and
government contracts. In the event the company does not purchase insurance
coverage to protect itself in connection with such warranty clauses, the
company records a liability for warranty claims when it determines that a
specific material liability exists. The company at times provides limited
warranties on certain commercial products and accrues an estimate of expected
warranty costs based on historical experience.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes
standards for reporting and presenting comprehensive income and its components
in the consolidated financial statements. The new disclosure requirements with
respect to comprehensive income will impact the manner of presentation of the
company's annual and interim consolidated financial statements. Upon adoption,
the company will be required to reclassify previously reported annual and
interim consolidated financial statements. SFAS 131 establishes new procedures
and requirements for the (i) determination of business segments, (ii)
presentation and disclosure of segment information and (iii) disclosure of
selected segment information within interim consolidated financial statements.
The company has assessed the impact of adopting SFAS 131 and believes that it
will not be required to change the composition of its segments, although it
will be required to report segment information within its interim consolidated
financial statements. In accordance with the provisions of SFAS 130 and SFAS
131, the company will adopt these standards in 1998.
1A. RESTATEMENT MATTERS
Management has determined to restate its previously issued consolidated
financial statements as of and for the years ended December 31, 1997, 1996 and
1995 with respect to its accounting treatment for the matters described below.
The following table summarizes the various adjustments by financial statement
line item for 1997, 1996 and 1995. The impact of these and other matters on the
unaudited interim financial results for 1997 and 1996 is summarized in Note 14.
32
<PAGE> 36
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(In thousands, except per share data)
For The Year Ended December 31,
-------------------------------------------------------------------------------
1997
-------------------------------------------------------------------------------
As
Previously
Reported Adjustments Restated
-------- ----------- --------
<S> <C> <C> <C>
Revenues $ 605,975 $ (59,967) (b)(f) $ 546,008
Costs of goods sold 456,772 (43,411) (b)(f) 413,361
Research and development expenses 26,355 6,785 (f) 33,140
Selling, general and administrative expenses 89,502 (1,354) (b) 88,148
Net investment income (expense) 1,475 (2,465) (c) (990)
Equity in earnings (losses) of affiliates (26,034) 940 (a)(b)(d)(e) (25,094)
Provision for income taxes 2,035 10,898 (b) 12,933
Net income (loss) 23,005 (11,405)
Net income (loss) per common share,
basic and assuming dilution 0.71 (0.35)
<CAPTION>
--------------------------------------------------------------------
1996
--------------------------------------------------------------------
As
Previously
Reported Adjustments Restated
-------- ----------- --------
<S> <C> <C> <C>
Revenues $ 461,435 $ (11,648) (f)(g)(h)(i) $449,787
Costs of goods sold 336,261 (3,680) (f)(h)(i) 332,581
Research and development expenses 22,179 889 (f)(h) 23,068
Selling, general and administrative expenses 76,019 1,228 (i) 77,247
Net investment income (expense) (1,123) 1,074 (c)(i) (49)
Equity in earnings (losses) of affiliates (6,454) (554) (e)(i) (7,008)
Provision for income taxes 1,831 (1,620) (g) 211
Extraordinary item - gain on sales of assets, net of tax -- 1,980 (g) 1,980
Net income (loss) 15,907 9,942
Net income (loss) per common share, basic and assuming dilution 0.55 0.34
<CAPTION>
--------------------------------------------------------------------
1995
--------------------------------------------------------------------
As
Previously
Reported Adjustments Restated
-------- ----------- --------
<S> <C> <C> <C> p
Revenues $ 364,320 $ (4,480) (f)(i) $ 359,840
Costs of goods sold 268,016 3,130 (f)(i) 271,146
Research and development expenses 28,512 46 (f) 28,558
Selling, general and administrative expenses 63,427 743 (i) 64,170
Net investment income (expense) 639 492 (c)(i) 1,131
Equity in earnings (losses) of affiliates (759) 115 (i) (644)
Provisions (benefit) for income taxes (1,302) (5,267) (i) (6,569)
Net income (loss) (4,848) (5,590)
Net income (loss) per common share, basic and assuming dilution (0.19) (0.21)
</TABLE>
33
<PAGE> 37
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
12/31/97
As 12/31/97
Previously As
Reported Adjustments Restated
------------ ----------- --------
<S> <C> <C> <C>
Receivables, net $ 180,204 $ 26,213 (b) $206,417
Property, plant and equipment, net 137,498 (12,171) (c)(f) 125,327
Investments in affiliates, net 159,230 (28,828) (a)(b)(c)(d)(e) 130,402
Accrued expenses 98,588 (570) (b) 98,018
Deferred revenue 46,138 23,329 (e) 69,467
Retained earnings (accumulated deficit) 33,260 (41,117) (7,857)
<CAPTION>
12/31/96
As 12/31/96
Previously As
Reported Adjustments Restated
------------ ----------- --------
<S> <C> <C> <C>
Cash and cash equivalents $ 26,859 $1,064 $ 27,923
Receivables, net 144,774 (3,801) (f) 140,973
Deferred income taxes and other current assets 6,475 (523) 5,952
Property, plant and equipment, net 127,862 (974) (f)(j) 126,888
Investments in affiliates, net 86,524 1,870 (f) 88,394
Deferred income taxes and other assets 9,720 7,265 16,985
Short-term borrowings and current portion of
long-term obligations 38,519 450 (j) 38,969
Accounts payable 25,789 822 26,611
Accrued expenses 32,372 7,647 40,019
Deferred revenue 30,741 439 (e) 31,180
Long-term obligations, net 33,076 2,250 (j) 35,326
Retained earnings (accumulated deficit) 10,255 (6,707) 3,548
</TABLE>
Equity Method Accounting Restatement Adjustments
The company uses the equity method of accounting for its investments in
affiliates in which the company has the ability to significantly influence, but
not control, such affiliates' operations. Accordingly, Orbital uses the equity
method of accounting for its investments in ORBIMAGE and ORBCOMM Global, L.P.
("ORBCOMM") or ("ORBCOMM Global").
(a) As a result of certain participating rights granted to holders of
convertible preferred stock of ORBIMAGE, Orbital significantly
influences, but does not control, ORBIMAGE even though it owns
substantially all of ORBIMAGE's outstanding common stock. The company's
prior consolidated financial statements reflected the company's
application of the equity method of accounting as it pertained to
ORBIMAGE based on Orbital's percentage share of ownership of ORBIMAGE
calculated to give effect to the assumed conversion of ORBIMAGE's
outstanding convertible preferred stock into ORBIMAGE common stock. As
reflected in its restated consolidated financial statements presented
herein, the company applies the equity method of accounting as it
pertains to ORBIMAGE based on its ownership of outstanding common stock
without giving effect to the assumed conversion of ORBIMAGE's outstanding
convertible preferred stock. The effect of this revision is to increase
equity in losses of affiliates in 1997 by $698,000.
ORBIMAGE's preferred stockholders are entitled to receive a cumulative
dividend, payable either in cash or in additional shares of convertible
preferred stock. To date, all dividends have been paid in additional
shares of convertible preferred stock. Previously, the company's
consolidated financial statements did not reflect additional net losses
allocable to Orbital as a result of ORBIMAGE's declaration of such
"in-kind" dividends on its convertible preferred stock. As reflected in
the restated consolidated financial statements presented herein, Orbital
calculates its equity in losses of affiliates taking into account such
non-cash dividends at their
34
<PAGE> 38
fair value. The effect of these revisions is to increase equity in losses
of affiliates in 1997 by $2,808,000.
(b) Previously, the company's consolidated financial statements reflected the
recognition of revenue related to the initial transfer of certain assets
to ORBIMAGE in 1997. Additionally, the company did not previously reflect
an increase in its deferred tax asset liabilities related to the ORBIMAGE
transaction. As reflected in the restated consolidated financial
statements presented herein, the company has revised its accounting for
these transactions and the tax impact thereto, eliminating its reported
revenues related to these sales to ORBIMAGE of $58,539,000 in 1997.
Operating income was also reduced in 1997 by $14,469,000. The effect of
these adjustments was to increase equity in losses of affiliates by
$5,122,000 in 1997. Finally, the company's provision for income taxes was
increased as a result of this revision in 1997 by $10,898,000 to reflect
deferred tax liabilities related to the investment basis differences.
(c) Previously, the company's consolidated financial statements reflected the
company's capitalization of interest expense on various assets, including
on its equity investments in ORBIMAGE and ORBCOMM. As reflected in the
restated consolidated financial statements presented herein, Orbital has
not capitalized interest expense on its investment in ORBIMAGE and has
revised the capitalization of interest on certain assets including its
equity method investment in ORBCOMM. These revisions include the
compounding impact of interest, and the reduction of eligible investment
amounts for losses recognized for equity method investors. These
revisions had the effect of increasing (decreasing) interest expense in
1997, 1996 and 1995 by $2,465,000, ($952,000), and ($985,000)
respectively.
(d) Previously, the company's consolidated financial statements did not
reflect amortization of the excess of the company's investment in
ORBIMAGE over the underlying share of the company's equity in ORBIMAGE.
As reflected in the restated consolidated financial statements presented
herein, Orbital is amortizing such excess over eight years. This revision
had the effect of increasing the company's equity in losses of affiliates
by approximately $237,000 in 1997.
(e) Previously, the company's consolidated financial statements did not
reflect the amortization of previously deferred profits in connection
with its sales of both satellites and ground stations to ORBCOMM. As
reflected in the restated consolidated financial statements presented
herein, Orbital is amortizing such deferred profits over the estimated
lives of both the satellites and the ground stations. This revision had
the effect of increasing the company's equity in losses of affiliates by
approximately $439,000 in each of 1997 and 1996.
Asset Restatement Adjustments
(f) The company has historically capitalized certain costs associated with
certain product enhancements, internally developed software and certain
other costs. Previously, the company's consolidated financial statements
reflected such costs as capitalized assets. As reflected in the restated
consolidated financial statements presented herein, the company has
expensed all previously capitalized enhancement costs and certain other
non-capitalizable costs. These revisions resulted in an increase
(decrease) in research and development expenses, costs of goods sold and
revenues for 1997 of $6,785,000, $660,000, and $(1,428,000),
respectively; for 1996 of $1,338,000, ($204,000) and ($4,791,000), and
for 1995 of $46,000, $10,000 and ($1,257,000), respectively.
Other Restatement and Reclassification Adjustments
(g) In October 1996, the company sold substantially all the assets of PSC
Communications Group, Inc. resulting in a gain of approximately
$3,600,000. The gain which was previously reported in revenue, has been
reclassified as an extraordinary gain of $1,980,000, net of taxes of
$1,620,000.
(h) The 1996 statement of operations has been reclassified to decrease
revenues by $4,464,000 and to decrease cost of goods sold and research
and development expenses by $4,014,000 and $450,000, respectively, to
reflect changes in certain contingent liabilities.
35
<PAGE> 39
(i) Certain other reclassification adjustments were made to the 1996 and
1995 statements of operations that resulted in increases (decreases) to
revenues, cost of goods sold, selling, general and administrative
expenses, net investment income (expense), equity in earnings (losses) of
affiliates and provision (benefit) for income taxes for 1996 of
$1,207,000 ($538,000), $0, $89,000, $115,000 and $0 and for 1995 of
($3,223,000), $3,120,000, $743,000, $493,000, $115,000 and $7,050,000,
respectively. The tax benefit of $1,783,000 was also netted against the
cumulative effect of the accounting change with a corresponding decrease
in the benefit for income taxes in 1995.
(j) Property, plant and equipment increased by $2,700,000 and short-term and
long-term obligations increased by $450,000 and $2,250,000, respectively,
as a result of recording certain capital leases for equipment that had
been accounted for as operating leases.
As reflected in the restated consolidated financial statements, the
company has recorded certain other adjustments, the net effect of which
is presented in the table. None of these entries is significant
individually or in the aggregate.
2. DISAGGREGATED FINANCIAL INFORMATION
INDUSTRY SECTOR INFORMATION
Orbital's operations are classified into three industry sectors: Space
and Ground Infrastructure Systems, Satellite Access Products and Satellite
Services. Space and Ground Infrastructure Systems include launch vehicles,
including space and suborbital expendable launch vehicles and reusable launch
vehicles, satellites and other space systems, electronics and sensors,
including space sensors and instruments, avionics and other electronics
equipment, and satellite ground systems. Satellite Access Products include
recreational, automotive and industrial satellite-based navigation products,
satellite communications products and transportation management systems.
Satellite Services include satellite-based global data communications services
and satellite-based imagery services.
The table on the following page presents revenues, operating income
(loss), identifiable assets (including goodwill), capital expenditures,
depreciation and amortization and impairment losses by industry sector.
Operating income (loss) is total revenues less costs of goods sold, research
and development expenses, selling, general and administrative expenses, and
amortization of goodwill. Identifiable assets are those assets used in the
operations of each industry sector. There were no significant inter-sector
sales or transfers.
36
<PAGE> 40
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1997 1996 1995
------------------------------------------------------------------------------------------
(restated) (restated) (restated)
<S> <C> <C> <C>
SPACE AND GROUND
INFRASTRUCTURE SYSTEMS
Revenues $474,452 $377,166 $296,109
Operating income (loss) 25,966 16,291 (5,816)
Identifiable assets 510,638 369,672 363,749
Capital expenditures 35,011 23,829 15,091
Depreciation and amortization 22,190 21,954 21,150
Impairment losses, net of taxes -- -- 2,377
SATELLITE ACCESS PRODUCTS
Revenues 71,384 71,188 52,531
Operating income (loss) (11,754) 4,902 3,291
Non-controlling interest in losses
of consolidated subsidiaries 8,151 -- --
Gain on sale of subsidiary equity 21,810 -- --
Identifiable assets 143,800 32,376 27,431
Capital expenditures 1,692 3,402 1,204
Depreciation and amortization 1,962 944 532
SATELLITE SERVICES
Revenues 172 1,433 11,200
Operating loss (6,705) (7,436) (4,730)
Equity in earnings (losses) of affiliates (25,094) (7,008) (644)
Non-controlling interest in (earnings)
losses of consolidated subsidiaries (5,513) 1,473 427
Identifiable assets 123,447 107,565 81,720
Capital expenditures 497 12,613 970
Depreciation and amortization 401 2,198 547
CONSOLIDATED
Revenues 546,008 449,787 359,840
Operating income (loss) 7,507 13,757 (7,255)
Equity in earnings (losses) of affiliates (25,094) (7,008) (644)
Non-controlling interest in losses of
consolidated subsidiaries 2,638 1,473 427
Gain on issuance of subsidiary stock 21,810 -- --
Identifiable assets 777,885 509,613 472,900
Capital expenditures 37,200 39,844 17,265
Depreciation and amortization 24,553 25,096 22,229
Impairment losses, net of taxes -- -- 2,377
==========================================================================================
</TABLE>
DOMESTIC AND NON-U.S. OPERATIONS
The following table presents Orbital's revenues, operating income (loss)
and identifiable assets by major location:
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1997 1996 1995
-------------------------------------------------------------------------------------------
(restated) (restated) (restated)
<S> <C> <C> <C>
REVENUES
United States $465,177 $380,482 $ 286,434
Canada and Mexico 75,584 65,350 68,997
United Kingdom and other 5,247 3,955 4,409
---------------------------------------------
Total $546,008 $449,787 $ 359,840
=============================================
OPERATING INCOME (LOSS)
United States $ 5,972 $ 11,098 $ (10,476)
Canada and Mexico 1,465 2,416 3,628
United Kingdom and other 70 243 (407)
---------------------------------------------
Total $ 7,507 $ 13,757 $ (7,255)
=============================================
IDENTIFIABLE ASSETS
United States $727,509 $459,237 $ 426,313
Canada and Mexico 46,984 46,984 44,048
United Kingdom and other 3,392 3,392 2,539
---------------------------------------------
Total $777,885 $509,613 $ 472,900
===========================================================================================
</TABLE>
37
<PAGE> 41
EXPORT SALES AND MAJOR CUSTOMERS
Orbital's sales to geographic areas were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1997 1996 1995
------------------------------------------------------------------------------------------
(restated) (restated) (restated)
<S> <C> <C> <C>
United States $387,074 $337,917 $271,227
Canada 39,274 46,742 45,558
Southeast Asia 35,688 -- --
Far East 32,875 17,517 15,242
Europe 26,771 33,752 23,594
Middle East and other 24,326 13,859 4,219
---------------------------------------------
Total $546,008 $449,787 $359,840
==========================================================================================
</TABLE>
Approximately 42%, 45% and 40% of the company's revenues in 1997, 1996
and 1995, respectively, were generated under contracts with the U.S. government
and its agencies or under subcontracts with the U.S. government's prime
contractors.
3. INVESTMENTS IN AFFILIATES
ORBIMAGE
On May 8, 1997, the company's then-subsidiary, Orbital Imaging
Corporation ("ORBIMAGE"), completed a private placement of 300,100 shares of
12% Series A Cumulative Convertible Preferred Stock (the "Preferred Stock"),
raising gross proceeds of $30,010,000. Also on that date, Orbital purchased
ORBIMAGE common stock. On July 3, 1997, ORBIMAGE sold an additional 72,605
shares of Preferred Stock, raising an additional $7,260,500. Each share of
Preferred Stock entitles its holder to receive annual cumulative dividends of
12% per annum, payable in cash or additional shares of Preferred Stock, at the
discretion of ORBIMAGE's Board of Directors. Pursuant to the terms of this
transaction, at December 31, 1997, Orbital owned approximately 75% of the total
voting interest in ORBIMAGE, after giving effect to the conversion of
ORBIMAGE's convertible preferred stock. Orbital no longer controls ORBIMAGE's
financial and operational affairs as a result of certain rights provided to
ORBIMAGE's preferred stockholders. Consequently, the company no longer
consolidates ORBIMAGE's financial results, but rather uses the equity method of
accounting for its investment in, and earnings or losses attributable to,
ORBIMAGE. At December 31, 1997, the company's total investment in and advances
to ORBIMAGE was $55,137,000.
Pursuant to a fixed-price contract, Orbital is the primary supplier to
ORBIMAGE of imaging satellites, launch services and ground systems. During the
year ended December 31, 1997, Orbital recorded sales of approximately
$30,079,000 to ORBIMAGE pursuant to this contract. Additionally, Orbital
provides certain administrative services to ORBIMAGE on a cost-reimbursable
basis. During 1997, Orbital was reimbursed approximately $1,444,000 for such
administrative services. At December 31, 1997, the company had receivables due
from ORBIMAGE of approximately $3,548,000.
At December 31, 1997, ORBIMAGE had approximately $137,749,000 of total
assets, $52,389,000 of total liabilities and $49,005,000 of total stockholders'
equity. ORBIMAGE recorded approximately $2,062,000 in revenues and $6,890,000
in net losses available to common stockholders for the year ended December 31,
1997.
ORBCOMM
In 1993, the company's majority owned subsidiary, Orbital Communications
Corporation ("OCC"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), an
affiliate of Teleglobe Inc., formed a partnership, ORBCOMM Global, for the
design, development, construction, integration, testing and operation of a
low-Earth orbit satellite communications system (the "ORBCOMM System"). OCC and
Teleglobe Mobile are each 50% general partners in ORBCOMM, and have contributed
to ORBCOMM $75,275,000 and $84,525,000, respectively, through December 31,
1997. At December 31, 1997, OCC and Teleglobe Mobile each had a remaining
commitment to fund $15,000,000 to ORBCOMM. Additionally, OCC is a 2% general
partner in ORBCOMM USA, L.P. ("ORBCOMM USA") and Teleglobe Mobile is a 2%
general partner in ORBCOMM International Partners, L.P. ("ORBCOMM
38
<PAGE> 42
International"), two partnerships formed to market the ORBCOMM System. ORBCOMM
is a 98% general partner in each of the two marketing partnerships.
Pursuant to the terms of the partnership agreements, (i) OCC and
Teleglobe Mobile share equal responsibility for the operational and financial
affairs of ORBCOMM, (ii) OCC controls the operational and financial affairs of
ORBCOMM USA and (iii) Teleglobe Mobile controls the operational and financial
affairs of ORBCOMM International. Since OCC is unable to control, but is able
to exercise significant influence over ORBCOMM's and ORBCOMM International's
operating and financial affairs, the company accounts for its investments in
ORBCOMM and ORBCOMM International using the equity method of accounting. Since
OCC is able to control the operational and financial affairs of ORBCOMM USA,
the company consolidates ORBCOMM USA's results of operations.
Orbital is the primary supplier of the communications satellites, launch
vehicles and certain ground systems to ORBCOMM pursuant to a fixed-price
contract. During 1997, 1996 and 1995, Orbital recorded sales to ORBCOMM
pursuant to this contract of approximately $57,988,000, $47,215,000 and
$49,187,000, respectively. At December 31, 1997 and 1996, Orbital had
approximately $16,646,000 and $3,400,000, respectively, in receivables from
ORBCOMM. Additionally, since 1995 Orbital has provided certain administrative
services to ORBCOMM on a cost-reimbursable basis. During 1997, 1996 and 1995,
Orbital was reimbursed approximately $2,298,000, $1,295,000 and $297,000,
respectively, for such services.
At December 31, 1997 and 1996, ORBCOMM had $316,969,000 and $329,509,000
of total assets, $210,551,000 and $191,568,000 of total liabilities and
$106,418,000 and $137,941,000 of total partners' capital, respectively. ORBCOMM
recorded approximately $527,000, $420,000 and $900,000 in revenues
and($31,436,000), ($19,480,000) and $55,000 in net income (losses) for the
years ended December 31, 1997, 1996 and 1995, respectively.
OTHER INVESTMENTS
The company owns equity interests in several emerging space-related
companies. The cost basis of these investments was approximately $7,275,000 and
$2,910,000, respectively, at December 31, 1997 and 1996. The company provides a
valuation allowance against investments in affiliates when it is determined
that recovery of all or part of the investment is not probable. At December 31,
1997 and 1996, approximately $4,886,000 and $1,100,000, respectively, of
allowance had been recorded against certain of these investments. Approximately
$2,000,000 of gain on the sale of an investment was realized in 1995 when
Orbital sold one such investment. The gain was reported in net investment
income in the 1995 consolidated statement of earnings. No such gains from sales
of investments were realized in 1997 or 1996.
4. BUSINESS COMBINATIONS
PURCHASE TRANSACTIONS
ASHTECH INC. MERGER. On December 31, 1997, Orbital merged its subsidiary,
Magellan Corporation, with Ashtech Inc. ("Ashtech") (the combined company is
hereinafter referred to as "Magellan"). To effect the merger, Orbital paid
former Ashtech security holders approximately $80,000,000, consisting of
$25,000,000 in cash and approximately 23,954,000 shares of Magellan common
stock. Orbital now owns a controlling interest of approximately 66% of
Magellan. Orbital recognized a gain of $21,810,000 on the issuance of Magellan
common stock. The merger was accounted for using the purchase method of
accounting. Accordingly, approximately $73,002,000 in excess of purchase price
over the fair value of net assets acquired was recorded and is being amortized
on a straight-line basis over 20 years.
CTA INCORPORATED ACQUISITION. On August 15, 1997, Orbital acquired
substantially all the assets, including all the stock of certain subsidiaries,
and certain liabilities relating to the satellite manufacturing and
communications services businesses of CTA Incorporated ("CTA"). The financial
results of the acquired businesses have been included in the company's
consolidated results since August 15, 1997. As consideration, Orbital repaid
$27,000,000 of outstanding debt related to the acquired businesses and paid
approximately $13,000,000 in cash, which may be reduced subject to certain
post-closing adjustments. The company accounted for the acquisition using the
purchase method of accounting. The purchase price exceeded the preliminary
estimates of fair value of the net assets acquired by approximately $65,724,000
which is being amortized on a straight-line basis over 30 years. During the
five years following the closing, CTA will also be entitled to receive (i)
royalties from $500,000 to $3,000,000 for sales by the company of certain
geostationary satellites in excess of certain threshold sales, and (ii) 3% of
39
<PAGE> 43
cumulative revenues in excess of $50,000,000 earned during such period from the
acquired transportation management business of CTA.
ROCKWELL INTERNATIONAL CORPORATION ACQUISITION. In July 1997, Orbital
formed Magellan DIS Inc. ("DIS") to acquire from Rockwell International
Corporation ("Rockwell") the assets and certain liabilities associated with
Rockwell's automotive navigation product line. Orbital paid approximately
$3,550,000 in cash and issued Rockwell a $4,350,000 unsecured note, which bears
interest at 6% and is repayable semi-annually over three years. The stock of
DIS was subsequently transferred to Magellan. The company accounted for the
acquisition using the purchase method of accounting. The purchase price
exceeded the fair value of the net assets acquired by approximately $2,262,000,
which is being amortized on a straight-line basis over 10 years.
The following unaudited supplemental financial information presents the
consolidated results of operations, on a pro forma basis, as though the
Ashtech, CTA and Rockwell acquisitions were consummated on January 1, 1996:
<TABLE>
<CAPTION>
December 31,
(In thousands, except share data) 1997 1996
-------------------------------------------------------------------------------------
(restated) (restated)
<S> <C> <C>
Revenues $ 640,478 $ 548,664
Net income (loss) (13,327) 16,224
Net income (loss) per common share (0.41) 0.55
Net income (loss) per common share, assuming dilution (0.41) 0.51
=====================================================================================
</TABLE>
The allocation of purchase price to net assets acquired on the 1997
acquisitions may be adjusted in 1998 if additional information becomes known
about certain business assumptions used to estimate the fair value of such net
assets.
In October 1996, the company's wholly-owned subsidiary, MacDonald,
Dettwiler and Associates Ltd. ("MDA"), sold substantially all the assets of The
PSC Communications Group Inc. for approximately $13,000,000, resulting in a
gain of approximately $3,600,000. The gain on the sale of $1,980,000, net of
tax, has been recorded as an extraordinary item since the assets were acquired
through the acquisition of MDA in 1995, which was accounted for as a pooling of
interests.
POOLING OF INTERESTS TRANSACTION
MACDONALD, DETTWILER AND ASSOCIATES LTD. On November 17, 1995, the
company acquired all the outstanding common shares of MDA from its former
shareholders in a merger designed to be tax free to MDA's Canadian shareholders
(the "MDA Acquisition").
Pursuant to the terms of the MDA Acquisition, a newly established, wholly
owned Canadian subsidiary of Orbital ("Acquisition Subsidiary") issued
4,087,126 exchangeable shares (the "Exchangeable Shares") in exchange for all
the issued and outstanding MDA common shares. The company also granted 328,399
options to acquire Orbital common stock to MDA employees who, at the date of
the acquisition, held options to acquire MDA common shares. The Exchangeable
Shares were exchangeable into Orbital common stock at the option of the
holders. As part of the MDA Acquisition, Acquisition Subsidiary also issued
10,000 shares of Class B Preferred Stock to a financial advisor in satisfaction
of a portion of the fees owed to that advisor; these shares were fully redeemed
during 1997. Additionally, Orbital issued one share of Series A Special Voting
Preferred Stock to a voting trust to act as a voting trustee on behalf of the
holders of the Exchangeable Shares. Orbital accelerated the redemption of all
outstanding Exchangeable Shares in December 1997.
The MDA Acquisition was accounted for using the pooling of interests
method of accounting and, accordingly, Orbital's historical consolidated
financial statements were restated to include MDA's financial position, results
of operations and cash flows. Merger expenses relating to the MDA Acquisition
of approximately $3,400,000 were charged to earnings and were included in
acquisition expenses during 1995.
40
<PAGE> 44
Prior to the acquisition, MDA's financial results were prepared on a
March 31 fiscal year basis. Orbital's restated financial statements for 1994
include MDA's historical financial results for its fiscal year ended March 31,
1995. Orbital's consolidated financial statements for the year ended December
31, 1995 included MDA's financial results for the twelve-month period ended
December 31, 1995. The effect of recasting MDA's year end for 1995 was charged
to Orbital's retained earnings as of January 1, 1995. The charge to retained
earnings eliminated the effect of including MDA's results of operations for the
three-month period ended March 31, 1995 of $1,047,000 in Orbital's 1995 and
1994 consolidated results of operations. MDA's revenues for the same
three-month period were approximately $20,634,000.
5. SHORT-TERM INVESTMENTS
The following table sets forth the aggregate amortized cost, aggregate
fair value and gross unrealized gains and losses for Orbital's short-term
investments in debt securities:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C>
Amortized cost $ 2,301 $ 5,813
Fair value 2,573 5,827
--------------------------
Unrealized gains $ 272 $ 14
=============================================================================
</TABLE>
Orbital recognized net losses of approximately $261,000 on sales of
short-term investments in 1995 and had no such losses in 1997 or 1996. All debt
securities held at December 31, 1997 are scheduled to mature in 1998.
6. RECEIVABLES AND ACCRUED EXPENSES
The components of receivables were as follows:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
------------------------------------------------------------------------------
(restated) (restated)
<S> <C> <C>
Billed and billable $ 118,612 $ 73,505
Recoverable costs and accrued profit not billed 99,750 59,069
Retainages due upon contract completion 6,132 9,767
Allowance for doubtful accounts (18,077) (1,368)
----------------------------
Total $ 206,417 $140,973
==============================================================================
</TABLE>
Approximately 75% of recoverable costs and accrued profit not billed and
retainages due upon contract completion at December 31, 1997 is due within one
year and will be billed on the basis of contract terms and delivery schedules.
The accuracy and appropriateness of Orbital's direct and indirect costs
and expenses under its government contracts, and therefore its receivables
recorded pursuant to such contracts, are subject to extensive regulation and
audit by the U.S. Defense Contract Audit Agency or by other appropriate
agencies of the U.S. government, which have the right to challenge Orbital's
cost estimates or allocations with respect to any such contracts. Additionally,
a substantial portion of the payments to the company under government contracts
are provisional payments that are subject to potential adjustment upon audit by
such agencies. In the opinion of management, any adjustments likely to result
from inquiries or audits of its contracts will not have a material adverse
impact on the company's financial condition or results of operations.
41
<PAGE> 45
At December 31, 1997 and 1996, $43,294,000 and $33,690,000, respectively,
were receivable from non-U.S. customers. The company enters into forward
exchange contracts in an effort to hedge against foreign currency fluctuations
on certain receivables and payables denominated in foreign currencies.
Accordingly, Orbital is subject to off-balance sheet market risk for the
possibility that future changes in market prices may make the forward exchange
contracts less valuable. The following table summarizes, at December 31, 1997,
outstanding foreign exchange contracts to sell (purchase) foreign currencies,
along with current market values:
<TABLE>
<CAPTION>
(U.S. Dollars in Thousands)
-----------------------------------------------------------------------------------------------------------------------
Foreign Currency
Currency Hedged Hedged Against Contract Amount Current Market Value Unrealized Gain (Loss)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Belgian Francs CD $ 569 $ 556 $ 13
ECU CD 1,477 1,492 (15)
ECU PS 1,392 1,271 121
French Francs CD (31) (28) (3)
Pounds Sterling CD 3,914 3,996 (82)
Malaysian Riggits CD 3,781 2,663 1,118
Norwegian Kroner CD 1,274 1,253 21
U.S. Dollars CD 36,090 37,377 (1,287)
U.S. Dollars PS 529 528 1
-----------------------------------------------------------------------------------------------------------------------
CD = Canadian Dollars PS = Pounds Sterling
</TABLE>
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
-----------------------------------------------------------------------------
(restated) (restated)
<S> <C> <C>
Payroll, payroll taxes and fringe benefits $ 28,291 $ 20,422
Payable to subcontractors 15,534 8,660
Accrued contract costs 38,866 2,027
Other accrued expenses 15,327 8,910
------------------------------
Total $ 98,018 $ 40,019
=============================================================================
</TABLE>
Approximately $16,332,000 of accrued contract costs at December 31, 1997
related to certain contingent liabilities associated with contracts acquired
from CTA.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
-------------------------------------------------------------------------------
(restated) (restated)
<S> <C> <C>
Land $ 852 $ 1,422
Buildings and leasehold improvements 22,112 21,239
Machinery and equipment 138,499 116,209
Equipment and satellite systems under construction 27,367 47,221
Software and technical drawings 15,750 10,331
Accumulated depreciation and amortization (79,253) (69,534)
---------------------------
Total $ 125,327 $ 126,888
===============================================================================
</TABLE>
Interest expense of approximately $7,257,000, $8,156,000 and $6,685,000
was capitalized during 1997, 1996 and 1995, respectively, as part of the
historical cost of equipment under construction and investments in affiliates.
42
<PAGE> 46
8. SHORT-TERM BORROWINGS
The company has a $25,000,000 unsecured demand line of credit with an
international bank. The line is repayable upon demand and bears interest at the
prime rate or LIBOR. At December 31, 1997, the interest rate on outstanding
borrowings under this line of credit was approximately 6.8%. At December 31,
1997 and 1996, approximately $3,500,000 and $17,500,000, respectively, of
borrowings were outstanding against this line of credit.
The company or its subsidiaries maintain other unsecured general
short-term credit facilities. At December 31, 1997, approximately $6,567,000
was outstanding on these facilities at an average borrowing rate of 8%. There
were no outstanding borrowings on these facilities at December 31, 1996.
The company's primary $100,000,000 credit facility was amended and
restated during 1997. At December 31, 1997, the amended facility included a
line of credit and a term loan, both maturing in 2001. All of the outstanding
borrowings under this facility have been classified as long-term obligations
(see note 9) due to the three-year term of the underlying debt instruments. The
company terminated a $10,000,000 line of credit with a domestic bank during
1997. At December 31, 1996, $5,700,000 was outstanding under this facility.
9. LONG-TERM OBLIGATIONS
The following sets forth the company's long-term obligations, excluding
capital lease obligations (see note 10):
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
7% note, principal and interest due monthly through 1998 $ 631 $ 1,275
7.74-9.35% notes, principal and interest due monthly 1998-1999 7,421 12,554
8.95% bank note, principal and interest due monthly through 1999 -- 2,284
7.19% - 8.64% notes, principal and interest due monthly through 2002 24,562 --
8.41% note, principal and interest due monthly through 2005 9,407 --
6% note, principal and interest due semi-annually through 2000 4,350 --
5% bank notes, principal and interest due monthly through 2003 1,964 1,631
7.89% bank notes, interest and principal due quarterly through 2001 47,750 8,000
12% note, interest due semi-annually, principal due 1999-2001 20,000 20,000
5% convertible subordinated notes, interest due semi-annually, principal due 2002 100,000 --
-----------------------------
216,085 45,744
Less current portion (18,189) (14,115)
-----------------------------
Total $ 197,896 $ 31,629
=======================================================================================================================
</TABLE>
The 7% note is secured by certain equipment located at the company's
Pomona, California facility. The 7.74-9.35% notes are secured by certain
equipment located at the company's Germantown, Maryland facility. The 8.95%
bank note was secured by the company's satellite integration and test facility
located in Dulles, Virginia; the company repaid this note in full in February
1997. The 7.19% - 8.64% notes are secured by certain office, computer and test
equipment located at the company's Germantown, Maryland, Chandler, Arizona and
Dulles, Virginia facilities. The 8.41% note is secured by the company's L-1011
aircraft. In conjunction with its acquisition of Rockwell's automotive
navigation product line, on July 31, 1997 Orbital issued Rockwell a $4,350,000
unsecured note, which bears interest at 6% and is repayable semi-annually over
three years.
The company has two secured bank borrowing agreements, totaling
approximately $71,000,000, of which $54,000,000 was available and $1,964,000
was outstanding at December 31, 1997. The secured bank notes, pursuant to an
intercreditor agreement between two international banks, provide for borrowings
at a variable rate, 5% at December 31, 1997, and are collateralized by MDA's
accounts receivable, inventory and certain other assets. The agreements contain
certain covenants with respect to MDA's leverage ratio and tangible net worth.
During 1997, Orbital amended and restated its existing revolving credit
facility to provide for total borrowings from an international syndicate of six
banks of up to $100,000,000. The facility included a $35,000,000 term loan, and
a $65,000,000 revolving line of credit; $10,000,000 of the term loan was repaid
in 1997. The interest rate charged under the facility is a variable rate based
on the prime rate or LIBOR. The weighted average interest rate on borrowings
outstanding under this facility at December
43
<PAGE> 47
31, 1997 was 7.89%. Outstanding borrowings are collateralized by the company's
accounts receivable. The facility prohibits the payment of cash dividends and
contains certain covenants with respect to the company's working capital
levels, fixed charge ratio, leverage ratio and net worth, and expires in August
2001.
Orbital amended its 12% unsecured note during the first quarter of 1997
to facilitate compliance with certain financial covenants as well as to permit
the completion of the ORBIMAGE equity financing (see note 3). In connection
with this amendment, the interest rate on the note increased from 11.5% to 12%
effective March 31, 1997. The unsecured note contains certain covenants with
respect to fixed charge ratio, leverage ratio and tangible net worth, and
includes certain cross-default provisions.
On September 16, 1997, Orbital sold $100,000,000 of 5% convertible
subordinated notes due October 2002. The notes, which are non-callable for
three years, are convertible at the option of the holders into Orbital common
stock at a conversion price of $28.00 per share, subject to adjustment in
certain events.
In 1996, ORBCOMM issued $170,000,000 senior unsecured notes due 2004 (the
"ORBCOMM Notes") to institutional investors. The ORBCOMM Notes bear interest at
a fixed rate of 14% and provide for noteholder participation in future ORBCOMM
service revenues. The ORBCOMM Notes are fully and unconditionally guaranteed on
a joint and several basis by OCC and Teleglobe Mobile. The guarantee is
non-recourse to Orbital.
The fair value of Orbital's long-term obligations at December 31, 1997
and 1996 is estimated at approximately $178,455,000 and $38,521,000,
respectively. Fair value estimates are based on quoted market prices or on
current rates offered for debt of similar remaining maturities. The 1997 fair
value amount is less than the carrying value primarily as a result of the
current market premium on the convertible notes. Scheduled maturities of
long-term debt for each of the years in the five-year period ending December
31, 2002 and thereafter are $18,189,000, $26,137,000, $24,550,000, $38,153,000,
$105,138,000 and $3,918,000, respectively.
10. LEASE COMMITMENTS
Aggregate minimum rental commitments under non-cancelable operating and
capital leases (primarily for office space and equipment) at December 31, 1997
were as follows (restated):
<TABLE>
<CAPTION>
(In thousands) Operating Capital
-----------------------------------------------------------------------------
<S> <C> <C>
1998 $ 13,479 $ 1,604
1999 12,033 1,418
2000 10,931 874
2001 8,706 72
2002 7,145 --
2003 and thereafter 22,634 --
----------------------------
$ 74,928 3,968
=========
Less: Interest at 10% (159)
Less: Current portion (1,511)
-----------
Total $ 2,298
===========
</TABLE>
Rent expense for 1997, 1996 and 1995 was approximately $10,870,000,
$12,300,000 and $11,215,000, respectively.
44
<PAGE> 48
11. INCOME TAXES
The provisions (benefits) for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1997 1996 1995
-----------------------------------------------------------------------------
(restated) (restated) (restated)
<S> <C> <C> <C>
CURRENT PROVISION:
U.S. Federal $ -- $ -- $ 33
Foreign 1,283 211 1,180
State -- -- --
DEFERRED PROVISION:
U.S. Federal 10,898 -- (5,623)
Foreign 752 -- (2,159)
State -- -- --
--------------------------------------
Total $ 12,933 $ 211 $ (6,569)
=============================================================================
</TABLE>
The income tax provisions (benefits) were different from those computed
using the statutory U.S. Federal income tax rate as set forth below:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-----------------------------------------------------------------------------
(restated) (restated) (restated)
<S> <C> <C> <C>
U.S. Federal statutory rate 35.0% 35.0% (34.0)%
Tax-exempt interest -- -- (13.7)
Intangible amortization 91.4 21.9 10.2
Foreign income taxes, net 60.3 (21.4) (10.8)
Changes in valuation allowance 815.2 (43.6) 249.7
Investments in affiliates and non-
controlling interests in net assets
of consolidated subsidiaries 582.2 -- --
Other, net (737.7) 10.7 (268.6)
-----------------------------------------
Effective rate 846.4% 2.6% (67.2)%
=============================================================================
</TABLE>
The tax effects of significant temporary differences were as follows:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
-------------------------------------------------------------------------------------
(restated)
<S> <C> <C>
TAX ASSETS:
Non-deductible financial statement accruals $ 55,792 $ 37,603
U.S. Federal and state net operating loss
carryforward 64,261 51,628
Intangible assets 5,988 6,865
U.S. Federal and foreign tax credit carryforward 11,219 16,952
-----------------------------
137,260 113,048
Valuation allowance (66,889) (54,432)
-----------------------------
Tax assets, net $ 70,371 $ 58,616
=============================
TAX LIABILITIES:
Percentage-of-completion accounting $ 5,211 $ 3,349
Excess tax depreciation 15,916 5,280
Investments in subsidiaries/affiliates 6,198 --
Excess deductions for tax reporting purposes 28,141 27,280
-----------------------------
Tax liabilities $ 55,466 $ 35,909
=====================================================================================
</TABLE>
45
<PAGE> 49
In 1997 and 1996, approximately 20.6% and 27.9%, respectively, of the
company's income before provision for income taxes and cumulative effect of an
accounting change was generated from foreign sources. In 1995, approximately
$2,100,000 of income before benefit for income taxes and cumulative effect of
an accounting change was generated from foreign sources. At December 31, 1997,
the company had U.S. Federal net operating loss carryforwards (portions of
which expire beginning in 2005) and research and environmental tax credit
carryforwards of approximately $150,000,000 and $3,000,000, respectively, that
may be used through the year 2013, subject to certain annual limitations and
other restrictions. Management believes that its net deferred tax assets,
largely attributable to Canadian investment tax credit carryforwards, will be
realized in the near future.
12. COMMON STOCK AND STOCK OPTION PLANS
In 1996, the company issued 1,200,000 shares of common stock in a private
placement to various offshore investors, receiving net proceeds of
approximately $20,300,000. In addition, during 1996, the company completed the
redemption of $55,880,000 outstanding principal of its 6 3/4% convertible
subordinated debentures that had been due 2003. As a result of this conversion,
the outstanding principal was converted into 3,887,304 shares of the company's
common stock.
The company's 1997 Stock Option and Incentive Plan (the "1997 Plan")
provides for awards of incentive or non-qualified stock options and restricted
stock to employees, directors, consultants and advisors of the company and its
subsidiaries. Under the terms of the 1997 Plan, options may not be issued at
less than 100% of the fair market value of the company's common stock on the
date of grant. Options under the 1997 Plan vest at a rate set forth by the
Board of Directors in each individual option agreement, generally in one-third
increments over a three-year period following the date of grant. Options expire
no more than ten years following the grant date. The 1997 Plan provides for
automatic grants of non-qualified stock options to non-employee directors of
the company. Restricted stock grants under the 1997 plan vest at a rate
determined by the Board, generally vesting two years following the date of
award.
The 1997 Plan has 1,600,000 shares authorized for option grants or
restricted stock awards. In January 1998, Orbital's Board of Directors
authorized an increase in the number of shares available for grant to
3,200,000, subject to stockholder approval. Options are also outstanding under
two predecessor option plans and pursuant to replacement options that have been
granted in connection with certain acquisitions.
The following two tables summarize information regarding options under
the company's stock option plans for the last three years:
<TABLE>
<CAPTION>
Weighted
Number of Option Price Average Outstanding
ORBITAL OPTIONS Shares Per Share Exercise Price and Exercisable
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING AT DECEMBER 31, 1994 2,116,895 $ 1.82 - $22.00 $ 13.02 997,981
Granted 553,966 $ 7.47 - $18.81 $ 16.97
Exercised (300,011) $ 3.51 - $15.30 $ 6.29
Canceled or expired (130,325) $ 3.51 - $22.00 $ 20.39
------------
OUTSTANDING AT DECEMBER 31, 1995 2,240,525 $ 1.82 - $22.00 $ 14.16 1,133,713
Granted 1,372,000 $12.25 - $17.63 $ 13.26
Exercised (298,916) $ 1.82 - $17.75 $ 7.20
Canceled or expired (588,399) $ 3.51 - $22.00 $ 20.23
------------
OUTSTANDING AT DECEMBER 31, 1996 2,725,210 $ 1.82 - $ 22.00 $ 13.10 1,324,316
Granted 1,908,650 $13.50 - $ 24.00 $ 17.29
Exercised (326,263) $ 1.82 - $ 18.81 $ 10.43
Canceled or expired (300,306) $ 1.82 - $ 22.00 $ 15.12
------------
OUTSTANDING AT DECEMBER 31, 1997 4,007,291 $ 1.84 - $ 24.00 $ 15.16 1,549,185
==========================================================================================================================
</TABLE>
46
<PAGE> 50
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at Dec. 31, 1997 Contractual Life Exercise Price at Dec. 31, 1997 Exercise Price
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.84 - $ 13.50 1,488,479 6.25 $11.89 912,472 $ 11.35
$ 13.62 - $ 16.50 1,377,136 7.95 $15.77 307,966 $ 14.33
$ 16.63 - $ 24.00 1,141,676 8.53 $18.68 328,747 $ 17.85
----------- ----------
$ 1.84 - $ 24.00 4,007,291 7.48 $15.16 1,549,185 $ 13.32
=======================================================================================================================
</TABLE>
OCC adopted a stock option plan in 1992 (the "ORBCOMM Plan"). The ORBCOMM
Plan provides for grants of incentive and non-qualified stock options to
purchase OCC common stock to officers and employees of ORBCOMM and the company.
Under the terms of the ORBCOMM Plan, incentive stock options may not be granted
at less than 100% of the fair market value, and non-qualified options may not
be granted at less than 85% of the fair market value, of OCC common stock at
the date of grant as determined by OCC's Board of Directors. The options vest
at a rate set forth by the Board of Directors in each individual option
agreement, generally in one-fourth increments over a four-year period. Certain
provisions of the ORBCOMM Plan require OCC to repurchase, with cash or
promissory notes, the common stock acquired pursuant to the options. The cash
repurchase amount is restricted by the terms of the ORBCOMM Notes to an amount
not to exceed $1,000,000 in any one year. During 1997 and 1996, OCC repurchased
43,800 and 47,760 shares, respectively, of OCC common stock under this
provision.
The following two tables summarize the option activity relating to the
ORBCOMM Plan:
<TABLE>
<CAPTION>
Weighted
Number of Option Price Average Outstanding
OCC OPTIONS Shares Per Share Exercise Price and Exercisable
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING AT DECEMBER 31, 1994 599,074 $ 1.50 - $14.00 $ 5.64 298,657
Granted -- N/A N/A
Exercised (8,936) $ 1.50 - $13.00 $ 3.87
Canceled or expired (44,238) $ 1.50 - $13.00 $ 6.74
----------
OUTSTANDING AT DECEMBER 31, 1995 545,900 $ 1.50 - $14.00 $ 5.56 411,086
Granted 154,500 $17.00 - $25.00 $ 20.50
Exercised (67,270) $ 1.50 - $13.00 $ 2.43
Canceled or expired (34,300) $ 1.50 - $17.00 $ 13.81
----------
OUTSTANDING AT DECEMBER 31, 1996 598,830 $ 1.50 - $25.00 $ 9.40 393,903
Granted 284,500 $26.50 $ 26.50
Exercised (20,900) $ 1.50 - $25.00 $ 6.68
Canceled or expired (112,600) $ 1.50 - $25.00 $ 14.86
----------
OUTSTANDING AT DECEMBER 31, 1997 749,830 $ 1.50 - $26.50 $ 15.22 415,804
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ---------------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at Dec. 31, 1997 Contractual Life Exercise Price at Dec. 31, 1997 Exercise Price
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.50 - $ 4.00 261,540 4.82 $ 2.38 261,540 $ 2.38
$ 5.25 - $25.00 163,790 6.52 $ 13.39 116,389 $ 11.79
$26.50 - $26.50 324,500 9.36 $ 26.50 37,875 $ 26.50
-------- -------
$ 1.50 - $26.50 749,830 7.16 $ 15.22 415,804 $ 7.21
=========================================================================================================================
</TABLE>
During 1996, Magellan adopted the 1996 Stock Option Plan (the "Magellan
Plan"), pursuant to which incentive or non-qualified options to purchase up to
7,000,000 shares of Magellan common stock may be granted to Magellan and
Orbital employees, consultants or advisors. The Magellan Plan stipulates that
stock options may not be granted with an exercise price less than 85% of the
stock's fair market value at the date of grant, as determined by Magellan's
Board of Directors. The Magellan options generally vest
47
<PAGE> 51
incrementally over a three-year period. Certain provisions of the Magellan Plan
require Magellan to repurchase the common stock acquired pursuant to options
granted prior to May 1, 1997.
The following table summarizes the option activity relating to the
Magellan Plan:
<TABLE>
<CAPTION>
Weighted
Number of Option Price Average Outstanding
MAGELLAN OPTIONS Shares Per Share Exercise Price and Exercisable
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING AT DECEMBER 31, 1995 -- -- -- --
Granted 6,915,900 $ 1.10 $ 1.10
Exercised -- N/A N/A
Canceled or expired (322,300) $ 1.10 $ 1.10
OUTSTANDING AT DECEMBER 31, 1996 6,593,600 $ 1.10 $ 1.10 667,539
Granted 1,717,500 $ 1.10 $ 1.10
Exercised (103,909) $ 1.10 $ 1.10
Canceled or expired (1,427,531) $ 1.10 $ 1.10
OUTSTANDING AT DECEMBER 31, 1997 6,779,660 $ 1.10 $ 1.10 2,528,097
=========================================================================================================
</TABLE>
The weighted average remaining contractual life on outstanding options
was 8.84 years.
In conjunction with the Ashtech merger (see note 4), Magellan assumed the
Ashtech option plan and issued replacement options that are exercisable into
Magellan common stock. At December 31, 1997, there were 5,316,561 non-qualified
Magellan replacement options outstanding, 3,606,540 of which were exercisable.
The option price per share ranges from $0.81 to $1.72 with an average exercise
price of $1.09. The weighted average remaining contractual life on the
outstanding Magellan replacement options was 7.74 years.
13. STOCK-BASED COMPENSATION
The company uses the Black-Scholes option pricing model to determine the
pro forma impact to the company's net income and earnings per share. The model
utilizes certain information, such as the interest rate on a risk-free security
maturing generally at the same time as the option being valued, and requires
certain assumptions, such as the expected amount of time an option will be
outstanding until it is exercised or it expires, to calculate the weighted
average fair value per share of stock options granted. This information and the
assumptions used for 1997, 1996 and 1995 for all option plans is summarized as
follows:
<TABLE>
<CAPTION>
Additional Shares Weighted Average
Available at Risk-Free Fair Value
December 31, Volatility Interest Rate Per Share at Grant Date
--------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996 1995 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Orbital Plan 218,868 231,955 54% 56% 58% 6.1% 5.3% 7.0% $17.29 $13.26 $16.97
ORBCOMM Plan 48,878 20,778 30% 30% N/A 6.1% 5.6% N/A $26.50 $20.50 N/A
Magellan Plan 116,431 406,400 30% 30% N/A 5.9% 6.4% N/A $ 1.10 $ 1.10 N/A
--------------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed expected dividend yield was zero for all years for all option
plans. The assumed average expected life for all options for all years was 4.5
years (except that no such assumption was applicable for the ORBCOMM and
Magellan Plans for 1995).
The company recorded compensation expense of approximately $600,000,
$300,000 and $55,000 related to the various option plans for the years ended
December 31, 1997, 1996 and 1995, respectively. Had the company determined
compensation expense based on the fair value at the grant date for stock
options, the company's net income (loss) and net income (loss) per common and
dilutive share would have been ($21,657,000) and ($0.67), respectively, for the
year ended December 31, 1997; ($743,000) and ($0.03), respectively, for the
year ended December 31, 1996; and ($7,515,000) and ($0.29), respectively, for
the year ended December 31, 1995. Pro forma net income (loss) reflects only
options granted in 1997, 1996 and 1995 and, therefore, may not be
representative of the effects for future periods.
During 1996, the company issued 150,000 stock appreciation rights that
vest over a three-year period. Payment is dependent on appreciation of the
company's common stock
48
<PAGE> 52
over the vesting period. The company recorded approximately $1,470,000 and
$175,000, respectively, in compensation expense during 1997 and 1996 with
respect to these rights.
14. SUPPLEMENTAL DISCLOSURES
DEFINED CONTRIBUTION PLANS
At December 31, 1997, the company had several defined contribution plans
(the "Plans") generally covering all full-time employees in the U.S. and
Canada. Company contributions to the Plans are made based on certain plan
provisions and at the discretion of the Board of Directors, and were
approximately $9,108,000, $7,097,000 and $6,533,000 during 1997, 1996 and 1995,
respectively.
CASH FLOWS
Cash payments for interest and income taxes were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1997 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $ 10,059 $ 10,860 $ 9,906
Income taxes paid, net of refunds 544 1,327 1,339
============================================================================
</TABLE>
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) and outstanding shares of common stock used in
calculating earnings (loss) per share differed from those amounts reported in
the consolidated financial statements as follows:
<TABLE>
<CAPTION>
Net Income (Loss) Per Common Share,
(In thousands) Net Income (Loss) Per Common Share Assuming Dilution
---------------------------------------------------------------------------------------------------------------------------
(restated)
<S> <C> <C>
1997
Net loss $ (11,405) N/A
Assuming conversion of convertible notes -- N/A
------------------------------------------------------------------
Outstanding common shares 32,482 N/A
Effect of weighting for outstanding shares (199) N/A
------------------------------------------------------------------
Adjusted shares 32,283 N/A
==================================================================
1996
Net income $ 9,942 $ 9,942
Assuming conversion of convertible notes -- 2,357
------------------------------------------------------------------
Net income, as adjusted $ 9,942 $ 12,299
==================================================================
Outstanding common shares 32,161 32,161
Effect of weighting for outstanding shares (3,024) (3,024)
Outstanding stock options -- 83
Assuming conversion of convertible notes -- 2,396
------------------------------------------------------------------
Adjusted shares 29,137 31,616
==================================================================
1995
Net loss $ (5,590) N/A
Assuming conversion of convertible notes -- N/A
------------------------------------------------------------------
Outstanding common shares 26,766 N/A
Effect of weighting for outstanding shares (558) N/A
Outstanding stock options -- N/A
Assuming conversion of convertible notes -- N/A
------------------------------------------------------------------
Adjusted shares 26,208 N/A
===========================================================================================================================
</TABLE>
49
<PAGE> 53
SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Management has determined to restate its previously issued consolidated
financial statements for each of the quarters in 1997 and 1996 with respect to
its accounting treatment for certain matters described below. The following is
a summary of selected quarterly financial data for the previous two years:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- ------- -------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
1997 (AS PREVIOUSLY REPORTED)
Revenues.................................... $ 122,112 $ 142,226 $ 164,670 $ 176,967
Gross profit................................ 33,678 39,673 46,015 29,837
Income from operations...................... 6,047 11,005 12,249 193
Net income.................................. 5,094 5,603 6,130 6,178
Net income per common share................. 0.16 0.17 0.19 0.20
Net income per common share, assuming
dilution.................................. 0.16 0.17 0.18 0.18
1996 (AS PREVIOUSLY REPORTED)
Revenues.................................... 104,894 116,512 119,571 120,458
Gross profit................................ 32,312 32,888 31,875 28,099
Income (loss) from operations............... 5,872 7,324 7,124 3,522
Net income (loss)........................... 3,128 3,839 4,456 4,484
Net income (loss) per common share.......... 0.12 0.14 0.15 0.14
Net income (loss) per common share, assuming
dilution.................................. 0.12 0.14 0.15 0.14
1997 (AS RESTATED)
Revenues.................................... 113,273 90,263 163,310 179,162
Gross profit................................ 30,018 22,439 45,641 34,549
Income (loss) from operations............... 2,936 (9,150) 10,383 3,338
Net income (loss)........................... 2,307 (20,274) 1,001 5,560
Net income (loss) per common share.......... 0.07 (0.62) 0.03 0.17
Net income (loss) per common share,
assuming dilution......................... 0.07 (0.62) 0.03 0.17
1996 (AS RESTATED)
Revenues.................................... 104,801 115,063 119,903 110,020
Gross profit................................ 33,063 32,336 30,368 21,439
Income (loss) from operations............... 5,458 6,191 6,574 (4,466)
Net income (loss) .......................... 2,965 3,054 4,082 (159)
Net income (loss) per common share,
and dilutive share........................ 0.11 0.11 0.14 (0.01)
</TABLE>
EQUITY METHOD ACCOUNTING RESTATEMENT ADJUSTMENTS
(a) As a result of certain participating rights granted to holders of
convertible preferred stock of ORBIMAGE, Orbital significantly
influences, but does not control, ORBIMAGE even though it owns
substantially all of ORBIMAGE's outstanding common stock. The company's
prior consolidated financial statements reflected the company's
application of the equity method of accounting as it pertained to
ORBIMAGE based on Orbital's percentage share of ownership of ORBIMAGE
calculated to give effect to the assumed conversion of ORBIMAGE's
outstanding convertible preferred stock into ORBIMAGE common stock. As
reflected in its restated financial statements, the company applies the
equity method of accounting as it pertains to ORBIMAGE based on its
ownership of outstanding common stock without giving effect to the
assumed conversion of ORBIMAGE's outstanding convertible preferred stock.
The effect of this revision is to increase (decrease) equity in losses of
affiliates as follows (in thousands):
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1997 -- $100 $(329) $927
</TABLE>
(b) ORBIMAGE's preferred stockholders are entitled to receive a cumulative
dividend, payable either in cash or in additional shares of convertible
preferred stock. To date all dividends have been paid in additional
shares of convertible preferred stock. Previously, the company's
consolidated financial statements did not reflect additional net losses
allocable to Orbital as a result of ORBIMAGE's declaration of such
"in-kind" dividends on its convertible preferred stock. As reflected in
the
50
<PAGE> 54
restated consolidated financial statements presented herein, Orbital
calculates its equity in losses of affiliates talking into account such
non-cash dividends at their fair value. The effect of these revisions is
to increase equity in losses of affiliates as follows (in thousands):
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1997 -- $ 150 $1,039 $1,619
</TABLE>
(c) Previously, the company's consolidated financial statements reflected the
recognition of revenue related to the initial transfer of certain assets
to ORBIMAGE in 1997. Additionally, the company did not previously
reflect an increase in its deferred tax asset liabilities related to the
ORBIMAGE transaction. As reflected in the restated financial statements,
the company has revised its accounting for these transactions and the tax
impact thereto, decreasing its reported revenues related to these sales.
The effect in the 1997 quarters was to decrease revenues and operating
income as follows (in thousands):
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Revenues $6,000 $52,539 -- --
Operating income
decrease (increase) $ 600 $18,869 -- ($5,000)
</TABLE>
The tax impacts associated with this transaction resulted in an increase
to the provision for income taxes of $10,898,000 in the second quarter of
1997 to reflect deferred tax liabilities related to the investment basis
differences.
(d) Previously, the company's consolidated financial statements reflected the
company's capitalization of interest expense on various assets, including
on its equity investments in ORBIMAGE and ORBCOMM. As reflected in the
restated consolidated financial statements presented herein, Orbital has
not capitalized interest expense on its investment in ORBIMAGE and has
revised the capitalization of interest on certain other assets, including
its equity method investment in ORBCOMM. These revisions include the
compounding impact of interest, and the reduction of eligible investment
amounts for losses recognized for equity method investors. These
revisions had the effect of increasing (decreasing) interest expense as
follows (in thousands):
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1997 $ (164) $ (273) $1,885 $1,017
1996 $ (322) $ (383) $ (300) 53
</TABLE>
(e) Previously, the company's consolidated financial statements did not
reflect amortization of the excess of the company's investment in
ORBIMAGE over the underlying share of the company's equity in ORBIMAGE.
As reflected in the restated consolidated financial statements, Orbital
is amortizing such excess over eight years. This revision had the effect
of increasing (decreasing) the company's equity in losses from affiliates
as follows (in thousands):
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1997 -- $59 $(59) $237
</TABLE>
(f) Previously, the company's consolidated financial statements did not
reflect the amortization of previously deferred profits in connection
with its sales of both satellites and ground stations to ORBCOMM. As
reflected in the restated consolidated financial statements presented
herein, Orbital is amortizing a portion of such deferred profits over the
estimated lives of both the satellites and the ground stations. The
effect of this revision was to increase the company's equity in losses of
affiliates by approximately $110,000 in each of the quarters in 1997 and
1996.
51
<PAGE> 55
ASSET RESTATEMENT ADJUSTMENTS
(g) The company has historically capitalized and depreciated certain product
enhancements and costs associated with internally developed software and
certain other costs. Previously, the company's consolidated financial
statements reflected such costs as capitalized assets. As reflected in
the company's restated consolidated financial statements, the company has
expensed all previously capitalized enhancement costs and certain other
non-capitalizable costs. These revisions resulted in a decrease in
operating income as follows (in thousands):
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1997 $ 2,868 $ 2,485 $ 1,867 $ 1,653
1996 $ 209 $ 1,132 $ 1,643 $ 2,941
</TABLE>
The company has recorded certain other adjustments, the net effect of
which is not significant individually or in the aggregate.
52
<PAGE> 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in Item 4A above and
under the caption "Election of Directors -- Directors to be Elected at the 1998
Annual Meeting, "-- Directors Whose Terms Expire in 1999" and "-- Directors
Whose Terms Expire in 2000" and "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Proxy Statement filed pursuant to Regulation 14A on March
24, 1998 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included under the captions
"Summary Compensation Table," "Option Grants in Last Fiscal Year," "Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values,"
"Indemnification Agreements," "Executive Employment Agreements" and
"Information Concerning the Board and Its Committees" of the Proxy Statement
filed pursuant to Regulation 14A on March 24, 1998 and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the caption
"Ownership of Common Stock" of the Proxy Statement filed pursuant to Regulation
14A on March 24, 1998 and is incorporated herein by reference.
53
<PAGE> 57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included under the caption
"Related Transactions" of the Proxy Statement filed pursuant to Regulation 14A
on March 24, 1998 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. FINANCIAL STATEMENTS. The following financial
statements, together with the reports of KPMG LLP are
filed as a part of this report:
A. Independent Auditors' Report
B. Consolidated Statements of Operations
C. Consolidated Balance Sheets
D. Consolidated Statements of Stockholders'
Equity
E. Consolidated Statements of Cash Flows
F. Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENTS OF 50% OWNED SUBSIDIARY AND
FINANCIAL STATEMENT SCHEDULES.
A. The financial statements of ORBCOMM Global,
L.P. were transmitted with the company's
Form 10K Previously filed with the
Commission.
B. The following additional financial data for
the company are transmitted with this
report and should be read in conjunction
with the company's consolidated financial
statements contained herein. Schedules
other than those listed below have been
omitted because they are inapplicable or
are not required.
I Independent Auditors' Report on
Consolidated Financial Statement
Schedule
II Valuation and Qualifying Accounts
3. EXHIBITS. A complete listing of exhibits required is
given in the Exhibit Index that precedes the exhibits
filed with this report.
(b) Reports on Form 8-K
(i) On October 1, 1997, the company filed a Current Report
on Form 8-K reporting, pursuant to Item 9, the sale of
equity securities pursuant to Regulation S under the
Securities Act of 1933, as amended.
(ii) On December 8, 1997, the company filed a Current Report
on Form 8-K reporting, pursuant to Item 5, the merger of
Magellan and Ashtech.
(c) See Item 14(a)(3) of this report.
(d) See Item 14(a)(2) of this report.
54
<PAGE> 58
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to be
signed on its behalf by the undersigned, thereunto duly authorized.
ORBITAL SCIENCES CORPORATION
DATED: June 26, 2000 By /s/ Jeffrey V. Pirone
---------------------------------------
Jeffrey V. Pirone, Executive Vice
President and Chief Financial Officer
55
<PAGE> 59
Independent Auditors' Report
The Board of Directors and Stockholders
Orbital Sciences Corporation:
Under date of February 4, 1998, except as to note 1A, which is as of April 17,
2000, we reported on the consolidated balance sheets of Orbital Sciences
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997, included in
the Company's 1997 annual report on Form 10-K/A. In connection with our audits
of the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule in the Company's 1997 Form
10-K/A. This consolidated financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statement schedule as of December 31,
1997 and 1996, and for each of the years in the three-year period ended
December 31, 1997 has been restated.
KPMG LLP
Washington, D.C.
February 4, 1998, except as to note 1A,
which is as of April 17, 2000
56
<PAGE> 60
ORBITAL SCIENCES CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C
ADDITIONS
---------------------------------------------
--------------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO COSTS CHARGED/CREDITED TO
DESCRIPTION START OF PERIOD AND EXPENSES OTHER ACCOUNTS (1)
<S> <C> <C> <C>
YEAR-ENDED DECEMBER 31, 1995 (Restated)
Allowance for doubtful accounts $ 859 $ 108 $ -
Allowance for obsolete inventory 3,936 580 -
Allowance for unrecoverable investments 3,100 - -
Deferred income tax valuation reserve 43,596 21,445 2,980
YEAR ENDED DECEMBER 31, 1996 (Restated)
Allowance for doubtful accounts $ 773 $ 603 $ -
Allowance for obsolete inventory 3,778 667 685
Allowance for unrecoverable investments 1,100 - -
Deferred income tax valuation reserve 68,021 - -
YEAR ENDED DECEMBER 31, 1997 (Restated)
Allowance for doubtful accounts $ 1,368 $ 709 $ 16,550
Allowance for obsolete inventory 5,098 1,527 4,902
Allowance for unrecoverable investments 1,100 729 3,057
Deferred income tax valuation reserve 54,432 12,457 -
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN D COLUMN E
--------------------------------------------------------------------------------
BALANCE AT
DESCRIPTION DEDUCTIONS (2) END OF PERIOD
<S> <C> <C>
YEAR-ENDED DECEMBER 31, 1995 (Restated)
Allowance for doubtful accounts $ (194) $ 773
Allowance for obsolete inventory (738) 3,778
Allowance for unrecoverable investments (2,000) 1,100
Deferred income tax valuation reserve - 68,021
YEAR ENDED DECEMBER 31, 1996 (Restated)
Allowance for doubtful accounts $ (8) $ 1,368
Allowance for obsolete inventory (32) 5,098
Allowance for unrecoverable investments - 1,100
Deferred income tax valuation reserve (13,589) 54,432
YEAR ENDED DECEMBER 31, 1997 (Restated)
Allowance for doubtful accounts $ (550) $ 18,077
Allowance for obsolete inventory (627) 10,900
Allowance for unrecoverable investments - 4,886
Deferred income tax valuation reserve - 66,889
</TABLE>
(1) - Amounts charged/credited to other accounts represent valuation and
qualifying accounts recorded pursuant to purchase business
combinations as described in Note (4) to the consolidated financial
statements incorporated by reference elsewhere herein.
(2) - Reduction of related allowance account.
57
<PAGE> 61
EXHIBIT INDEX
The following exhibits are filed as part of this report. Where such
filing is made by incorporation by reference to a previously filed statement or
report, such statement or report is identified in parentheses.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-3 (File Number 333-08769) filed and
effective on July 25, 1996.
3.2 By-Laws of Orbital Sciences Corporation, as amended on July
27, 1995 (incorporated by reference to Exhibit 3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995).
4.1 Form of Certificate of Common Stock (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (File Number 33-33453) filed on
February 9, 1990 and effective on April 24, 1990).
4.2 Indenture dated as of September 16, 1997 between the Company
and Deutsche Bank AG, New York Branch, as Trustee
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997).
4.3 First Supplemental Indenture dated as of December 15, 1997
between the Company and Deutsche Bank AG, New York Branch, as
Trustee (incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement on Form S-3 (File Number
333-42271) filed on December 15, 1997 and effective on March
12, 1998).
4.4 Form of 5% Convertible Subordinated Note (incorporated by
reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-3 (File Number 333-42271) filed on
December 15, 1997 and effective on March 12, 1998).
4.5 Registration Rights Agreement dated as of September 16, 1997
among the Company and Deutsche Morgan Grenfell Inc. and J.P.
Morgan Securities Inc. (incorporated by reference to Exhibit
4.6 to the Company's Registration Statement on Form S-3 (File
Number 333-42271) filed on December 15, 1997 and effective on
March 12, 1998).
10.1 Second Amended and Restated Credit Agreement, dated as of
August 5, 1997 among the Company, Magellan Corporation, the
Banks listed therein, Morgan Guaranty Trust Company of New
York, as Administrative Agent and Collateral Agent (the
"Credit Agreement") (incorporated by reference to Exhibit
10.1 to the Company's Report on Form 10-Q for the quarter
ended September 30, 1997).
10.1.1 Amendment No. 1 to the Credit Agreement, dated as of December
19, 1997 (previously filed).
10.1.2 Amendment No. 2 to the Credit Agreement, dated as of December
31, 1997 (previously filed).
10.2 Note Agreement, dated as of June 14, 1995 between the
Corporation and The Northwestern Mutual Life Insurance
Company (the "NWML Note Agreement") (incorporated by
reference to Exhibit 4.7.1 to the Company's Report on Form
10-Q for the quarter ended June 30, 1995).
10.2.1 1st Amendment to the NWML Note Agreement, dated as of June
30, 1995, between the Corporation and The Northwestern Mutual
Life Insurance Company (incorporated by reference to the
Company's Report on Form 10-Q for the quarter ended September
30, 1995).
10.2.2 Second Amendment to the NWML Note Agreement, dated as of
March 15, 1996
</TABLE>
58
<PAGE> 62
(incorporated by reference to Exhibit 10.2.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.2.3 Third Amendment to NWML Note Agreement, dated as of July 13,
1996 (incorporated by reference to Exhibit 10.2 to the
Company's Report on Form 10-Q for the quarter ended June 30,
1996).
10.2.4 Fourth Amendment to NWML Note Agreement, dated as of March
31, 1997 (incorporated by reference to Exhibit 10.2.4 to the
Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1997).
10.2.5 Fifth Amendment to NWML Note Agreement, dated as of December
23, 1997 (previously filed).
10.3 Promissory Notes dated as of August 31, 1994 made by
Fairchild Space and Defense Corporation and Corporate
Guaranty dated August 31, 1994 made by the
Company(incorporated by reference to Exhibit 10.7 to the
Company's Report on Form 10-Q for the quarter ended September
30, 1994).
10.4 Amended and Restated Security Agreement dated as of August 5,
1997 among the Company, Morgan Guaranty Trust Company, as
Collateral Agent, and NationsBank, N.A., as Designated
Lockbox Bank (incorporated by Reference to Exhibit 10.4 to
the Company's Report on Form 10-Q for the quarter ended
September 30, 1997).
10.4.1 Security Agreement dated as of August 5, 1997 among the
Company, Morgan Guaranty Trust Company, as Collateral Agent,
and NationsBank, N.A., as Designated Lockbox Bank
(incorporated by Reference to Exhibit 10.4.1 to the Company's
Report on Form 10-Q for the quarter ended September 30,
1997).
10.5 Master Security Agreement dated as of August 31, 1994 between
Fairchild Space and Defense Corporation and General Electric
Capital Corporation (incorporated by reference to Exhibit
10.7 to the Company's Report on Form 10-Q for the Quarter
ended September 30, 1994).
10.6 Orbital Sciences Corporation 1990 Stock Option Plan, restated
as of April 27, 1995 (incorporated by reference to Exhibit
10.5.1 to the Company's Report on Form 10-Q for the quarter
ended June 30, 1995).*
10.7 Orbital Sciences Corporation 1990 Stock Option Plan for
Non-Employee Directors, restated as of April 27, 1995
(incorporated by reference 10.7 to Exhibit 10.5.2 to the
Company's Report on Form 10-Q for the quarter ended June 30,
1995).*
10.8 Orbital Communications Corporation Restated 1992 Stock Option
Plan, restated as of September 12, 1995 (incorporated by
reference to Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
10.8.1 Amendment to Orbital Communications Corporation Restated 1992
Stock Option Plan, dated February 5, 1997 (incorporated by
reference to Exhibit 10.8.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996).*
10.9 Orbital Sciences Corporation 1995 Deferred Compensation Plan
(incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995).*
10.10 Magellan Corporation 1996 Stock Option Plan (incorporated by
reference to Exhibit 10.3 to the Company's Report on Form
10-Q for the quarter ended June 30, 1996).*
10.11 Orbital Imaging Corporation 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996).*
10.12 Form of Executive Employment Agreement entered into between
the Company and Executive Officers and certain other Officers
of the Company (incorporated by
59
<PAGE> 63
reference to Exhibit 10.17 to the Company's Registration
Statement on Form S -1 (File Number 33-33453) filed on
February 9, 1990 and effective on April 24, 1990).*
10.12.1 Performance Share Agreement dated October 23, 1996 between
the Company and Mr. D.W. Thompson (incorporated by reference
to Exhibit 10.12.1 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996).*
10.12.2 Amendment No. 1 to Performance Share Agreement dated January
30, 1998 between the Company and Mr. D. W. Thompson
(previously filed).*
10.13 Form of Indemnification Agreement entered into between the
Company and Directors, Executive Officers and certain other
Officers of the Company (incorporated by reference to Exhibit
10.18 to the Company's Registration Statement on Form S-1
(File Number 33-33453) filed on February 9, 1990 and
effective on April 24, 1990).*
10.13.1 Amendment dated October 22, 1992 to form of Indemnification
Agreement entered into between the Company and Directors,
Executive Officers and certain other Officers of the Company
(incorporated by reference to Exhibit 19 to the Company's
Report on Form 10-Q for the Quarter Ended September 30,
1992).*
10.14 Promissory Note of the Company payable to the order of
Deutsche Bank AG dated July 8, 1996 (previously filed).
10.15 Restated Master Agreement, dated as of September 12, 1995, by
and among the Company, OCC, Teleglobe Inc. and Teleglobe
Mobile Partners (incorporated by reference to Exhibit 10 to
ORBCOMM Global L.P.'s Registration Statement on Form S-4
(File Number 333-11149) filed on August 30, 1996).
10.15.1 Amendment No. 1 to Restated Master Agreement, restated as of
September 12, 1995, by and among the Company, OCC, Teleglobe
Inc. and Teleglobe Mobile Partners filed on August 30, 1996
(incorporated by reference to Exhibit 10.15.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997).
10.16 Restated Agreement of Limited Partnership of ORBCOMM Global,
L.P., dated as of September 12, 1995, between OCC and
Teleglobe Mobile Partners (incorporated by reference to
Exhibit 3.2 to ORBCOMM Global L.P.'s Registration Statement
on Form S-4 (File Number 333-11149) filed on August 30,
1996).
10.16.1 Amendment No. 1 to Restated Agreement of Limited Partnership
of ORBCOMM Global, L.P., dated December 2, 1996 (incorporated
by reference to Exhibit 10.16.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996).
10.17 Restated Agreement of Limited Partnership of ORBCOMM USA,
L.P., dated as of September 12, 1995 between Orbital
Communications Corporation and ORBCOMM Global (incorporated
by reference to Exhibit 3.4 to ORBCOMM Global L.P.'s
Registration Statement on Form S-4 (File Number 333-11149)
filed on August 30, 1996).
10.18 Orbital Sciences Corporation 1997 Stock Option and Incentive
Plan (incorporated by reference to Exhibit 10.19 to the
Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1997).
10.19 Promissory Note dated June 27, 1997 from the Company payable
to the order of General Electric Capital Corporation ("GECC")
(previously filed).
10.20 Aircraft Security Agreement dated as of June 27, 1997 from
the Company to GECC (previously filed)
11 Statement re: Computation of Earnings Per Share (transmitted
herewith).
13.2 ORBCOMM Global, L.P. financial statements (previously filed).
21 Subsidiaries of the Company (previously filed).
23.1 Consent of KPMG LLP (transmitted herewith).
60
<PAGE> 64
23.2 Consent of KPMG LLP on ORBCOMM Global, L.P. financial
statements (transmitted herewith).
27 Financial Data Schedule for year ended December 31, 1997
(such schedule is furnished for the information of the
Securities and Exchange Commission and is not to be deemed
"filed" as part of the Form 10-K/A, or otherwise subject to
the liabilities of Section 18 of the Securities Exchange Act
of 1934) (transmitted herewith).
---------------------
* Management Contract or Compensatory Plan or Arrangement.
61
