April 11, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended
SEPTEMBER 30, 1999
ORBITAL SCIENCES CORPORATION
Commission file number 0-18287
Delaware 06-1209561
-------------------------- --------------------
(State of Incorporation) (IRS Identification
number)
21700 Atlantic Boulevard
Dulles, Virginia 20166 (703) 406-5000
-------------------------- -------------------
(Address of principal (Telephone number)
executive offices)
The registrant has (1) filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months, and (2) has been subject to such filing requirements for the past
90 days.
As of November 15, 1999, 37,416,772 shares of the registrant's common stock
were outstanding.
<PAGE>
Explanatory Note
Orbital Sciences Corporation ("Orbital") has determined to restate its
consolidated financial statements for the years ended December 31, 1998,
1997, 1996 and 1995 and its condensed consolidated quarterly financial
statements for 1999, 1998, 1997, 1996 and 1995. This amendment includes in
Item 1 such restated condensed consolidated financial statements and
related footnotes thereto for the three and nine months ended September 30,
1999 and 1998, and other information relating to such restated condensed
consolidated financial statements. Item 2 includes Orbital's amended
and restated discussion and analysis of financial condition and results of
operations.
Except for Items 1 and 2 and Exhibits 11 and 27, no other information
included in the original report on Form 10-Q is amended by this amendment.
Exhibit 11, Computation of Earnings Per Share, has been intentionally
omitted from this filing as it is not required for this Form 10-Q/A. For
current information regarding risks, uncertainties and other factors that
may affect Orbital's future performance, please see "Outlook: Issues and
Uncertainties" included in Item 7 of Orbital's Annual Report on Form 10-K
for the year ended December 31, 1999.
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1999 1998
------------ -----------
(Restated) (Restated)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 14,517 $ 15,268
Restricted cash and short-term
investments, at market 24,723 7,922
Receivables, net 271,675 215,110
Inventories, net 55,827 58,141
Deferred income taxes and other
assets 10,793 7,686
----------- --------
Total current assets 377,535 304,127
Property, plant and equipment, at
cost, less accumulated depreciation
and amortization of $116,147 and
$99,839, respectively 158,120 139,401
Investments in and advances to
affiliates, net 200,720 199,267
Goodwill, less accumulated
amortization of $39,142 and $28,744,
respectively 276,278 227,351
Deferred income taxes and other
assets, less accumulated
amortization of $1,567 and none,
respectively 57,548 25,046
----------- ---------
TOTAL ASSETS $ 1,070,201 $ 895,192
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Short-term borrowings and current
portion of long-term obligations $ 55,612 $ 26,814
Accounts payable 67,306 39,095
Accrued expenses 116,075 108,488
Deferred revenues 134,048 76,678
---------- --------
Total current liabilities 373,041 251,075
Due to joint venture partner 28,418 26,829
Long-term obligations, net of current
portion 313,925 181,281
Other liabilities 13,997 3,007
---------- --------
Total liabilities 729,381 462,192
Non-controlling interests in net
assets of consolidated subsidiaries 6,049 13,648
---------- --------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, par value $.01;
10,000,000 shares authorized, none
outstanding -- --
Common Stock, par value $.01;
80,000,000 shares authorized,
37,395,343 and 37,018,256 shares
outstanding, respectively after
deducting 20,877 shares held in
treasury 374 370
Additional paid-in capital 496,651 490,540
Accumulated other comprehensive
income (6,043) (7,149)
Accumulated deficit (156,211) (64,409)
----------- ---------
Total stockholders' equity 334,771 419,352
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,070,201 $ 895,192
=========== =========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
For the Three Months Ended
September 30,
--------------------------
1999 1998
------------ -----------
(Restated) (Restated)
Revenues $ 228,994 $ 187,028
Costs of goods sold 184,478 140,939
----------- ---------
Gross Profit 44,516 46,089
Research and development expenses 10,675 14,652
Selling, general and administrative
expenses 31,753 19,858
Amortization of goodwill 3,861 2,283
----------- ---------
Income (loss) from operations (1,773) 9,296
Net investment income (expense) (6,697) (244)
Equity in earnings (losses) of
affiliates (30,896) (12,844)
Non-controlling interests in
(earnings) losses of consolidated
subsidiaries 2,082 2,560
----------- ---------
Loss before provision for income
taxes (37,284) (1,232)
Provision for income taxes 2,282 994
----------- ---------
Net loss $ (39,566) $ (2,226)
=========== =========
Net loss per common and dilutive share $ (1.06) $ (0.06)
=========== =========
Shares used in computing net loss
per common and dilutive share 37,384,519 36,757,055
=========== ==========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
For the Nine Months Ended
September 30,
--------------------------
1999 1998
------------- ----------
(Restated) (Restated)
Revenues $ 655,649 $ 554,981
Costs of goods sold 520,829 414,375
----------- ---------
Gross Profit 134,820 140,606
Research and development expenses 31,375 37,284
Selling, general and administrative
expenses 89,189 75,028
Amortization of goodwill 9,960 6,822
----------- ---------
Income from operations 4,296 21,472
Net investment income (expense) (15,404) (3,109)
Equity in earnings (losses) of
affiliates (82,618) (57,154)
Non-controlling interests in
(earnings) losses of consolidated
subsidiaries 7,536 11,617
----------- ---------
Loss before provision for income taxes (86,190) (27,174)
Provision for income taxes 5,610 3,756
----------- ---------
Net loss $ (91,800) $ (30,930)
=========== =========
Net loss per common and dilutive share $ (2.47) $ (0.88)
=========== =========
Shares used in computing net loss
per common and dilutive share 37,240,742 35,199,984
=========== ==========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine Months Ended
September 30,
-------------------------
1999 1998
----------- ------------
(Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (91,800) $ (30,930)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization
expenses 36,330 24,980
Amortization of prepaid financing
costs 1,664 443
Equity in losses of affiliates 82,618 57,154
Non-controlling interests in losses
of consolidated subsidiaries (7,536) (11,617)
Loss on sale of assets 992 --
Changes in assets and liabilities:
(Increase) decrease in current and
other non-current assets (24,071) 8,776
Increase (decrease) in current and
other non-current liabilities 40,950 (51,263)
------------- ----------
Net cash provided by (used in)
operating activities 39,147 (2,457)
------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (36,242) (31,566)
Payments for business combinations (26,374) --
Purchase of other assets (14,006) --
Purchases, sales and maturities of
available-for-sale investment
securities, net (8,276) 8,510
Investments in and advances to
affiliates (79,074) (87,500)
------------ ----------
Net cash used in investing
activities (163,972) (110,556)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings
(repayments) 135 17,440
Advances from joint venture partner 1,589 16,246
Principal payments on long-term
obligations (90,476) (74,283)
Net proceeds from issuances of
long-term obligations 205,000 27,000
Net proceeds from issuances of
common stock 6,115 160,777
------------ ----------
Net cash provided by financing
activities 122,363 147,180
------------ ----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS 1,711 (1,076)
------------ ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (751) 33,091
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 15,268 6,391
------------ ----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 14,517 $ 39,482
============ ==========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited interim financial
information reflects all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation thereof. Certain information
and footnote disclosure normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to instructions, rules and regulations
prescribed by the Securities and Exchange Commission (the "Commission").
The company believes that the disclosures provided herein are adequate to
make the information presented not misleading when these unaudited interim
condensed consolidated financial statements are read in conjunction with
the company's Annual Report on Form 10-K/A for the year ended December 31,
1998. Operating results for the three- and nine-month periods ended
September 30, 1999 are not necessarily indicative of the results expected
for the full year. Orbital Sciences Corporation, together with its
subsidiaries, is hereafter referred to as "Orbital" or the "company."
(2) Preparation of Condensed Consolidated Financial Statements
The preparation of condensed 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 the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Management periodically assesses and evaluates the sufficiency and/or
deficiency of estimated liabilities recorded for various operational and
business risks and uncertainties. Actual results could differ from these
estimates.
Certain reclassifications have been made to the 1998 financial statements
and footnote disclosures to conform to the 1999 financial statement
presentation. All financial amounts are stated in U.S. dollars unless
otherwise indicated.
(3) Restatements
Management has determined to restate its previously issued unaudited
consolidated financial statements for 1999 and 1998 with respect to its
accounting treatment for certain matters, including among other things, its
accounting for equity method investments, capitalized costs and certain
other matters. For a full description of the restatement matters, refer to
Notes 2A and 13 to the company's consolidated financial statements included
in the company's 1999 Annual Report on Form 10-K previously filed with the
Commission.
The effect of the restatement matters on the company's previously reported
revenues, gross profit, income (loss) from operations, net income (loss)
and net income (loss) per common and dilutive share for the periods is as
follows:
Nine Months
Quarter Ended Ended
September 30, September 30,
------------- -------------
1999, restated:
Revenues $ 228,994 $ 655,649
Gross profit 44,516 134,820
Income (loss) from operations (1,773) 4,296
Net loss (39,566) (91,800)
Net loss per common and dilutive share (1.06) (2.47)
1999, as previously reported:
Revenues $ 248,914 $ 685,538
Gross profit 54,727 155,870
Income from operations 11,182 27,322
Net loss (32,649) (71,507)
Net loss per common and dilutive share (0.87) (1.92)
1998, restated:
Revenues $ 187,028 $ 554,981
Gross profit 46,089 140,606
Income from operations 9,296 21,472
Net loss (2,226) (30,930)
Net loss per common and dilutive share (0.06) (0.88)
1998, as previously reported
Revenues $ 187,688 $ 558,363
Gross profit 46,493 148,718
Income from operations 9,292 30,908
Net income 2,436 13,179
Net income per common share 0.07 0.37
Net income per dilutive share 0.06 0.37
(4) 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 or
specific identification basis, net of allowances for estimated
obsolescence.
Components and raw materials are purchased to support future production
efforts. Work-in-process inventory consists primarily of (i) costs
incurred under long-term fixed-price contracts accounted for using the
percentage-of-completion method of accounting applied on a units of
delivery basis, and (ii) partially assembled commercial products, and
generally includes direct production costs and certain allocated indirect
costs (including an allocation of general and administrative costs). Work-
in-process inventory has been reduced by contractual progress payments
received. Finished goods inventory consists of fully assembled commercial
products awaiting shipment.
(5) Disaggregated Financial Information
Orbital's operations are organized into three business sectors, which
correspond to different product and service types, the different markets
served by such products and services, and the manner in which these
products and services are managed. Orbital's three business sectors are:
space and ground infrastructure systems, satellite access products and
satellite services. Space and ground infrastructure systems include launch
vehicles, satellites and related space systems, electronics and sensor
systems and transportation management systems, and satellite ground
systems, software, mapping and land information services. Satellite access
products include satellite-based navigation, positioning and communications
products. Satellite services include satellite-based mobile data
communications services, satellite-based remote imaging services, satellite-
based automotive information services and satellite-based voice
communications services.
The following table presents operating information for the three and nine
months ended September 30, 1999 and 1998 by business sector. Operating
income (loss) is total revenues less costs of goods sold, research and
development expenses, selling, general and administrative expenses, and
amortization of goodwill. Identifiable assets are those assets used in the
operations of each business sector. There were no significant sales or
transfers between consolidated sectors.
Three Three Nine Nine
Months Months Months Months
1999 1998 1999 1998
------ ------ ------ ------
(Restated) (Restated) (Restated) (Restated)
(In thousands)
Space and ground
Infrastructure
systems:
Revenues $198,202 $163,852 $564,473 $479,926
Operating income 5,335 16,591 26,816 48,426
Identifiable
assets (1) 765,430 605,316 765,430 605,316
Capital
expenditures 7,482 11,885 26,563 28,058
Depreciation and
amortization 8,968 5,280 26,146 18,549
Satellite access
products:
Revenues $ 26,524 $ 23,037 $ 79,471 $ 74,593
Operating loss (2,500) (6,348) (7,944) (23,589)
Non-controlling
interests in
(earnings) losses
of consolidated
subsidiaries 1,676 2,124 4,565 10,065
Identifiable
assets (1) 104,051 121,196 104,051 121,196
Capital
expenditures 3,774 1,751 5,145 3,016
Depreciation and
amortization 4,286 2,612 8,417 6,431
Satellite services:
Revenues $ 4,268 $ 139 $ 11,705 $ 462
Operating loss (4,608) (947) (14,576) (3,365)
Equity in earnings
(losses) of
affiliates (30,896) (12,844) (82,618) (57,154)
Non-controlling
interests in
(earnings) losses
of consolidated
subsidiaries 406 436 2,971 1,552
Identifiable
assets (1) 200,720 168,680 200,720 168,680
Capital
expenditures 72 51 4,534 492
Depreciation and
amortization 642 -- 1,767 --
Consolidated:
Revenues $ 228,994 $ 187,028 $ 655,649 $ 554,981
Operating income
(loss) (1,773) 9,296 4,296 21,472
Equity in earnings
(losses) of
affiliates (30,896) (12,844) (82,618) (57,154)
Non-controlling
interests in
(earnings) losses
of consolidated
subsidiaries 2,082 2,560 7,536 11,617
Identifiable
assets (1) 1,070,201 895,192 1,070,201 895,192
Capital
expenditures 11,328 13,687 36,242 31,566
Depreciation and
amortization 13,896 7,892 36,330 24,980
(1) Identifiable assets are as of September 30, 1999 and
December 31, 1998.
(6) Business Combinations and Investments in and Advances to Affiliates
During the second quarter of 1999, the company through its wholly owned
subsidiary, Orbital Navigation Corporation, and The Hertz Corporation
("Hertz") formed a joint venture, Navigation Solutions, L.L.C. ("Navigation
Solutions"). The company, through its Magellan subsidiary, sells
automotive navigation products to Navigation Solutions, which in turn
collects fees for the use of these systems from Hertz. The company had
contributed $13,800,000 as of September 30, 1999, for a 60% non-controlling
interest in the venture. Accordingly, the company currently accounts for
this investment using the equity method of accounting. Under the terms of
the joint venture agreement, the company is committed to contribute up to
an aggregate of $30,000,000 through the end of 2000.
In May 1999, the company acquired all the assets and certain liabilities of
the space robotics division of Toronto-based Spar Aerospace Limited
("Robotics") for approximately $43,000,000. The company paid half of the
purchase price in cash at closing and issued an unsecured 8% note, due May
2000, for the remainder. The company has accounted for the acquisition
using the purchase method of accounting. The liabilities recorded exceeded
the fair value of the tangible and intangible assets acquired resulting in
goodwill of approximately $56,000,000. The company has engaged an
appraiser to conduct a valuation of Robotics' assets and liabilities to
assist in the allocation of the purchase price to the tangible and
intangible assets and liabilities. Orbital anticipates that the final
purchase accounting adjustments will be recorded in the fourth quarter of
1999.
Also in May 1999, the company entered into a $37,000,000 long-term license
agreement with the British Columbia provincial government whereby the
company obtained the exclusive rights to use certain government information
databases (the "License Agreement"). The company intends to provide
Internet-based services pursuant to the License Agreement. The company
paid approximately $13,000,000 in cash and borrowed approximately
$24,000,000 to acquire the license. The cost of this license is being
amortized on a straight line basis over ten years.
The company made cash capital contributions to ORBCOMM Global, L.P.
totaling $41,500,000 during the first nine months of 1999. Additionally,
the company has deferred invoicing $17,757,000 during the first nine months
of 1999 for work performed under two satellite and launch procurement
contracts.
Orbital has an equity investment in CCI International, N.V. ("CCI"), a
development stage company formed to offer satellite-based voice
communications services, which has continued to incur start-up losses. Two
other start-up companies that have also been developing similar satellite
telecommunications systems recently announced that they are experiencing
significant financial difficulties and have filed for bankruptcy
protection. CCI needs a significant infusion of capital to complete its
contemplated constellation of satellites. Orbital believes that CCI's
ability to raise the needed capital in the current financial environment is
doubtful and, accordingly, Orbital has concluded that its investment in CCI
is impaired. The company recorded a one-time non-cash charge of $11,128,000
during the third quarter for its remaining investment in CCI. This charge
is included in equity in earnings (losses) of affiliates in the
accompanying consolidated statement of operations.
<PAGE>
(7) Income Taxes
The company has recorded its interim income tax provision (for U.S. Federal
and state taxes and foreign taxes) based on an estimate of its full-year
provision. Estimated provisions recorded during interim periods may be
periodically revised, if necessary, to reflect current estimates.
(8) Earnings Per Share
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 and common equivalent shares outstanding during
the periods, plus the dilutive effects of stock options and the assumed
conversion of the company's convertible notes, after giving effect to all
net income adjustments that would result from the assumed conversion.
In periods of net loss, the assumed conversion of convertible notes and
stock options is anti-dilutive. Accordingly, fully diluted per-share
losses are the same as basic losses per share disclosed on the accompanying
statements of operations. If the company had reported net income, the
number of shares used in calculating diluted earnings per share would have
been 41,569,899 and 41,749,105, for the three and nine months ended
September 30, 1999, respectively, and 41,172,222 and 39,925,234, for the
three and nine months ended September 30, 1998, respectively.
(9) Comprehensive Loss
Comprehensive loss and associated differences are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
(Restated) (Restated) (Restated) (Restated)
(In thousands)
Differences between
net loss, as
reported, and
comprehensive
loss:
Net loss, as
reported $ (39,566) $ (2,226) $(91,800) $ (30,930)
Unrealized gains
(losses) on
short-term
investments -- 251 -- 115
Translation adjustments (59) (676) 1,106 (1,191)
--------- --------- ---------- ----------
Comprehensive
loss $ (39,625) $ (2,651) $ (90,694) $ (32,006)
========= ========= ========== ==========
Accumulated differences
between net loss,
as reported, and
comprehensive loss:
Beginning of period $ (5,984) $ (5,322) $ (7,149) $ (4,671)
Unrealized gains
(losses) on
short-term
investments -- 251 -- 115
Translation adjustments (59) (676) 1,106 (1,191)
---------- --------- -------- ---------
End of period $ (6,043) $ (5,747) $ (6,043) $ (5,747)
========= ======== ========= ==========
(10) Commitments, Contingencies and Subsequent Events
In March 1999, the company signed an agreement to purchase Lowrance
Electronics, Inc. ("Lowrance"), a leading manufacturer of marine and
recreational electronics using GPS-satellite navigation and sonar
technology. The merger agreement originally called for an exchange of
Orbital common stock for the outstanding shares of Lowrance, but was
amended in September 1999 to require a cash payment of approximately
$27,000,000 in exchange for the Lowrance shares. The acquisition has been
approved by Lowrance's shareholders, but the closing is subject to the
consent of Orbital's primary lenders, who have conditioned their consent on
Orbital raising additional equity. If such lender consent is not obtained
by December 23, 1999, the merger agreement will terminate unless extended
by mutual agreement.
During the first quarter of 1999, a number of class action lawsuits were
filed in the U.S. District Court for the Eastern District of Virginia (the
"District Court") against the company, an officer and an officer/director
alleging violations of the federal securities laws, on behalf of purchasers
of the company's stock during the period from April 21, 1998 through
February 16, 1999, and seeking monetary damages. On May 21, 1999, the
cases were consolidated into a single class action and, on May 28, 1999, an
amended consolidated class action complaint was filed with the District
Court. An additional class action complaint was filed on behalf of
purchasers of call options on July 1, 1999, which action was consolidated
with the previous action. The District Court also denied the company's
motion to dismiss and granted the plaintiff's motion for class
certification.
In connection with the company's recent announcement of the restatement of
its financial statements for fiscal years 1997, 1998 and the first two
quarters of 1999, a class action lawsuit was filed in the District Court
on November 10, 1999 against the company, an officer and an
officer/director alleging violations of the federal securities laws, on
behalf of purchasers of the company's stock and call options during the
period from April 22, 1997 through October 29, 1999. On November 19, 1999,
the District Court granted the plaintiffs leave to file an amended
complaint consolidating the new action with the previously consolidated
pending cases. While the amounts to be claimed may be substantial, the
company believes that the allegations are without merit and intends to
defend vigorously against such allegations.
In October 1999, Orbital entered into a stock purchase agreement with
ORBIMAGE pursuant to which Orbital has agreed to purchase up to 2,500,000
shares of ORBIMAGE's common stock for up to $25,000,000. This investment
may be made over time in $5,000,000 minimum increments when ORBIMAGE's cash
balance falls below $10,000,000. Orbital is required to obtain the consent
of one of its lenders in order to make this investment.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Certain statements included in this discussion relating to future revenues,
expenses, growth rates, net income, liquidity, new business, operational
performance schedules, sources and uses of funds, "Year 2000" issues, the
outcome of pending litigation and the performance of our affiliates,
Orbital Imaging Corporation ("ORBIMAGE"), ORBCOMM Global L.P. ("ORBCOMM"),
Navigation Solutions, L.L.C. ("Navigation Solutions") and CCI
International, N.V. ("CCI"), are forward-looking statements that involve
known and unknown risks, uncertainties and other factors that may cause
actual results, performance, achievements or investments of Orbital to
differ materially from any future results, performance, achievements, or
investments expressed or implied by such forward-looking statements. Such
factors include general economic and business conditions, launch results,
product performance, risks associated with government contracts, market
acceptance of consumer and industrial products, the introduction of
products and services by competitors, risks associated with acquired
businesses, the availability of required capital, our ability and the
ability of our customers and suppliers to assess and correct timely and
accurately "Year 2000" issues, market acceptance of new products and
technologies, risks associated with long-term contracts, the effects of
pending or possible litigation or government investigations, and other
factors more fully described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Outlook: Issues and
Uncertainties" included in our Annual Report on Form 10-K/A for the year
ended December 31, 1998.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
1999 AND 1998
Our 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 and related space systems, electronics and sensor systems and
transportation management systems, and satellite ground systems, software,
mapping and land information services. Our satellite access products
sector consists of satellite-based navigation, positioning and
communications products. The satellite services sector includes satellite-
based mobile data communications services, satellite-based remote imaging
services, satellite-based automotive information services and satellite-
based voice communications services. This sector includes our share of the
income or losses of our unconsolidated affiliates, ORBCOMM, ORBIMAGE,
Navigation Solutions and CCI.
Certain of the 1999 and 1998 financial information has been restated.
See note 3 to the condensed consolidated financial statements.
REVENUES. Our consolidated revenues for the quarter ended September 30,
1999 were $228,994,000 as compared to $187,028,000 for the same quarter
last year. Consolidated revenues for the nine-month periods ended
September 30, 1999 and 1998 were $655,649,000 and $554,981,000,
respectively.
SPACE AND GROUND INFRASTRUCTURE SYSTEMS. Revenues from our space and
ground infrastructure systems sector totaled $198,202,000 and $163,852,000
for the three months ended September 30, 1999 and 1998, respectively.
Revenues from this sector totaled $564,473,000 and $479,926,000 for the
nine months ended September 30, 1999 and 1998, respectively.
Revenues from launch vehicles increased to $37,648,000 for the third
quarter of 1999 from $34,993,000 in the third quarter of 1998. Year-to-
date revenues were $117,157,000 as compared to $128,729,000 for the same
period last year. The year-to-date decrease is primarily attributable to
launch delays caused by late delivery of customer satellites and payloads,
while the quarter-to-quarter increase is due to increased activity on
certain contracts.
Satellite and related space systems revenues increased to $90,417,000 for
the quarter ended September 30, 1999, as compared to $74,498,000 for the
third quarter of 1998. Year-to-date revenues increased to $241,055,000 as
compared to $190,050,000 for the same period last year. As discussed in
Note 6 to the accompanying financial statements, in May 1999, we acquired
the space robotics division of Spar Aerospace Limited ("Robotics").
Robotics' revenues, which are now consolidated in our financial statements,
were approximately $19,917,000 and $33,655,000, respectively, for the three-
and nine-month periods ended September 30, 1999. The remaining increase in
1999 satellite and related space systems revenues is due, in part, to
revenues realized from a new commercial geosynchronous satellite contract
received in late 1998.
Revenues from electronics and sensor systems and transportation management
systems, increased to $34,557,000 for the quarter ended September 30, 1999
from $29,655,000 for the quarter ended September 30, 1998. Year-to-date
revenues increased to $107,174,000 from $93,221,000 for the first three
quarters of 1998. The increase in revenues this year is primarily due to
new contract awards in early 1999 as well as an increase in transportation
management systems revenues. The increase in transportation management
systems revenues is partly attributable to our December 1998 acquisition of
Raytheon Company's transportation management systems business.
Revenues from our satellite ground systems, software, mapping and land
information services were $35,580,000 for the quarter ended September 30,
1999, as compared to $24,706,000 for the same quarter last year, and
$99,087,000 for the nine months ended September 30, 1999, as compared to
$67,926,000 for the same period last year. These increases are primarily
attributable to revenues recognized on work performed on orders received in
1998 for a new remote imaging system and other satellite ground systems and
system upgrades, as well as increased revenues from mapping and land
information services.
Space and ground infrastructure revenues included sales to our non-
controlled and unconsolidated affiliates totaling $21,257,000 and
$24,798,000 for the quarters ended September 30, 1999 and 1998,
respectively, and $84,127,000 and $95,343,000 for the nine months ended
September 30, 1999 and 1998, respectively.
SATELLITE ACCESS PRODUCTS. Revenues from sales of satellite-based
navigation, positioning and communications products increased to
$26,524,000 for the quarter ended September 30, 1999 from $23,037,000 for
last year's third quarter. Satellite access products revenues were
$79,471,000 for the first three quarters of 1999 as compared to $74,593,000
for the same period last year.
SATELLITE SERVICES. Revenues for this sector totaled $4,268,000 and
$139,000 for the third quarters of 1999 and 1998, respectively, and
$11,705,000 and $462,000 for the first three quarters of 1999 and 1998,
respectively. The increase in revenues this year is primarily attributable
to the acquisition of a controlling interest in Radarsat International
("RSI") in the first quarter of 1999.
GROSS MARGINS. Gross profit margin depends on a number of factors,
including the mix of contract types and costs incurred thereon in relation
to revenues recognized. Costs of goods sold include the costs of
personnel, materials, subcontracts and overhead related to sales of
commercial products and to costs incurred under various development and
production contracts. Our consolidated gross margin for the third quarter
of 1999 was $44,516,000 as compared to $46,089,000 in the third quarter of
1998, and $134,820,000 for the first nine months of 1999 as compared to
$140,606,000 for the first nine months of 1998. Consolidated gross profit
margins as a percentage of revenues were approximately 19% and 25%,
respectively, for the quarters ended September 30, 1999 and 1998, and 21%
and 25%, respectively, for the nine-month periods ended September 30, 1999
and 1998.
SPACE AND GROUND INFRASTRUCTURE SYSTEMS. Gross margins from our space and
ground infrastructure systems sector were $34,620,000 (or 17% of sector
revenues) and $39,267,000 (or 24% of sector revenues) for the quarters
ended September 30, 1999 and 1998, respectively. Gross margins for this
sector were $105,210,000 (or 19% of sector revenues) and $123,551,000 (or
26% of sector revenues) for the nine months ended September 30, 1999 and
1998, respectively. Gross margins percentages by product lines were as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Launch vehicles 24% 22% 17% 25%
Satellites and related
space systems 11% 22% 16% 26%
Electronics and sensor
systems and transportation
management systems 27% 30% 26% 27%
Ground systems, software,
mapping and land
information services 19% 24% 20% 25%
The increase in launch vehicle gross margins in the third quarter of 1999
as compared to the same quarter last year is primarily due to increased
profits on certain existing contracts. Year-to-date margins declined
primarily due to launch delays caused by late deliveries of customer
satellites and payloads, low margins from advanced vehicle contracts and to
completing work on certain less profitable contracts.
The decrease in gross margins for satellites and related space systems for
both the quarter and year-to-date periods is due to work performed on a
large commercial geosynchronous satellite contract won in late 1998, which
contains a significant amount of lower-margin, external subcontract effort,
and from lower margins for work performed on certain contracts.
Gross margins for electronics and sensor systems and transportation
management systems declined in the third quarter and year-to-date periods
as compared to the same periods last year. The decline in margins is due
to reduced profitability on certain transportation management systems
contracts.
Gross margins for ground systems, software, mapping and land information
services declined slightly due to lower margins from sales pursuant to a
British Columbia government license agreement (discussed in Note 6 to the
accompanying financial statements) and an increase in the amount of lower
margin, subcontract work on several ground systems contracts.
Satellite Access Products. Gross margin percentages for satellite access
products were 35% and 34%, respectively, for the quarters ended September
30, 1999 and 1998, and 37% and 27%, respectively, for the nine months ended
September 30, 1999 and 1998. The increase in 1999 gross margins is
primarily due to a reserve for inventory obsolescence recorded in the
second quarter of 1998.
Satellite Services. This sector had gross margins (losses) of $560,000 and
($898,000) during the third quarters of 1999 and 1998, respectively, and
$573,000 and ($3,193,000) during the first nine months of 1999 and 1998,
respectively. The improvement in 1999 gross margins is primarily
attributable to consolidation of RSI operations in 1999 as discussed above.
Research and Development Expenses. Research and development expenses
represent Orbital's self-funded product development activities, and exclude
direct customer-funded development. Research and development expenses for
the quarters ended September 30, 1999 and 1998 were $10,675,000 (or 5% of
revenues) and $14,652,000 (or 8% of revenues), respectively. Research and
development expenses were $31,375,000 (or 5% of revenues) and $37,284,000
(or 7% of revenues) for the first three quarters of 1999 and 1998,
respectively. Research and development expenses relate primarily to the
development of new or improved satellite access products, improved launch
vehicles and new satellite initiatives.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the costs of marketing, advertising,
promotional and other selling expenses as well as the costs of the finance,
legal, administrative and general management functions of the company.
Selling, general and administrative expenses for the quarter ended
September 30, 1999 and 1998 were $31,753,000 (or 14% of revenues) and
$19,858,000 (or 11% of revenues), respectively. Selling, general and
administrative expenses for the nine months ended September 30, 1999 and
1998 were $89,189,000 (or 14% of revenues) and $75,028,000 (or 14% of
revenues), respectively.
Net Investment Income (Expense). Net investment income (expense) was
($6,697,000) and ($244,000) for the three months ended September 30, 1999
and 1998, respectively. Net investment income (expense) was ($15,404,000)
and ($3,109,000) for the nine months ended September 30, 1999 and 1998,
respectively. Net investment income (expense) includes interest earnings
on short-term investments and realized gains and losses on investments, net
of interest expense. Interest expense, net of interest capitalized, was
$7,935,000 and $1,245,000 for the third quarters of 1999 and 1998,
respectively, and $18,456,000 and $5,984,000 for the first three quarters
of 1999 and 1998, respectively. Capitalized interest was $687,000 and
$3,118,000 for the third quarters of 1999 and 1998, respectively, and
$2,283,000 and $8,248,000 for the first nine months of 1999 and 1998,
respectively.
Equity in Earnings (Losses) of Affiliates. Equity in earnings (losses) of
affiliates was ($30,896,000) and ($12,844,000) for the three months ended
September 30, 1999 and 1998, respectively, and was ($82,618,000) and
($57,154,000) for the nine months ended September 30, 1999 and 1998,
respectively. These amounts primarily include our proportionate share of
the current period earnings and losses of our unconsolidated affiliates
(ORBCOMM, ORBIMAGE, CCI and Navigation Solutions), the elimination of our
proportionate share of profits or losses, when appropriate, on sales to
these affiliates and preferred dividends and beneficial conversion rights
to other investors in ORBIMAGE. Additionally, the third quarter of 1999
included a one-time non-cash charge of $11,128,000 to write off our
investment in CCI as discussed in Note 6 to the accompanying financial
statements. In addition to this write-off, equity losses increased in 1999
as compared to 1998, primarily due to an increase in ORBCOMM's losses.
ORBCOMM's losses increased due to (i) higher general and administrative
expenses relating to the rollout of global commercial services, (ii)
increased interest expense and (iii) increased system depreciation expense.
ORBCOMM stopped capitalizing interest and began depreciating its full
satellite constellation in the fourth quarter of 1998. We expect equity in
losses of affiliates in the remainder of 1999 to continue to be
significantly higher than last year, primarily due to increased losses at
ORBCOMM.
Non-Controlling Interests in (Earnings) Losses of Consolidated
Subsidiaries. Non-controlling interests in (earnings) losses of
consolidated subsidiaries were $2,082,000 and $2,560,000 for the three
months ended September 30, 1999 and 1998, respectively, and $7,536,000 and
$11,617,000 for the nine months ended September 30, 1999 and 1998,
respectively. These amounts represent the non-controlling stockholders'
proportionate share of ORBCOMM USA L.P.'s and Magellan Corporation's
current period earnings and losses.
Provision for Income Taxes. We recorded an income tax provision of
$2,282,000 and $994,000 for the three months ended September 30, 1999 and
1998, respectively, and $5,610,000 and $3,756,000 for the nine months ended
September 30, 1999 and 1998, respectively. The provision in both periods
was entirely due to foreign taxes attributable to our Canadian operations.
Our interim income tax provision is based on an estimate of our full-year
provision. Estimated provisions recorded during interim periods may be
periodically revised, if necessary, to reflect current estimates of the
full year provision.
Net Loss. Our consolidated net loss for the third quarters of 1999 and
1998 was ($39,566,000) and ($2,226,000), respectively, and ($91,800,000)
and ($30,930,000) for the first three quarters of 1999 and 1998,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our growth has required, and continues to require, substantial capital to
fund investments in affiliates, business acquisitions, expanding working
capital needs, new business initiatives, research and development and
capital expenditures. We have funded these requirements to date through
cash generated by operations, working capital, loan facilities, asset-based
financings, joint venture arrangements and private and public equity and
debt offerings. As described below, our liquidity is currently constrained
primarily as a result of the restatement of our financial statements.
(See note 3 to the accompanying condensed consolidated financial statements).
While we believe that cash from operations and available resources are
sufficient to fund our core operations through the early part of 2000, to
satisfy our capital requirements beyond such core operations we need to raise
additional equity and/or debt capital. We are pursuing these alternatives,
but no assurance can be given that we will be successful in completing any
new equity or debt financings. We are also examining our existing
commitments to affiliates and, in particular, are exploring alternative
methods to provide additional funds to ORBCOMM as described below. Our
inability to raise additional capital may have a material adverse effect on
our business.
Cash and investments were $39,240,000 and total debt obligations were
$369,537,000 at September 30, 1999. The outstanding debt is comprised
primarily of our $100,000,000 5% convertible subordinated notes, advances
under several revolving credit facilities, secured and unsecured notes, and
asset-based financings. Cash and investments at September 30, 1999
included approximately $18,174,000 restricted against outstanding letters
of credit. Our current ratio was 1.0 and 1.2 at September 30, 1999 and
December 31, 1998, respectively. Our debt-to-equity ratio was
approximately 110% at September 30, 1999 as compared to 50% at December 31,
1998.
Our primary revolving credit facility provides for total borrowings from a
syndicate of banks of up to $200,000,000. Borrowings of $164,000,000 were
outstanding under the facility at September 30, 1999 at a weighted average
interest rate of 7.4% and are secured by accounts receivable. Borrowings
of approximately $187,000,000 are currently outstanding. The facility
prohibits the payment of cash dividends, contains certain covenants with
respect to our working capital levels, fixed charges ratio, leverage ratio
and net worth, and expires in December 2002. We also issued $45,200,000 of
new debt during the first nine months of 1999 related to various business
acquisitions. (See note 6 to the accompanying financial statements.)
In October 1999, we amended our $200,000,000 primary revolving credit
facility in order to receive full availability under the facility. The
amendment provides for the resetting of, and waivers to covenants with
respect to net worth, leverage and fixed charges ratios. The waivers
expire on December 30, 1999. In exchange for the amendment, we and certain
of our subsidiaries are obligated to deliver additional collateral to our
syndicate of banks on or before November 30, 1999. The additional
collateral currently consists primarily of all intellectual property, all
general intangibles, all financial instruments and all stock of certain
subsidiaries, not including Magellan. As a result of our announcement in
late October 1999 that previously audited and unaudited financial results
would need to be restated, we are currently unable to borrow additional
amounts under the bank facility. We have advised our bank group that,
based on the preliminary results through September 30, 1999, we believe we
no longer comply with the minimum consolidated net worth covenant and a
permitted investment covenant that is tied to net worth, and that
adjustments to such covenants will be necessary. There can be no assurance
that our syndicate of banks will agree either to adjust the covenants or to
waive the defaults. Our inability to resolve these defaults with the banks
could have a material adverse effect on our business.
During the first nine months of 1999, we provided $41,500,000 in capital to
ORBCOMM. In addition, during this time frame, we deferred invoicing
ORBCOMM for approximately $17,800,000 of work performed under our ORBCOMM
satellite and launch procurement agreement and anticipate deferring
additional invoicing during the remainder of 1999. ORBCOMM will require
additional funding and Orbital and Teleglobe are currently analyzing
different capital raising and partner funding alternatives.
In addition to our investment in ORBCOMM, for the nine months ended
September 30, 1999, we invested approximately $13,800,000 in Navigation
Solutions, $40,380,000 in business and other asset acquisitions and
$36,242,000 in capital expenditures for various satellite, launch vehicle
and other infrastructure production, manufacturing and test equipment,
leasehold improvements and office equipment. Our operations provided net
cash of $39,147,000 during the first nine months of 1999.
We are expanding our offices and satellite-related engineering,
manufacturing and operations facilities adjacent to our Dulles, Virginia
headquarters in order to consolidate certain operational facilities and
office space and provide for future growth. Construction has commenced and
is expected to continue into 2001. To finance the majority of this
expansion, we have negotiated a built-to-suit agreement with a developer
for the office expansion. We are actively pursuing third-party financing
for the engineering, manufacturing and operating facilities.
YEAR 2000 ISSUES
Orbital and its operating companies have been engaged in a comprehensive
plan to prepare for potential "Year 2000" issues with respect to various
operational, technical and financial computer-related systems. The plan was
designed to minimize risk to the company and its customers using a standard
industry five-phase approach, including awareness, assessment, renovation,
validation and implementation, which we have essentially completed.
Activities through September 30, 1999 included renovating, validating and
implementing our corrective action plan by reprogramming affected hardware
and software when appropriate and feasible, obtaining vendor-provided
software upgrades when available and completely replacing affected systems
when necessary. Actions in the last quarter of the year will include
further testing and validation and ensuring Year 2000 compliance of newly
introduced system changes.
The total costs to implement our comprehensive plan, which include the
previously planned replacement of existing systems to support our overall
growth, are estimated to be less than 1% of 1998 revenues. More than 85%
of the estimated costs to implement our plan has been incurred so far with
the remaining costs expected to be incurred during the remainder of 1999.
All costs, including the costs of internal personnel, outside consultants,
system replacements and other equipment, will be expensed as incurred,
except for the purchase of long-lived assets, which will be capitalized in
accordance with our capitalization policies. We have not postponed the
implementation or upgrade of other systems as a result of focusing on the
Year 2000 plan.
As part of our plan, we have been surveying our customers, suppliers and
other service providers regarding their Year 2000 readiness. At this point
we believe that any "Year 2000" issues will not negatively impact our
significant customers (including the U.S. government), key suppliers or
critical service providers and consequently, will not materially impact the
company's cash flows or operating results. We will continue to monitor the
status of our customers and suppliers through the remainder of the year.
A "reasonably likely worst case" scenario of the Year 2000 issue for us
could include isolated performance problems with engineering, financial and
administrative systems; isolated interruption of deliveries from suppliers;
product liability or warranty issues; and the temporary inability of key
customers to pay amounts due us. Contingency plans are being finalized, and
will be implemented if necessary, including the identification of
alternative suppliers for critical components. There can be no assurance
that we have identified, or will identify, all "Year 2000" affected
systems, suppliers, customers and service providers, or that our corrective
action plan will be timely and successful.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company does not have any material exposure to interest rate changes,
commodity price changes, foreign currency fluctuation, or similar market
risks, although we do enter into forward exchange contracts to hedge
against specific foreign currency fluctuations, principally with respect to
the Canadian dollar and Japanese yen. At September 30, 1999, the majority
of the company's long-term debt consisted of its $100,000,000 5%
convertible subordinated notes, due 2002. The fair market value of these
convertible securities fluctuates with the company's stock price, and was
$111,000,000 at September 30, 1999.<PAGE>
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the first quarter of 1999, a number of class action
lawsuits were filed in the U.S. District Court for the Eastern
District of Virginia (the "District Court") against the company,
an officer and an officer/director alleging violations of the
federal securities laws, on behalf of purchasers of the company's
stock during the period from April 21, 1998 through February 16,
1999, and seeking monetary damages. On May 21, 1999, the cases
were consolidated into a single class action and, on May 28,
1999, an amended consolidated class action complaint was filed
with the District Court. An additional class action complaint
was filed on behalf of purchasers of call options on July 1,
1999. The District Court consolidated that case with the
previous action on July 30, 1999. The District Court also denied
the company's motion to dismiss and granted the plaintiff's
motion for class certification. In connection with the company's
recent announcement of the restatement of its financial reports
for fiscal years 1997, 1998 and the first two quarters of 1999, a
class action lawsuit was filed in the District Court on November
10, 1999 against the company, an officer and an officer/director
alleging violations of the federal securities laws, on behalf of
purchasers of the company's stock and call options during the
period from April 22, 1997 through October 29, 1999. On November
19, 1999, the District Court granted the plaintiffs leave to file
an amended complaint consolidating the new action with the
previously consolidated pending cases. While the amounts to be
claimed may be substantial, the company believes that the
allegations are without merit and intends to defend vigorously
against such allegations.
As previously reported in the company's report on Form 10-K for
the fiscal year ended December 31, 1998, Thomas van der Heyden
filed a lawsuit in December 1998 in the Circuit Court for
Montgomery County, Maryland alleging that the company is in
actual or anticipatory breach of obligations allegedly imposed on
it in a judgment confirming an award granted in an arbitration
between van der Heyden and CTA. The plaintiff claims that he is
entitled to a sum exceeding $30 million from the company, as
successor-in-interest to CTA. The company removed this action to
United States District Court for the District of Maryland. In
response to a motion by the company, the plaintiff agreed to
voluntarily dismiss the action and arbitrate his claims. We
believe that the allegations are without merit and intend to
vigorously defend against the allegations. In addition, under
the terms of the CTA acquisition agreement, we believe we may be
entitled to indemnification from CTA for all or a part of any
damages arising from the van der Heyden arbitration.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and
Capital Resources" above, we have advised our bank group that,
based on the preliminary results through September 30, 1999, we
believe we no longer comply with the minimum consolidated net
worth covenant and a permitted investment covenant that is tied
to net worth, and that adjustments to such covenants will be
necessary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY- HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - A complete listing of exhibits required is given
in the Exhibit Index that precedes the exhibits filed with
this report.
(b) Reports on Form 8-K.
(i) On July 28, 1999, the company filed a Current Report on
Form 8-K, dated July 28, 1999, disclosing its financial
results for the quarter ended June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ORBITAL SCIENCES CORPORATION
DATED: May 31, 2000 By: /s/ David W. Thompson
----------------------
David W. Thompson, Chairman
and Chief Executive Officer
DATED: May 31, 2000 By: /s/ Jeffrey V. Pirone
----------------------
Executive Vice President
and Principal Financial Officer
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this report.
Exhibit No Description
---------- -----------
10.12.3 Performance Share Agreement between the Company and David
W. Thompson dated July 21, 1999 (previously filed).
10.12.4 Performance Share Agreement between the Company and James
R. Thompson dated July 21, 1999 (previously filed).
10.12.5 Performance Share Agreement between the Company and
Jeffrey V. Pirone dated July 21, 1999 (previously filed).
27 Financial Data Schedule (such schedule is furnished for
the information of the Securities and Exchange Commission
and is not to be deemed "filed" as part of the Form 10-Q,
or otherwise subject to the liabilities of Section 18 of
the Securities Exchange Act of 1934) (transmitted
herewith).
