-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SFy6klAW0pq5Uc0g3DrpXT2ZfCzobILlk59Yc3IyuyjSi1YesYU1u2walm0tYQI8 NTdDk1gXB+C7B+EbLsKV5A== 0000950133-00-001582.txt : 20000420 0000950133-00-001582.hdr.sgml : 20000420 ACCESSION NUMBER: 0000950133-00-001582 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 20000419 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORBITAL SCIENCES CORP /DE/ CENTRAL INDEX KEY: 0000820736 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 061209561 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-14279 FILM NUMBER: 604372 BUSINESS ADDRESS: STREET 1: 21700 ATLANTIC BLVD CITY: DULLES STATE: VA ZIP: 20166 BUSINESS PHONE: 7034065000 MAIL ADDRESS: STREET 1: 21700 ATLANTIC BLVD STREET 2: 21700 ATLANTIC BLVD CITY: DULLES STATE: VA ZIP: 20166 FORMER COMPANY: FORMER CONFORMED NAME: ORBITAL SCIENCES CORP II DATE OF NAME CHANGE: 19900212 10-K/A 1 FORM 10-K/A FOR ORBITAL SCIENCES CORP 12/31/98 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- ANNUAL REPORT ON FORM 10-K/A For the fiscal year ended December 31, 1998 COMMISSION FILE NUMBER 0-18287 --------------- ORBITAL SCIENCES CORPORATION (Exact name of registrant as specified in charter) DELAWARE 06-1209561 (State of Incorporation of (I.R.S. Employer I.D. Registrant) No.) 21700 ATLANTIC BOULEVARD DULLES, VIRGINIA 20166 (Address of principal executive offices) (703) 406-5000 (Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.01 (LISTED ON THE NEW YORK STOCK EXCHANGE) --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing sales price as reported on the New York Stock Exchange on March 22, 1999 was approximately $767,918,943. As of March 22, 1999, 37,182,819 shares of the registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement dated March 29, 1999 are incorporated by reference in Part III of this Report. ================================================================================ 2 EXPLANATORY NOTE Orbital Sciences Corporation ("Orbital") has determined to restate its consolidated financial statements for the years ended December 31, 1998, 1997, 1996 and 1995 and its condensed consolidated quarterly financial statements for 1998, 1997, 1996 and 1995. This amendment includes in Item 8 such restated financial statements for the year ended December 31, 1998, 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 Exhibit 27, no other information included in the original Annual 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. 2 3
TABLE OF CONTENTS ITEM PAGE ---- ---- PART I ITEM 1. Business 4 ITEM 2. Properties 14 ITEM 3. Legal Proceedings 14 ITEM 4. Submission of Matters to a Vote of Security Holders 14 ITEM 4A. Executive Officers of the Registrant 15 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 ITEM 6. Selected Financial Data 17 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 26 ITEM 8. Financial Statements and Supplementary Data 27 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 58 PART III ITEM 10. Directors and Executive Officers of the Registrant 58 ITEM 11. Executive Compensation 58 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 58 ITEM 13. Certain Relationships and Related Transactions 58 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 58
- ---------- Pegasus(R) is a registered trademark and service mark of Orbital Sciences Corporation; Taurus(R) is a registered trademark of Orbital Sciences Corporation; Orbital(TM) is a trademark of Orbital Sciences Corporation; OrbView(R) and ORBIMAGE(R) are registered service marks of Orbital Imaging Corporation; and ORBCOMM(R) is a registered service mark of ORBCOMM Global L.P. 3 4 ITEM 1. BUSINESS BACKGROUND Orbital Sciences Corporation, together with its subsidiaries, is a leading space and information systems company that designs, manufactures, operates and markets a broad range of space-related products and services. Our products and services are grouped into three general business sectors: space and ground infrastructure systems, satellite access products and satellite services. Space and ground infrastructure systems include launch vehicles, satellites and related space systems, electronics and sensor systems, and satellite ground systems and software. Satellite access products include satellite-based navigation, positioning and communications products and transportation management systems. Satellite services include satellite-based two-way mobile data communications services, satellite-based remote imaging services, and new initiatives relating to satellite-based automotive information services and satellite-based voice communications services. Orbital was incorporated in Delaware in 1987 to consolidate the assets, liabilities and operations of Space Systems Corporation and Orbital Research Partners, L.P. Since inception, it has been our strategy to develop and grow a core integrated business of space systems technologies and products, starting with the design and manufacturing of small satellites and lightweight rockets and other inexpensive space systems intended to capitalize on the commercial development of space. A major part of this strategy has centered on market-expanding innovations that we have pioneered. For example, in 1990, we introduced the world's first privately-developed space launch vehicle; in 1992, we operated the first commercial orbit transfer vehicle; in 1995, we launched the first operational low-orbit commercial communications satellites; in 1997, we deployed the first small geosynchronous television broadcast satellite and also launched the first privately-owned remote imaging satellite; and in 1998, we shipped the first hand-held satellite communications device. In the last ten years, we have also expanded our space-based product lines through a number of acquisitions and strategic investments. For example, in 1994 and 1997, we acquired Fairchild Space and Defense Corporation and the space systems and communications service businesses of CTA Incorporated ("CTA"), respectively, broadening our satellite system and subsystem development and production capabilities and expanding our product lines by adding various sophisticated electronics products and transportation management systems. We further enhanced our transportation management systems product line with the 1998 acquisition of Raytheon Company's transportation management systems business. Through our 1994 acquisition of Magellan Corporation ("Magellan"), we expanded our technology base and product lines into the consumer markets for hand-held receivers for Global Positioning System, or GPS, satellite-based navigation and positioning. We expanded our GPS business with the 1997 acquisition of the satellite-aided automotive navigation product line from Rockwell International Corporation and the 1997 merger of Magellan with Ashtech Inc. ("Ashtech"), a developer and supplier of high-precision GPS products, components and technologies. In 1995, we acquired MacDonald, Dettwiler and Associates Ltd. ("MDA"), a leading supplier of commercial satellite imaging ground stations and related information processing software based in Vancouver, British Columbia. In 1990, we developed the "ORBCOMM" concept and in 1993, our subsidiary, Orbital Communications Corporation ("OCC"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), an affiliate of Teleglobe Inc., formed ORBCOMM Global, L.P. ("ORBCOMM") for the design, development, construction, integration, testing and operation of a low-Earth orbit satellite communications system known as the ORBCOMM System. OCC and Teleglobe Mobile are each 50% general partners in ORBCOMM. Additionally, OCC is a 2% partner in ORBCOMM USA, L.P. ("ORBCOMM USA") and Teleglobe Mobile is a 2% general partner in ORBCOMM International Partners, L.P. ("ORBCOMM International"), two partnerships formed to market the ORBCOMM System. ORBCOMM is a 98% general partner in each of the two marketing partnerships. We control and, therefore, consolidate ORBCOMM USA's results of operations. We do not control ORBCOMM's or ORBCOMM International's operational or financial affairs and therefore do not consolidate their results of operations. In 1992, we established a subsidiary, Orbital Imaging Corporation ("ORBIMAGE"), to develop and operate commercial remote imaging satellites and to market the products and services derived from such satellites. ORBIMAGE raised equity in private placements of preferred stock in 1997 and 1998, and as a result we own approximately 100% of ORBIMAGE's outstanding common stock and approximately 60% of the total voting interest in ORBIMAGE (after giving effect to the conversion of ORBIMAGE's outstanding convertible preferred stock. Based on certain rights granted to the preferred equity investors, we do not control ORBIMAGE's operational or financial affairs and therefore do not consolidate its results of operations. 4 5 We have also begun to pursue additional satellite-based services opportunities. In early 1999, we formed a subsidiary, Orbital Navigation Corporation ("ORBNAV"), to develop, operate and market, directly or through joint ventures, satellite-aided automotive guidance and related value-added information services for the rental car, private passenger car, commercial delivery vehicle and emergency vehicle markets. ORBNAV plans to leverage Magellan's satellite access products, ORBCOMM's satellite data network and other technologies to pursue growth opportunities in these markets. ORBNAV's current focus is on developing the rental car market through a joint venture with The Hertz Corporation. In 1998, we also made a strategic investment in CCI International N.V. ("CCI"), a company formed to offer satellite-based voice communications services. We own approximately 40% of the equity interests in CCI in the form of nonvoting preferred stock with various protective provisions, and we have entered into a contract for the construction and launch of CCI's satellites. We do not control CCI's operational or financial affairs and therefore do not consolidate its results of operations. DESCRIPTION OF ORBITAL'S PRODUCTS AND SERVICES Our products and services are grouped into three general business sectors: space and ground infrastructure systems, satellite access products and satellite services. Our overall business is not seasonal to any significant extent. SPACE AND GROUND INFRASTRUCTURE SYSTEMS Our space and ground infrastructure systems sector currently includes launch vehicles, satellites and related space systems, electronics and sensor systems, and satellite ground systems and software products, and is described more fully below. Launch Vehicles. We developed and produce the Pegasus and Taurus space launch vehicles that place small satellites into Earth orbit. Our Pegasus launch vehicle is launched from beneath our L-1011 carrier aircraft to deploy satellites weighing up to 1,000 pounds into low-Earth orbit. The Taurus launch vehicle is a ground-launched derivative of the Pegasus vehicle that can carry payloads weighing up to 3,000 pounds to low-Earth orbit and payloads weighing up to 800 pounds to geosynchronous orbit. The Pegasus has performed a total of 26 missions, including six successful launches in 1998 and one successful mission so far in 1999. The Taurus has performed a total of three launches, including two successful missions in 1998. Customers for Pegasus launch services currently include the National Aeronautics and Space Administration ("NASA"), the U.S. Air Force, the Defense Advanced Research Projects Agency ("DARPA"), ORBCOMM and ORBIMAGE. Customers for Taurus missions currently include the U.S. Air Force, South Korea's space agency and ORBIMAGE. Under a research and development contract with NASA, we are designing and constructing three X-34 unmanned reusable launch vehicles that will be launched from our L-1011 carrier aircraft. The X-34 will test and demonstrate advanced reusable launch system technologies and materials as part of NASA's program that is focused on the development of next-generation, lower cost launch vehicles. We have completed the detailed design of the X-34, have constructed and shipped one vehicle to the launch test site and are constructing two other vehicles. The first test flight of the X-34 is currently scheduled for later in 1999. NASA has contracted with us to conduct up to 27 test flights using the X-34. We also produce suborbital launch vehicles, which place payloads into a variety of high-altitude trajectories but, unlike space launch vehicles, do not place payloads into orbit around the Earth. Our suborbital launch products include suborbital vehicles and their principal subsystems, payloads carried by such vehicles, and related launch support installations and systems used in their assembly and operation. Customers typically use our suborbital launch vehicles to launch scientific and other payloads and for defense-related applications such as target signature and interceptor experiments. Our primary customers for suborbital launch vehicles include various branches of the U.S. military. We conducted three successful suborbital launches in 1998 and, since 1982, we (including a predecessor company) have performed 102 suborbital missions. Orbital's space launch technology is also the basis for several other space and suborbital programs. We are currently performing work under a suborbital contract with the U.S. Air Force to combine surplus government 5 6 ballistic missile equipment with Pegasus and Taurus launch vehicle technology to conduct up to 24 space and suborbital launch missions over the next several years. In addition, under NASA's Hyper-X project, we are building several Pegasus-derivative rockets to explore technologies that could be applied to hypersonic aircraft of the future. Satellites and Related Space Systems. We design and manufacture small and medium-class satellites to be used in low-Earth orbit, or LEO, and in geosynchronous orbit, or GEO. In addition, we are in the process of designing small and medium-class satellites to be used in medium-Earth orbit, or MEO. Our satellites are used by various commercial and governmental customers for a wide range of communications, broadcasting, remote imaging, scientific and military missions. Since 1982, we (including two predecessor companies) have built and delivered 74 satellites. Twenty Orbital-built satellites were deployed during 1998, including 18 ORBCOMM communications satellites. Customers for our LEO and MEO satellites include NASA, the U.S. Air Force, DARPA, the Canadian Space Agency, ORBCOMM, ORBIMAGE and CCI, while Japan's Broadcast Satellite Systems Corporation has ordered two GEO direct-to-home broadcast satellites from Orbital. We design and manufacture various other space systems, including satellite command and data handling, attitude control and structural subsystems for a variety of government and commercial customers. In addition, we provide a broad range of spacecraft design and engineering services as well as specialized space-related analytical engineering services for U.S. government agencies, including NASA, the Jet Propulsion Laboratory, the Department of Defense ("DoD") and the Department of Energy. Electronics and Sensor Systems. Orbital develops and manufactures defense electronics products, including advanced avionics and data management systems for aircraft flight operations and ground support applications. These systems collect, process and store mission-critical data for, among other things, mission planning and flight operations, and manage on-board equipment for aircraft and similar platforms. The primary customers for data management systems are the U.S. Navy, the U.S. Air Force, and various DoD prime contractors and foreign governments. We are the leading supplier of certain avionics systems and products, including mission data equipment for the U.S. Navy and data transfer equipment and digital terrain systems for the U.S. Air Force and foreign military customers. In addition, we provide stores management systems, including weapons arming and firing functions for use on tactical aircraft and helicopters. The avionics systems and products are deployed on a number of platforms, including the F-4, F-14, F-16, F-18 and F-22 aircraft and the LAMPS helicopter. The U.S. Army is also a customer for land combat vehicle-based systems that are derived from Orbital's avionics systems. Orbital also produces satellite-borne scientific sensors and instruments, such as atmospheric ozone monitoring instruments and environmental sensors. For example, our instruments have successfully operated in space, measuring ozone concentrations around the world. We also developed and produced an atmospheric monitoring system for use on the International Space Station. We provide sensors performing similar functions for U.S. Navy nuclear submarines, and we are developing sensors for the DoD for use in the detection of chemical or biological weapons. In addition, Orbital manufactures and markets sensors that analyze gas properties for commercial customers in the chemical, biotechnology, pharmaceutical and steel industries. Satellite Ground Systems and Software. Through our MDA subsidiary, we are the leading supplier of turn-key commercial imaging satellite ground stations and a provider of advanced image processing software used in such stations. In recent years, our ground systems have also expanded to include software-intensive products designed for air and sea navigation systems, along with a variety of military applications including naval mine-hunting operations, artillery command and control, radar deception and logistics support. Of approximately 45 major non-military imaging satellite ground stations around the world, Orbital has been the prime contractor or a major supplier in the construction of 35 ground stations in 19 countries. These ground stations are designed to receive and process data from the eight major civil and commercial Earth observation satellites currently in operation. Orbital also develops and markets software that generates and processes imagery from satellites and airborne sensors. Customers for our ground stations and Earth information systems and system upgrades include the European and Canadian space agencies as well as ORBIMAGE, EarthWatch, Incorporated and various other commercial and government customers in the United States, Brazil, China, Europe and Japan. 6 7 We also produce automated aeronautical information and air traffic control systems. Faster and less expensive to operate than traditional manual systems, automated aeronautical information systems provide pilots and other users with aeronautical and meteorological information on a timely basis. Customers for our aeronautical systems products include the military and civil aviation authorities in various countries such as Australia, Belgium, Canada, Malaysia, Norway and Switzerland. We are building on our expertise in satellite image processing software by expanding into land-oriented information systems. In 1998, the British Columbia government selected MDA to operate and enhance the province's electronic information access system, which provides the public with electronic access to a series of land-related government databases, such as land titles, tax records and property assessment information. SATELLITE ACCESS PRODUCTS Our satellite access products include the satellite-based navigation, positioning and communications products of our Magellan subsidiary, as well as transportation management systems, as described more fully below. GPS Navigation, Positioning and Communications Products. Magellan's product line consists of inexpensive satellite-based navigation and positioning products for consumer markets as well as GPS products that are used for professional and other high-precision industrial applications. Its consumer products are marketed to recreational marine and general aviation customers and outdoor recreation users such as campers, hunters and hikers. In 1998, Magellan introduced the GSC 100, a hand-held satellite communications device that combines GPS and communications functions. The GSC 100 represents the first generation of Magellan products that will be used in conjunction with the ORBCOMM System described below. Professional and industrial applications include using GPS for precision surveying, guiding aircraft under low-visibility conditions, monitoring movements of the Earth's surface for researchers, and managing natural resources. In addition, some of Magellan's higher-performance products incorporate technology that provides access to both the U.S. GPS satellites and GLONASS, the comparable Russian satellite navigation system, which improves performance and accuracy. Magellan has also entered the market for GPS-based car navigation products with its automotive navigation system, which uses GPS information to provide electronic map guidance to individual motorists. Magellan's automotive navigation system is currently in use in approximately 6,000 Hertz rental cars. Magellan recently introduced its second-generation vehicle navigation system, which has greater functionality and improved features to address broader private passenger vehicle and rental car markets. As one of the first opportunities we are pursuing through our ORBNAV initiative, we have agreed with Hertz to enter into an exclusive joint venture, subject to negotiation of final documentation, whereby Hertz will offer Magellan's new automotive navigation systems in 50,000 of its rental cars in the U.S., Canada and Europe. Magellan also pursues technology license agreements whereby Magellan licenses its GPS and GLONASS technology to manufacturers of GPS consumer and industrial products. Magellan has entered into such license arrangements with a Mitsubishi subsidiary, Philips Semiconductor and Matsushita Electric Works. In the first quarter of 1999, Magellan and Japan-based Topcon Corporation entered into a preliminary agreement to form a joint venture to develop and sell GPS-based positioning products for the surveying, industrial geographic information systems, mapping and machine control markets. Under the terms of the agreement, which is subject to negotiation of final documentation, Magellan will transfer certain assets and technology in exchange for cash, royalties, rights in technology and a 30% ownership interest. Topcon also will contribute assets to the venture in exchange for a 70% ownership interest. In connection with the 1997 merger of Ashtech with Magellan, Orbital entered into a stockholders' agreement with certain substantial stockholders of Ashtech. The Ashtech stockholders were granted certain rights with respect to Magellan, including, among others, the right to designate two members of Magellan's seven-member board of directors and to demand registration of their Magellan common stock after the earlier of 180 days after an initial public offering of the common stock of Magellan or December 31, 1999. Orbital and former Ashtech stockholders own approximately 66% and 34%, respectively, of Magellan. 7 8 Transportation Management Systems. Orbital also produces satellite-related vehicle location and fleet management systems that have been used primarily for metropolitan mass transit operators. Our ORBTRAC transportation management systems combine GPS vehicle tracking technology with local area wireless terrestrial communications to help manage public bus and light rail systems, provide for voice and data communications and transmit precise GPS-based location information in emergency situations. The 1998 acquisition of Raytheon Company's transportation management systems business expanded our satellite-based vehicle location products to include fleet management software for utilities and other companies. Customers for our transportation management systems include the metropolitan mass transit authorities in Chicago, New York, Oakland, Philadelphia, Houston and Detroit, as well as a number of smaller state and municipal transit systems and vehicle fleets. SATELLITE SERVICES In Orbital's satellite services sector, our ORBCOMM and ORBIMAGE affiliates are developing and providing satellite-based services to address markets for global two-way data communications and digital imagery of the Earth's surface. We have also begun to pursue additional satellite-provided services opportunities in the markets for automotive information services through ORBNAV. As a result of our equity investment in CCI, our satellite services sector also includes the development of a satellite-based voice communications system. ORBCOMM Communications Services. The ORBCOMM System consists of global space and ground segments designed to provide continuous low-cost monitoring, tracking and messaging communications coverage over most of the Earth's surface. ORBCOMM is currently providing commercial service primarily in the monitoring and tracking applications. The system is intended to be a reliable, cost-effective method of providing fixed asset monitoring, mobile asset tracking and data messaging services to a broad range of industrial and commercial customers around the world, enabling customers to collect data from multiple locations, track assets on a global basis and transmit and receive messages outside the coverage area of terrestrial services. It is designed to permit subscribers to use inexpensive communicators to send and receive short messages, high-priority alerts and other information, such as the location and condition of automobiles, trucks, railcars, industrial equipment, shipping vessels and other remote or mobile assets. We expect that the ability to send and receive data and messages without the geographic limitations of existing terrestrial communications systems will stimulate the growth of new markets for satellite-based monitoring, tracking and messaging communications and will be used to supplement terrestrial-based communications systems by providing relatively low-cost wide area geographic coverage in areas those systems are unable to reach. The ORBCOMM System initial network consists of a constellation of 28 small LEO satellites, with a satellite control center that operates and positions the satellites, fixed and mobile communicators used by subscribers to transmit messages to and receive messages from the satellites, and regional ground gateway systems that transmit and control the flow of data and message communications and other information for the system. A gateway generally consists of a satellite tracking station that sends signals to and receives signals from the satellites and a message switching system that processes the message traffic. There are currently four operational U.S. gateway stations located in New York, Washington, Arizona and Georgia. Gateways are also planned to be owned and operated by ORBCOMM licensees in strategic locations around the world. These licensees are responsible for obtaining the necessary regulatory approvals for operating the ORBCOMM System in their regions. Gateways located in Italy, Brazil, and Japan, providing coverage for significant portions of Europe and South America and all of Japan, have successfully completed acceptance testing. ORBCOMM's international licensees in Italy and Brazil commenced commercial service for their respective regions in early 1999, and Japan is expected to commence commercial service shortly. ORBCOMM has agreements with several manufacturers for the development and manufacture of hand-held communicators used by individuals and various types of industrial communicators that monitor fixed and mobile assets. Subscriber communicator manufacturers include Panasonic, Magellan and Scientific Atlanta. Orbital is completing construction of ORBCOMM's equatorial plane of seven satellites, scheduled for launch on a Pegasus vehicle later in 1999. Orbital and ORBCOMM have also entered into a procurement agreement valued at up to $72 million, under which Orbital has agreed to build and launch an additional seven satellites on a fixed-price basis, with options to build and launch up to an additional 22 satellites. Orbital also provides ORBCOMM with 8 9 certain administrative services, generally on a cost-reimbursable basis. Orbital developed the "ORBCOMM" concept in 1990, and in 1993 formed the ORBCOMM partnership with Teleglobe Mobile for the design, development, construction, integration, testing and operation of the ORBCOMM System. OCC and Teleglobe Mobile each hold a 50% interest in ORBCOMM and have invested approximately $110,000,000 and $118,000,000, respectively, through December 31, 1998. OCC and Teleglobe Mobile also formed two marketing partnerships, ORBCOMM USA and ORBCOMM International, each with the exclusive right to market the ORBCOMM System in the U.S. and internationally, respectively. Pursuant to the terms of the partnership agreements, OCC indirectly holds a 51% interest in ORBCOMM USA, with the result that OCC acting alone can generally control the operational and financial affairs of ORBCOMM USA, and Teleglobe Mobile indirectly holds a 51% interest in ORBCOMM International, with the result that Teleglobe Mobile acting alone can generally control the operational and financial affairs of ORBCOMM International. Since OCC is unable to control, but is able to exercise significant influence over, ORBCOMM's and ORBCOMM International's operational and financial affairs, we account for our investments in ORBCOMM and ORBCOMM International using the equity method of accounting. Since OCC is able to control the operational and financial affairs of ORBCOMM USA, we consolidate ORBCOMM USA's results of operations. In accordance with the equity method of accounting, we recognize 100% of the revenues earned and costs incurred on sales of products and services to ORBCOMM. We also recognize as equity in earnings (losses) of affiliates our proportionate share of ORBCOMM's profits and losses based on our percentage of partnership interest. To the extent ORBCOMM capitalizes its purchases from Orbital, we eliminate as equity in earnings (losses) of affiliates approximately 50%, our current equity ownership in ORBCOMM, of our profits from sales to ORBCOMM. We believe that ORBCOMM will require significant additional funding in 1999. Orbital and ORBCOMM are currently in the process of exploring financing alternatives to fund future capital expenditures and to fund ORBCOMM's operations costs. Such alternatives include, but are not limited to, additional capital contributions from ORBCOMM's existing partners or other strategic investors, vendor financing, deferred invoicing, equity or debt transactions and other strategic alternatives. There can be no assurance that any financing will be completed or available on terms commercially acceptable to ORBCOMM. During 1998, Orbital deferred invoicing ORBCOMM for approximately $33,000,000 of work performed under our ORBCOMM satellite and launch procurement agreement. During 1999, we may defer up to $25,000,000 of invoicing for work performed for ORBCOMM. One-half of the deferred invoice amounts has been, and is expected to continue to be, advanced to Orbital by an affiliate of Teleglobe Inc. Orbital anticipates that start-up of the ORBCOMM System will continue to produce substantial operating losses through 1999. There can be no assurance that an adequate market will develop for ORBCOMM services, that ORBCOMM will achieve profitable operations or that we will recover any of our past or anticipated investment in ORBCOMM. ORBIMAGE Imagery Services. ORBIMAGE operates, and is further developing, a fleet of satellites that collect, process and distribute digital imagery of the Earth's surface, the atmosphere and weather conditions. ORBIMAGE's imaging products and services are designed to provide customers with timely and competitively priced information concerning, among other things, the location and movement of military assets, urban growth, forestry and crop health, land and ocean-based natural resources and weather patterns and wind conditions. In April 1995, ORBIMAGE launched its first satellite, OrbView-1, which provides to NASA dedicated weather-related imagery and meteorological products. ORBIMAGE's second satellite, OrbView-2 (operated under a licensing agreement with Orbital), commenced commercial service in 1997 and is used by ORBIMAGE to deliver high-quality multi-spectral ocean imagery and land surface imagery to government and commercial customers. ORBIMAGE expects to launch two additional satellites, OrbView-3 and OrbView-4, in 1999 and 2000, respectively. We believe that OrbView-3 and OrbView-4 will be among the first commercial satellites with high-resolution imagery capability and that OrbView-4 will be the world's first satellite with commercially available hyperspectral imaging capability. As of December 31, 1998, ORBIMAGE and MDA entered into a license agreement whereby ORBIMAGE agreed to acquire from MDA the exclusive worldwide rights to distribute and sell radar imagery from the RadarSat-2 satellite that is expected to be operational in 2002. Orbital is constructing the 9 10 RadarSat-2 satellite and ground system, which are being financed by the Canadian Space Agency, the anchor customer for RadarSat-2 imagery. Under the procurement agreement between Orbital and ORBIMAGE, Orbital is producing and launching the OrbView-3 and OrbView-4 satellites, and is constructing the related ground segment on a fixed-price basis. Orbital also provides ORBIMAGE with administrative services and technical support, generally on a cost-reimbursable basis. In February 1998, ORBIMAGE completed a private financing of $150,000,000 units consisting of 11 5/8% Senior Notes due 2005 and warrants to purchase an aggregate of approximately 3% of ORBIMAGE's outstanding common stock. Concurrently, the existing preferred stockholders of ORBIMAGE exercised an option to purchase additional preferred stock of ORBIMAGE, resulting in additional net proceeds to ORBIMAGE of approximately $21,000,000. The preferred stockholders have certain demand registration rights with respect to their shares after June 30, 2002. We own approximately 100% of ORBIMAGE's outstanding common stock and approximately 60% of the total voting interest in ORBIMAGE (after giving effect to the conversion of ORBIMAGE's convertible preferred stock, with the remainder owned primarily by the preferred stockholders. As a result of certain rights granted to the preferred stockholders, including the right to elect certain directors and have such directors participate in significant management decisions, we do not control the operational and financial affairs of ORBIMAGE. In accordance with the equity method of accounting, we recognize 100% of the revenues earned and costs incurred on sales of products and services to ORBIMAGE. We also recognize as equity in earnings (losses) of affiliates our proportionate share (based on our current common equity ownership) of ORBIMAGE's net income available to common stockholders. To the extent ORBIMAGE capitalizes its purchases from Orbital, we eliminate as equity in earnings (losses) of affiliates our proportionate share (based on our current common equity ownership) of profits from sales to ORBIMAGE. As of December 31, 1998, we had invested approximately $27,891,000 in ORBIMAGE. We anticipate that ORBIMAGE will incur operating losses at least through 1999. There can be no assurance that an adequate market will develop for ORBIMAGE's products and services, that it will achieve profitable operations or that we will recover our investment in ORBIMAGE. ORBNAV Automotive Information Services. We established ORBNAV in early 1999 to develop, operate and market, directly or through joint ventures, satellite-aided automotive guidance and related value-added information services for the rental car, private passenger car, commercial delivery vehicle and emergency vehicle markets. ORBNAV's initial focus is on developing the rental car market through an exclusive joint venture for which final documentation is currently under negotiation with Hertz, which venture will initially purchase 50,000 Magellan automotive navigation systems for installation in Hertz rental cars. Through ORBNAV, Orbital intends to invest up to $30,000,000 in exchange for a 60% interest, while Hertz intends to invest up to $20,000,000 and provide initial marketing services in exchange for a 40% interest in the joint venture. CCI Voice Communications. In 1998, we made a strategic investment in CCI. CCI was formed to develop, construct and operate a constellation of satellites offering satellite-based voice communications services in the world's equatorial regions. Pursuant to the terms of our stock purchase agreement, we have agreed, subject to the satisfaction by CCI of various operational and financial milestones, to purchase up to $50,000,000 of CCI's nonvoting convertible preferred shares, and we have an option to purchase an additional $50,000,000 of such preferred shares. In connection with the stock purchase transaction, we also entered into a satellite and launch vehicle procurement contract valued at approximately $480,000,000 for the satellites (and a price to be determined for the launch vehicles in the event we procure them). We have also agreed, subject to satisfaction of various conditions, to provide vendor financing. We own approximately 40% of CCI, with the remainder owned by outside investors. Our preferred shares in CCI are nonvoting, but pursuant to the terms of such shares, we have approval rights with respect to significant management decisions. Our approval rights may become diluted to the extent additional investors in CCI purchase preferred shares with similar terms. Though we do not control CCI, we are able to exercise significant influence over CCI's operational and financial affairs, and we currently account for our investment in CCI using a modified equity method of accounting. In accordance with the modified equity method of accounting, we recognize 100% of CCI's losses. As we have provided substantially all of the CCI's funding, we do not recognize revenues on sales to CCI. As of December 31, 1998, we had purchased $22,000,000 of the preferred shares and had not 10 11 provided any vendor financing. There can be no assurance that CCI will achieve its financial or operational milestones, some of which entail raising additional capital, or that an adequate market will develop for CCI's products and services, and we may be required to write off all, or a portion, of our investment. RECENT DEVELOPMENTS On March 12, 1999, Orbital and Magellan signed a merger agreement with Lowrance Electronics, Inc., a leading manufacturer of marine and recreational electronics using GPS-satellite navigation and sonar technology. Under the terms of the merger, Orbital will acquire all the outstanding common stock of Lowrance and Lowrance shareholders will receive between 745,000 and 1,250,000 shares of Orbital common stock, based on the fair market value of Orbital common stock prior to closing. Lowrance will be merged into Magellan at the closing and Orbital's ownership of Magellan following the merger will increase to approximately 85%. We expect the transaction to close in the second half of 1999. Closing is subject to regulatory approval and Lowrance shareholder approval. On March 18, 1999, MDA and Toronto-based Spar Aerospace Limited signed an asset purchase agreement pursuant to which MDA will acquire Spar's space robotics division for approximately $43,000,000 in cash, one-half of which is payable upon closing, with the other half payable a year following closing. The Spar acquisition will expand our product lines to include advanced robotics primarily for the manned space market. We expect the transaction to close in the second quarter of 1999, subject to customary closing conditions. COMPETITION Orbital believes that competition for sales of its products and services is based on performance and other technical features, price, reliability, scheduling and customization. The primary domestic competition for the Pegasus and Taurus launch vehicles comes from the Athena launch vehicles developed by Lockheed Martin Corporation. In addition, Pegasus may face competition from launch systems derived from U.S. government surplus ballistic missiles. The Israeli Shavit vehicle and other potential foreign launch vehicles could also pose competitive challenges to Pegasus, although U.S. government policy currently prohibits the launch of foreign vehicles from U.S. territory. Competition for Taurus could come from surplus Titan II launch vehicles, although a very limited inventory remains, and from the Russian Kosmos SL-8 launch vehicle. Competition to Pegasus and Taurus vehicles also exists in the form of partial or secondary payload capacity on larger boosters including the Ariane, Atlas and Delta launch vehicles. Our primary competitors in the suborbital launch vehicle product line are Coleman Research Corporation, Lockheed Martin and Space Vector Corporation. Our satellites and satellite subsystems products compete with products and services produced or provided by government entities and numerous private entities, including TRW Inc., Ball Aerospace and Technology Corporation, Lockheed Martin, GM Hughes Electronics Corporation and Spectrum Astro, Inc. Our airborne and ground-based electronics, data management systems, defense-oriented avionics products and software systems, aviation systems and space sensors and instruments face competition from several established manufacturers, including Smiths Industries, Lockheed Sanders and Honeywell Inc. Our main competitors in the area of satellite ground stations include Datron Systems Inc., Matra Marconi Space N.V. and Hughes-STX Corp. Our satellite access products primarily face competition from Trimble Navigation Ltd., Garmin International, Philips Automotive Electonics, Alpine Electronics and Clarion. The main competitors to our transportation management systems are Rockwell and Harris Corporation. ORBCOMM may face competition from numerous existing and proposed satellite-based and terrestrial systems providing data communications services. ORBIMAGE may face competition from U.S. and foreign governmental entities and private entities, including Space Imaging EOSAT and EarthWatch, that provide or are seeking to provide satellite-based imagery products. Many of our competitors are larger and have substantially greater resources than we do. Furthermore, the possibility exists that other domestic or foreign companies or governments, some with greater experience in the space industry and greater financial resources than Orbital, will seek to produce products or services that compete with our products or services. Any such foreign competitor could benefit from subsidies from or other protective 11 12 measures by its home country. RESEARCH AND DEVELOPMENT We expect to continue to invest in product-related research and development, to conceive and develop new products and services, to enhance existing products and services and to seek customer and, where appropriate, third-party strategic investments in these products and services. Our research and development expenses, excluding direct customer-funded development, were approximately $49,384,000, $33,140,000 and $23,068,000, respectively, for the fiscal years ended December 31, 1998, 1997 and 1996. PATENTS AND TRADEMARKS We rely, in part, on patents, trade secrets and know-how to develop and maintain our competitive position and technological advantage. We hold and have applications pending for various U.S. and foreign patents relating to the Pegasus vehicle, our satellites, certain of our GPS products, and other systems and products. Certain of the trademarks and service marks used in connection with our products and services have been registered with the U.S. Patent and Trademark Office, the Canadian Intellectual Property Office and certain other foreign trademark authorities. COMPONENTS, RAW MATERIALS AND CARRIER AIRCRAFT We purchase a significant percentage of our product components, including rocket propulsion motors, structural assemblies, electronic equipment and computer chips, from third parties. We also occasionally obtain from the U.S. government parts and equipment that are used in the production of our products or in the provision of our services. We have not experienced material difficulty in obtaining product components or necessary parts and equipment and we believe that alternative sources of supply would be available, although increased costs and possible delays could be incurred in securing alternative sources of supply. Our ability to launch our Pegasus vehicle depends on the availability of an aircraft with the capability of carrying and launching such space launch vehicle. We own the modified Lockheed L-1011 carrier aircraft that is used for the Pegasus vehicle and will be used for the X-34 advanced launch vehicle. In the event that the L-1011 carrier aircraft were to be unavailable, we would experience significant delays, expenses and loss of revenues as a result of having to acquire and modify a new carrier aircraft. U.S. GOVERNMENT CONTRACTS During 1998, 1997 and 1996, approximately 46%, 42% and 45%, respectively, of our total annual revenues were derived from contracts with the U.S. government and its agencies or from subcontracts with the U.S. government's prime contractors. Most of our U.S. government contracts are funded incrementally on a year-to-year basis. Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies or the imposition of budgetary constraints could materially adversely affect our financial condition or results of operations. Customers that accounted for 10% or more of our consolidated 1998 revenues were NASA, DoD and ORBIMAGE. The accuracy and appropriateness of our direct and indirect costs and expenses under our contracts with the U.S. government are subject to extensive regulation and audit by the Defense Contract Audit Agency or by other appropriate agencies of the U.S. government. These agencies have the right to challenge our cost estimates or allocations with respect to any such contract. Additionally, a substantial portion of payments to Orbital under U.S. government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies. We believe that any adjustments likely to result from inquiries or audits of our contracts will not have a material adverse impact on our financial condition or results of operations. Since Orbital's inception, we have not experienced any material adjustments as a result of any such inquiries or audits. Orbital's major contracts with the U.S. government fall into three categories: firm fixed-price contracts, fixed-price incentive fee contracts and cost-plus-fee contracts. Under firm fixed-price contracts, work performed and products shipped are paid for at a fixed price without adjustment for actual costs incurred in connection with the contract. Therefore, we bear the risk of loss due to increased cost, although some of this risk may be passed on to subcontractors. Under fixed-price government contracts, we may receive progress payments, generally in an amount 12 13 equal to between 80% and 95% of monthly costs and profits, or we may receive milestone payments upon the occurrence of certain program achievements, with final payments occurring at project completion. Fixed-price incentive fee contracts provide for sharing by Orbital and the customer of unexpected costs incurred or savings realized within specified limits, and may provide for adjustments in price depending on actual contract performance other than costs. Costs in excess of the negotiated maximum (ceiling) price and the risk of loss by reason of such excess costs are borne by Orbital, although some of this risk may be passed on to subcontractors. Under a cost-plus-fee contract, we recover our actual allowable costs incurred and receive a fee consisting of a base amount that is fixed at the inception of the contract and/or an award amount that is based on the U.S. government's subjective evaluation of the contractor's performance in terms of the criteria stated in the contract. All of our U.S. government contracts and, in general, our subcontracts with the U.S. government's prime contractors provide that such contracts may be terminated at will by the U.S. government or the prime contractor, respectively. Furthermore, any of these contracts may become subject to a government-issued stop work order under which we would be required to suspend production. In the event of a termination at will, Orbital would normally be entitled to recognize the purchase price for delivered items, reimbursement for allowable costs for work in process and an allowance for reasonable profit thereon or adjustment for loss if completion of performance would have resulted in a loss. From time to time we experience contract suspensions and terminations. REGULATION Our ability to pursue our business activities is regulated by various agencies and departments of the U.S. government and, in certain circumstances, the governments of other countries. Commercial space launches require licenses from the U.S. Department of Transportation (the "DoT") and operation of our L-1011 aircraft requires licenses from certain agencies of the DoT, including the Federal Aviation Administration. Construction, launch and operation of commercial communications satellites, including the ORBCOMM communications network and CCI's business, require licenses from the U.S. Federal Communications Commission (the "FCC") and frequently require the approval of international and individual country regulatory authorities. ORBCOMM has received the necessary FCC regulatory authority to operate its system. ORBCOMM's international licensees have obtained or are responsible for obtaining the necessary international regulatory licenses. In addition, U.S.-based commercial remote imagery satellite systems such as those developed by ORBIMAGE require licenses from the U.S. Department of Commerce (the "DoC") and the FCC for the construction, launch and operation of remote imaging satellites. ORBIMAGE has the necessary DoC licenses and its FCC license to construct, launch and operate the OrbView-3 and OrbView-4 satellites. ORBIMAGE has applied to DoC to amend its OrbView-4 license to permit the commercial distribution of hyperspectral imagery from such satellite. The DoC has indicated that its approval may be subject to certain limitations, such as delaying release of imagery or degrading spatial resolution of imagery for commercial uses. Exports of our products, services and technical information frequently require licenses from the U.S. Department of State or the DoC. There can be no assurance that we will be successful in our efforts to obtain necessary licenses or regulatory approvals. The inability of Orbital, ORBCOMM, ORBIMAGE or CCI to secure or maintain any necessary licenses or approvals or significant delays in obtaining such licenses or approvals could have a material adverse effect on the financial condition or results of operations of Orbital. BACKLOG Orbital's contract backlog is attributable to its space and ground infrastructure systems business. Our firm backlog at December 31, 1998 and 1997 was approximately $1,826,000,000 and $1,040,000,000, respectively. As of December 31, 1998, approximately 41% of our firm backlog was with the U.S. government and its agencies or from subcontracts with the U.S. government's prime contractors. Firm backlog consists of aggregate contract values for firm product orders, excluding the portion previously included in operating revenues on the basis of percentage of completion accounting, and including government contract orders not yet funded in the amounts of approximately $1,300,000,000 and $435,000,000 as of December 31, 1998 and 1997, respectively. Approximately 55% of total firm backlog is currently scheduled to be performed beyond 1999. Firm backlog excludes unexercised contract options and undefinitized new contracts having an aggregate potential contract value at December 31, 1998 of approximately $2,220,000,000. 13 14 EMPLOYEES As of December 31, 1998, Orbital (including ORBCOMM and ORBIMAGE) had approximately 4,400 full-time permanent employees. We do not have any collective bargaining agreements with our employees and believe our employee relations are good. ITEM 2. PROPERTIES Orbital owns or leases over 1,700,000 square feet of office, engineering and manufacturing space in various locations throughout the world. In 1998, we purchased a parcel of real estate adjacent to our corporate headquarters in Northern Virginia to expand our satellite-related engineering, manufacturing and operations facilities at this site, which will allow us to consolidate our existing Northern Virginia and portions of our Maryland work force in a single integrated site. Orbital expects to convey portions of this land to a third-party developer shortly so that construction of the buildings can commence. As such buildings are completed, Orbital expects to lease the buildings pursuant to long-term leases. In 1993, Orbital entered into a 12-year lease agreement for approximately 100,000 square feet of office and engineering space in Dulles, Virginia, which serves as its corporate headquarters. We own a 59,000 square-foot manufacturing facility on land adjacent to the Dulles office facility that has office, engineering and manufacturing space. We intend to increase the size of this facility by approximately 50,000 to 75,000 square feet over the next year. Orbital also leases approximately 73,000 square feet of office, engineering and manufacturing space in McLean, Virginia; 400,000 square feet of office, engineering and manufacturing space in Germantown, Maryland; 345,000 square feet of office, engineering and manufacturing space in Chandler, Arizona; 182,000 square feet of office and engineering space in Richmond, British Columbia; 135,000 square feet of office, engineering and manufacturing space in Pomona, California; 75,000 square feet of office, engineering and manufacturing space in San Dimas, California; and 82,500 square feet of office, engineering and manufacturing space in Santa Clara, California. We lease or own other smaller facilities, offices or manufacturing space around the United States, in Canada and in Russia. Although completion of our existing and pending contracts may in the future require additional manufacturing capacity, we believe that our existing facilities are adequate for our near-term requirements and that such facilities, along with those to be constructed, will be adequate for our medium-term requirements. ITEM 3. LEGAL PROCEEDINGS In the first quarter of 1999, a number of class action lawsuits were filed in federal court in the Eastern District of Virginia against Orbital, an officer and an officer/director, alleging violations of the federal securities laws during the period from April 21, 1998 through February 16, 1999 and seeking monetary damages. In December 1998, Thomas van der Heyden filed a lawsuit in the Circuit Court for Montgomery County, Maryland alleging that Orbital is in actual or anticipatory breach of obligations allegedly imposed on Orbital in a judgment in a previous action brought by plaintiff against CTA. The plaintiff claims that he is entitled to a sum exceeding $30 million from Orbital, as successor-in-interest to CTA. We believe that the allegations in the legal proceedings described above are without merit and intend to vigorously defend against the allegations. In addition, under the terms of the CTA acquisition, we believe we are entitled to indemnification from CTA for all or a part of any damages arising from the van der Heyden litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There was no matter submitted to a vote of our security holders during the fourth quarter of 1998. 14 15 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the name, age and position of each of the executive officers of Orbital as of March 1, 1999. All executive officers are elected annually and serve at the discretion of the Board of Directors.
NAME AGE POSITION --------------------- --- --------------------------------------------------------- David W. Thompson.... 44 Chairman of the Board, President and Chief Executive Officer James R. Thompson.... 62 Director, Executive Vice President and General Manager/ Launch Systems Group Robert R. Lovell..... 62 Executive Vice President and General Manager/Space Systems Group John P. Huyett....... 45 Executive Vice President and General Manager/Satellite Access Products Group Robert D. Strain..... 42 Executive Vice President and General Manager/Electronics and Sensor Systems Group Daniel E. Friedmann.. 42 Executive Vice President and General Manager/Systems Integration and Software Group Jeffrey V. Pirone.... 38 Executive Vice President and Chief Financial Officer Michael D. Griffin... 49 Executive Vice President and Chief Technical Officer Antonio L. Elias..... 49 Senior Vice President for Advanced Programs Leslie C. Seeman..... 46 Senior Vice President, General Counsel and Secretary
- ---------- David W. Thompson is a co-founder of Orbital and has been Chairman of the Board, President and Chief Executive Officer of Orbital since 1982. Prior to founding Orbital, Mr. Thompson was employed by Hughes Electronics Corporation as special assistant to the President of its Missile Systems Group and by NASA at the Marshall Space Flight Center as a project manager and engineer, and also worked on the Space Shuttle's autopilot design at the Charles Stark Draper Laboratory. Mr. Thompson serves as Chairman of Magellan, Chairman and Chief Executive Officer of ORBIMAGE and as a director of ORBCOMM and CCI. Mr. Thompson is a Fellow of the American Institute of Aeronautics and Astronautics, the American Astronautical Society and the Royal Aeronautical Society. James R. Thompson (who is not related to David W. Thompson) has been Executive Vice President and General Manager/Launch Systems Group since 1993 and a director of Orbital since 1992. Mr. Thompson was Executive Vice President and Chief Technical Officer of Orbital from 1991 to 1993. He was Deputy Administrator of NASA from 1989 to 1991. From 1986 until 1989, Mr. Thompson was Director of NASA's Marshall Space Flight Center. He was Deputy Director for Technical Operations at Princeton University's Plasma Physics Laboratory from 1983 through 1986. Before that, he had a 20-year career with NASA at the Marshall Space Flight Center. He is a director of Nichols Research Corp. and SPACEHAB Incorporated. John P. Huyett has been Executive Vice President and General Manager, Satellite Access Products since January 1, 1999. Mr. Huyett also serves, effective January 1, 1999, as President and Chief Executive Officer of Magellan. Mr. Huyett joined Magellan as its Vice President and Chief Financial Officer in 1998. From 1993 through 1998, Mr. Huyett was the Vice President and Chief Financial Officer of Avant! Corporation and its predecessor, Integrated Silicon Systems, a software company. From 1985 through 1993, Mr. Huyett was a partner at KPMG LLP. Mr. Huyett is a director of Magellan. Robert R. Lovell has been Executive Vice President and General Manager/Space Systems Group since 1997. From 1994 to 1997, he was Senior Vice President for Special Projects at Orbital. Mr. Lovell previously served as Executive Vice President and General Manager/Space Systems Group from 1993 to 1994. From 1990 to 1993, he was President/Space Systems Division of Orbital and, from 1987 to 1989, he served as Vice President/Space Applications. From 1980 to 1987, Mr. Lovell was employed by NASA as Director of the Communications Division in the Office of Space Science and Applications. Before that, he had an 18-year career with NASA at the Lewis Research Center. Mr. Lovell is a director of CCI. Michael D. Griffin has been Executive Vice President and Chief Technical Officer since 1997. From 1996 to 1997, Dr. Griffin served as Executive Vice President/Space Systems Group. Dr. Griffin joined Orbital in 1995 when he was appointed Senior Vice President and Chief Technical Officer. From 1994 to 1995, he was Senior Vice President for Program Development at Space Industries International. From 1991 to 1994, he served as Chief 15 16 Engineer of NASA and, from 1989 to 1991, was Deputy Director for Technology at the Strategic Defense Initiative Organization. Dr. Griffin is a director of Magellan. Robert D. Strain has been Executive Vice President and General Manager/Electronics and Sensor Systems Group since 1996. From 1994 until 1996, he was Vice President for Finance and Manufacturing at Orbital. Prior to that he served in a variety of senior-level financial positions with Fairchild Space and Defense Corporation, including Vice President of Finance, Treasurer and Controller. Daniel E. Friedmann has been Executive Vice President and General Manager/Systems Integration and Software Group since 1996. He continues to serve as President and Chief Executive Officer of Orbital's subsidiary, MDA, a position he has held since 1995. From 1992 to 1995, he served as Executive Vice President and Chief Operating Officer of MDA. Between 1979 and 1992, he held a variety of positions at MDA, including serving as Vice President of various divisions. Jeffrey V. Pirone has been Executive Vice President and Chief Financial Officer since 1996. From 1993 until 1996, Mr. Pirone served as Vice President and Controller of Orbital. Mr. Pirone joined Orbital as Controller in 1991, and prior to that was a Senior Manager at KPMG LLP. Mr. Pirone is a director of Magellan and ORBCOMM. Antonio L. Elias has been Senior Vice President for Advanced Programs since August 1997. From January 1996 until August 1997, Dr. Elias served as Senior Vice President and Chief Technical Officer. From May 1993 through December 1995 he was Senior Vice President for Advanced Projects and was Senior Vice President/Space Systems Division from 1990 to April 1993. He was Vice President/Engineering of Orbital from 1989 to 1990 and was Chief Engineer from 1986 to 1989. From 1980 to 1986, Dr. Elias was an Assistant Professor of Aeronautics and Astronautics at Massachusetts Institute of Technology. Leslie C. Seeman has been Senior Vice President of Orbital since 1993 and General Counsel and Secretary of Orbital since 1989. From 1989 to 1993, she was also Vice President of Orbital, and from 1987 to 1989, Ms. Seeman was Assistant General Counsel of Orbital. From 1984 to 1987, she was General Counsel of Source Telecomputing Corporation, a telecommunications company. Prior to that, she was an attorney at the law firm of Wilmer, Cutler and Pickering. 16 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On March 22, 1999, there were 1,325 Orbital stockholders of record. Our common stock began trading on the New York Stock Exchange ("NYSE") on July 10, 1998 under the symbol ORB. Prior to that our common stock was traded on the Nasdaq National Market under the symbol ORBI. The range of high and low sales prices of Orbital common stock from 1996 through 1998, as reported on Nasdaq or the NYSE, as applicable, was as follows:
1998 HIGH LOW -------------------- ---------- --------- 4th Quarter......... $ 44 $ 19 1/2 3rd Quarter......... $ 39 $ 17 2nd Quarter......... $ 50 $ 32 1/4 1st Quarter......... $ 46 1/2 $ 29 1997 HIGH LOW -------------------- ---------- --------- 4th Quarter......... $ 30 3/4 $ 21 3rd Quarter......... $ 25 $ 15 7/8 2nd Quarter......... $ 18 $ 12 3/4 1st Quarter......... $ 19 1/4 $ 13 3/4 1996 HIGH LOW -------------------- ---------- --------- 4th Quarter......... $ 21 $ 16 1/4 3rd Quarter......... $ 20 7/8 $ 16 3/8 2nd Quarter......... $ 19 7/8 $ 13 1st Quarter......... $ 16 1/8 $ 11 3/4
We have never paid any cash dividends on our common stock. We presently intend to retain future earnings for working capital and product development and therefore do not anticipate paying cash dividends on our common stock at any time in the foreseeable future. In addition, we are prohibited from paying cash dividends under an existing credit facility. The transfer agent for our Common Stock is: The First National Bank of Boston c/o Boston Equiserve P.O. Box 8040 Boston, MA 02266-8040 Telephone: (617) 575-3170 or (800) 730-4001 www.bostonequiserve.com The trustee for our 5% convertible subordinated notes due 2002 is: Deutsche Bank AG, New York Branch 31 W. 52nd St. New York, NY 10019 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA Management has determined to restate its previously issued consolidated financial statements as of and for the years ended December 31, 1998, 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, 1998 and the consolidated balance sheet data at December 31, 1998 and 1997 are derived from and should be read in conjunction with the audited consolidated financial statements and notes thereto included in this Report. The consolidated operating data and balance sheet data for the years ended December 31, 1995 and 17 18 \ 1994 and the consolidated balance sheet data at December 31, 1996, 1995 and 1994 are derived from consolidated financial statements not included or incorporated by reference herein.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------- ----------- ----------- ----------- (restated) (restated) (restated) (restated) (IN THOUSANDS, EXCEPT SHARE DATA) OPERATING DATA: Revenues....................................... $ 730,662 $ 546,008 $ 449,787 $ 359,840 $ 301,576 Costs of goods sold............................ 549,628 413,361 332,581 271,146 216,417 ----------- ------------ ----------- ----------- ----------- Gross profit................................... 181,034 132,647 117,206 88,694 85,159 Research and development expenses.............. 49,384 33,140 23,068 28,558 17,259 Selling, general and administrative expenses... 106,812 88,148 77,247 64,170 53,165 Amortization of goodwill....................... 9,713 3,852 3,134 3,221 2,360 Asset impairment charges....................... 2,479 -- -- -- -- ----------- ------------ ----------- ----------- ----------- Income (loss) from operations.................. 12,646 7,507 13,757 (7,255) 12,375 Net investment income (expense)................ (1,279) (990) (49) 1,131 (244) Equity in earnings (losses) of affiliates...... (76,815) (25,094) (7,008) (644) (1,264) Non-controlling interests in (earnings) losses of consolidated subsidiaries................. 14,112 2,638 1,473 427 -- Gain on sale 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....... (51,336) 1,528 8,173 (9,782) 10,364 Provision (benefit) for income taxes........... 5,216 12,933 211 (6,569) 2,744 ----------- ------------ ----------- ----------- ----------- Income (loss) before extraordinary item and cumulative effect of accounting change....... (56,552) (11,405) 7,962 (3,213) 7,620 Extraordinary item -- gain on sale of assets, net of taxes................................. -- -- 1,980 -- -- Cumulative effect of accounting change, net of taxes........................................ -- -- -- (2,377) -- ----------- ------------ ----------- ----------- ----------- Net income (loss).............................. $(56,552) $(11,405) $9,942 $(5,590) $ 7,620 =========== ============ =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE(1): Income (loss) before extraordinary items and cumulative effect of accounting change....... $(1.59) $(0.35) $0.27 $(0.12) $0.33 Extraordinary item -- gain on sale of assets, net of taxes................................. -- -- 0.07 -- -- Cumulative effect of accounting change......... -- -- -- (0.09) -- ----------- ------------ ----------- ----------- ----------- $(1.59) $(0.35) $0.34 $(0.21) $0.33 =========== ============ =========== =========== =========== Shares used in computing net income (loss) per common share................................. 35,624,888 32,283,138 29,137,361 26,207,746 23,191,553 =========== ============ =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE, ASSUMING DILUTION(2): Income (loss) before extraordinary items and cumulative effect of accounting change....... $(1.59) $ (0.35) $ 0.30 $ (0.12) $ 0.32 Extraordinary item -- gain on sale of assets, net of taxes................................. -- -- 0.04 -- -- Cumulative effect of accounting change......... -- -- -- (0.09) -- ----------- ------------ ----------- ----------- ----------- $(1.59) $(0.35) $0.34 $(0.21) $ 0.32 =========== ============ =========== =========== =========== Shares used in computing net income (loss) per common share, assuming dilution.............. 35,624,888 32,283,138 31,616,119 26,207,746 27,309,336 =========== ============ =========== =========== =========== BALANCE SHEET DATA: Cash and investments........................... $23,190 $15,126 $33,750 $35,030 $ 40,345 Net working capital............................ 53,052 53,201 71,055 78,778 57,449 Total assets................................... 895,192 777,885 509,613 472,900 441,042 Short-term borrowings.......................... 26,814 29,767 38,969 11,907 28,977 Long-term obligations, net..................... 181,281 200,194 35,326 96,990 86,068 Stockholders' equity........................... 419,352 313,984 323,795 238,116 206,943
- ---------- (1) Net income (loss) per common share is calculated using the weighted average number of shares outstanding during the periods. (2) Net income (loss) per common share, assuming dilution, is calculated using the weighted average number of shares and dilutive equivalent shares outstanding during the periods, plus the dilutive effect of an assumed conversion of our convertible subordinated notes. 18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW With the exception of historical information, the matters discussed below under the headings "Recent Developments," "Results of Operations" and "Liquidity and Capital Resources" and elsewhere in this Annual Report on Form 10-K include forward-looking statements that involve risks and uncertainties, many of which are beyond our control. We wish to caution readers that a number of important factors, including those identified below in "Outlook: Issues and Uncertainties," may affect our actual results and may cause actual results to differ materially from those in any forward-looking statement. Our products and services are grouped into three general business sectors: space and ground infrastructure systems, satellite access products and satellite services. Space and ground infrastructure systems include launch vehicles, satellites and related space systems, electronics and sensor systems, and satellite ground systems and software. Satellite access products include satellite-based navigation, positioning and communications products and transportation management systems. Satellite services include satellite-based two-way mobile data communications services, satellite-based remote imaging services, our new ORBNAV initiative relating to satellite-based automotive information services and satellite-based voice communications services provided by ORBCOMM and ORBIMAGE and to be provided by ORBNAV and CCI, respectively. We are accounting for our investments in ORBCOMM, ORBIMAGE and CCI using the equity method of accounting. In accordance with the equity method of accounting, we recognize as equity in earnings (losses) of affiliates our proportionate share of ORBCOMM's and ORBIMAGE's profits and losses based on our percentage of common equity ownership or partnership interest. In accordance with a modified equity method of accounting, we currently recognize as equity in earnings (losses) of affiliates 100% of CCI's losses. We also recognize as equity in losses of affiliates our proportionate share of preferred dividends to other investors in such entities. We also recognize 100% of the revenues earned and costs incurred on sales of products and services to ORBCOMM and ORBIMAGE. However, as ORBCOMM and ORBIMAGE are currently capitalizing substantially all system construction costs, including amounts paid to Orbital, we eliminate as equity in earnings (losses) of affiliates our share of our profits from sales to ORBCOMM and ORBIMAGE based on our percentage of common equity ownership or partnership interest. We do not recognize any revenues or related profits on sales of products and services to CCI since we have provided substantially all CCI's funding. Certain of the 1998, 1997, 1996 and 1995 financial information has been restated. See Notes 1A and 12 to the consolidated financial statements. RECENT DEVELOPMENTS In April 1998, we sold 3,450,000 shares of our common stock in a public offering at $45.81 per share, generating net proceeds of approximately $150,000,000. In July 1998, our common stock began trading on the New York Stock Exchange under the ticker symbol "ORB." Our stock had previously traded on the Nasdaq National Market under the symbol "ORBI." In August 1998, we entered into a stock purchase agreement with CCI pursuant to which we agreed, subject to the satisfaction by CCI of certain milestones and conditions, to purchase up to $50,000,000 of CCI's non-voting convertible preferred shares, with an option to purchase an additional $50,000,000 of preferred shares, and to provide vendor financing. In connection with the execution of the stock purchase agreement, we entered into a satellite and launch vehicle procurement contract with CCI valued at approximately $480,000,000 for the satellites (and a price to be determined for the launch vehicles in the event we procure them). As of December 31, 1998, we had purchased $22,000,000 of the preferred shares and had not provided any vendor financing. Should CCI not achieve its financial or operational milestones, some of which entail raising capital, or if an adequate market for its products and services should not develop, we may be required to write off all, or a portion, of this investment. In October 1998, we adopted a stockholder rights plan in which preferred stock purchase rights were granted as a dividend at the rate of one right for each share of common stock to stockholders of record on November 13, 1998. The plan is designed to deter coercive or unfair takeover tactics. The rights become exercisable only if a person or group in the future becomes the beneficial owner of 15% or more of our common stock, or announces a tender or exchange offer that would result in its ownership of 15% or more of our common stock. Each right, when 19 20 exercisable, entitles the holder to purchase one-one thousandth of a share of Series B Junior Participating Preferred Stock. Under certain circumstances, each holder of a right will be able to exercise the right and receive common stock having a value equal to two times the exercise price. The rights are generally redeemable by our Board of Directors at a redemption price of $0.005 per right and expire on October 31, 2008. On December 31, 1998, we acquired the transportation systems business of Raytheon Company for approximately $21,000,000 in cash. We merged the acquired business into our existing transportation management systems business. RESULTS OF OPERATIONS As noted above, certain of the 1998, 1997 and 1996 financial information presented below has been restated. See Note 1A to the consolidated financial statements.
1998 (restated) 1997(restated) 1996 (restated) ------------------ ----------------- ------------------ GROSS GROSS GROSS REVENUES PROFITS REVENUES PROFITS REVENUES PROFITS -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) SPACE AND GROUND INFRASTRUCTURE SYSTEMS................... $613,511 $152,146 $474,452 $114,653 $377,166 $93,899 Launch Vehicles........... 179,591 43,592 120,203 26,516 103,687 18,769 Satellites................ 227,504 48,685 175,450 42,472 101,891 22,625 Electronics and Sensor Systems................. 111,034 35,446 100,554 26,263 92,070 26,608 Satellite Ground Systems and Software............ 95,382 24,423 78,245 19,402 79,518 25,897 SATELLITE ACCESS PRODUCTS.................. 116,392 28,886 71,384 18,205 71,188 25,134 SATELLITE SERVICES.......... 759 2 172 (211) 1,433 (1,827) -------- -------- -------- -------- -------- -------- CONSOLIDATED TOTALS......... $730,662 $181,034 $546,008 $132,647 $449,787 $117,206 ======== ======== ======== ======== ======== ========
REVENUES Our consolidated revenues for the years ended December 31, 1998, 1997 and 1996 were $730,662,000, $546,008,000 and $449,787,000, respectively. Space and Ground Infrastructure Systems. Revenues from our space and ground infrastructure systems sector increased to $613,511,000 in 1998, from $474,452,000 in 1997 and $377,166,000 in 1996. Revenues from our launch vehicles increased to $179,591,000 in 1998, from $120,203,000 in 1997 and $103,687,000 in 1996. The increase in revenues in 1998 and 1997 was attributable to a number of factors, including increased work performed under contracts received for our Taurus launch vehicle, a significant increase in new orders for our Pegasus and suborbital launch vehicles and increased work performed on the X-34 reusable launch vehicle. Revenues from sales of satellites increased to $227,504,000 in 1998, from $175,450,000 in 1997 and $101,891,000 in 1996. Satellite revenues increased from 1997 to 1998 based on work performed on new satellite orders. The increase in 1997 satellite revenues was primarily due to new satellite orders received in the second half of 1996 and in 1997. Revenues in 1998 and 1997 also included approximately $51,471,000 and $54,090,000, respectively, of sales generated by the satellite contracts we acquired from CTA in August 1997. Revenues from electronics and sensor systems increased to $111,034,000 in 1998, from $100,554,000 in 1997 and $92,070,000 in 1996. The increase in 1998 and 1997 revenues was primarily attributable to work performed on new orders for defense electronics products received during 1997 and early 1998. Revenues from satellite ground systems and software products increased to $95,382,000 in 1998, from $78,245,000 in 1997 and $79,518,000 in 1996. The increase in 1998 revenues is primarily due to work performed on 20 21 orders received in 1997 and 1998, including work on a new remote imaging system. The decrease in 1997 revenues from 1996 revenues was primarily due to the sale in late 1996 of a software-related business that had generated 1996 revenues of approximately $15,755,000. Orbital's space and ground infrastructure systems sector revenues included sales to ORBCOMM of approximately $35,479,000, $57,988,000 and $47,215,000 in 1998, 1997 and 1996, respectively, and to ORBIMAGE of approximately $89,006,000 and $29,923,000 in 1998 and 1997, respectively. We expect 1999 sales to our satellite services affiliates to be less than those recorded in 1998 primarily because the basic ORBCOMM satellite construction and launch program is nearing completion. Satellite Access Products. Revenues from sales of consumer, high-precision and automotive satellite-based positioning and navigation products, satellite communications products and transportation management systems increased to $116,392,000 in 1998, from $71,384,000 in 1997 and $71,188,000 in 1996. Revenues in 1998 included approximately $44,636,000 of sales generated by our high-precision navigation products that were acquired as a result of the December 1997 merger of Ashtech with our Magellan subsidiary. Although 1998 revenues from satellite access products were greater than 1997 revenues, revenues were below our expectations due to increased competition in consumer products and slower sales of automotive navigation products. Gross Profit/Costs of Goods Sold Costs of goods sold include the costs of personnel, materials, subcontracts and overhead related to commercial products and under various development and production contracts. Gross profit depends on a number of factors, including our mix of contract types and costs incurred thereon in relation to estimated costs. Our consolidated gross profit for 1998, 1997 and 1996 was $181,034,000 (25% of revenues), $132,647,000 (24% of revenues) and $117,206,000 (26% of revenues), respectively. Space and Ground Infrastructure Systems. Gross profit from our space and ground infrastructure systems sector was $152,146,000 (25% of sector revenues), $114,653,000 (24% of sector revenues) and $93,899,000 (25% of sector revenues) for 1998, 1997 and 1996, respectively. Gross profit margins from our space and ground infrastructure systems sector for 1998 were generally consistent with 1997 margins. Gross profit margins were slightly higher in 1996 due to the inclusion of higher margins from a software-related business that was part of our ground systems business and was sold in late 1996. Gross profit margins in this sector are impacted by management's periodic assessments and reevaluations of programmatic risks included in estimated costs to complete long-term contracts. During the fourth quarter of 1997, the Company recognized approximately $5,000,000 of contract costs related to increases in estimates to complete certain space launch vehicle and satellite contracts. During 1998 and 1997, the Company recognized increases in gross margins of $1,902,000 and $2,647,000, respectively, related to the write-off or expiration of certain Canadian development loans no longer required or not expected to be repaid. Satellite Access Products. Gross profit from our satellite access products sector was $28,886,000 (25% of sector revenues), $18,204,000 (26% of sector revenues) and $25,134,000 (35% of sector revenues) for 1998, 1997 and 1996, respectively. The overall increase in 1998 gross profit margins when compared to 1997 margins is due to the inclusion of higher margin, high-precision positioning and navigation product lines acquired from Ashtech offset, in part, by lower margins achieved on other consumer and automotive navigation product sales. The decrease in gross profit margins from 1996 to 1997 was due to lower unit sales prices for consumer products and certain fourth quarter 1997 reorganizational charges incurred by Magellan. During 1998 and 1997, Magellan recognized approximately $12,500,000 and $500,000, respectively, of charges for inventory obsolescence relating to consumer navigation products. Magellan continues to face increased competition, which places significant pressure on individual product lifetimes and inventory levels. Research and Development Expenses Research and development expenses represent our self-funded product development activities and exclude direct customer-funded development. Research and development expenses during 1998, 1997 and 1996 were $49,384,000 (7% of revenues), $33,140,000 (6% of revenues) and $23,068,000 (5% of revenues), respectively. Research and 21 22 development spending during these periods related primarily to the development of new or improved satellite access products, improved launch vehicles, and new satellite initiatives. Research and development expenses in 1998 also included approximately $5,000,000 of costs related to identifying and resolving certain technical issues arising on ORBCOMM data communications satellites. Selling, General and Administrative Expenses Selling, general and administrative expenses include the costs of marketing, advertising, promotion and other selling expenses, as well as the costs of the finance, legal, administrative and general management functions of Orbital. Selling, general and administrative expenses for 1998, 1997 and 1996 were $106,812,000 (15% of revenues), $88,148,000 (16% of revenues) and $77,247,000 (17% of revenues), respectively. In the fourth quarter of 1997, we recognized increases in allowances for receivables related to a certain satellite construction contract of approximately $3,000,000. While selling, general and administrative expenses as a percentage of revenues was consistent from 1998 to 1997, the total amount of selling, general and administrative costs increased substantially, primarily as a result of growth in our space and ground infrastructure systems sector and the impact of various business and product line acquisitions. The decrease in selling, general and administrative expenses as a percentage of revenues in 1997 from 1996 was primarily attributable to significant growth in space and ground infrastructure systems revenues, along with only modest growth in selling, general and administrative expenses attributable to those product lines. Net Investment Income (Expense) Net investment income (expense) was ($1,279,000), ($990,000) and ($49,000) for 1998, 1997 and 1996, respectively. Investment income reflected interest earnings on short-term investments and realized gains and losses on investments, reduced by interest expense on outstanding debt of $8,886,000, $2,894,000 and $1,412,000 in 1998, 1997 and 1996, respectively. Interest expense was net of capitalized interest of approximately $11,638,000, $7,257,000 and $8,240,000 in 1998, 1997 and 1996, respectively. Equity in Earnings (Losses) of Affiliates and Non-Controlling Interests in (Earnings) Losses of Consolidated Subsidiaries Equity in earnings (losses) of affiliates and non-controlling interests in (earnings) losses of consolidated subsidiaries were ($76,815,000), ($25,094,000) and ($7,008,000) for 1998, 1997 and 1996, respectively. These amounts primarily include our proportionate share of the current period earnings and losses of our noncontrolled and unconsolidated affiliates (ORBCOMM, ORBIMAGE and CCI), preferred dividends and beneficial conversion rights to other investors in such entities (if any) and the elimination of our proportionate share of profits, when appropriate. The increases in 1998 and 1997 were primarily due to increased operational and system depreciation expenses and resulting losses at ORBCOMM. We expect equity in earnings (losses) of affiliates to increase in 1999 primarily due to increased losses at ORBCOMM. Gain on Issuance of Subsidiary Equity We recorded a gain on issuance of subsidiary equity of $ $21,810,000 in 1997 related to the issuance of additional equity by our Magellan subsidiary. Provision for Income Taxes We recorded consolidated income tax provisions of $5,216,000, $12,933,000 and $211,000 for 1998, 1997 and 1996, respectively. Our provisions for these periods were primarily due to foreign taxes attributable to our Canadian operations. The 1997 tax provision includes a deferred tax provision of approximately $10,898,000 relating to the ORBIMAGE preferred stock transaction in 1997. At December 31, 1998, we had U.S. federal net operating loss carryforwards (portions of which expire beginning in 2004) of approximately $278,000,000, U.S. research and experimental income tax credit carryforwards of approximately $3,148,000, and foreign investment income tax credit carryforwards (subject to expiration in 2008) of approximately $5,000,000. Such net operating loss carryforwards and tax credits are subject to certain limitations 22 23 and other restrictions. At December 31, 1998 and 1997, we provided a valuation allowance of $94,751,000 and $66,889,000, respectively, against certain of our consolidated deferred tax assets. Net Income (Loss) Our consolidated net income (loss) for the years ended December 31, 1998, 1997 and 1996 was ($56,552,000), ($11,405,000) and $9,942,000, respectively. During 1998, our satellite access products sector continued to face increased competition in consumer products and slower sales of automotive navigation products, placing pressure on revenues and margins. Magellan has introduced new products and is implementing cost savings measures intended to moderate the unfavorable trends experienced in 1998 in this sector. In addition, this sector incurred significant costs in 1998 associated with the integration and restructuring of Ashtech and Magellan and research and development with respect to new products and enhancements of existing products. Net income for 1997 included a $21,810,000 gain on the issuance of Magellan stock. LIQUIDITY AND CAPITAL RESOURCES Our growth has required substantial capital to fund expanding working capital needs, investments in affiliates, certain business acquisitions, new business initiatives, research and development and capital expenditures. We have funded these requirements to date, and expect to fund our future requirements, through cash generated by operations, working capital, loan facilities, asset-based financings, joint venture arrangements and private and public equity and debt offerings. We expect to continue to pursue potential acquisitions, new business opportunities and equity investments that we believe would enhance our businesses and to fund such transactions through existing cash, loan facilities, joint ventures, the issuance of equity and/ or debt securities, asset-based financings, and cash generated by operations. At December 31, 1998, cash and investments were $23,190,000, and we had total debt obligations outstanding of approximately $208,095,000. The outstanding debt is comprised of our $100,000,000 5% convertible subordinated notes, advances under our line of credit facilities, secured and unsecured notes, and asset-based financings. Cash and investments at December 31, 1998 included approximately $7,922,000 of cash and short-term investments restricted against outstanding letters of credit. Our current ratio was 1.2 at December 31, 1998 and 1997. In 1998, we amended and restated our primary credit facility to increase the maximum amount available under a revolving line of credit from $100,000,000 to $200,000,000 and to modify certain financial covenants. At December 31, 1998, $36,000,000 was outstanding on the facility. During the first quarter of 1999, the facility was amended to modify a financial covenant to provide full availability under the facility. The interest rate charged under the facility is a variable rate based on the prime rate or LIBOR. The weighted average interest rate on borrowings outstanding under this facility at December 31, 1998 was 7.5%. The facility is secured by accounts receivable, prohibits the payment of cash dividends, contains certain covenants with respect to our working capital levels, fixed charges ratio, leverage ratio and net worth, and expires in December 2002. During 1998, we provided $34,500,000 in capital to ORBCOMM. We currently estimate that our share of additional funding for ORBCOMM's 1999 capital needs could exceed $30,000,000, of which $18,450,000 has been contributed so far in 1999. We expect to fund our share of ORBCOMM's capital needs through existing resources, including our primary credit facility. In addition, during 1998, Orbital deferred invoicing ORBCOMM for approximately $35,144,000 of work performed under our ORBCOMM satellite and launch procurement agreement. During 1999, we may defer up to $25,000,000 of invoicing for work done under our ORBCOMM procurement agreement. One-half of the deferred invoice amounts has been, and is expected to continue to be, advanced to Orbital by an affiliate of Teleglobe Inc. 23 24 Our operations provided net cash of approximately $48,205,000 during 1998. Also during 1998, in addition to our investment in ORBCOMM, we invested approximately (i) $22,000,000 in CCI, (ii) $48,263,000 in capital expenditures for various satellite and launch vehicle production, manufacturing and test equipment and office equipment, and (iii) $22,751,000 in business acquisitions. In the event CCI meets various operational and financial milestones, we may invest an additional $28,000,000 in CCI over the next two years. We are expanding our offices and satellite-related engineering, manufacturing and operations facilities adjacent to our Dulles, Virginia headquarters. Construction is scheduled to commence in the first half of 1999 and we expect completion in 2001. To finance the majority of this expansion, Orbital is pursuing various financing alternatives, including third-party debt financings and a "build-to-suit" agreement. On March 18, 1999, MDA and Toronto-based Spar Aerospace Limited signed an asset purchase agreement pursuant to which MDA will acquire Spar's robotics division for approximately $43,000,000 in cash. The transaction is expected to close during the second quarter of 1999. Approximately one-half of the purchase price will be paid at closing and the balance is payable one year from closing. We expect to fund the first installment of the purchase price through an existing credit facility, and have received a commitment from a lender to finance the second installment due in 2000. In late 1998, we agreed to enter into an exclusive $50,000,000 joint venture with Hertz whereby Hertz will offer Magellan's automotive navigation systems in its rental cars in the U.S., Canada and Europe. The agreement, which is subject to negotiation of the joint venture documents, contemplates that we will receive a 60% interest in the venture in exchange for a $30,000,000 investment to be made during 1999 and 2000. We expect that our capital needs for 1999 will be provided by working capital, cash flows from operations, existing or new credit facilities, and operating lease arrangements. To support further business expansion, we may also consider equity and debt financings. NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 becomes effective June 15, 1999 and will require the company to disclose additional information on its hedging activities. Also in 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). Initial application by the company of SOP 98-5 was as of January 1, 1998. This SOP requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 also amended certain sections of Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1"), which addresses revenue recognition on long-term contracts using the percentage-of-completion method of accounting. The impact of adopting SOP 98-5 in 1998 was not significant. YEAR 2000 ISSUES We have developed a plan to prepare for potential "Year 2000" issues with respect to various operational, technical and financial computer-related systems. The plan has been designed to minimize risk to Orbital and its customers using a standard industry five-phase approach. The five phases are awareness, assessment, renovation, validation and implementation. We have substantially completed the awareness and assessment phases, including preparation of a comprehensive inventory of potentially affected systems. In many cases renovation work is well underway and validation testing has begun with respect to certain critical systems. We currently plan to achieve our overall goal of Year 2000 readiness in mid-1999. The first half of 1999 will be devoted to renovating, validating and implementing our corrective action plan by reprogramming affected software when appropriate and feasible, obtaining vendor-provided software upgrades when available and completely replacing affected systems when necessary. 24 25 The total costs to implement the plan, which costs include the already planned replacement of existing systems to support our overall growth, are estimated to be well less than one percent of 1998 revenues. Approximately 70% of the estimated costs to implement the plan have been incurred to date and the remaining costs are expected to be incurred in the remainder of 1999. All costs, including the cost of internal personnel, outside consultants, system replacements and other equipment, will be expensed as incurred, except for long-lived assets, which will be capitalized in accordance with our capitalization policies. We have not postponed the implementation or upgrade of other systems as a result of focusing on the Year 2000 plan. As part of the plan, formal communication with our suppliers, customers and other service providers has been initiated. To date, however, we have not determined whether "Year 2000" issues affecting key suppliers, significant customers (including the U.S. government), or critical service providers will materially impact our cash flows or operating results. A "reasonably likely worst case" scenario of the Year 2000 issue for Orbital could include: isolated performance problems with engineering, financial and administrative systems; isolated interruption of deliveries from critical suppliers; product liability or warranty issues; and the temporary inability of key customers to pay amounts due to Orbital. Contingency plans are being prepared, and will be implemented if necessary, including having sufficient liquidity available to sustain a temporary interruption of cash receipts during early 2000 and the identification of alternative suppliers for critical components. There can be no assurance that we have identified, or will identify, all "Year 2000" affected systems, suppliers, customers and service providers, or that our corrective action plan will be timely and successful. OUTLOOK: ISSUES AND UNCERTAINTIES The Private Securities Litigation Reform Act of 1995 provides a safe harbor, in certain circumstances, for forward-looking statements made by or on behalf of Orbital. Orbital and its representatives may from time to time make written or verbal forward-looking statements, including statements contained in our filings with the SEC and in the report to stockholders. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to our sales and earnings growth, statements expressing general optimism about future operating results, statements relating to our belief about the outcome of pending litigation, and statements relating to our achievement of Year 2000 readiness are forward-looking statements within the meaning of the Act. The forward-looking statements are and will be based on management's then-current views and assumptions regarding future events and operating performance. The following are some of the factors that could cause actual results to differ materially from information contained in our forward-looking statements: Most of the products we and our affiliates develop and manufacture are technologically advanced and sometimes novel systems that must function under demanding operating conditions and are subject to significant technological change and innovation. We have occasionally experienced product failures or other operational problems. In addition to any costs resulting from product warranties or required remedial action, product failures may result in increased costs or loss of revenues due to postponement or cancellation of subsequently scheduled operations or product deliveries. Our financial performance generally, as well as the recoverability of our investments in ORBCOMM, ORBIMAGE and CCI and any other company in which we make a strategic investment, and investments that we make in the development of new technologies for new products or existing product enhancements, depend on several factors including, among other things, the successful and timely funding and implementation of innovative and novel technologies involving complex systems in a cost-effective manner, the establishment and expansion of commercial markets and customer acceptance, competition and such entities' ability to raise necessary capital. If we conclude at any time that our investments are not recoverable, we may be required to write off part or all of such investments. Historically, we have made strategic acquisitions of businesses, and we routinely evaluate potential acquisition candidates that we believe would enhance our business. We have also historically pursued strategic alliances through joint ventures, and we routinely evaluate similar opportunities. Such transactions commonly involve certain risks including, among others, assimilating the acquired operations, technologies and personnel and maintaining 25 26 appropriate standards, controls, procedures and policies, entering markets in which we have little or no direct prior experience, potentially losing key employees of acquired organizations, the diversion of management attention from other ongoing business concerns and resolving potential disputes with joint venture partners. At December 31, 1998, approximately 41% of our total firm contract backlog was derived from contracts with the U.S. government and its agencies or from subcontracts with prime contractors to the U.S. government. Most of our government contracts are funded incrementally on a year-to-year basis. Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies could materially adversely affect our financial condition or results of operations. Furthermore, contracts with the U.S. government may be terminated or suspended by the U.S. government at any time, with or without cause. Such contract suspensions or terminations could result in unreimbursable expenses or charges or otherwise adversely affect our business. The accuracy and appropriateness of our direct and indirect costs and expenses under our contracts with the U.S. government are subject to extensive regulation and audit by the Defense Contract Audit Agency or by other appropriate agencies of the U.S. government. These agencies have the right to challenge our cost estimates or allocations with respect to any such contract. A substantial portion of payments to us under U.S. government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies. The majority of our contracts, particularly for our space and ground infrastructure systems, are long-term contracts. We recognize revenues on long-term contracts using the percentage of completion method of accounting, whereby revenue, and therefore profit, is recognized based on actual costs incurred in relation to total estimated costs to complete the contract or based on specific delivery terms and conditions. Revenue recognition and profitability, if any, from a particular contract may be adversely affected to the extent that original cost estimates, estimated costs to complete or incentive or award fee estimates are revised, delivery schedules are delayed, or progress under a contract is otherwise impeded. The costs and other effects of pending or possible litigation or governmental investigations could have an adverse effect on our business and could divert the attention of management from ongoing business matters. Virtually all our products and services face significant competition from existing competitors, many of whom are larger and have substantially greater resources than we do. Furthermore, the possibility exists that other domestic or foreign companies or governments will seek to produce products or services that compete with our products or services. A foreign competitor could benefit from subsidies from, or other protective measures by, its home country. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any material exposure to interest rate changes, commodity price changes, foreign currency fluctuations, or similar market risks, although it does enter into forward exchange contracts to hedge against specific foreign currency fluctuations, principally with respect to the Canadian dollar. 26 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS PAGE Independent Auditors' Report.................................. 28 Consolidated Statements of Operations......................... 29 Consolidated Balance Sheets................................... 30 Consolidated Statements of Stockholders' Equity............... 31 Consolidated Statements of Cash Flows......................... 32 Notes to Consolidated Financial Statements.................... 33 27 28 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Orbital Sciences Corporation: We have audited the accompanying consolidated balance sheets of Orbital Sciences Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orbital Sciences Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in note 1A, the accompanying consolidated balance sheets as of December 31, 1998 and 1997, and the consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998 have been restated. KPMG LLP Washington, D.C. February 16, 1999, except as to note 13, which is as of March 18, 1999, and note 1A, which is as of April 17, 2000 28 29 ORBITAL SCIENCES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996 ---- ---- ---- (RESTATED) (RESTATED) (RESTATED) REVENUES $ 730,662 $ 546,008 $ 449,787 COSTS OF GOODS SOLD 549,628 413,361 332,581 ----------- ------------ ----------- GROSS PROFIT 181,034 132,647 117,206 RESEARCH AND DEVELOPMENT EXPENSES 49,384 33,140 23,068 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 106,812 88,148 77,247 AMORTIZATION OF GOODWILL 9,713 3,852 3,134 ASSET IMPAIRMENT CHARGES 2,479 -- -- ----------- ------------ ----------- INCOME FROM OPERATIONS 12,646 7,507 13,757 NET INVESTMENT INCOME (EXPENSE), (NET OF INTEREST EXPENSE OF $8,886, $2,894 AND $1,412, RESPECTIVELY) (1,279) (990) (49) EQUITY IN EARNINGS (LOSSES) OF AFFILIATES (76,815) (25,094) (7,008) NON-CONTROLLING INTERESTS IN (EARNINGS) LOSSES OF CONSOLIDATED SUBSIDIARIES 14,112 2,638 1,473 GAIN ON ISSUANCE OF SUBSIDIARY EQUITY -- 21,810 -- ACQUISITION EXPENSES -- (4,343) -- ----------- ------------ ----------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (51,336) 1,528 8,173 PROVISION FOR INCOME TAXES 5,216 12,933 211 ----------- ------------ ----------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (56,552) (11,405) 7,962 EXTRAORDINARY ITEM - GAIN ON SALE OF ASSETS, NET OF TAX -- -- 1,980 ----------- ------------ ----------- NET INCOME (LOSS) $ (56,552) $ (11,405) $ 9,942 =========== ============ =========== NET INCOME (LOSS) PER COMMON SHARE: BEFORE EXTRAORDINARY ITEM $ (1.59) $ (0.35) $ 0.27 EXTRAORDINARY ITEM - GAIN ON SALE OF ASSETS, NET OF TAX -- -- 0.07 ----------- ------------ ----------- $ (1.59) $ (0.35) $ 0.34 =========== ============ =========== SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE 35,624,888 32,283,138 29,137,361 =========== ============ =========== NET INCOME (LOSS) PER COMMON SHARE, ASSUMING DILUTION: BEFORE EXTRAORDINARY ITEM $ (1.59) $ (0.35) $ 0.30 EXTRAORDINARY ITEM - GAIN ON SALE OF ASSETS, NET OF TAX -- -- 0.04 ----------- ------------ ----------- $ (1.59) $ (0.35) $ 0.34 =========== ============ =========== SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON SHARE, ASSUMING DILUTION 35,624,888 32,283,138 31,616,119 =========== ============ ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 30 ORBITAL SCIENCES CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS ------ DECEMBER 31, DECEMBER 31, 1998 1997 (RESTATED) (RESTATED) ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 15,268 $ 6,391 Short-term investments, at market 7,922 8,735 Receivables, net 215,110 206,417 Inventories, net 58,141 59,239 Deferred income taxes and other current assets 7,686 5,889 --------- --------- TOTAL CURRENT ASSETS 304,127 286,671 PROPERTY, PLANT AND EQUIPMENT, AT COST, LESS ACCUMULATED depreciation and amortization of $99,839 and $79,253, respectively 139,401 125,327 INVESTMENTS IN AND ADVANCES TO AFFILIATES, NET 199,267 130,402 GOODWILL, less accumulated amortization of $28,744 and $19,794, respectively 227,351 207,523 DEFERRED INCOME TAXES AND OTHER ASSETS 25,046 27,962 --------- --------- TOTAL ASSETS $ 895,192 $ 777,885 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Short-term borrowings and current portion of long-term obligations $ 26,814 $ 29,767 Accounts payable 39,095 36,218 Accrued expenses 108,488 98,018 Deferred revenues 76,678 69,467 --------- --------- TOTAL CURRENT LIABILITIES 251,075 233,470 DUE TO JOINT VENTURE PARTNER 26,829 -- LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION 181,281 200,194 OTHER LIABILITIES 3,007 2,443 --------- --------- TOTAL LIABILITIES 462,192 436,107 NON-CONTROLLING INTERESTS IN NET ASSETS OF CONSOLIDATED SUBSIDIARIES 13,648 27,794 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock, par value $.01; 10,000,000 shares authorized: none outstanding -- -- Common Stock, par value $.01, 80,000,000 shares authorized, 37,018,256 and 32,481,719 shares outstanding, respectively after deducting 20,877 shares held in treasury 370 325 Additional paid-in capital 490,540 326,187 Accumulated other comprehensive loss (7,149) (4,671) Accumulated deficit (64,409) (7,857) --------- --------- TOTAL STOCKHOLDERS' EQUITY 419,352 313,984 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 895,192 $ 777,885 ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 31 ORBITAL SCIENCES CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED OTHER RETAINED COMMON STOCK ADDITIONAL COMPREHENSIVE EARNINGS SHARES AMOUNT PAID-IN-CAPITAL INCOME (DEFICIT) TOTAL ------ ------ --------------- ------ --------- ----- BALANCE, DECEMBER 31, 1995 (RESTATED) 26,766,029 $ 268 $ 247,580 $ (3,288) $ (6,394) $ 238,166 Conversion of convertible debentures 3,895,653 39 53,598 - - 53,637 Shares issued in private offering 1,200,000 12 20,251 - - 20,263 Shares issued to employees and directors 298,916 3 2,163 - - 2,166 Comprehensive income (loss): Net income (loss) - - - - 9,942 9,942 Translation adjustment - - - (325) - (325) Unrealized losses on short-term investments - - - (54) - (54) ---------- Total comprehensive income 9,563 ---------- ----- --------- -------- -------- --------- BALANCE, DECEMBER 31, 1996 (RESTATED) 32,160,598 322 323,592 (3,667) 3,548 323,795 Shares issued to employees and directors 321,121 3 2,595 - - 2,598 Comprehensive income: Net income (loss) - - - - (11,405) (11,405) Translation adjustment - - - (1,262) - (1,262) Unrealized gains on short-term investments - - - 258 - 258 --------- Total comprehensive income (loss) (12,409) ---------- ----- --------- -------- -------- --------- BALANCE, DECEMBER 31, 1997 (RESTATED) 32,481,719 325 326,187 (4,671) (7,857) 313,984 Shares issued in equity offering 3,450,000 34 150,118 - - 150,152 Shares issued to employees and directors 1,086,537 11 14,235 - - 14,246 Comprehensive income: Net income (loss) - - - - (56,552) (56,552) Translation adjustment - - - (2,282) - (2,282) Unrealized losses on short-term investments - - - (196) - (196) --------- Total comprehensive income (loss) (59,030) ---------- ----- --------- -------- -------- --------- BALANCE, DECEMBER 31, 1998 (RESTATED) 37,018,256 $ 370 $ 490,540 $ (7,149) $(64,409) $ 419,352 ========== ===== ========= ======== ======== =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 32 ORBITAL SCIENCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: (RESTATED) (RESTATED) (RESTATED) NET INCOME (LOSS) $ (56,552) $(11,405) 9,942 ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Depreciation and amortization expense 31,272 24,553 25,096 Equity in losses of affiliates 76,815 25,094 7,008 Non-controlling interests in losses of consolidated subsidiaries (14,112) (2,638) (1,473) (Gain) loss on issuance of subsidiary stock and sale of fixed assets and investments (576) (21,810) 226 Deferred income taxes 3,822 11,650 -- CHANGES IN ASSETS AND LIABILITIES: (Increase) decrease in receivables, net (27,015) (16,863) (27,712) (Increase) decrease in inventories, net 3,362 (26,602) 10,261 (Increase) decrease in other assets (9,002) (7,903) 2,085 Decrease in accounts payable and accrued expenses 8,946 (17,144) (9,318) Increase (decrease) in deferred revenue (15,347) 35,338 1,360 Increase (decrease) in other liabilities (1,305) (13,151) (2,954) ------------- ------------- ------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 308 (20,881) 14,521 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (36,294) (37,200) (39,844) Proceeds from sales of fixed assets -- 34,682 9,518 Payments for business combinations, net of cash acquired (22,751) (66,558) -- Purchases of available-for-sale investment securities (2,500) (25,328) (5,623) Sales of available-for-sale investment securities -- 22,209 11,041 Maturities of available-for-sale investment securities 2,409 6,631 8,220 Investments in and advances to affiliates (101,700) (75,564) (23,458) ------------- ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (160,836) (141,128) (40,146) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings, net of (repayments) 1,940 (3,700) 26,200 Principal payments on long-term obligations (79,556) (20,237) (7,502) Net proceeds from issuance of long-term obligations 63,000 163,078 -- Fees associated with conversion of debentures -- -- (2,571) Net proceeds from issuances of common stock 164,398 2,598 22,429 Advances from joint venture partner 21,829 -- -- ------------- ------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 171,611 141,739 38,556 ------------- ------------- ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (2,206) (1,262) (325) ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,877 (21,532) 12,606 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,391 27,923 15,317 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,268 $ 6,391 $ 27,923 ============= ============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 33 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Orbital Sciences Corporation (together with its subsidiaries, "Orbital" or the "company"), a Delaware corporation, is a leading space and information systems company that designs, manufactures, operates and markets a broad range of space-related products and services that are grouped into three sectors: space and ground infrastructure systems, satellite access products and satellite services. Space and ground infrastructure systems include launch vehicles, satellites and related space systems, electronics and sensor systems, and satellite ground systems and software. Satellite access products include satellite-based navigation, positioning and communications products and transportation management systems. Satellite services include satellite-based two-way mobile data communications, satellite-based remote imaging and satellite-based voice communications services. Disaggregated financial information is presented in note 2. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Orbital, all wholly and partially owned subsidiaries controlled by Orbital, and partnerships in which Orbital directly or indirectly controls the general partner interests. The consolidated financial statements do not include the accounts of affiliates that the company does not control, including ORBCOMM, ORBIMAGE and CCI. All material transactions and accounts among consolidated entities have been eliminated in consolidation. PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS The preparation of consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management periodically assesses and evaluates the sufficiency and/or deficiency of estimated liabilities recorded for various programmatic risks and uncertainties. Actual results could differ from these estimates. Certain reclassifications have been made to the 1997 and 1996 financial statements to conform to the 1998 financial statement presentation. All financial amounts are stated in U.S. dollars unless otherwise indicated. REVENUE RECOGNITION Orbital recognizes revenues on long-term contracts using the percentage-of-completion method of accounting. Accordingly, (i) revenues on cost-plus-fee contracts are recognized to the extent of costs incurred plus a proportionate amount of fee earned, and (ii) revenues on fixed-price contracts are recognized based on costs incurred in relation to total estimated costs, or based on specific delivery terms and conditions. To the extent that estimated costs of completion are adjusted, revenue and profit recognized from a particular contract will be affected in the period of the adjustment. Anticipated contract losses are recognized as they become known. Fees under certain long-term contracts may be increased or decreased in accordance with cost or performance incentive provisions that measure actual performance against actual targets or other criteria. Such incentive fee awards or penalties are included in revenues at the time the amounts can be determined reasonably. Revenues from sales of satellite access products and satellite services are generally recognized when the product is shipped or the service is performed. 33 34 COMPREHENSIVE INCOME (LOSS) The company's comprehensive income (loss) is presented in the consolidated statements of stockholders' equity. Other comprehensive income (loss) consists primarily of foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. FOREIGN CURRENCY Orbital's operating entities conduct business in a number of countries and deal in a number of foreign currencies. The financial results of foreign operations are translated into U.S. dollars using year-end exchange rates for assets and liabilities and using weighted average exchange rates for revenues, expenses, gains and losses. Translation gains and losses relating to foreign operations that are self-contained and integrated within a particular country or economic environment, and therefore are not dependent on the U.S. dollar, are recognized as a separate component of stockholders' equity until there is a realized reduction in Orbital's net investment in the foreign operation. Translation losses in 1998, 1997 and 1996 were approximately $2,282,000, $1,262,000 and $325,000, respectively. Transaction gains and losses relating to foreign operations that are a direct and integral component or extension of Orbital's domestic operations, and therefore are dependent on the U.S. dollar, are reported currently as a component of net income. Orbital enters into forward exchange contracts to hedge against foreign currency fluctuations on certain receivables and payables. Gains and losses on contracts to hedge specific foreign currency commitments are deferred and accounted for as part of the underlying transaction. RESEARCH AND DEVELOPMENT Research and development expenses include self-funded product development activities and exclude direct customer-funded development and are expensed as incurred. Research and development expenses are allocated, when appropriate, to U.S. government contracts under government-mandated cost accounting standards. DEPRECIATION, AMORTIZATION AND RECOVERABILITY OF LONG-LIVED ASSETS Depreciation and amortization are provided using the straight-line method as follows: Buildings......................... 18 to 20 years Machinery, equipment, software and intellectual property....... 3 to 10 years Satellite systems................. 5 to 7 years Shorter of estimated useful life or lease Leasehold improvements............ term Orbital's policy is to review its long-lived assets, including excess of purchase price over net assets acquired, investments in and advances to affiliates, and specialized equipment used to support specific space-related products, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The company recognizes an impairment loss when the sum of expected future cash flows is less than the carrying amount of the asset. Given the inherent technical and commercial risks within the space industry, it is possible that the company's current expectation that it will recover the carrying amount of its long-lived assets from future operations may change. INCOME TAXES The company recognizes income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which 34 35 those temporary differences are expected to be recovered or settled. The effect of a tax rate change on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. STOCK-BASED COMPENSATION On January 1, 1996, the company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which requires companies to (i) recognize as expense the fair value of all stock-based awards on the date of grant, or (ii) continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issues to Employees" ("APB 25") and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS 123 had been applied. The company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure in accordance with the provisions of SFAS 123. EARNINGS PER SHARE The company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), in the fourth quarter of 1997. SFAS 128 requires companies to present basic earnings per share and diluted earnings per share, instead of the primary and fully diluted earnings per share that had previously been required. Net income (loss) per common share is calculated using the weighted average number of common shares outstanding during the periods. Net income (loss) per common share assuming dilution is calculated using the weighted average number of common shares and dilutive common equivalent shares outstanding during the periods, plus the effects of an assumed conversion of the company's convertible notes, after giving effect to all net income adjustments that would result from the assumed conversion. CASH AND INVESTMENTS Orbital considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Investments in securities that do not meet the definition of cash equivalents are classified as short-term investments. Since Orbital does not intend to hold its investments in debt and equity securities until maturity and does not actively trade the securities to maximize trading gains, Orbital classifies these securities as "available-for-sale" and, accordingly, reports such securities at fair value plus accrued interest. Any temporary excess (deficiency) of market value over (under) the underlying cost of the short-term investment is excluded from current period earnings and is reported as unrealized gains (losses) as a separate component of stockholders' equity. In addition, at December 31, 1998 and 1997, the company had approximately $7,757,000 and $6,162,000, respectively, of cash and short-term investments restricted to support outstanding letters of credit. INVENTORIES Inventories consist of components and raw materials inventory, work-in-process inventory and finished goods inventory and are generally stated at the lower of cost or net realizable value on a first-in, first-out ("FIFO") or specific identification basis. Components and raw materials are purchased to support future production efforts. Work-in-process inventory consists primarily of (i) costs incurred under long-term fixed-price contracts accounted for using the percentage-of-completion method of accounting applied on a units of delivery basis, and (ii) partially assembled commercial products, and generally includes direct production costs and certain allocated indirect costs (including an allocation of general and administrative costs). Finished goods inventory consists of fully assembled commercial products awaiting shipment. SELF-CONSTRUCTED ASSETS AND INTERNALLY DEVELOPED SOFTWARE The company self-constructs much of its ground and airborne support and special test equipment used in the manufacture, production and delivery of many of its space infrastructure products. Orbital capitalizes certain costs incurred in constructing ground and airborne support and special test equipment 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. 35 36 Orbital, pursuant to the requirements of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 86, "Software Development Costs" ("SFAS 86"), 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 AND ADVANCES TO AFFILIATES The company uses the equity method of accounting for its investments in and advances to affiliates in which the company has the ability to significantly influence, but not control, the affiliates' operations. In accordance with the equity method of accounting, the company's carrying amount of an investment in an affiliate is initially recorded at cost and is increased to reflect its proportionate share of the affiliate's income and is reduced to reflect its proportionate share of the affiliate's losses based on the company's common stock or partnership interest, including all preferred dividends to other investors in such entities. For those investments for which Orbital has provided substantially all of the investee's funding, the company uses a modified equity method of accounting whereby 100% of the investee's current period losses are recognized. Further, Orbital does not recognize revenues on sales to investees for which Orbital has provided substantially all such investees' funding. 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 an affiliate has significant assets under construction and has not yet commenced principal operations. During 1998, 1997, and 1996, the company capitalized interest on investments in and advances to affiliates of $9,555,000, $6,828,000, and $6,890,000, respectively. The company uses the cost method of accounting for investments in which it has no significant influence. GOODWILL 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 At times, the company may divest a portion or all of its ownership in its subsidiaries through the issuance of additional subsidiary equity. The company recognizes the difference between the carrying amount of its interest in the subsidiary equity sold and the fair market value of the equity as a gain or loss upon divestiture or issuance when the company believes the realization of the gain or loss is assured. The company recognized a gain on issuance of subsidiary equity of $21,810,000 in 1997 related to the issuance of additional equity by the company's majority owned subsidiary, Magellan Corporation ("Magellan"). WARRANTIES The company occasionally accepts warranty clauses in its commercial and government contracts. In the event the company does not purchase insurance coverage to protect itself in connection with such warranty clauses, the company records a liability for warranty claims when it determines that a specific material liability exists. The company at times provides limited warranties on certain commercial products and accrues an estimate of expected warranty costs based on historical experience. NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 becomes effective June 15, 1999 and will require the company to disclose additional information on its hedging activities. 36 37 Also in 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). Initial application by the company of SOP 98-5 was as of January 1, 1998. This SOP requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 also amended certain sections of Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1"), which addresses revenue recognition on long-term contracts using the percentage-of-completion method of accounting. The impact of adopting SOP 98-5 in 1998 was not significant. 1A RESTATEMENT MATTERS Management has determined to restate its previously issued consolidated financial statements as of and for the years ended December 31, 1998, 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 items for 1998 and 1997. See subparagraphs (d), (f) and (g) for a discussion of 1996 and 1995 restatement impacts. The 1996 restatement impact reduced reported net income by $5,965,000. The impact of these and other matters on the unaudited interim financial results for 1998 and 1997 are summarized in Note 12. 37 38 ORBITAL SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Consolidated Statements of Operations (In thousands, except per share data) For the Year Ended December 31, ------------------------------------------------------------ 1998 ------------------------------------------------------------ As Previously Reported Adjustments Restated REVENUES $734,277 $ (3,615) (c)(g) $730,662 COSTS OF GOODS SOLD 546,721 2,907 (c)(g)(h)(j) 549,628 RESEARCH AND DEVELOPMENT EXPENSES 44,597 4,787 (g) 49,384 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 109,727 (2,915) (g)(h) 106,812 GOODWILL AMORTIZATION 7,939 1,774 (i) 9,713 ASSET IMPAIRMENT CHARGES -- 2,479 (k) 2,479 NET INVESTMENT INCOME (EXPENSE) 2,567 (3,846) (d)(k) (1,279) EQUITY IN EARNINGS (LOSSES) OF AFFILIATES (45,092) (31,723) (a)(c)(e)(f)(g) (76,815) NON-CONTROLLING INTERESTS IN (EARNINGS) LOSSES OF CONSOLIDATED SUBSIDIARIES 10,610 3,502 (h)(i) 14,112 GAIN ON ISSUANCE OF SUBSIDIARY EQUITY 4,793 (4,793) (b) -- PROVISION FOR INCOME TAXES 4,543 673 (j) 5,216 NET LOSS (6,372) (56,552) NET LOSS PER COMMON SHARE, BASIC AND ASSUMING DILUTION (0.18) (1.59) For the Year Ended December 31, ---------------------------------------------------------- 1997 ---------------------------------------------------------- As Previously Reported Adjustments Restated REVENUES $605,975 $(59,967) (c)(g) $546,008 COSTS OF GOODS SOLD 456,772 (43,411) (c)(g) 413,361 RESEARCH AND DEVELOPMENT EXPENSES 26,355 6,785 (g) 33,140 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 89,502 (1,354) (c) 88,148 GOODWILL AMORTIZATION 3,852 3,852 NET INVESTMENT INCOME (EXPENSE) 1,475 (2,465) (d) (990) EQUITY IN EARNINGS (LOSSES) OF AFFILIATES (26,034) (940) (a)(c)(e)(f) (25,094) NON-CONTROLLING INTERESTS IN (EARNINGS) LOSSES OF CONSOLIDATED 2,638 2,638 SUBSIDIARIES GAIN ON ISSUANCE OF SUBSIDIARY EQUITY 21,810 21,810 ACQUISITION EXPENSES (4,343) -- (4,343) PROVISION FOR INCOME TAXES 2,035 10,898 (c) 12,933 NET INCOME (LOSS) 23,005 (11,405) NET INCOME (LOSS) PER COMMON SHARE, BASIC AND ASSUMING DILUTION 0.71 (0.35)
CONSOLIDATED BALANCE SHEETS (In thousands) December 31, 1998 December 31, 1998 As previously reported Adjustments As restated ---------------------- ------------- ----------------- Receivables, net $205,409 $ 9,701 (c) $215,110 Inventories, net 64,710 (6,569)(h) 58,141 Deferred income taxes and other current assets 8,252 (566)(j) 7,686 Property, plant and equipment 157,075 (17,674)(d)(g) 139,401 Investments in and advances to affiliates 237,589 (38,322)(a)(b)(c)(d)(e)(f)(k) 199,267 Goodwill 228,624 (1,273)(i) 227,351 Deferred taxes and other assets 35,393 (10,347)(c)(j) 25,046 Deferred revenues 73,987 2,691 (c)(f) 76,678 Due to joint venture partner -- 26,829 (k) 26,829 Non-controlling interests in consolidated subsidiaries 17,150 (3,502)(h)(i) 13,648 Accumulated (earnings) deficit 26,888 (91,297) (64,409) December 31, 1997 December 31, 1997 As previously reported Adjustments As restated ---------------------- ------------- ----------------- Receivables, net $180,204 $ 26,213 (c) $206,417 Inventories, net 59,239 -- (h) 59,239 Property, plant and equipment 137,498 (12,171)(d)(g) 125,327 Investments in and advances to affiliates 159,230 (28,828)(a)(c)(d)(e)(f) 130,402 Accrued Expenses 98,588 (570)(c) 98,018 Deferred revenues 46,138 23,329 (f) 69,467 Accumulated (earnings) deficit 33,260 (41,117) (7,857)
38 39 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, ORBCOMM and CCI. (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 1998 and 1997 by $8,519,000 and $698,000, respectively. In the first quarter of 1998, pursuant to rights granted under a 1997 stock purchase agreement, ORBIMAGE's minority investors acquired 227,295 shares of ORBIMAGE's convertible preferred stock for total consideration of $22,729,500. ORBIMAGE's convertible preferred stock is convertible into ORBIMAGE's common stock based on a per common share price that was less than the fair value of ORBIMAGE's common stock when the additional preferred shares were acquired in 1998. Previously, the company's financial statements did not give effect to any beneficial conversion discount as an additional net loss allocable to the company pursuant to the equity method of accounting. As reflected in the restated consolidated financial statements presented herein, Orbital calculates its equity in losses of affiliates including the impact of the beneficial conversion. The effect of these revisions is to increase equity in losses of affiliates in 1998 by $13,695,000. 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 fair value. The effect of these revisions is to increase equity in losses of affiliates in 1998 and 1997 by $7,324,000 and $2,808,000, respectively. (b) Previously, the company's consolidated financial statements reflected recognition of a gain in the second quarter of 1998 arising from ORBIMAGE's issuance of warrants to purchase common stock. As reflected in the restated consolidated financial statements presented herein, since the warrants have not been exercised, the company has revised its accounting for this equity issuance, resulting in the elimination of its previously reported gain on issuance of affiliate equity by $4,793,000 in 1998. (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 and sales under a procurement agreement with CCI in 1998. 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 CCI of $6,556,000 in 1998, and to ORBIMAGE of $58,539,000 in 1997. Operating income was also reduced in 1998 and 1997 by $596,000 and 14,469,000, respectively. The net impact of the adjustments on equity in losses of affiliates was $238,000 in 1998 and $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. (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, ORBCOMM and CCI. 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 investments in ORBCOMM and CCI. These revisions include the compounding impact of interest, and the reduction of eligible investment amounts for losses 39 40 recognized for equity method investors. These revisions had the effect of increasing (decreasing) interest expense in 1998, 1997 and 1996 by $6,204,000, $2,465,000, and $ (952,000), respectively. (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 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 $355,000 and $237,000 in 1998 and 1997, respectively. (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. This revision had the effect of increasing the company's equity in losses of affiliates by approximately $1,298,000, $439,000 and $439,000 in 1998, 1997 and 1996, respectively. Asset Restatement Adjustments (g) 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 in research and development expenses and costs of goods sold and an increase (decrease) in revenues for 1998 of $4,787,000, $1,708,000 and $2,477,000, respectively, for 1997 of $6,785,000, $660,000, and $(1,428,000), respectively and for 1996 of $1,338,000, ($204,000) and ($4,791,000), respectively. These adjustments also had the impact of decreasing selling, general and administrative expenses by $2,631,000 in 1998 and increasing equity in losses of affiliates by $770,000 in 1998. This adjustment had the impact of increasing accumulated deficit at January 1, 1996 by $328,000. Other Restatement and Reclassification Adjustments (h) Previously, the company's consolidated financial statements did not reflect a write-down in the book value of inventory at the company's Magellan subsidiary related to certain obsolete consumer products. The adjustment to record the write-down in inventory as reflected in the restated consolidated financial statements presented herein, resulted in an increase to costs of goods sold of approximately $4,670,000, an increase in selling, general and administrative expenses of $324,000 and an increase in non-controlling interests of approximately $2,988,000 in 1998. (i) The company had previously amortized a portion of the goodwill arising from the acquisition of Ashtech Inc. as a direct charge against non-controlling interests. As reflected in the restated consolidated financial statements presented herein, the company is amortizing such goodwill as a charge to operations, resulting in an increase in goodwill amortization expense for 1998 of $1,202,000 and an increase in non-controlling interests of $408,000. (j) The company's consolidated balance sheet at December 31, 1998 includes a deferred tax asset of approximately $3,400,000 relating primarily to Canadian investment tax credit carryforwards. The restated consolidated financial statements include a revised calculation of this deferred tax asset in 1998, resulting in an increase of costs of goods sold and provision for income taxes in 1998 of $2,166,000 and $1,222,000, respectively. (k) The company's consolidated balance sheet as of December 31, 1998 reflected $26,829,000 due to a joint venture partner as a reduction of advances to the investment in the joint venture. The restated consolidated balance sheet as of December 31, 1998 has classified this amount as a long-term liability. During 1998, the company reclassified a permanent impairment of $2,479,000 on a certain investment from costs of goods sold to asset impairment charges. 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 During 1998, the company adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). The adoption of SFAS 131 had no significant impact on the manner of presentation of Orbital's disaggregated financial information in prior years. Orbital's operations are organized into three business sectors, which correspond to the different markets served by the company's products and services, as well as the manner in which these products and services are managed. Orbital's three business sectors are: space and ground infrastructure systems, satellite access products and satellite services. Space and ground infrastructure systems include launch vehicles, satellites and related space systems, electronics and sensor systems, and satellite ground systems and software. Satellite access products include satellite-based navigation products, satellite positioning and communications products and transportation management systems. Satellite services include satellite-based two-way mobile data communications, satellite-based remote imaging and satellite-based voice communications services. The following table presents operating information and identifiable assets by business sector. Operating income (loss) is total revenues less costs of goods sold, research and development expenses, selling, general and administrative expenses, and amortization 40 41 of goodwill. Identifiable assets are those assets used in the operations of each business sector. There were no significant sales or transfers between consolidated sectors.
YEARS ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- ----------- ---------- (restated) (restated) (restated) (IN THOUSANDS) SPACE AND GROUND INFRASTRUCTURE SYSTEMS: Revenues.................................. $ 613,511 $ 474,452 $ 377,166 Operating income.......................... 48,344 25,966 16,291 Identifiable assets....................... 605,316 510,638 369,672 Capital expenditures...................... 30,844 35,011 23,829 Depreciation and amortization............. 26,409 22,190 21,954 SATELLITE ACCESS PRODUCTS: Revenues.................................. $ 116,392 $ 71,384 $ 71,188 Operating income (loss)................... (31,659) (11,754) 4,902 Non-controlling interest in losses of consolidated subsidiaries............... 12,349 8,151 -- Gain on sale of subsidiary equity......... -- 21,810 -- Identifiable assets....................... 121,196 143,800 32,376 Capital expenditures...................... 5,450 1,692 3,402 Depreciation and amortization............. 4,863 1,962 944 SATELLITE SERVICES: Revenues.................................. $ 759 $ 172 $ 1,433 Operating loss............................ (4,039) (6,705) (7,436) Equity in earnings (losses) of affiliates. (76,816) (25,094) (7,008) Non-controlling interest in (earnings) losses of consolidated subsidiaries..... 1,763 (5,513) 1,473 Identifiable assets....................... 168,680 123,447 107,565 Capital expenditures...................... -- 497 12,613 Depreciation and amortization............. -- 401 2,198 CONSOLIDATED: Revenues.................................. $ 730,662 $ 546,008 $ 449,787 Operating income.......................... 12,646 7,507 13,757 Equity in earnings (losses) of affiliates. (76,815) (25,094) (7,008) Non-controlling interest in losses of consolidated subsidiaries............... 14,112 2,638 1,473 Gain on issuance of subsidiary equity..... -- 21,810 -- Identifiable assets....................... 895,192 777,885 509,613 Capital expenditures...................... 36,294 37,200 39,844 Depreciation and amortization............. 31,272 24,553 25,096
DOMESTIC AND NON-U.S. OPERATIONS The following table presents Orbital's revenues, operating income (loss) and identifiable assets by major originating location:
YEARS ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 ---------- ---------- ---------- (restated) (restated) (restated) (IN THOUSANDS) REVENUES: United States ..... $ 644,448 $ 465,177 $ 380,482 Canada and Mexico . 72,642 75,584 65,350 Other ............. 13,572 5,247 3,955 --------- --------- --------- Total ........ $ 730,662 $ 546,008 $ 449,787 ========= ========= ========= OPERATING INCOME (LOSS): United States ..... $ 11,939 $ 5,972 $ 11,098 Canada and Mexico . 2,277 1,465 2,416 Other ............. (1,570) 70 243 --------- --------- --------- Total ........ $ 12,646 $ 7,507 $ 13,757 ========= ========= ========= IDENTIFIABLE ASSETS: United States ..... $ 833,054 $ 727,509 Canada and Mexico . 57,121 46,984 Other ............. 5,017 3,392 --------- --------- Total ........ $ 895,192 $ 777,885 ========= =========
41 42 EXPORT SALES AND MAJOR CUSTOMERS Orbital's sales to geographic areas were as follows:
YEARS ENDED DECEMBER 31, 1998 1997 1996 ---------- ---------- ---------- (RESTATED) (RESTATED) (RESTATED) (IN THOUSANDS) United States .......... $551,976 $387,074 $337,917 Canada ................. 48,330 39,274 46,742 Far East ............... 39,196 32,875 17,517 Middle East and other... 34,486 24,326 13,859 Southeast Asia ......... 28,976 35,688 -- Europe ................. 27,698 26,771 33,752 -------- -------- -------- Total ........ $730,662 $546,008 $449,787 ======== ======== =======
Approximately 46%, 42% and 45% of the company's revenues in 1998, 1997 and 1996, respectively, were generated under contracts with the U.S. government and its agencies or under subcontracts with the U.S. government's prime contractors. 3. INVESTMENTS IN AND ADVANCES TO AFFILIATES ORBCOMM In 1993, the company's subsidiary, Orbital Communications Corporation ("OCC"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), an affiliate of Teleglobe Inc. ("Teleglobe"), formed a partnership, ORBCOMM Global, L.P. ("ORBCOMM"), for the design, development, construction, integration, testing and operation of a low-Earth orbit satellite communications system (the "ORBCOMM System"). OCC and Teleglobe Mobile are each 50% general partners in ORBCOMM. Additionally, OCC is a 2% general partner in ORBCOMM USA, L.P. ("ORBCOMM USA") and Teleglobe Mobile is a 2% general partner in ORBCOMM International Partners, L.P. ("ORBCOMM International"), two partnerships formed to market the ORBCOMM System. ORBCOMM is a 98% general partner in each of the two marketing partnerships. Pursuant to the terms of the partnership agreements, (i) OCC and Teleglobe Mobile share equal responsibility for the operational and financial affairs of ORBCOMM, (ii) OCC controls and consolidates the operational and financial affairs of ORBCOMM USA, and (iii) Teleglobe Mobile controls the operational and financial affairs of ORBCOMM International. Since OCC is unable to control, but is able to exercise significant influence over ORBCOMM's and ORBCOMM International's operational and financial affairs, the company accounts for its investments in ORBCOMM and ORBCOMM International using the equity method of accounting. Orbital is the primary supplier to ORBCOMM of its communications satellites, launch vehicles and certain of its satellite ground systems and software. During 1998, 1997 and 1996, Orbital recorded sales to ORBCOMM of approximately $36,596,000, $57,988,000 and $47,215,000, respectively. During 1998, Orbital deferred invoicing ORBCOMM for approximately $33,000,000 for work done under a satellite and launch procurement agreement. Approximately one-half of the deferred invoice amount has been advanced to Orbital by an affiliate of Teleglobe. This deferral is classified as an advance to ORBCOMM and is repayable by December 31, 1999, or at the time of ORBCOMM's initial public offering, whichever occurs first. In addition, since 1995 Orbital has provided certain administrative services to ORBCOMM on a cost-reimbursable basis. During 1998, 1997 and 1996, Orbital was reimbursed approximately $3,183,000, $2,298,000 and $1,295,000, respectively, for such services. At December 31, 1998 and 1997, Orbital had approximately $157,725,000 and $80,682,000, respectively, in investments in and advances to ORBCOMM, of which $49,570,000 and $32,704,000, respectively, represented receivables and deferred invoicing (net of the amount advanced by Teleglobe). At December 31, 1998 and 1997, ORBCOMM had approximately $346,634,000 and $316,969,000 in total assets, $241,844,000 and $210,551,000 in total liabilities and $104,790,000 and $106,418,000 of total partners' capital, respectively. ORBCOMM recorded approximately $1,262,000, $527,000 and $420,000 in revenues and $69,628,000, $31,436,000 and $19,480,000 in net losses for the years ended December 31, 1998, 1997 and 1996, respectively. ORBIMAGE In 1997, the company's then-subsidiary, ORBIMAGE, completed a private placement of equity. Since Orbital is unable to control, but is able to exercise significant influence over ORBIMAGE's operational and financial affairs, the company uses the equity method 42 43 of accounting for its ownership interest in ORBIMAGE. As of December 31, 1998 and 1997, the company's investments in and advances to ORBIMAGE were $27,891,000 and $26,443,000, respectively. Orbital is the primary supplier to ORBIMAGE of imaging satellites, launch services and satellite ground systems and software. During the years ended December 31, 1998 and 1997, Orbital recorded sales to ORBIMAGE of approximately $89,006,000 and $ $30,079,000, respectively. Additionally, Orbital provides certain administrative services to ORBIMAGE on a cost-reimbursable basis. During 1998 and 1997, Orbital was reimbursed approximately $1,985,000 and $1,444,000, respectively, for such administrative services. At December 31, 1998 and 1997, the company had total receivables due from ORBIMAGE of approximately $18,725,000 and $3,548,000, respectively. At December 31, 1998 and 1997, ORBIMAGE had approximately $308,078,000 and $137,749,000 in total assets, $195,625,000 and $52,389,000 in total liabilities and $33,964,000 and $49,005,000 of total stockholders' equity, respectively. ORBIMAGE recorded approximately $11,663,000, $2,062,000, and $1,055,000 in revenues and $26,538,000, $6,890,000 and $4,895,000 in net losses available to common stockholders for the years ended December 31, 1998, 1997 and 1996, respectively. CCI INTERNATIONAL, N.V. In 1998, the company entered into a stock purchase agreement with CCI International, N.V. ("CCI"), a corporation that plans to provide satellite-based voice-communication services. In connection with the execution of the agreement, the company and CCI entered into a satellite and launch vehicle procurement contract valued at approximately $480,000,000 for the satellites (and a price to be determined for the launch vehicles in the event Orbital procures them). As of December 31, 1998, the company's investment in and advances to CCI was $21,382,000. The company currently owns 40% of CCI and may make additional investments in CCI during 1999, and uses the modified equity method of accounting to account for its investment in CCI. However, the company has provided substantially all CCI's funding, and accordingly, the company did not recognize any revenue in connection with its satellite contract. OTHER INVESTMENTS The company owns equity interests in several emerging space-related companies. The cost basis of these investments was approximately $6,947,000 and $7,275,000, respectively, at December 31, 1998 and 1997. The company provides a valuation allowance against investments in affiliates when it is determined that recovery of all or part of the investment is not probable. At December 31, 1998 and 1997, approximately $4,338,000 and $4,886,000 of allowance had been recorded against certain of these investments. 4. BUSINESS COMBINATIONS RAYTHEON COMPANY On December 31, 1998, the company acquired the transportation management systems business of Raytheon Company for approximately $21,000,000 in cash. The acquired business produces satellite-based automatic vehicle location systems for public transit fleets. The company accounted for the acquisition using the purchase method of accounting. The purchase price exceeded the fair value of the net assets acquired by approximately $19,931,000, which is being amortized on a straight-line basis over 15 years. ASHTECH INC. On December 31, 1997, Orbital merged Magellan with Ashtech Inc. ("Ashtech"). To effect the merger Orbital provided consideration of approximately $80,000,000 to former Ashtech stockholders consisting of $25,000,000 in cash and approximately 23,954,000 shares of Magellan common stock, and now owns a controlling interest of approximately 66% of Magellan. Orbital recognized a gain of $21,810,000 on the issuance of the shares of Magellan common stock. The merger was accounted for using the purchase method of accounting. The purchase price exceeded the fair value of the net assets acquired by approximately $73,002,000, which is being amortized on a straight-line basis over 20 years. CTA INCORPORATED On August 15, 1997, Orbital acquired substantially all the assets, including all the stock of certain subsidiaries, and certain liabilities relating to the satellite manufacturing and communications services businesses of CTA Incorporated ("CTA"). The financial 43 44 results of the acquired businesses have been included in the company's consolidated results since August 15, 1997. As consideration, Orbital paid approximately $13,000,000 in cash, and repaid $27,000,000 of outstanding debt related to the acquired business. The company accounted for the acquisition using the purchase method of accounting. The purchase price exceeded the preliminary estimates of fair value of the net assets acquired by approximately $65,724,000, which is being amortized on a straight-line basis over 30 years. During 1998, the company revised the preliminary allocation of the purchase price to the fair value of the net assets acquired and received a $2,100,000 refund of the initial purchase price pursuant to the terms of the acquisition agreement, resulting in a net increase in goodwill of approximately $4,500,000. During the five years following the closing, CTA will also be entitled to receive (i) royalties from $500,000 to $3,000,000 for sales by the company of certain geostationary satellites in excess of certain threshold sales, and (ii) 3% of cumulative revenues in excess of $50,000,000 earned during such period from the acquired transportation management business of CTA. ROCKWELL INTERNATIONAL CORPORATION. In July 1997, Orbital acquired from Rockwell International Corporation ("Rockwell") the assets and certain liabilities associated with Rockwell's automotive navigation product line. Orbital paid approximately $3,550,000 in cash and issued Rockwell a $4,350,000 unsecured note. The company accounted for the acquisition using the purchase method of accounting. The purchase price exceeded the fair value of the net assets acquired by approximately $2,262,000, which is being amortized on a straight-line basis over 10 years. The following unaudited, supplemental financial information presents the consolidated results of operations, on a pro forma basis, as though the acquisitions were consummated on January 1, 1997:
DECEMBER 31, -------------------------- 1998 1997 ---------- ---------- (RESTATED) (RESTATED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues......................................... $ 749,734 $ 659,732 Net income (loss)................................ $ (59,634) $ (12,976) Net income (loss) per common and dilutive share.. $ (1.67) $ (0.40)
The allocation of purchase price to net assets acquired in 1998 may be adjusted in 1999 if additional information becomes known about certain business assumptions used to estimate the fair value of such net assets. In October 1996, Orbital's wholly owned subsidiary, MacDonald, Dettwiler and Associates Ltd. ("MDA"), sold substantially all the assets of The PSC Communications Group Inc. for approximately $13,000,000, resulting in a gain of approximately $3,600,000. The gain on the sale of $1,980,000, net of taxes, has been recognized as an extraordinary item since the assets were acquired through the acquisition of MDA, which was accounted for as a pooling-of-interests. 5. BALANCE SHEET ACCOUNTS SHORT-TERM INVESTMENTS The following table sets forth the aggregate amortized cost, aggregate fair value and gross unrealized gains for Orbital's short-term investments in debt securities:
DECEMBER 31, -------------- 1998 1997 ---- ---- (IN THOUSANDS) Amortized cost.... $ 2,665 $ 2,301 Fair value........ 2,665 2,573 ------- ------- Unrealized gains.. $ -- $ 272 ======= =======
During 1998, the company did not realize any significant gains on sales of investments corresponding to unrealized gains included in other comprehensive income as of December 31, 1997. All debt securities held at December 31, 1998 are scheduled to mature in 1999. 44 45 INVENTORY Inventories, net of allowances for obsolescence, consisted of the following:
DECEMBER 31, --------------------- 1998 1997 ---------- -------- (RESTATED) (RESTATED) (IN THOUSANDS) Components and raw materials.................... $ 14,488 $ 24,913 Work-in-process................................. 45,178 35,246 Finished goods.................................. 6,690 9,980 Allowance for inventory obsolescence............ (8,215) (10,900) -------- -------- Total................................. $ 58,141 $ 59,239 ========= ========
Work-in-process inventory was reduced by contractual progress payments received of $5,624,000 and $5,899,000 at December 31, 1998 and 1997, respectively. ACCOUNTS RECEIVABLE The components of receivables were as follows:
DECEMBER 31, -------------------- 1998 1997 -------- -------- (RESTATED) (RESTATED) (IN THOUSANDS) Billed and billable...................... $111,322 $118,612 Recoverable costs and accrued profit not billed................................. 120,371 99,750 Retainages due upon contract completion.. 4,987 6,132 Allowance for doubtful accounts.......... (21,570) (18,077) -------- -------- Total.......................... $215,110 $206,417 ======== ========
Approximately 84% of recoverable costs and accrued profit not billed and retainages due upon contract completion at December 31, 1998 is due within one year and will be billed on the basis of contract terms and delivery schedules. The accuracy and appropriateness of Orbital's direct and indirect costs and expenses under its government contracts, and therefore its receivables recorded pursuant to such contracts, are subject to extensive regulation and audit by the U.S. Defense Contract Audit Agency or by other appropriate agencies of the U.S. government, which have the right to challenge Orbital's cost estimates or allocations with respect to any such contracts. Additionally, a substantial portion of the payments to the company under government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies. In the opinion of management, any adjustments likely to result from inquiries or audits of its contracts will not have a material adverse impact on the company's financial condition or results of operations. 45 46 At December 31, 1998 and 1997, $50,165,000 and $43,294,000, respectively, were receivable from non-U.S. customers. The company enters into forward exchange contracts in an effort to hedge against foreign currency fluctuations on certain receivables and payables denominated in foreign currencies. Accordingly, Orbital is subject to off-balance sheet market risk for the possibility that future changes in market prices may make the forward exchange contracts less valuable. The following table summarizes at December 31, 1998, outstanding foreign exchange contracts to sell (purchase) foreign currencies, along with current market values:
CURRENCIES CURRENT UNREALIZED HEDGED CONTRACT MARKET GAIN FOREIGN CURRENCY HEDGED AGAINST AMOUNT VALUE (LOSS) ----------------------- ---------- --------- -------- ---------- (U.S. DOLLARS, IN THOUSANDS) Australian Dollars....... CD $ 144 $ 142 $ (2) Belgian Francs........... CD 243 232 (11) European Currency Units.. CD 2,053 2,023 (30) European Currency Units.. PS 759 732 (27) Pounds Sterling.......... CD (373) (384) (11) Norwegian Kroner......... CD 1,016 981 (35) U.S. Dollars............. CD 16,430 14,917 (1,513) U.S. Dollars............. PS 64 66 2
- ---------- CD - Canadian Dollars PS - Pounds Sterling MDA is also subject to off-balance sheet risk for a letter-of-credit facility to cover foreign exchange commitments. At December 31, 1998, $10,000,000 of letters of credit were secured by this facility and $37,000,000 remained available. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following:
DECEMBER 31, --------------------- 1998 1997 ---------- --------- (RESTATED) (RESTATED) (IN THOUSANDS) Land.......................................... $ 4,123 $ 852 Buildings and leasehold improvements.......... 21,557 22,112 Machinery and equipment....................... 167,722 138,499 Equipment and satellite systems under construction................................ 18,616 27,367 Software, intellectual property and technical drawings.................................... 27,222 15,750 Accumulated depreciation and amortization..... (99,839) (79,253) --------- --------- Total............................... $ 139,401 $ 125,327 ========= =========
Interest expense of approximately $1,705,000, $429,000 and $1,266,000 was capitalized during 1998, 1997 and 1996, respectively, as part of the historical cost of land, buildings and equipment under construction. ACCRUED EXPENSES Accrued expenses consisted of the following:
DECEMBER 31, -------------------- 1998 1997 -------- --------- (IN THOUSANDS) Payroll, payroll taxes and fringe $ 39,289 $ 28,291 benefits.......................... Payable to subcontractors........... 18,703 15,534 Accrued contract costs.............. 32,118 38,866 Other accrued expenses.............. 18,378 15,327 -------- -------- Total..................... $108,488 $ 98,018 ======== ========
Approximately $6,520,000 and $16,332,000 of accrued contract costs at December 31, 1998 and 1997, respectively, related to certain contracts acquired in 1997. 46 47 6. DEBT OBLIGATIONS The following sets forth long-term obligations, excluding capital lease obligations (see note 7):
DECEMBER 31, --------------------- 1998 1997 --------- --------- (IN THOUSANDS) 7% note, principal and interest due monthly through $ - $ 631 1998................................................ 7.09 - 9.35% notes, principal and interest due monthly 1998-1999........................................... 3,098 7,421 8.25% bank note, principal and interest due monthly through 2001........................................ 1,142 - 7.19% - 8.64% notes, principal and interest due monthly through 2003........................................ 24,428 24,562 8.41% note, principal and interest due monthly through 2005................................................ 8,439 9,407 6% note, principal and interest due semi-annually through 2000........................................ 2,900 4,350 6% bank notes, principal and interest due monthly through 2002........................................ 1,823 1,964 12% note, interest due semi-annually, principal due 1999-2001........................................... 20,000 20,000 7.5% bank notes, interest and principal due quarterly through 2002........................................ 36,000 47,750 5% convertible subordinated notes, interest due semi-annually, principal due 2002................... 100,000 100,000 -------- -------- 197,830 216,085 LESS CURRENT PORTION.................................. (19,236) (18,189) -------- -------- LONG-TERM PORTION..................................... $178,594 $197,896 ======== ========
The 7.09% - 9.35% notes are secured by certain equipment located at the company's Germantown, Maryland facility. The 8.25% bank note is secured by certain Magellan assets. The 7.19% - 8.64% notes are secured by certain office, computer and test equipment located at the company's Germantown, Maryland, Chandler, Arizona and Dulles, Virginia facilities. The 8.41% note is secured by the company's L-1011 aircraft. The 6% note is unsecured. The 6% bank notes due 2002 are secured by MDA's accounts receivable, inventory and certain other assets. The related credit agreements contain certain covenants with respect to MDA's leverage ratio and tangible net worth. The company's 12% unsecured note restricts the payment of cash dividends and contains certain covenants with respect to fixed charges ratio, leverage ratio and tangible net worth, and includes certain cross-default provisions. Orbital's primary credit facility from an international syndicate of six banks was amended and restated in 1998 to increase maximum borrowings to $200,000,000 from $100,000,000. The interest rate charged under the facility is a variable rate based on the prime rate or LIBOR. The weighted average interest rate on borrowings outstanding under this facility at December 31, 1998 was 7.5%. Outstanding borrowings are collateralized by the company's accounts receivable. The facility prohibits the payment of cash dividends and contains certain covenants with respect to the company's working capital levels, fixed charge ratio, leverage ratio and net worth, and expires in December 2002. On September 16, 1997, Orbital sold $100,000,000 of 5% convertible subordinated notes due October 2002. The notes, which are non-callable for three years, are convertible at the option of the holders into Orbital common stock at a conversion price of $28.00 per share, subject to adjustment in certain events. The fair value of Orbital's long-term obligations at December 31, 1998 and 1997 is estimated at approximately $127,830,000 and $178,455,000, respectively. Fair value estimates are based on quoted market prices or on current rates offered for debt of similar remaining maturities. Scheduled maturities of long-term debt for each of the years in the five-year period ending December 31, 2003 and thereafter are $19,236,000, $16,614,000, $15,491,000, $142,366,000, $1,668,000 and $2,455,000, respectively. Magellan maintains its own short-term credit facility. At December 31, 1998 and 1997, approximately $6,008,000 and $6,567,000 was outstanding on this facility at an average borrowing rate of 9.25% and 8%, respectively. These borrowings are secured by Magellan's accounts receivable, inventory, equipment and general intangibles. In 1996, ORBCOMM issued $170,000,000 senior unsecured notes due 2004 (the "ORBCOMM Notes") to institutional investors. The ORBCOMM Notes bear interest at a fixed rate of 14% and provide for noteholder participation in future ORBCOMM service 47 48 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. 7. LEASE COMMITMENTS Aggregate minimum rental commitments under non-cancelable operating and capital leases (primarily for office space and equipment) at December 31, 1998 were as follows:
OPERATING CAPITAL --------- ------- (IN THOUSANDS) 1999....................... $ 14,425 $ 1,877 2000....................... 13,462 1,308 2001....................... 10,995 1,213 2002....................... 9,135 202 2003....................... 8,878 169 2004 and thereafter........ 29,948 - -------- ------- $ 86,843 4,769 ======== Less interest at 10%....... (512) Less current portion....... (1,570) ------- Long-term portion.......... $ 2,687 =======
Rent expense for 1998, 1997 and 1996 was approximately $14,124,000, $10,870,000 and $12,300,000, respectively. 8. INCOME TAXES The provisions for income taxes consisted of the following:
YEARS ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 --------- --------- ------- (restated)(restated) (restated) (IN THOUSANDS) CURRENT PROVISION: U.S. Federal..... $ - $ - $ - Foreign.......... 1,394 1,283 211 State............ - - - DEFERRED PROVISION: U.S. Federal..... - 10,898 - Foreign.......... 3,822 752 - State............ - - - ------ ------- ------ Total.... $5,216 $12,933 $ 211 ====== ======= ======
The income tax provisions were different from those computed using the statutory U.S. Federal income tax rate as set forth below:
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- --------- --------- (restated) (restated) (restated) U.S. Federal statutory rate..................... (35.0)% 35% 35% Changes in valuation allowance.................. 53.4 815.2 (43.6) Investments in affiliates and non-controlling interests in net assets of consolidated subsidiaries.................................. 2.0 582.2 - Intangible amortization......................... 4.7 91.4 21.9 Foreign income taxes, net....................... 2.2 60.3 (21.4) Other, net...................................... (17.1) (737.7) 10.7 -------- -------- ----- Effective rate........................ 10.2% 846.4% 2.6% ======== ======== =====
48 49 The tax effects of significant temporary differences were as follows:
DECEMBER 31, --------------------- 1998 1997 --------- --------- (RESTATED) (IN THOUSANDS) TAX ASSETS: U.S. Federal and state net operating loss carryforward........................... $ 106,390 $ 67,517 Non-deductible financial statement accruals............................... 49,384 55,792 U.S. Federal and foreign tax credit carryforward........................... 8,771 14,464 Intangible assets........................ 8,364 5,988 --------- --------- 172,909 143,761 Valuation allowance...................... (94,185) (66,889) --------- --------- Tax assets, net....................... $ 78,724 $ 76,872 ========= ========= TAX LIABILITIES: Excess deductions for tax reporting purposes............................... $ 36,760 $ 28,141 Excess tax depreciation.................. 27,216 15,916 Investments in subsidiaries/affiliates... -- 6,198 Percentage-of-completion accounting...... 5,049 5,211 --------- --------- Tax liabilities....................... $ 69,025 $ 55,466 ========= =========
In 1998, 1997 and 1996 approximately $8,300,000, $5,200,000 and $4,900,000, respectively, of income (loss) before provision for income taxes was generated from foreign sources. At December 31, 1998, the company had U.S. federal net operating loss carryforwards (portions of which expire beginning in 2004) of approximately $278,000,000, and U.S. research and experimental income tax credit carryforwards of approximately $3,148,000, and foreign investment income tax credit carryforwards (subject to expiration in 2008) of approximately $3,778,000. Such net operating loss carryforwards and tax credits are subject to certain limitations and other restrictions. Additionally, at December 31, 1998, approximately $43,000,000 of net deferred tax assets will reduce goodwill and approximately $9,700,000 of net deferred tax assets will reduce equity to the extent such assets reduce future taxable income. Management believes that it is more likely than not that the net deferred tax assets recorded will be realized in the future. 9. COMMON STOCK AND STOCK OPTION PLANS In October 1998, the company adopted a stockholder rights plan in which preferred stock purchase rights were granted as a dividend at the rate of one right for each share of common stock to stockholders of record on November 13, 1998. The plan is designed to deter coercive or unfair takeover tactics. The rights become exercisable only if a person or group in the future becomes the beneficial owner of 15% or more of Orbital's common stock, or announces a tender or exchange offer that would result in its ownership of 15% of more of the company's common stock. The rights are generally redeemable by Orbital's Board of Directors at a redemption price of $0.005 per right and expire on October 31, 2008. Effective January 1, 1999, the company adopted, subject to stockholder approval, an Employee Stock Purchase Plan ("ESPP") for employees of the company (including its consolidated U.S. subsidiaries). Under the ESPP, eligible employees may purchase up to 1,000,000 shares of Orbital's common stock, subject to certain limitations. The ESPP has semi-annual offering periods beginning on January 1 and July 1 and allows employees to purchase shares of stock at the lesser of 85% of the fair market value of shares at either the beginning or the end of the offering period. Also effective January 1, 1999, the company adopted a similar employee stock purchase plan for its Canadian employees to purchase up to 500,000 shares of Orbital common stock. As of December 31, 1998, the company's 1997 Stock Option and Incentive Plan (the "1997 Plan") provided for awards of up to 3,200,000 incentive or non-qualified stock options and shares of restricted stock to employees, directors, consultants and advisors of the company and its subsidiaries. In January 1999, the Board approved an amendment to the 1997 Plan to increase the number of shares available for option grants by 1,800,000 to 5,000,000. Under the terms of the 1997 Plan, options may not be issued at less than 100% of the fair market value of the company's common stock on the date of grant. Options under the 1997 Plan vest at a rate set forth by the Board of Directors in each individual option agreement, generally in one-third increments over a three-year period following the date of grant. Options expire no more than ten years following the grant date. The 1997 Plan provides for automatic grants of non-qualified stock options to nonemployee directors of the company. The company also has options outstanding that were issued pursuant to two predecessor plans to the 1997 Plan as well as replacement options issued in connection with certain acquisitions. 49 50 The following two tables summarize information regarding options under the company's stock option plans for the last three years:
WEIGHTED AVERAGE OUTSTANDING NUMBER OF OPTION PRICE EXERCISE AND ORBITAL OPTIONS SHARES PER SHARE PRICE EXERCISABLE -------------------------------- --------- ------------ -------- ----------- Outstanding at December 31, 1995..... 2,240,525 $1.82-$22.00 $ 14.16 1,133,713 Granted............................ 1,372,000 12.25-17.63 13.26 Exercised.......................... (298,916) 1.82-17.75 7.20 Cancelled or expired............... (588,399) 3.51-22.00 20.23 ---------- Outstanding at December 31, 1996..... 2,725,210 1.82-22.00 13.10 1,324,316 Granted............................ 1,908,650 13.50-24.00 17.29 Exercised.......................... (326,263) 1.82-18.81 10.43 Cancelled or expired............... (300,306) 1.82-22.00 15.12 ---------- Outstanding at December 31, 1997..... 4,007,291 1.84-24.00 15.16 1,549,185 Granted............................ 2,236,700 18.38-38.44 32.49 Exercised.......................... (1,086,537) 1.76-20.75 13.39 Cancelled or expired............... (713,898) 3.51-38.44 35.07 ---------- Outstanding at December 31, 1998..... 4,443,556 $3.51-$38.44 $ 21.09 1,548,218 ========== ============ ======= =========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- --------------------------------- WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT DEC. 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE AT DEC. 31, 1998 EXERCISE PRICE --------------- ---------------- ---------------- -------------- ---------------- -------------- $ 3.51-$16.50 1,987,735 6.66 $ 14.30 1,064,127 $ 13.43 $16.63-$30.69 1,959,821 8.76 $ 24.26 450,757 $ 18.60 $32.88-$38.44 496,000 9.35 $ 35.77 33,334 $ 32.88 ------------- --------- ---- ------- --------- ------- $ 3.51-$38.44 4,443,556 7.88 $ 21.09 1,548,218 $ 15.36 ============= ========= ==== ======= ========= =======
OCC adopted a stock option plan in 1992 (the "OCC Plan"). The OCC Plan provides for grants of incentive and non-qualified stock options to purchase OCC common stock to officers and employees of ORBCOMM and the company. Under the terms of the OCC Plan, incentive stock options may not be granted at less than 100% of the fair market value, and non-qualified options may not be granted at less than 85% of the fair market value of OCC common stock at the date of grant as determined by OCC's Board of Directors. Options under the OCC Plan vest at a rate set forth by the Board of Directors in each individual option agreement, generally in one-fourth increments over a four-year period following the date of grant. Certain provisions of the OCC Plan require OCC to repurchase, with cash or promissory notes, the common stock acquired pursuant to the options. The cash repurchase amount is restricted by the terms of the ORBCOMM Notes to an amount not to exceed $1,000,000 in any one year. During 1998 and 1997, OCC repurchased 1,000 and 43,800 shares, respectively, of OCC common stock under this provision. The following two tables summarize information regarding options under the OCC Plan for the last three years:
WEIGHTED AVERAGE OUTSTANDING NUMBER OF OPTION PRICE EXERCISE AND OCC OPTIONS SHARES PER SHARE PRICE EXERCISABLE ------------------------------- ---------- ------------ --------- ------------ Outstanding at December 31, 1995... 545,900 $1.50-$14.00 $ 5.56 411,086 Granted.......................... 154,500 17.00-25.00 20.50 Exercised........................ (67,270) 1.50-13.00 2.43 Cancelled or expired............. (34,300) 1.50-17.00 13.81 --------- Outstanding at December 31, 1996... 598,830 1.50-25.00 9.40 393,903 Granted.......................... 284,500 26.50 26.50 Exercised........................ (20,900) 1.50-25.00 6.68 Cancelled or expired............. (112,600) 1.50-25.00 14.86 --------- Outstanding at December 31, 1997... 749,830 1.50-26.50 15.22 415,804 Granted.......................... 305,300 26.50-39.75 32.37 Exercised........................ (32,600) 1.50-13.00 3.15 Cancelled or expired............. (17,700) 1.50-26.50 23.94 --------- Outstanding at December 31, 1998... 1,004,830 $1.50-$39.75 $ 20.40 520,864 ========== ============ ======= =======
50 51
WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT DEC. 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE AT DEC. 31, 1998 EXERCISE PRICE ---------------- ---------------- ---------------- -------------- ---------------- -------------- $1.50-$13.00 .. 345,530 4.10 $ 4.96 345,530 $ 4.96 $17.00-$25.00.. 77,500 7.19 $ 20.35 43,750 $ 19.97 $26.50-$39.75.. 581,800 8.83 $ 29.58 131,584 $ 26.50 --------------- --------- ---- -------- ------- --------- $1.50-$39.75 .. 1,004,830 7.08 $ 20.40 520,864 $ 11.66 =============== ========= ==== ======== ======= =========
Magellan adopted a stock option plan in 1998 (the "1998 Magellan Plan"). The 1998 Magellan Plan authorizes the issuance of incentive or non-qualified options to purchase up to 19,900,000 shares of Magellan common stock to Magellan and Orbital employees, consultants or advisors. Stock options may not be granted with an exercise price less than 85% of the fair market value of the common stock at the date of grant as determined by Magellan's Board of Directors. Options under the 1998 Magellan Plan vest at a rate set forth by the Board of Directors in each individual option agreement, generally in one-third increments over a three-year period following the date of the grant. There are also Magellan options outstanding that were issued pursuant to an option plan adopted in 1996. The following two tables summarize information regarding options under Magellan's stock option plans for the last three years:
WEIGHTED OUTSTANDING NUMBER OF OPTION PRICE AVERAGE AND MAGELLAN OPTIONS SHARES PER SHARE EXERCISE PRICE EXERCISABLE ------------------------------------ --------- -------------- -------------- ------------ Outstanding at December 31, 1995.... -- -- -- -- Granted........................... 6,915,900 $ 1.10 $ 1.10 Exercised......................... -- -- -- Cancelled or expired.............. (322,300) 1.10 1.10 ---------- Outstanding at December 31, 1996.... 6,593,600 1.10 1.10 667,539 Granted........................... 1,717,500 1.10 1.10 Exercised......................... (103,909) 1.10 1.10 Cancelled or expired.............. (1,427,531) 1.10 1.10 ---------- Outstanding at December 31, 1997.... 6,779,660 1.10 1.10 2,528,097 Granted........................... 15,307,204 0.40 0.40 Exercised......................... (21,300) 0.40-1.10 $ 0.98 Cancelled or expired.............. (5,093,210) 0.40-1.10 1.03 ---------- Outstanding at December 31, 1998.... 16,972,354 $ 0.40-$1.10 $ 0.47 5,389,208 ========== ============ ======= ==========
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT DEC., 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE AT DEC., 31, 1998 EXERCISE PRICE --------------- ----------------- ---------------- --------------- ----------------- --------------- $0.40-$0.40.... 15,268,917 8.28 $ 0.40 3,900,075 $ 0.40 $1.10-$1.10.... 1,703,437 7.59 $ 1.10 1,489,133 $ 1.10 ----------- ---------- ---- ------ --------- ------ $0.40-$1.10.... 16,972,354 8.21 $ 0.47 5,389,208 $ 0.59 =========== ========== ==== ====== ========= ======
In connection with Magellan's merger with Ashtech on December 31, 1997, Magellan assumed Ashtech's option plan and issued replacement options that are exercisable into Magellan common stock. At December 31, 1998, 650,077 non-qualified replacement options were outstanding, 494,561 of which were exercisable at prices ranging from $0.81 to $1.72. The weighted average remaining contractual life on these outstanding options is seven years. 10. STOCK-BASED COMPENSATION The company uses the Black-Scholes option pricing model to determine the pro forma impact under SFAS 123 to the company's net income and earnings per share. The model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the option being valued, and requires certain assumptions, such as the expected amount of time an option 51 52 will be outstanding until it is exercised or it expires, to calculate the weighted average fair value per share of stock options granted. This information and the assumptions used for 1998, 1997 and 1996 for all option plans is summarized as follows:
ADDITIONAL SHARES WEIGHTED AVERAGE AVAILABLE AT RISK-FREE FAIR VALUE DECEMBER 31, VOLATILITY INTEREST RATE PER SHARE AT GRANT DATE --------------------------- -------------------------- -------------------------- --------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996 --------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------- Orbital Plans.... 271,619 218,868 231,955 55% 54% 56% 5.8% 6.1% 5.3% $ 32.49 $ 17.29 $ 13.26 OCC Plan......... 56,925 48,878 20,778 30% 30% 30% 5.4% 6.1% 5.6% $ 32.37 $ 26.50 $ 20.50 Magellan Plans... 9,892,346 116,431 406,400 30% 30% 30% 5.5% 5.9% 6.4% $ 0.40 $ 1.10 $ 1.10
The assumed expected dividend yield was zero for all years for all option plans. The assumed average expected life for all options for all years was 4.5 years. Had the company determined compensation expense in accordance with the provisions of SFAS 123, based on the calculated fair value of stock options at the grant date, the company's net loss, net loss per common share and net loss per common share, assuming dilution, would have been ($76,176,000), ($2.14) and ($1.89), respectively, for the year ended December 31, 1998; ($21,657,000), ($0.67) and ($0.64), respectively, for the year ended December 31, 1997; and ($743,000), ($0.03) and ($0.02), respectively, for the year ended December 31, 1996. Pro forma net loss reflects only options granted in 1998, 1997 and 1996 and, therefore, may not be representative of the effects for future periods. In 1996, the company issued 150,000 stock appreciation rights that vested annually through 1998. Payment was dependent on appreciation of the company's common stock over the vesting period. The company recorded approximately $250,000 and $1,470,000, respectively, in compensation expense during 1998 and 1997 with respect to these rights (none in 1996). 11. SUPPLEMENTAL DISCLOSURES DEFINED CONTRIBUTION PLANS At December 31, 1998, the company had several defined contribution plans (the "Plans") generally covering all full-time employees in the U.S. and Canada. Company contributions to the Plans are made based on certain plan provisions and at the discretion of the Board of Directors, and were approximately $10,370,000, $9,108,000 and $7,097,000 during 1998, 1997 and 1996, respectively. CASH FLOWS Cash payments for interest and income taxes were as follows:
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 ---------- ---------- -------- (IN THOUSANDS) Interest paid............................. $ 16,032 $ 10,059 $ 10,860 Income taxes paid, net of refunds......... 1,624 544 1,327
52 53 NET INCOME (LOSS) PER COMMON SHARE Net income (loss) and outstanding shares of common stock used in calculating earnings (loss) per share differed from those amounts reported in the consolidated financial statements as follows:
NET INCOME NET INCOME (LOSS) (LOSS) PER COMMON SHARE, PER COMMON SHARE ASSUMING DILUTION ---------------- ------------------ (RESTATED) (IN THOUSANDS) 1998 Net loss....................................... $(56,552) N/A ======= Outstanding common shares...................... 37,018 N/A Effect of weighting for outstanding shares..... (1,393) N/A ------- ------- Adjusted shares........................... 35,625 N/A ======= ======= 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) Dilutive impact of outstanding stock options... -- 83 Assuming conversion of convertible notes....... -- 2,396 ------- ------- Adjusted shares........................... 29,137 31,616 ======= =======
In periods of net loss, the assumed conversion of convertible notes and stock options are anti-dilutive. For the year ended December 31, 1998 and 1997, assuming conversion of convertible notes and the dilutive impact of outstanding stock options, diluted shares would have been 40,336,587 and 33,981,000, respectively. 53 54 12. SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Management has determined to restate its previously issued consolidated financial statements for each of the quarters in 1998 and 1997 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:
QUARTER ENDED --------------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 --------- ------- -------- ------- (IN THOUSANDS, EXCEPT SHARE DATA) 1998 (AS PREVIOUSLY REPORTED) Revenues.................................... $ 186,159 $ 184,516 $ 187,688 $ 175,914 Gross profit................................ 51,374 50,851 46,493 38,838 Income (loss) from operations............... 13,365 8,251 9,292 (5,615) Net income (loss)........................... 4,745 5,998 2,436 (19,551) Net income (loss) per common share.......... 0.14 0.17 0.07 (0.53) Net income (loss) per common share, assuming dilution.................................. 0.13 0.17 0.06 (0.53) 1997 (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 1998 (AS RESTATED) Revenues.................................... 186,027 181,926 187,028 175,681 Gross profit................................ 50,970 43,547 46,089 40,428 Income (loss) from operations............... 10,853 1,323 9,296 (8,826) Net loss.................................... (19,331) (9,373) (2,226) (25,622) Net loss per common and diluted share....... (0.59) (0.26) (0.06) (0.69) 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)........................... 2,308 (20,274) 1,001 5,577 Net income (loss) per common share.......... 0.07 (0.63) 0.10 0.17 Net income (loss) per common share, assuming dilution......................... 0.07 (0.63) 0.10 0.17
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 company has also adjusted the application of the equity method with respect to its investment in CCI. The effect of this revision is to increase equity in losses of affiliates as follows (in thousands): 54 55
March 31 June 30 September 30 December 30 1998 $6,429 $ 3,376 $325 $(1,611) 1997 -- $100 $(329) $927
(b) In the first quarter of 1998, pursuant to rights granted under a 1997 stock purchase agreement, ORBIMAGE's minority investors acquired 227,295 shares of ORBIMAGE's convertible preferred stock for total consideration of $22,729,500. ORBIMAGE's convertible preferred stock is convertible into ORBIMAGE's common stock based on a per common share price of $4.17 that was less than the fair value of ORBIMAGE's common when the additional preferred shares were acquired in 1998. Previously, the company's financial statements did not give effect to any beneficial conversion discount as an additional net loss allocable to the company pursuant to the equity method of accounting. As reflected in the restated consolidated financial statements presented herein, Orbital calculates its equity in losses of affiliates including the impact of the beneficial conversion. The effect of these revisions is to increase equity in losses of affiliates as follows (in thousands):
March 31 June 30 September 30 December 30 1998 $10,989 $875 $898 $933
(c) 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 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):
March 31 June 30 September 30 December 30 1998 $1,438 $1,916 $1,957 $2,013 1997 -- $ 150 $1,039 $1,619
(d) The company's consolidated financial statements reflected recognition of a gain in the second quarter of 1998 arising from ORBIMAGE's issuance of warrants to purchase common stock. As reflected in the restated consolidated financial statements presented herein, since the warrants have not been exercised, the company has revised its accounting for this equity issuance, resulting in the elimination of its previously reported gain on issuance of affiliate equity by $4,793,000 in the second quarter of 1998. (e) Previously, the company's consolidated financial statements reflected the recognition of revenue related to the initial transfer of certain assets to ORBIMAGE in 1997 and sales under a procurement agreement with CCI in 1998. 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 1998 and 1997 quarters was to decrease revenues and operating income as follows (in thousands): 55 56
March 31 June 30 September 30 December 30 Revenues 1998 -- $ 3,031 $1,032 $ 2,493 1997 $6,000 $52,539 -- -- Operating Income 1998 -- -- -- $ 596 1997 $ 600 $18,869 -- $(5,000)
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. (f) The company's consolidated financial statements reflected the company's capitalization of interest expense on various assets, including on its equity investments in ORBIMAGE, ORBCOMM and CCI. 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 investments in ORBCOMM and CCI. 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 interest expense as follows (in thousands):
March 31 June 30 September 30 December 30 1998 $2,324 $ 956 $1,220 $1,704 1997 $ (164) $ (273) $1,885 $1,017
(g) 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 those affiliates. As reflected in the restated consolidated financial statements, Orbital is amortizing such excess over eight years. This revision had the effect of increasing the company's equity in losses from affiliates as follows (in thousands):
March 31 June 30 September 30 December 30 1998 $89 $89 $ 88 $ 89 1997 -- $59 $(59) $237
(h) The company's consolidated financial statements did not reflect the amortization of previously deferred profits in connection with its sales of both satellite 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 is to increase the company's equity in losses of affiliates by approximately $110,000 in each of the quarters in 1997 and the first three quarters in 1998, and by $968,000 in the fourth quarter of 1998. 56 57 Asset Restatement Adjustments (i) 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 expensed all previously capitalized enhancement costs and certain non-capitalizable costs. These revisions resulted in an increase (decrease) in operating income as follows (in thousands):
March 31 June 30 September 30 December 30 1998 $1,738 $ (774) $(468) $3,373 1997 $ 29 $3,061 $ 507 $3,848
This also resulted in an increase in equity in losses of $770,000 in the third quarter of 1998. Other Restatement and Reclassification Adjustments (j) Previously, the company's consolidated financial statements did not reflect a write-down in the book value of inventory at the company's Magellan subsidiary related to certain obsolete consumer products. The adjustment to record the write-down in inventory as reflected in the restated consolidated financial statements presented herein resulted in an increase to costs of goods sold of approximately $4,760,000, an increase in selling, general and administrative expenses of $324,000 and an increase in non-controlling interests of approximately $2,988,000 in the second quarter of 1998. (k) The company had previously amortized a portion of the goodwill arising from the acquisition of Ashtech as a direct charge against non-controlling interests. As reflected in the company's restated consolidated financial statements, the company is amortizing such goodwill as a charge to operations, resulting in an increase in goodwill amortization expense and an increase in non-controlling interests as follows (in thousands):
March 31 June 30 September 30 December 30 1998 Goodwill amortization $300 $301 $300 $301 Non-controlling interests $102 $102 $102 $102
(l) The company's consolidated balance sheet at December 31, 1998 reflected a net deferred tax asset of approximately $3,400,000 relating primarily to Canadian investment tax credit carryforwards. The restated consolidated financial statements include a revised calculation of this deferred tax asset in 1998 by increasing costs of goods sold and provision for income taxes by $542,000 and $306,000 in each of the four quarters of 1998. (m) During the fourth quarter of 1998, the company reclassified a permanent impairment of $2,479,000 on a certain investment from costs of goods sold to asset impairment charges. The company has recorded certain other adjustments, the net effect of which is not significant individually or in the aggregate. 13. SUBSEQUENT EVENTS AND OTHER MATTERS Litigation. In the first quarter of 1999, a number of class action lawsuits were filed in federal court in the Eastern District of Virginia against Orbital, an officer and an officer/director, alleging violations of the federal securities laws during the period from April 21, 1998 through February 16, 1999 and seeking monetary damages. In December 1998, Thomas van der Heyden filed a lawsuit in the Circuit Court for Montgomery County, Maryland alleging that Orbital is in actual or anticipatory breach of obligations allegedly imposed on Orbital in a judgment in a previous action brought by plaintiff against CTA. The plaintiff claims that he is entitled to a sum exceeding $30 million from Orbital, as successor-in-interest to CTA. The company believes that the allegations in the legal proceedings described above are without merit and intends to vigorously defend against the allegations. In addition, under the terms of the CTA acquisition, the company believes it is entitled to indemnification from CTA for all or a part of any damages arising from the van der Heyden litigation. Business Combinations. On March 12, 1999, Orbital and Magellan signed a merger agreement with Lowrance Electronics, Inc., a leading manufacturer of marine and recreational electronics using GPS-satellite navigation and sonar technology. Under the terms of the merger, Orbital will acquire all the outstanding common stock of Lowrance and Lowrance shareholders will receive between 745,000 and 1,250,000 shares of Orbital common stock, based on the fair market value of Orbital common stock prior to closing. Lowrance will be merged into Magellan at the closing and Orbital's ownership of Magellan following the merger will increase to 57 58 approximately 85%. The transaction is expected to close in the second half of 1999. Closing is subject to regulatory approval and Lowrance shareholder approval. On March 18, 1999, MDA and Toronto-based Spar Aerospace Limited signed an asset purchase agreement pursuant to which MDA will acquire Spar's space robotics division for approximately $43,000,000 in cash, one half of which is payable upon closing, with the other half payable a year following closing. The acquisition will expand the company's product lines to include advanced robotics primarily for the manned space market. Orbital expects the transaction to close in the second quarter of 1999, subject to customary closing conditions. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is included in Item 4A above and under the caption "Election of Directors -- Directors to be Elected at the 1999 Annual Meeting, -- Directors Whose Terms Expire in 2000 and -- Directors Whose Terms Expire in 2001" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement filed pursuant to Regulation 14A on or about March 29, 1999 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is included under the captions "Summary Compensation Table," "Option Grants in Last Fiscal Year," "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Indemnification Agreements," "Executive Employment Agreements" and "Information Concerning the Board and Its Committees" of the Proxy Statement filed pursuant to Regulation 14A on or about March 29, 1999 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is included under the caption "Ownership of Common Stock" of the Proxy Statement filed pursuant to Regulation 14A on or about March 29, 1999 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is included under the caption "Related Transactions" of the Proxy Statement filed pursuant to Regulation 14A on or about March 29, 1999 and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: 1. Financial Statements. The following financial statements, together with the report of KPMG LLP are filed as a part of this report: A. Independent Auditors' Report B. Consolidated Statements of Earnings C. Consolidated Balance Sheets D. Consolidated Statements of Stockholders' Equity 58 59 E. Consolidated Statements of Cash Flows F. Notes to Consolidated Financial Statements 2. Financial Statements of 50-Percent Owned Subsidiary and Financial Statement Schedules. The financial statements of ORBCOMM Global, L.P. are transmitted with this report. The following additional financial data are transmitted with this report and should be read in conjunction with the Consolidated Financial Statements contained herein. Schedules other than those listed below have been omitted because they are inapplicable or are not required. Independent Auditors' Report on Consolidated Financial Statements Schedule II -- Valuation and Qualifying Accounts 3. Exhibits. A complete listing of exhibits required is given in the Exhibit Index that precedes the exhibits filed with this report. (b) Reports on Form 8-K (i) On October 23, 1998, we filed a Current Report on Form 8-K, dated October 20, 1998, disclosing, under Item 5 our financial results for the fiscal quarter ending September 30, 1998. (ii) On November 2, 1998, we filed a Current Report on Form 8-K, dated October 30, 1998, disclosing under Item 5, the adoption of a stockholder rights plan. (c) See Item 14(a)(3) of this report. (d) See Item 14(a)(2) of this report. 59 60 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: April 17, 2000 ORBITAL SCIENCES CORPORATION By: /s/ DAVID W. THOMPSON ------------------------------------------------- David W. Thompson Chairman of the Board and Chief Executive Officer 60 61 Independent Auditors' Report The Board of Directors and Stockholders Orbital Sciences Corporation: Under date of February 16, 1999, except as to note 13, which is as of March 18, 1999, and 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, 1998 and 1997, 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, 1998, included in the Company's 1998 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 1998 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, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998 has been restated. KPMG LLP Washington, D.C. February 16, 1999, except as to note 13, which is as of March 18, 1999, and note 1A, which is as of April 17, 2000 62 ORBITAL SCIENCES CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FORM 10-K/A FOR THE YEAR ENDED DECEMBER 31, 1998 (AMOUNTS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------------------------------------------------------------------------- ADDITIONS ----------------------------------- CHARGED/ BALANCE AT CHARGED TO COSTS CREDITED TO BALANCE AT DESCRIPTION START OF PERIOD AND EXPENSES OTHER ACCOUNTS(1) DEDUCTIONS(2) END OF PERIOD - ----------------------------------------- --------------- ---------------- ----------------- ------------- -------------- YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts $ 773 $ 603 $ - $ (8) $ 1,368 Allowance for obsolete inventory 3,778 667 685 (32) 5,098 Allowance for unrecoverable investments 1,100 - - - 1,100 Deferred income tax valuation reserve 60,166 - - (5,734) 54,432 YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts $ 1,368 $ 709 $ 16,550 $ (550) $ 18,077 Allowance for obsolete inventory 5,098 1,527 4,902 (627) 10,900 Allowance for unrecoverable investments 1,100 729 3,057 - 4,886 Deferred income tax valuation reserve 54,432 12,457 - - 66,889 YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts $ 18,077 $ 4,635 $ 794 $ (1,936) $ 21,570 Allowance for obsolete inventory 10,900 6,023 4,161 (12,869) 8,215 Allowance for unrecoverable investments 4,886 552 (1,100) - 4,338 Deferred income tax valuation reserve 66,889 27,296 - - 94,185
(1) - Amounts charged/credited to other accounts represent valuation and qualifying accounts recorded pursuant to purchase business combinations as described in Note 4 to the consolidated financial statements incorporated by reference elsewhere herein, and certain other reclassifications. (2) - Deduction for revaluation of allowance account. 63 EXHIBIT INDEX The following exhibits are filed as part of this report. Where such filing is made by incorporation by reference to a previously filed statement or report, such statement or report is identified in parentheses. EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ----------------------------------------------- 3.1 Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 to the company's Registration Statement on Form S-3 (File Number 333-08769) filed and effective on July 25, 1996). 3.2 By-Laws of Orbital Sciences Corporation, as amended on July 27, 1995 (incorporated by reference to Exhibit 3 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 3.3 Certificate of Amendment to Restated Certificate of Incorporation, dated April 29, 1997 (previously filed). 3.4 Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock, dated November 2, 1998 (incorporated by reference to Exhibit 2 to the company's Report on Form 8-A filed on November 2, 1998). 4.1 Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to the company's Registration Statement on Form S-1 (File Number 33-33453) filed on February 9, 1990 and effective on April 24, 1990). 4.2 Indenture dated as of September 16, 1997 between the company and Deutsche Bank AG, New York Branch, as Trustee (incorporated by reference to Exhibit 4.1 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 4.3 First Supplemental Indenture dated as of December 15, 1997 between the company and Deutsche Bank AG, New York Branch, as Trustee (incorporated by reference to Exhibit 4.4 to the company's Registration Statement on Form S-3 (File Number 333-42271) filed on December 15, 1997 and effective on March 12, 1998). 4.4 Form of 5% Convertible Subordinated Note (incorporated by reference to Exhibit 4.5 to the company's Registration Statement on Form S-3 (File Number 333-42271) filed on December 15, 1997 and effective on March 12, 1998). 4.5 Registration Rights Agreement dated as of September 16, 1997 among the company and Deutsche Morgan Grenfell Inc. and J.P. Morgan Securities Inc. (incorporated by reference to Exhibit 4.6 to the company's Registration Statement on Form S-3 (File Number 333-42271) filed on December 15, 1997 and effective on March 12, 1998). 4.6 Rights Agreement dated as of October 22, 1998 between the company and BankBoston N.A., as Rights Agent (incorporated by reference to Exhibit 1 to the company's Report on Form 8-A filed on November 2, 1998). 4.7 Form of Rights Certificate (incorporated by reference to Exhibit 3 to the company's Report on Form 8-A filed on November 2, 1998). 10.1 Third Amended and Restated Credit Agreement, dated as of December 21, 1998 among the company, Magellan Corporation, the Banks listed therein, Morgan Guaranty Trust Company of New York, as Administrative Agent and Collateral Agent (the "Credit Agreement") (previously filed). 10.2 Note Agreement, dated as of June 14, 1995 between the company and The Northwestern Mutual Life Insurance Company (the "NWML Note Agreement") (incorporated by reference to Exhibit 4.7.1 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). 10.2.1 First Amendment to the NWML Note Agreement, dated as of June 30, 1995, between the company and The Northwestern Mutual Life Insurance Company (incorporated by reference to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.2.2 Second Amendment to the NWML Note Agreement, dated as of March 15, 1996 (incorporated by reference to Exhibit 10.2.2 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.2.3 Third Amendment to NWML Note Agreement, dated as of July 13, 1996 (incorporated by reference to Exhibit 10.2 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.2.4 Fourth Amendment to NWML Note Agreement, dated as of March 31, 1997 (incorporated by reference to Exhibit 10.2.4 to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). 10.2.5 Fifth Amendment to NWML Note Agreement, dated as of December 23, 1997 (incorporated by reference to Exhibit 10.2.5 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.2.6 Sixth Amendment to NWML Note Agreement, dated as of August 14, 1998 (incorporated by reference to Exhibit 10.2.6 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 10.3 Promissory Notes dated as of August 31, 1994 made by Fairchild Space and Defense Corporation and Corporate Guaranty dated August 31, 1994 made by the company (incorporated by reference to Exhibit 10.7 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.4 Amended and Restated Security Agreement dated as of August 5, 1997 among the 61 64 company, Morgan Guaranty Trust Company, as Collateral Agent, and NationsBank, N.A., as Designated Lockbox Bank (incorporated by Reference to Exhibit 10.4 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.4.1 Security Agreement dated as of August 5, 1997 among the company, Morgan Guaranty Trust Company, as Collateral Agent, and NationsBank, N.A., as Designated Lockbox Bank (incorporated by Reference to Exhibit 10.4.1 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.5 Master Security Agreement dated as of August 31, 1994 between Fairchild Space and Defense Corporation and General Electric Capital Corporation (incorporated by reference to Exhibit 10.7 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.6 Orbital Sciences Corporation 1990 Stock Option Plan, restated as of April 27, 1995 (incorporated by reference to Exhibit 10.5.1 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).* 10.7 Orbital Sciences Corporation 1990 Stock Option Plan for Non-Employee Directors, restated as of April 27, 1995 (incorporated by reference 10.7 to Exhibit 10.5.2 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).* 10.8 Orbital Communications Corporation Restated 1992 Stock Option Plan, restated as of September 12, 1995 (incorporated by reference to Exhibit 10.8 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.8.1 Amendment to Orbital Communications Corporation Restated 1992 Stock Option Plan, dated February 5, 1997 (incorporated by reference to Exhibit 10.8.1 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).* 10.9 Orbital Sciences Corporation 1995 Deferred Compensation Plan (incorporated by reference to Exhibit 10.9 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).* 10.10 Magellan Corporation 1996 Stock Option Plan (incorporated by reference to Exhibit 10.3 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).* 10.11 Orbital Imaging Corporation 1996 Stock Option Plan (incorporated by reference to Exhibit 10.11 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).* 10.12 Form of Executive Employment Agreement entered into between the Company and Executive Officers and certain other Officers of the Company (incorporated by reference to Exhibit 10.17 to the company's Registration Statement on Form S-1 (File Number 33-33453) filed on February 9, 1990 and effective on April 24, 1990).* 10.12.1 Performance Share Agreement dated October 23, 1996 between the Company and Mr. D. W. Thompson (incorporated by reference to Exhibit 10.12.1 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).* 10.12.2 Amendment No. 1 to Performance Share Agreement dated January 30, 1998 between the company and Mr. D.W. Thompson (incorporated by reference to Exhibit 10.12.2 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).* 10.13 Form of Indemnification Agreement entered into between the company and directors, executive Officers and certain other officers of the company (incorporated by reference to Exhibit 10.18 to the company's Registration Statement on Form S-1 (File Number 33-33453) filed on February 9, 1990 and effective on April 24, 1990).* 10.13.1 Amendment dated October 22, 1992 to form of Indemnification Agreement entered into between the company and directors, executive officers and certain other officers of the company (incorporated by reference to Exhibit 19 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992).* 10.15 Restated Master Agreement, dated as of September 12, 1995, by and among the company, OCC, Teleglobe Inc. and Teleglobe Mobile Partners (incorporated by reference to Exhibit 10 to ORBCOMM Global L.P.'s Registration Statement on Form S-4 (File Number 333-11149) filed on August 30, 1996). 10.15.1 Amendment No. 1 to Restated Master Agreement, restated as of September 12, 1995, by and among the company, OCC, Teleglobe Inc. and Teleglobe Mobile Partners filed on August 30, 1996 (incorporated by reference to Exhibit 10.15.1 to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). 10.16 Restated Agreement of Limited Partnership of ORBCOMM Global, L.P., dated as of September 12, 1995, between OCC and Teleglobe Mobile Partners (incorporated by reference to Exhibit 3.2 to ORBCOMM Global L.P.'s Registration Statement on Form S-4 (File Number 333-11149) filed on August 30, 1996). 10.16.1 Amendment No. 1 to Restated Agreement of Limited Partnership of ORBCOMM Global, L.P., dated December 2, 1996 (incorporated by reference to Exhibit 10.16.1 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 10.17 Restated Agreement of Limited Partnership of ORBCOMM USA, L.P., dated as of September 12, 1995 between Orbital Communications Corporation and ORBCOMM Global (incorporated by reference to Exhibit 3.4 to ORBCOMM Global L.P.'s Registration Statement on Form S-4 (File Number 333-11149) filed on August 30, 1996). 10.18 Amended and Restated Orbital Sciences Corporation 1997 Stock Option and Incentive Plan (previously filed). 62 65 10.19 Promissory Note dated June 27, 1997 from the company payable to the order of General Electric Capital Corporation ("GECC") (incorporated by reference to Exhibit 10.19 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.20 Aircraft Security Agreement dated as of June 27, 1997 from the company to GECC (incorporated by reference to Exhibit 10.20 to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.21 1998 Magellan Stock Option Plan (previously filed). 10.22 Letter Agreement between the company and Robert Lovell dated July 28, 1997 (previously filed).* 10.23 Form of 1998 Indemnification Agreement (previously filed).* 10.24 Form of 1998 Executive Employment Agreement (previously filed).* 11 Statement re: Computation of Earnings Per Share (not required). 13.1 ORBCOMM Global, L.P. financial statements (previously filed). 21 Subsidiaries of the Company (previously filed). 23.1 Consent of KPMG LLP (transmitted herewith). 23.2 Consent of KPMG LLP (transmitted herewith). 27 Financial Data Schedule for year ended December 31, 1998 (such schedule is furnished for the information of the Securities and Exchange Commission and is not to be deemed "filed" as part of the Form 10-K, or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934) (transmitted herewith). - ------------- * Management Contract or Compensatory Plan or Arrangement. 63 EX-23.1 2 CONSENT OF KPMG LLP 1 Exhibit 23.1 ACCOUNTANTS' CONSENT The Board of Directors Orbital Sciences Corporation and subsidiaries: We consent to incorporation by reference in the registration statements on Forms S-8 (Nos. 33-84296, 33-62277, 33-64517, 333-53585, 333-69887, 333-69885, and 333-27999) of Orbital Sciences Corporation and subsidiaries of our reports dated February 16, 1999, except as to note 13 which is as of March 18, 1999, and note 1A which is as of April 17, 2000, relating to the consolidated balance sheets of Orbital Sciences Corporation as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows, and the related consolidated financial statement schedule, for each of the years in the three-year period ended December 31, 1998, which reports appear in the December 31, 1998 annual report on Form 10-K/A of Orbital Sciences Corporation and subsidiaries. Our reports refer to the restatement of the consolidated balance sheets as of December 31, 1998 and 1997, and the consolidated statements of operations, stockholders' equity and cash flows, and the related consolidated financial statement schedule, for each of the years in the three-year period ended December 31, 1998. KPMG LLP Washington, D.C. April 17, 2000 EX-23.2 3 CONSENT OF KPMG LLP 1 Exhibit 23.2 Accountants' Consent The Board of Directors Orbital Sciences Corporation and subsidiaries: We consent to the incorporation by reference in the registration statements on Forms S-8 (Nos. 33-84296, 33-62277, 33-64517, 333-53585, 333-69887, 333-69885, and 333-27999) of Orbital Sciences Corporation and subsidiaries of our report dated March 30, 1999, relating to the consolidated balance sheets of ORBCOMM Global, L.P. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations and comprehensive loss, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K/A of Orbital Sciences Corporation. KPMG LLP Washington, DC April 17, 2000 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AT AND FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0000820736 ORBITAL SCIENCES CORP /DE/ 1000 YEAR DEC-31-1998 JAN-1-1998 DEC-31-1998 15,268 7,922 236,680 (21,570) 58,141 304,127 239,240 (99,839) 895,192 251,075 181,281 0 0 370 418,982 895,192 730,662 730,662 549,628 549,628 0 3,493 8,886 (51,336) 5,216 (56,552) 0 0 0 (56,552) (1.59) (1.59)
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