10-K/A 1 e10-ka.txt FORM 10-K/A 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K/A AMENDMENT NO. 2 TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-18287 ------------- ORBITAL SCIENCES CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION OF REGISTRANT) 06-1209561 (I.R.S. EMPLOYER I.D. NO.) 21700 ATLANTIC BOULEVARD DULLES, VIRGINIA 20166 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (703) 406-5000 (REGISTRANT'S TELEPHONE NUMBER) --------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 (listed on The Nasdaq National Market System) ================================================================================ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing sales price as reported on the Nasdaq Stock Market on March 19, 1997 was approximately $515,228,830. As of March 12, 1997, 32,201,802 shares of the registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Stockholders for fiscal year ended December 31, 1996 (the "Annual Report") are incorporated by reference in Parts I and II of this Report. Portions of the registrant's definitive Proxy Statement dated March 24, 1997 (the "Proxy Statement") 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, 1996 and 1995 and its condensed consolidated quarterly financial statements for 1996 and 1995. This amendment includes in Item 8 such restated financial statements as of December 31, 1996 and 1995 and for the years in the two-year period ended December 31, 1996, and other information relating to such restated financial statements, including Business (Item 1), Selected Financial Data (Item 6) and Management's Discussion and Analysis of Financial Condition and Results of Operation (Item 7). Information regarding the effect of the restatements on Orbital's results of operations is included in the Notes to Financial Statements included in Item 8 of this amendment. Except for Items 1, 6, 7 and 8 and Exhibits 11 and 27, no other information included in the original report on Form 10-K is amended by this amendment. For current information regarding risks, uncertainties and other factors that may affect Orbital's future performance, please see "Outlook: Issues and Uncertainties" included in Item 7 of Orbital's Annual Report on Form 10-K for the year ended December 31, 1999. 3 ORBITAL SCIENCES CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K/A FOR YEAR ENDED DECEMBER 31, 1996
PAGE ------------- ----- PART I Item 1. Business 1 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 Item 4A. Executive Officers of the Registrant 9 PART II Item 5. Market for Registrant's Common Equity 10 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 8. Financial Statements and Supplementary Data 18 Item 9. Changes in and Disagreements with Accountants 45 PART III Item 10. Directors and Executive Officers of the Registrant 45 Item 11. Executive Compensation 45 Item 12. Security Ownership of Certain Beneficial Owners and Management 45 Item 13. Certain Relationships and Related Transactions 45 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 45
Pegasus(R) and Taurus(R) are registered trademarks and service marks, and OrbView(R) is a registered trademark of Orbital Sciences Corporation; Orbital(TM), MicroStar(TM) and PegaStar(TM) are trademarks of Orbital Sciences Corporation; and Orbital(sm) and ORBIMAGE(sm) are service marks of Orbital Sciences Corporation. ORBCOMM(sm) is a service mark of ORBCOMM Global, L.P. 4 ITEM 1. BUSINESS BACKGROUND Orbital Sciences Corporation (together with its subsidiaries, "Orbital" or the "Company") is a space and information systems company that designs, manufactures, operates and markets a broad range of space-related products and services. Orbital's products and services are grouped into three business sectors: space and ground infrastructure systems, satellite access products and satellite services. Space and ground infrastructure systems include launch vehicles, satellites, electronics and sensors, and ground systems and software. Satellite access products include low-cost, hand-held satellite-based navigation and communications products. Satellite services include satellite-based two-way mobile data communications and remote sensing and Earth imaging services. Orbital operates major launch vehicle, satellite and electronics engineering, manufacturing and test facilities in Dulles, Virginia, Germantown, Maryland and Chandler, Arizona, a launch vehicle and satellite integration and test facility at Vandenberg Air Force Base, California, a space sensors and instruments facility in Pomona, California, a ground systems and software facility in Vancouver, British Columbia, and facilities for its navigation and communications products in San Dimas, California and Mexicali, Mexico. Orbital was incorporated in Delaware in 1987 to consolidate the assets, liabilities and operations of Space Systems Corporation and Orbital Research Partners, L.P. The Company acquired Space Data Corporation ("Space Data") in 1988, thereby expanding its product lines and increasing its vertical integration in production and testing. In late 1992, SSC and Space Data were merged into Orbital, with the Company being the surviving corporation. In September 1993, Orbital acquired all the assets of the Applied Science Operation, a division of The Perkin-Elmer Corporation. This operation designs, develops and produces satellite-borne scientific sensors for space and terrestrial research, in situ atmospheric monitoring equipment for human space flight programs and other sensors and instruments for commercial and military applications. In August 1994 and December 1994, Orbital acquired Fairchild Space and Defense Corporation ("Fairchild") and Magellan Corporation ("Magellan"), respectively. The Fairchild acquisition enhanced Orbital's satellite system and subsystem development and production capabilities and expanded Orbital's existing product lines by adding various sophisticated electronics products. Magellan designs, manufactures and markets hand-held receivers for Global Positioning System ("GPS") satellite-based navigation and positioning for commercial and consumer markets, along with portable satellite communications equipment. In November 1995, Orbital 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 1992, Orbital established a wholly owned subsidiary, Orbital Imaging Corporation ("ORBIMAGE"), to develop and operate commercial Earth imaging and remote sensing satellites and to market the information services derived from such satellites. In 1993, Orbital's majority owned subsidiary Orbital Communications Corporation ("OCC") and Teleglobe Mobile Partners ("Teleglobe Mobile"), an affiliate of Teleglobe Inc., formed ORBCOMM Global, L.P. ("ORBCOMM Global") to develop, construct and operate a low-Earth orbit satellite-based two-way data communications and messaging system (the "ORBCOMM System"). OCC and Teleglobe Mobile also formed two marketing partnerships, ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners, L.P. ("ORBCOMM International"), each with the exclusive right to market the ORBCOMM System in the United States and internationally, respectively. DESCRIPTION OF ORBITAL'S PRODUCTS AND SERVICES Orbital's products and services are grouped into three categories: space and ground infrastructure systems, satellite access products and satellite services. Orbital's overall business is not seasonal to any significant extent. SPACE AND GROUND INFRASTRUCTURE SYSTEMS The Company's space and ground infrastructure systems include launch vehicles, satellites, electronics and sensors, and ground systems and software. SPACE LAUNCH VEHICLES. The Company has developed and produces the Pegasus and Taurus space launch vehicles. Orbital's Pegasus launch vehicle is launched from beneath the Company's leased Lockheed L-1011 aircraft to deploy satellites weighing up to 1,000 pounds into low-Earth orbit. Through December 1996, the Company had conducted a total of fourteen Pegasus missions, twelve of which were fully or partially successful. Whether a mission is fully or partially successful depends on the 1 5 particular mission requirements designated by the customer. Orbital conducted five Pegasus missions in 1996. Following a comprehensive review of design, assembly, test and operations procedures triggered by two earlier unsuccessful flights, the Pegasus XL, an enhanced version of the standard Pegasus launch vehicle, successfully launched a satellite for the U.S. Air Force to its intended orbit in March 1996 and performed two successful National Aeronautics and Space Administration ("NASA") missions during the summer. A standard Pegasus also successfully launched a U.S. Department of Defense ("DoD") satellite in May 1996. In a November 1996 launch for NASA, a Pegasus XL delivered two scientific satellites to their designated orbits, but the satellites failed to separate from the launch vehicle. The Pegasus separation system used on this launch has worked properly on all previous launches on which it was deployed. The Company believes that the problem was caused by a faulty electrical power system on the Pegasus that failed to activate certain satellite separation mechanisms, and does not anticipate significant further delays in its launch schedule to implement necessary corrective actions. The higher capacity 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. In March 1994, Orbital successfully launched the first Taurus vehicle, deploying two satellites for the Defense Advanced Research Projects Agency ("DARPA"). U.S. and international government customers for Pegasus launch vehicles include NASA, the U.S. Air Force, DARPA, the Ballistic Missile Defense Organization ("BMDO"), and the national space agencies of Spain and Brazil. Commercial customers include ORBCOMM Global and CTA, Incorporated ("CTA"). In addition, ORBIMAGE plans to launch a remote imaging satellite on Pegasus. Customers for Taurus launch vehicles include NASA, the U.S. Air Force, Ball Corporation ("Ball"), ORBCOMM Global (as a secondary payload on the Ball mission) and South Korea's space agency. During 1996, NASA selected Orbital to design, construct, test and operate the X-34 reusable launch demonstrator vehicle. The X-34 will test and demonstrate advanced reusable launch system technologies and materials as part of NASA's Reusable Launch Vehicle Program that is spearheading the development of next-generation, lower cost launch vehicles. SUBORBITAL LAUNCH VEHICLES. Suborbital launch vehicles place payloads into a variety of high-altitude trajectories but, unlike space launch vehicles, do not place payloads into orbit around the Earth. The Company's suborbital launch products include suborbital vehicles and their principal subsystems, payloads carried by such vehicles and related launch support installations and systems used in their assembly and operation. The Company offers its customers customized vehicle and payload design, manufacturing and integration, launch and mission support, and tracking and recovery services, as well as construction and activation of launch pads and other infrastructure elements. Customers typically use the Company's suborbital launch vehicles to launch scientific and other payloads and for defense-related applications such as target signature and interceptor experiments. Primary customers of the Company's suborbital launch vehicles include the U.S. Army, the U.S. Navy and BMDO. Orbital's primary programs in 1996 for suborbital launch vehicles and related systems included the Theater Missile Defense Critical Measurement Program pursuant to which Orbital provides ballistic and maneuvering tactical target suborbital vehicles for use by the U.S. Army and U.S. Air Force in developing and testing interceptor and sensor systems, and BMDO's Red Tigress anti-missile defense research program. Orbital conducted two suborbital launches in 1996, both of which were successful. From January 1993 through March 1997, the Company has conducted a total of 34 launches of suborbital vehicles with a 100% success rate. SATELLITES. The Company designs and produces small and medium class satellites for commercial, scientific and military applications. The Company's small satellite platforms such as MicroStar and PegaStar are designed and produced to be launched by the Pegasus or Taurus launch vehicle. The PegaStar spacecraft is a general purpose spacecraft that has successfully performed one mission for the U.S. Air Force measuring space radiation and carrying out related experiments. It will also be used for certain ORBIMAGE satellite-based remote imaging programs, such as the OrbView-2 ocean and land surface environmental monitoring satellite system and the OrbView-3 high-resolution remote imagery system. Orbital's MicroStar spacecraft platform, which is placed into orbit by the Pegasus launch vehicle, is designed for use in the ORBCOMM System and also for a variety of small space science and remote imaging projects. The first three MicroStar spacecraft were deployed by Orbital in 1995, two for the ORBCOMM System and the other for ORBIMAGE to monitor lightning and severe weather patterns, and continued to perform throughout 1996. Customers for the Company's small spacecraft include NASA, the U.S. Air Force, DARPA and ORBCOMM Global. Orbital's medium class satellites, such as NASA's TOPEX/Poseidon, NASA's Upper Atmosphere Research satellite and the National Oceanic and Atmospheric Administration's Landsat 4 and Landsat 5, have been in space for up to 15 years, and are used to gather various scientific data, such as ocean topography and atmospheric imaging information. Orbital also is the spacecraft supplier 2 6 to Johns Hopkins University, which is leading NASA's Far Ultraviolet Spectroscopic Explorer (FUSE) program to measure the early universe's radiation. Orbital also designs and manufactures satellite command and data handling, attitude control and structural subsystems for a variety of government and commercial customers, and provides a broad range of spacecraft design and engineering services as well as specialized analytical engineering services for NASA, DoD, the Department of Energy and other customers. For example, Orbital provided engineering support products and services for both the first and second repair missions for the orbiting Hubble Space Telescope. ELECTRONICS AND SENSORS. Orbital develops, manufactures and markets defense electronics, including advanced avionics and data management systems for aircraft flight operations and ground support applications. These systems collect, process and store mission-critical data for, among other things, mission planning and flight operations, and manage on-board equipment for strategic and tactical military aircraft, helicopters and surface vehicles. The primary customers for data management systems are the U.S. Navy, the U.S. Air Force, and various DoD prime contractors and foreign governments. The Company is the leading supplier of certain avionics systems and products, including mission data equipment for the U.S. Navy and data transfer equipment and digital terrain systems for the U.S. Air Force. In addition, the Company provides stores management systems, including weapons arming and firing functions for use on tactical aircraft and helicopters. The avionics systems and products are deployed on a number of platforms, including the F-4, F-14, F-16, F-18 and F-22 aircraft and the LAMPS helicopter. In addition, Orbital produces electronics and data management systems that have been applied to the development and installation of "intelligent transportation systems," primarily, to date, for metropolitan mass transit operators. These systems help manage public bus and light rail systems, provide for voice and data communications and transmit precise GPS-based location information in emergency situations. Customers for Orbital's intelligent transportation systems include the metropolitan mass transit authorities in Chicago and New York City. Orbital also produces satellite-borne scientific sensors and instruments, such as atmospheric ozone monitoring instruments and environmental sensors. The Company's second and third Total Ozone Mapping Spectrometer ("TOMS") instruments were successfully launched in 1996, one on a Pegasus vehicle for NASA. TOMS measures ozone concentrations around the world for the purpose of monitoring the effect of man-made chemicals and atmospheric conditions on the ozone layer. Orbital has also developed and produced an atmospheric monitoring system for use on the Space Station called the Atmospheric Composition Monitoring Assembly, which will measure various atmospheric gases in the crew's living quarters on the Space Station for the purpose of ensuring a healthy environment for astronauts. In addition, Orbital recently expanded its commercial base of sensors products to include the manufacturing and marketing of sensors that analyze fuel properties in the chemical, biotechnology, pharmaceutical and steel industries. SATELLITE GROUND SYSTEMS. Orbital is a leading supplier of commercial satellite remote imaging ground stations and a provider of advanced space-qualified software and air navigation systems. The Company's ground systems have also expanded to include software-intensive systems designed for naval operations, artillery command and control, radar deception and logistics support. The Company develops, provides and upgrades commercial satellite remote imaging ground stations and related information-processing software. Of the 27 major non-military satellite ground stations around the world, Orbital's MDA subsidiary has built or been involved in the construction of 23 ground stations in 20 countries. These ground stations are designed to receive and process data from the eight major civil and commercial Earth observation satellites currently in operation. MDA also develops and markets software that generates and processes imagery and mapping products from satellites and airborne sensors. Customers for the Company's ground stations and Earth information systems include the European and Canadian space agencies as well as various commercial and government customers around the world. The Company's aviation systems products include automated aeronautical information and air traffic management systems. The Company has developed an automated aeronautical information management system that delivers weather and route information directly to a pilot by computer. This system is designed to address a growing trend toward automation and commercial operation of air traffic control systems. Faster and less expensive to operate than traditional manual systems, automated aeronautical information systems provide pilots and other users with aeronautical and meteorological information on a timely basis. Customers for the Company's aviation systems products include the military and civil aviation authorities in various countries such as Australia, Belgium, Canada, Norway, Malaysia and Switzerland. 3 7 SATELLITE ACCESS PRODUCTS The Company's Magellan subsidiary designs, manufactures and markets hand-held GPS navigators that provide users with precise positioning and location information and also develops and provides personal data and voice communicators that operate in conjunction with satellite systems. Magellan manufactures satellite-based navigation and communications products for commercial and consumer markets including recreational marine and aviation users, outdoor recreational users such as hunters and hikers and professional users such as geologists, geographers, surveyors, natural resource managers and construction contractors. Magellan focuses its research, design and engineering activities on the development of GPS navigators that are reliable, portable, easy to use and highly affordable, targeting the growing recreational market. Recently, Magellan announced the introduction of a combined GPS navigator and personal messaging communicator for the ORBCOMM System that Magellan expects to be ready for shipment in 1997, and Magellan will continue to develop new satellite-based communications and tracking technology that is compatible with the ORBCOMM System and other satellite networks. SATELLITE SERVICES In the Company's satellite services sector, ORBCOMM Global and ORBIMAGE are developing satellite-based services to address markets for global two-way data communications and information derived from remote imaging of the atmosphere, oceans and land surfaces. ORBCOMM COMMUNICATIONS SERVICES. The ORBCOMM System is designed to provide virtually continuous low-cost monitoring, tracking and messaging communications coverage over most of the Earth's surface. Under this system, subscribers are able 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, industrial equipment, shipping vessels and other remote assets. The Company expects that the ability to send and receive data and messages without the geographic limitations of existing 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 geographic coverage in areas these systems are unable to reach. The global ORBCOMM System design consists of a constellation of small low-Earth orbit satellites, a control center that monitors and manages the flow of information throughout the System, the gateways that transmit and receive signals and process data and other information and the communicators that are used by subscribers to transmit and receive messages to and from the satellites. The first two ORBCOMM Global satellites launched in April 1995 are being used to provide initial services, primarily in monitoring and tracking applications, following the commencement of commercial service in the United States in February 1996. There are currently four operational U.S. "gateway" Earth stations located in New York, Washington, Arizona and Georgia, while gateways are also planned to be owned and operated by ORBCOMM Global licensees in strategic locations around the world. During 1996, ORBCOMM Global reached agreements with several manufacturers for the development and manufacture of hand-held communicators and various types of industrial communicators that monitor fixed assets. In March 1996, subscriber communicators became commercially available from Panasonic, the first of ORBCOMM's manufacturers. The ORBCOMM System will be operated throughout the world by ORBCOMM Global licensees, who will be responsible for obtaining the applicable foreign regulatory approvals and for constructing the ground network in their designated territories. The ORBCOMM System is marketed in the United States through ORBCOMM USA. ORBCOMM International has signed preliminary agreements with seven candidate licensees serving 69 countries to seek such regulatory approvals and to initiate territory-specific market development in such countries. ORBCOMM International has definitive agreements with international licensees who will provide regional services in Canada, Europe and portions of East Asia, the Middle East and Africa. The two ORBCOMM System satellites currently in orbit and the U.S. gateways provide communications availability in the United States approximately 10% of each 24-hour period, with maximum outages of approximately nine hours. This type of availability is particularly appropriate for ORBCOMM Global's planned initial applications focusing on monitoring the status of remote assets and tracking trucks and cargo, where several readings per day satisfy a customer's requirements. With the launch of additional satellites, communications availability will also increase. The Company expects that, with a planned constellation of 28 satellites and appropriately situated gateways, the ORBCOMM System will provide communications availability generally exceeding 95% of each 24-hour period in the United States and other temperate zones in the Northern and Southern hemispheres and exceeding 75% of each 24-hour period in the equatorial region. Equatorial region availability could be improved to generally exceed 90% with an additional group of eight satellites. Outside the United States, the ORBCOMM System will only be available in countries and regions where appropriate licenses have been obtained and where there is a gateway that can serve the applicable market. 4 8 Under the ORBCOMM System Procurement Agreement between Orbital and ORBCOMM Global (the "Procurement Agreement"), Orbital is constructing and will launch 26 additional satellites, and will construct an additional eight satellites, all on a fixed-price basis. Consistent with industry practice for similar contracts, the Procurement Agreement contains certain performance incentives with respect to the satellites and their launches. The ORBCOMM Partnerships. Under ORBCOMM Global's partnership agreement, action by the partnership generally requires the approval of general partners holding a majority of the participating interests (i.e., interests participating in profits and losses). OCC and Teleglobe Mobile are each 50% general partners in ORBCOMM Global, with the result that OCC and Teleglobe Mobile share equal responsibility for the operational and financial affairs of ORBCOMM Global, and the approval of both OCC and Teleglobe Mobile is necessary for ORBCOMM Global to act on major matters. OCC indirectly holds a 51% participating interest in ORBCOMM USA, and Teleglobe Mobile indirectly holds a 51% participating interest in ORBCOMM International, with the result that OCC acting alone can generally control the operational and financial affairs of ORBCOMM USA, and Teleglobe Mobile acting alone can generally control the operational and financial affairs of ORBCOMM International. Financing. Orbital and Teleglobe Mobile's total equity capital contributions to ORBCOMM Global are approximately $75 million and $85 million, respectively. In 1996, ORBCOMM Global and its wholly owned subsidiary, ORBCOMM Global Capital Corporation, issued $170,000,000 of senior unsecured notes (the "Notes") to institutional investors. The Notes are fully and unconditionally guaranteed on a joint and several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM International. The guarantees and the Notes are non-recourse to Orbital, bear interest at a fixed rate of 14% and provide for noteholder participation in future ORBCOMM System revenues, payment of which may be deferred by ORBCOMM Global to the extent certain fixed charge ratios are not met. Net proceeds from the sale of the Notes (approximately $164,500,000) are being applied to (i) the design, construction, launch, operation and marketing of the ORBCOMM System and related development, operating and management expenses (including cost contingencies) and (ii) the first two years of interest on the Notes. Start-up of the ORBCOMM System will produce significant ORBCOMM Global operating losses for several more years. Even if the ORBCOMM System is fully constructed and operational, there can be no assurance that an adequate market will develop for ORBCOMM services, that ORBCOMM Global will achieve profitable operations or that Orbital will recover any of its past or anticipated investment in the ORBCOMM System. Because Orbital (through OCC) has a 50% participating interest in ORBCOMM Global, Orbital expects to recognize its proportionate share of ORBCOMM Global profits and losses. As of March 14, 1997, certain officers and employees of ORBCOMM Global and Orbital held options to acquire 611,680 shares of OCC's common stock (or approximately 13 percent of OCC's outstanding common stock) at option exercise prices ranging from $1.50 to $26.50 per share. On an annual basis, holders of OCC common stock acquired on exercise of these options may, subject to certain conditions, require OCC to purchase such OCC common stock at its then fair market value, subject to limitations under the indenture for the senior note financing. As of March 14, 1997, there were 48,020 shares of OCC common stock outstanding that were acquired in connection with option exercises by current or former OCC and Orbital employees. Regulatory Approvals. OCC has retained control over the applicable license issued by the Federal Communications Commission ("FCC"), consistent with FCC regulations. This license, which provides that the ORBCOMM System must be constructed within six years from the date the license was granted, extends for a period of ten years from the date the first ORBCOMM System satellite was operational. At the end of the seventh year of the ten-year term, a renewal application must be filed with the FCC. As with any such license, the ORBCOMM System FCC license may be revoked and a license renewal application may be denied for cause. In addition, there can be no assurance that ORBCOMM Global or its international licensees will be granted all licenses or approvals necessary to operate the ORBCOMM System in any other country. ORBIMAGE REMOTE SENSING AND IMAGING SERVICES. The Company is currently seeking, through its ORBIMAGE subsidiary, to develop and market a broad range of information services that involve identifying and monitoring global environmental changes and weather patterns, and collecting and disseminating digital land maps and other remote imaging information. Small Earth-viewing satellites and related sensors and instruments placed in low orbits are planned to offer cost-efficient image collection and processing, together with daily global coverage and high-resolution imaging quality. Since April 1995, ORBIMAGE's first satellite, OrbView-1, has been monitoring lightning and severe weather patterns. Orbital has also entered into a contract with NASA to provide worldwide, daily ocean imagery using Orbital's OrbView-2 environmental monitoring satellite system. The Company plans to develop, produce, launch and operate the OrbView-2 system to deliver high-quality multi-spectral ocean imagery and land surface imagery for up to five years. The OrbView-2 launch has been delayed several 5 9 years, primarily due to technical challenges associated with the development of the spacecraft. The OrbView-2 satellite has completed final testing and is currently scheduled to be launched in the first half of 1997. In addition to providing unprocessed real-time ocean data to NASA, ORBIMAGE plans to market the OrbView-2 imagery directly and indirectly through value-added resellers and other marketing agents to other U.S. Government users and to potential domestic and international customers such as commercial fishing fleets, oil and gas companies, ocean transportation operators, oceanographers and agricultural companies. ORBIMAGE is pursuing a one-meter high-resolution satellite imagery business based on imagery to be provided by the OrbView-3 satellite currently under development by the Company, with Orbital under contract to provide the launch service, ground stations and other related products and services. OrbView-3 would be the third in a fleet of three spacecraft, including OrbView-1 and OrbView-2, that will constitute the foundation of ORBIMAGE's commercial satellite remote imagery business. The Company is currently pursuing a transaction that would involve a sale of ORBIMAGE equity securities to one or more third parties in order to finance such venture including the development and construction of the OrbView-3 satellite and ground system. There can be no assurance that the Company will be able to conclude such financing arrangement or develop profitable commercial Earth observation and other remote imaging businesses. * * * * Financial information about the Company's products and services, domestic and foreign operations and export sales is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth below in Item 7 and the notes to the Company's consolidated financial statements set forth below in Item 8, and is incorporated herein by reference. COMPETITION Orbital believes that competition for sales of its products and services is based on performance and other technical features, price, reliability, scheduling and customization. While there is currently no direct domestic competition for the Pegasus and Taurus launch vehicles, potential competition may come from launch systems derived from the LMLV currently being developed by Lockheed Martin Corporation ("Lockheed"). Pegasus may face competition from launch systems derived from 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. Japan's space agency has a launcher that directly competes with Taurus in terms of launch capacity, but is considerably more expensive than the Taurus. Competition to Pegasus and Taurus vehicles also exists in the form of partial or secondary ("piggyback") payload capacity on larger boosters such as the Ariane, Titan, Delta, Long March and Proton launch vehicles. While several companies design and manufacture suborbital launch vehicles, Orbital's primary competitors in this product line are Coleman Research Corp. and Space Vector Corporation. The Company's satellite systems and subsystems products compete with products and services produced or provided by government entities and numerous companies, including TRW Inc., CTA, Ball and Spectrum Astro, Inc. The Company's airborne and ground-based electronics, data management systems, defense-oriented avionics products and software systems and aviation systems face competition from several established manufacturers. The Company's space sensors and instruments face competition from a number of companies and university research laboratories capable of designing and producing space instruments. The Company's main competitors in the area of satellite ground stations include Datron Systems Inc., Matra Marconi Space N.V. and Hughes-STX Corp. Magellan's marine, outdoor recreation and aviation GPS satellite-based navigation products primarily face competition from Garmin International. Magellan competes with a larger number of producers of satellite navigation and communications products in its other markets. The Company believes that Magellan's success will depend on its ability to continue to develop new lower-cost and enhanced performance products to enter into and develop new markets for GPS navigators and personal satellite communicators, and to develop and strengthen sales and distribution channels for such products. The ORBCOMM System will face competition from numerous existing and potential alternative communications products and services provided by various large and small companies, including sophisticated two-way satellite-based data and voice communications services. For specific markets, the ORBCOMM System may complement existing tower-based services such as one-way and two-way paging, cellular data, specialized mobile radio and private networks. ORBIMAGE may face competition from U.S. 6 10 and foreign government entities and private entities, such as EarthWatch Incorporated and Space Imaging L.P., that provide or are seeking to provide satellite-based and other land remote imaging, environmental monitoring and atmospheric sensing products. Many of the Company's competitors are larger and have substantially greater resources than the Company. Furthermore, the possibility exists that other domestic or foreign companies or governments, some with greater experience in the space industry and greater financial resources than Orbital, will seek to produce products or services that compete with those of the Company. Any such foreign competitor could benefit from subsidies from, or other protective measures by, its home country. RESEARCH AND DEVELOPMENT The Company expects to continue to invest in product-related research and development, to conceive and develop new products and services, to enhance existing products and services and to seek customer and, where appropriate, strategic partner investments in these products and services. Orbital's research and development expenses, excluding direct customer-funded development, were approximately $23.1 million, $28.6 million and $17.3 million, respectively, for the fiscal years ended December 31, 1996, 1995 and 1994. PATENTS AND TRADEMARKS Orbital relies, in part, on patents, trade secrets and know-how to develop and maintain its competitive position and technological advantage. The Company holds U.S. and foreign patents relating to the Pegasus vehicle and U.S. patents relating to the ORBCOMM System as well as for other systems and products produced by the Company. The Company also has various pending patent applications relating to Pegasus and the ORBCOMM System along with other products. Certain of the trademarks and service marks used in connection with the Company's products and services have been registered with the U.S. Patent and Trademark Office, the Canadian Intellectual Property Office and certain other foreign trademark authorities. COMPONENTS AND RAW MATERIALS Orbital purchases a significant percentage of its product components, including rocket propulsion motors, structural assemblies and electronic equipment, from third parties. Orbital also occasionally obtains from the U.S. Government parts and equipment that are used in the production of the Company's products or in the provision of the Company's services. Orbital has not experienced material difficulty in obtaining product components or necessary parts and equipment and believes that alternative sources of supply would be available, although increased costs and possible delays could be incurred in securing alternative sources of supply. The Company's ability to launch its Pegasus vehicle depends on the availability of an aircraft with the capability of carrying and launching such space launch vehicles. Orbital entered into a 10-year lease in 1992 for the modified Lockheed L-1011 used for the air-launch of the Pegasus vehicle. U.S. GOVERNMENT CONTRACTS During 1996, 1995 and 1994, approximately 45 percent, 40 percent and 45 percent, respectively, of the Company's total annual revenues were derived from contracts with the U.S. Government and its agencies or from subcontracts with the U.S. Government's prime contractors. Orbital's government contracts are subject to regular audit and periodic reviews and may be modified, increased, reduced or terminated in the event of changes in government requirements or policies, Congressional appropriations and program progress and scheduling. U.S. Government curtailment of expenditures for space research and development and related products and services could have a material adverse effect on Orbital's revenues and results of operations. Agencies within the U.S. Government and commercial customers to which sales by the Company accounted for ten percent or more of the Company's consolidated 1996 revenues were NASA, DoD and ORBCOMM Global. Orbital's major contracts with the U.S. Government fall into three categories: firm fixed-price contracts, fixed-price incentive fee contracts and cost-plus-fee contracts. Under firm fixed-price contracts, work performed and products shipped are paid for at a fixed price without adjustment for actual costs incurred in connection with the contract. Risk of loss due to increased cost, therefore, is borne by the Company, although some of this risk may be passed on to subcontractors. Under fixed-price government contracts, Orbital may receive progress payments, generally in an amount equal to between 80 and 95 percent of monthly costs, or it may receive milestone payments upon the occurrence of certain program achievements, with final payments occurring at project completion. Fixed-price incentive fee contracts provide for sharing by the customer and the Company of unexpected costs incurred or savings realized within specified limits, and may provide for adjustments in price depending on actual contract performance other than costs. Costs in excess of the negotiated maximum (ceiling) price and the risk of loss by reason of such excess costs are borne by the 7 11 Company, although some of this risk may be passed on to subcontractors. Under a cost-plus-fee contract, Orbital recovers its actual allowable costs incurred and receives a fee consisting of a base amount that is fixed at the inception of the contract and/or an award amount that is based on the Government's subjective evaluation of the contractor's performance in terms of the criteria stated in the contract. All Orbital's U.S. Government contracts and, in general, its subcontracts with the U.S. Government's prime contractors provide that such contracts may be terminated at will by the U.S. Government or the prime contractor, respectively. Furthermore, any of these contracts may become subject to a government-issued stop work order under which the Company is required to suspend production. In the event of a termination at will, Orbital is normally 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. The Company from time to time experiences contract suspensions and terminations. BACKLOG Orbital's contract backlog is attributable to its space and ground infrastructure systems business. The Company's firm backlog at December 31, 1996 and 1995 was approximately $710 million and $530 million, respectively. As of December 31, 1996, approximately 60 percent of the Company's backlog was with the U.S. Government and its agencies or from subcontracts with the U.S. Government's prime contractors. 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 $265 million and $355 million as of December 31, 1996 and 1995, respectively. Approximately $325 million of backlog is currently scheduled to be performed beyond 1997. Backlog excludes unexercised and undefinitized contract options having an aggregate potential contract value at December 31, 1996 of approximately $1.4 billion. EMPLOYEES As of December 31, 1996, Orbital had approximately 3,000 full-time permanent employees. ITEM 2. PROPERTIES In 1993, Orbital entered into a 12-year lease agreement for approximately 100,000 square feet of office and engineering space in Dulles, Virginia, which serves as its corporate headquarters. The Company owns an approximate 30,000 square-foot satellite engineering and manufacturing facility on land adjacent to the Dulles office facility and is constructing an addition to such facility to provide additional office, engineering and manufacturing space. Orbital also leases approximately 320,000 square feet of office, engineering and manufacturing space in Germantown, Maryland; 305,000 square feet of office, engineering and manufacturing space in Chandler, Arizona; approximately 214,000 square feet of office and engineering space in Richmond, British Columbia; approximately 135,000 square feet of office, engineering and manufacturing space in Pomona, California; and approximately 75,000 square feet of office, engineering and manufacturing space in San Dimas, California. The Company leases or owns other smaller facilities, offices or manufacturing space around the United States, including Huntsville, Alabama; Edwards Air Force Base, California; Vandenberg Air Force Base, California and Greenbelt, Maryland; as well as in other locations in Canada such as Ottawa, Ontario, as well as in England, Malaysia, Mexico and Australia. Although completion of the Company's existing and pending contracts may in the future require additional manufacturing capacity, Orbital believes that its existing facilities are adequate for its near- and medium-term requirements. ITEM 3. LEGAL PROCEEDINGS On November 12, 1996, BTG USA Inc. filed a lawsuit against Magellan in the U.S. District Court for the Eastern District of Pennsylvania, alleging that Magellan's GPS products infringe a United States patent and seeking an unspecified amount of monetary damages. The patent at issue expired in November 1996. The Company believes the complaint has no merit, and the Company is vigorously defending the action. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There was no matter submitted to a vote of the Company's security holders during the fourth quarter of 1996. 8 12 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, 1997. All Executive Officers are elected annually and serve at the discretion of the Board of Directors.
NAME AGE POSITION David W. Thompson 42 Chairman of the Board, President and Chief Executive Officer Bruce W. Ferguson 42 Executive Vice President and General Manager/Communications and Information Services Group James R. Thompson 60 Executive Vice President and General Manager/Launch Systems Group Michael D. Griffin 47 Executive Vice President and General Manager/Space Systems Group Robert D. Strain 40 Executive Vice President and General Manager/Electronics and Sensor Systems Group Daniel E. Friedmann 40 Executive Vice President and General Manager/Systems Integration and Software Group Jeffrey V. Pirone 36 Senior Vice President and Chief Financial Officer Antonio L. Elias 47 Senior Vice President and Chief Technical Officer Leslie C. Seeman 44 Senior Vice President, General Counsel and Secretary
David W. Thompson is a founder of Orbital and has been Chairman of the Board, President and Chief Executive Officer of the Company since 1982. From 1981 to 1982, Mr. Thompson was Special Assistant to the President at Hughes Aircraft Company's Missile Systems Group. From 1977 to 1979, Mr. Thompson was employed by NASA at the Marshall Space Flight Center as a project manager and engineer. Prior to that, he worked on the Space Shuttle's autopilot design at the Charles Stark Draper Laboratory. Bruce W. Ferguson is a founder of Orbital and has been Executive Vice President and General Manager/Communications and Information Services Group since October 1993 and a Director of the Company since 1982. Mr. Ferguson was Executive Vice President and Chief Operating Officer of Orbital from 1989 to October 1993 and Senior Vice President/Finance and Administration and General Counsel of Orbital from 1985 to 1989. James R. Thompson (who is not related to David W. Thompson) has been Executive Vice President and General Manager/Launch Systems Group since October 1993 and a Director since January 1992. Mr. Thompson was Executive Vice President and Chief Technical Officer of Orbital from 1991 to October 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. Michael D. Griffin has been Executive Vice President/Space Systems Group since January 1996. Dr. Griffin joined Orbital in August 1995 when he was appointed Senior Vice President and Chief Technical Officer. From 1994 to August 1995, he was Senior Vice President for Program Development at Space Industries International. From September 1991 to January 1994, he served as Chief Engineer of NASA and, from 1989 to 1991, was Deputy Director for Technology at the Strategic Defense Initiative Organization. Robert D. Strain has been Executive Vice President and General Manager/Electronics and Sensor Systems Group since October 1996. From 1994 until 1996, he was Vice President for Finance and Manufacturing at Orbital. Prior to that he served in a variety of senior-level financial positions with Fairchild, including Vice President of Finance, Treasurer and Controller. Daniel E. Friedmann has been Executive Vice President and General Manager/Systems Integration and Software Group since January 1996. He continues to serve as President and Chief Executive Officer of Orbital's subsidiary, MDA, a position he has held since March 1995. From 1992 to March 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 Senior Vice President and Chief Financial Officer since August 1996, and had served as acting Chief Financial Officer as of April 1996. From 1993 until March 1996, Mr. Pirone served as Vice President and Controller of Orbital. Mr. Pirone joined Orbital as Controller in 1991, and prior to that was a Senior Manager at KPMG Peat Marwick LLP. Antonio L. Elias has been Senior Vice President and Chief Technical Officer since January 1996. 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. 9 13 Leslie C. Seeman has been Senior Vice President of the Company since October 1993 and General Counsel and Secretary of the Company since 1989. From 1989 to October 1993, she was Vice President of the Company, 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. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On March 12, 1997, there were 1,549 Orbital stockholders of record. The Company's Common Stock is traded on the Nasdaq Stock Market under the symbol ORBI. The range of high and low closing sales prices of Orbital Common Stock for 1994 through 1996, as reported on the Nasdaq Stock Market, was as follows:
1996 HIGH LOW ---- ----------- ------------ Fourth Quarter $ 21 7/8 $ 16 1/4 Third Quarter $ 20 $ 16 Second Quarter $ 19 7/8 $ 13 First Quarter $ 16 1/8 $ 11 3/4 1995 HIGH LOW ---- ----------- ------------ Fourth Quarter $ 16 5/8 $ 12 3/16 Third Quarter $ 19 1/4 $ 16 Second Quarter $ 22 $ 15 1/2 First Quarter $ 20 1/2 $ 16 1/2 1994 HIGH LOW ---- ----------- ------------ Fourth Quarter $ 22 1/2 $ 15 Third Quarter $ 18 1/2 $ 14 1/2 Second Quarter $ 24 1/2 $ 14 First Quarter $ 26 1/2 $ 15 1/4
Orbital has never paid a cash dividend on its Common Stock. The Company currently intends to retain earnings primarily for working capital and product development and therefore does not anticipate paying dividends in the foreseeable future. In addition, the Company is prohibited from paying cash dividends under an existing credit facility. 10 14 ITEM 6. SELECTED FINANCIAL DATA Management has determined to restate its previously issued consolidated financial statements as of and for the years ended December 31, 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, 1996 and the consolidated balance sheet data at December 31, 1996 and 1995 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 and other data for the years ended December 31, 1993 and 1992 and the consolidated balance sheet data at December 31, 1994, 1993 and 1992 are derived from consolidated financial statements not included or incorporated by reference herein. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1996 1995 1994 ----------------- -------------------- -------------------- OPERATING DATA: (restated) (restated) Revenues $ 449,787 $ 359,840 $ 301,576 Costs of goods sold 332,581 271,146 216,417 ---------------- ---------------- ---------------- Gross profit 117,206 88,694 85,159 Research and development expenses 23,068 28,558 17,259 Selling, general and administrative expenses 77,247 64,170 53,165 Amortization of goodwill 3,134 3,221 2,360 ---------------- ------------------ ------------------ Income (loss) from operations 13,757 (7,255) 12,375 Net investment income (expense) (49) 1,131 (244) Equity in earnings (losses) of affiliates (7,008) (644) (1,264) Non-controlling interests in (earnings) losses of consolidated subsidiaries 1,473 427 -- Acquisition expenses -- (3,441) (503) ---------------- ---------------- ---------------- Income (loss) before provision (benefit) for income taxes, extraordinary item and cumulative effect of accounting change 8,173 (9,782) 10,364 Provision (benefit) for income taxes 211 (6,569) 2,744 ---------------- ---------------- ---------------- Income (loss) before extraordinary item and cumulative effect of accounting change 7,962 (3,213) 7,620 Extraordinary item--gain on sale of assets, net of tax 1,980 -- -- Cumulative effect of accounting change, net of tax -- (2,377) -- ---------------- ---------------- ---------------- Net income (loss) $ 9,942 $ (5,590) $ 7,620 ================ ================ ================ NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (1): Income (loss) before extraordinary item and cumulative effect of accounting change $ 0.27 $ (0.12) $ 0.33 Extraordinary item--gain on sale of assets, net of tax 0.07 -- -- Cumulative effect of accounting change, net of tax -- (0.09) -- ------------ ------------ ------------ $ 0.34 $ (0.21) $ 0.33 ============ ============ ============ SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE 29,137,361 26,207,746 23,191,553 ============ ============ ============ NET INCOME (LOSS) PER COMMON SHARE, ASSUMING FULL DILUTION (2): Income (loss) before extraordinary item and cumulative effect of accounting change $ 0.30 $ (0.12) $ 0.32 Extraordinary item--gain on sale of assets, net of tax 0.04 -- -- Cumulative effect of accounting change, net of tax -- (0.09) -- ------------ ------------ ------------ $ 0.34 $ (0.21) $ 0.32 ============ ============ ============ SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON SHARE, ASSUMING FULL DILUTION 31,616,119 26,207,746 27,309,336 ============ ============ ============ BALANCE SHEET DATA: Cash and cash equivalents and short-term investments $ 33,750 $ 35,030 $ 40,345 Net working capital 71,055 78,778 57,449 Total assets 509,613 472,900 441,042 Short-term borrowings 38,969 11,907 28,977 Long-term obligations, net 35,326 96,990 86,068 Stockholders' equity 323,795 238,166 206,943 YEARS ENDED DECEMBER 31, 1993 1992 -------------------- ------------------- OPERATING DATA: Revenues $ 300,184 $ 273,171 Costs of goods sold 228,289 207,834 ---------------- ---------------- Gross profit 71,895 65,337 Research and development expenses 19,703 15,565 Selling, general and administrative expenses 38,270 41,723 Amortization of goodwill 1,634 1,606 ------------------ ------------------ Income (loss) from operations 12,288 6,443 Net investment income (expense) (44) 860 Equity in earnings (losses) of affiliates (2,436) -- Non-controlling interests in (earnings) losses of consolidated subsidiaries -- -- Acquisition expenses -- -- ---------------- ---------------- Income (loss) before provision (benefit) for income taxes, extraordinary item and cumulative effect of accounting change 9,808 7,303 Provision (benefit) for income taxes 2,403 1,997 ---------------- ---------------- Income (loss) before extraordinary item and cumulative effect of accounting change 7,405 5,306 Extraordinary item--gain on sale of assets, net of tax -- -- Cumulative effect of accounting change, net of tax 200 -- ---------------- ---------------- Net income (loss) $ 7,605 $ 5,306 ================ ================ NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (1): Income (loss) before extraordinary item and cumulative effect of accounting change $ 0.40 $ 0.29 Extraordinary item--gain on sale of assets, net of tax -- -- Cumulative effect of accounting change, net of tax 0.01 -- -------------- -------------- $ 0.41 $ 0.29 ============ ============ SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE 18,728,980 18,492,059 ================ ================ NET INCOME (LOSS) PER COMMON SHARE, ASSUMING FULL DILUTION (2): Income (loss) before extraordinary item and cumulative effect of accounting change $ 0.36 $ 0.29 Extraordinary item--gain on sale of assets, net of tax -- -- Cumulative effect of accounting change, net of tax 0.01 -- ------------ ------------- $ 0.37 $ 0.29 ============ ============ SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON SHARE, ASSUMING FULL DILUTION 22,343,402 18,492,059 ================ ================ BALANCE SHEET DATA: Cash and cash equivalents and short-term investments $ 85,347 $ 16,019 Net working capital 92,036 41,527 Total assets 367,979 212,151 Short-term borrowings 15,793 6,377 Long-term obligations, net 73,165 10,818 Stockholders' equity 169,389 111,687
11 15 1. Net income (loss) per common and common equivalent share is calculated using the weighted average number of shares and dilutive equivalent shares outstanding during the periods. 2. Net income (loss) per common share, assuming full dilution, is calculated using the weighted average number of shares and dilutive equivalent shares outstanding during the periods, plus the effect of an assumed conversion of the Company's convertible subordinated debentures prior to their actual conversion in 1996. 12 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW A significant portion of the company's space and ground infrastructure systems revenues are generated under long-term contracts with various agencies of the U.S. Government, various foreign governments and commercial customers. Orbital recognizes revenues on long-term contracts using the percentage of completion method of accounting, under which revenue and profit are recognized based on actual costs incurred in relation to total estimated costs to complete the contract or specific delivery terms and conditions. To the extent that estimated costs of completion are adjusted, revenue recognized from a particular contract will be affected in the period of the adjustment. The company is accounting for its 50% investment in ORBCOMM Global, L.P. ("ORBCOMM Global") using the equity method of accounting. In accordance with the equity method of accounting, Orbital consolidates 100% of the revenues earned and costs incurred on sales of products and services to ORBCOMM Global. The company also recognizes as equity in earnings (losses) of affiliates its proportionate share of ORBCOMM Global's profits and losses. During the construction phase of the ORBCOMM system, ORBCOMM Global is capitalizing substantially all system construction costs, including amounts paid to Orbital. To the extent ORBCOMM Global capitalizes its purchases from Orbital, the company eliminates as equity in earnings (losses) of affiliates 50% of its profits and losses from those sales. Orbital controls, and therefore consolidates the accounts of, ORBCOMM USA, L.P., a partnership that markets ORBCOMM system services in the United States. In 1995, the company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS 121"). The cumulative effect of adopting SFAS 121 on prior years' earnings, relating to the impairment in the carrying amount of certain assets to be disposed of that supported the company's orbit transfer vehicle product line, was $2,377,000, net of tax benefit of $1,783,000, and is reported in the 1995 consolidated statement of operations. Statements included in this discussion and in the Annual Report relating to future revenues, sales, expenses, growth rates, net income, new business, operational performance, schedules, sources and uses of funds, and the level of the company's investment in satellite imaging projects and the ORBCOMM business are forward-looking statements that involve risks and uncertainties. Factors that may cause the actual results, performance or achievements of the company to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements include, among other things, general economic and business conditions, launch success, product performance, availability of required capital, market acceptance of new products and technologies and other factors more fully described in Exhibit 99 to the company's Report on Form 10-K for the year ended December 31, 1996. Certain of the 1996 and 1995 financial information has been restated. See Notes 1A and 14 to the consolidated financial statements. SIGNIFICANT RECENT ACQUISITIONS Orbital acquired MacDonald, Dettwiler and Associates, Ltd. ("MDA") on November 17, 1995 and Magellan Corporation ("Magellan") on December 29, 1994. Both transactions were accounted for using the pooling of interests method of accounting for business combinations. Orbital's historical financial information has been restated to effect the pooling of interests with MDA and Magellan as of the earliest period presented. Orbital incurred transaction expenses of approximately $3,400,000 and $500,000 in 1995 and 1994, respectively, related to these business combinations. On August 11, 1994, Orbital acquired Fairchild Space and Defense Corporation ("Fairchild"), a subsidiary of Matra Aerospace, Inc., in a transaction accounted for as a purchase business combination. Fairchild's results of operations for the nineteen-week period ended December 31, 1994 have been included in Orbital's consolidated results of operations for the year ended December 31, 1994. 13 17 The following table shows the company's revenues, gross profits and margins, by major product category within each business sector, for each of the three years ended December 31, 1996, 1995 and 1994:
1996 (RESTATED) 1995 (RESTATED) --------------------------------------------- ------------------------------------------- (DOLLARS IN THOUSANDS) GROSS GROSS REVENUES PROFIT MARGIN REVENUES PROFIT MARGIN ---------------- ------------ ------------ ---------------- ----------- ------------ SPACE AND GROUND INFRASTRUCTURE SYSTEMS $ 377,166 $ 93,899 24.9% $ 296,109 $ 65,360 22.1% Launch Vehicles 103,687 18,769 18.1 67,803 7,462 11.0 Satellites 101,891 22,625 22.2 82,849 10,431 12.6 Electronics and Sensor Systems 92,070 26,608 28.9 71,983 24,597 34.2 Ground Systems and Software 79,518 25,897 32.6 73,474 22,870 31.1 SATELLITE ACCESS PRODUCTS 71,188 25,134 35.3 52,531 20,085 38.2 SATELLITE-DELIVERED SERVICES 1,433 (1,827) N/A 11,200 3,249 29.0 ------------ ------------ ----- ------------ ----------- ---- CONSOLIDATED TOTALS $ 449,787 $ 117,206 26.1% $ 359,840 $ 88,694 24.6% ============ ============ ===== ============ =========== ==== 1994 ----------------------------------------- (DOLLARS IN THOUSANDS) GROSS REVENUES PROFIT MARGIN ---------------- ----------- --------- SPACE AND GROUND INFRASTRUCTURE SYSTEMS $ 252,905 $ 61,239 24.2% Launch Vehicles 84,970 16,954 20.0 Satellites 35,032 9,231 26.4 Electronics and Sensor Systems 53,273 14,775 27.7 Ground Systems and Software 79,630 20,279 25.5 SATELLITE ACCESS PRODUCTS 38,517 17,802 46.2 SATELLITE-DELIVERED SERVICES 10,154 6,118 60.3 ------------ ----------- ---- CONSOLIDATED TOTALS $ 301,576 $ 85,159 28.2% ============ =========== ====
RESULTS OF OPERATIONS REVENUES Orbital's consolidated revenues for 1996, 1995 and 1994 were $449,787,000, $359,840,000 and $301,576,000, respectively. Revenues include sales to ORBCOMM Global of approximately $47,215,000, $49,187,000 and $30,048,000 in 1996, 1995 and 1994, respectively. Space and Ground Infrastructure Systems. Revenues from the company's space and ground infrastructure systems increased to $377,166,000 in 1996, from $296,109,000 in 1995 and $252,905,000 in 1994. Revenues from the company's launch vehicles increased to $103,687,000 in 1996 from $67,803,000 in 1995. Launch vehicle revenues were $84,970,000 in 1994. The decrease in revenues from 1994 to 1995 is primarily attributable to significant delays in production of the company's Pegasus space launch vehicle as a result of the June 1994 and June 1995 Pegasus XL launch failures. The significant increase in revenues in 1996 is attributable to revenues generated from the resumption of production and launch of the Pegasus XL launch vehicle and from work performed under new and existing contracts for the company's Taurus launch vehicle. During 1996, Orbital carried out four successful Pegasus launches. A fifth Pegasus launch, which occurred in November 1996, delivered two NASA satellites to their targeted orbits, but the two satellites failed to separate from the launch vehicle. The company believes that the problem was caused by a faulty electrical power system on the Pegasus launcher that failed to activate certain satellite separation mechanisms, and does not anticipate significant further launch delays as a result of this problem. Revenues from sales of satellites increased to $101,891,000 in 1996, from $82,849,000 in 1995 and $35,032,000 in 1994. The increase in satellite revenues in 1995 as compared to 1994 is primarily attributable to a full year's sales of satellites following the 1994 acquisition of Fairchild. The increase in 1996 is primarily attributable to additional revenues generated from new satellite orders from commercial and government customers received in late 1995 and in 1996. Electronics and sensor systems revenues increased to $92,070,000 in 1996, from $71,983,000 in 1995 and $53,273,000 in 1994. The increase in 1995 as compared to 1994 is primarily due to a full year's sales of defense electronics products following the 1994 acquisition of Fairchild offset, in part, by a decrease in space sensors and instruments sales. The increase in 1996 revenues is primarily attributable to work performed on defense electronics and intelligent transportation management systems orders received in 1995 and 1996. Ground systems and software revenues were $79,518,000, $73,474,000 and $79,630,000 in 1996, 1995 and 1994, respectively. Sales of satellite ground systems declined in 1995 due to a decrease in worldwide demand for ground system installations; however, the number of installations and upgrades increased in 1996, resulting in greater revenues. 14 18 Satellite Access Products. Revenues from sales of satellite navigation and communications products were $71,188,000 for 1996, as compared to $52,531,000 in 1995 and $38,517,000 in 1994. The year-to-year increases are due to significant growth in the number of Global Positioning System ("GPS") products sold offset, in part, by lower average unit sales prices. Satellite-Delivered Services. The company's start-up satellite-delivered services businesses generated revenues of $1,433,000, $11,200,000 and $10,154,000 for 1996, 1995 and 1994, respectively. Satellite-delivered services revenues for 1996 were primarily attributable to sales of satellite imagery to government and commercial customers by the company's subsidiary, Orbital Imaging Corporation ("ORBIMAGE"), as well as modest sales of ORBCOMM services in the United States. Revenues in 1995 and 1994 primarily represented sales of ground stations and network software to ORBCOMM Global; no such sales were made in 1996. COSTS OF GOODS SOLD Costs of goods sold include the costs of personnel, materials, subcontracts and overhead related to commercial products and under the company's various development and production contracts. Orbital's costs of goods sold for 1996, 1995 and 1994 were $332,581,000 (73.9% of revenues), $271,146,000 (75.4% of revenues) and $216,417,000 (71.8% of revenues), respectively. The reduction in costs of goods sold as a percentage of revenues in 1996 is attributable in part to resumption of production of the company's Pegasus space launch vehicle. Other contributing factors include increased profit margins on certain satellite and ground systems contracts offset, in part, by lower average unit sales prices of satellite navigation products. Profit margins in 1996 decreased as a result of the November Pegasus launch anomaly and certain other unanticipated contract cost increases. There can be no assurance that the company will have sufficient contingency reserves to cover any future launch vehicle or other contract cost increases. Also during 1996, the company recognized a decrease in costs of goods sold of $2,523,000 related to the write-off or expiration of certain Canadian Development loans no longer required or expected to be repaid. The increase in costs of goods sold as a percentage of revenues in 1995 as compared to 1994 is attributable in part to approximately $2,100,000 of cost increases on the Pegasus program resulting from two earlier launch failures, and unanticipated cost increases on certain satellite programs. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses represent Orbital's self-funded product development activities, and exclude direct customer-funded development. Research and development expenses during 1996, 1995 and 1994 were $23,068,000, $28,558,000 and $17,259,000, respectively. Research and development spending during 1996 relates primarily to the development of new or improved navigation and communications access products, improved launch vehicles, including enhancements to the Taurus and Pegasus launch vehicles, and new satellite initiatives. Research and development spending during 1995 and 1994 reflected Orbital's continued development of its Pegasus XL, including certain failure review and resolution efforts of approximately $7,900,000 in 1995. Research and development expenses in 1995 included $3,000,000 of costs related to an advanced reusable launch vehicle development program. 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 the company. Selling, general and administrative expenses for 1996, 1995 and 1994 were $77,247,000 (17.2% of revenues), $64,170,000 (17.8% of revenues) and $53,165,000 (17.6% of revenues), respectively. The decrease in selling, general and administrative expenses as a percentage of revenues from 1995 to 1996 is primarily attributable to significant growth in space and ground infrastructure revenues, along with only modest growth in selling, general and administrative expenses attributable to those product lines offset, in part, by increased costs from expanded marketing efforts related to the company's satellite-delivered services start-up businesses. INVESTMENT INCOME AND INTEREST EXPENSE Net investment income (expense) was ($49,000), $1,131,000 and ($244,000) for 1996, 1995 and 1994, respectively. Investment income reflects interest earnings on short-term investments and realized gains and losses on investments, reduced by interest expense on outstanding debt of $1,412,000, $2,952,000 and $1,740,000 in 1996, 1995 and 1994, respectively. Investment income in 1995 included an approximate $2,000,000 gain on the sale of an investment. Interest expense is net of capitalized interest of approximately $8,156,000, $6,685,000 and $5,500,000 in 1996, 1995 and 1994, respectively. On August 14, 1996, the company completed the 15 19 redemption of the remaining $55,880,000 outstanding principal amount of its 6.75% Convertible Subordinated Debentures due 2003, thereby reducing interest payments going forward. EQUITY IN LOSSES OF AFFILIATES AND NON-CONTROLLING INTERESTS IN LOSSES OF CONSOLIDATED SUBSIDIARIES Equity in losses of affiliates includes Orbital's proportionate share of ORBCOMM Global's net income or loss for the year and Orbital's elimination of proportionate profits or losses on sales to ORBCOMM Global. In 1996, Orbital's share of ORBCOMM Global's net loss was $8,268,000, and Orbital eliminated $714,000 of losses on sales to ORBCOMM Global. In 1995, Orbital's share of ORBCOMM Global's net income was $454,000, and Orbital eliminated $1,213,000 of profits on sales to ORBCOMM Global. In 1994, ORBCOMM Global had no net income or loss, and Orbital eliminated $1,264,000 of profits on sales to ORBCOMM Global. Non-controlling interests in losses of consolidated subsidiaries represents that portion of the subsidiary's losses allocable to other shareholders. PROVISION (BENEFIT) FOR INCOME TAXES The company recorded consolidated income tax provisions of $211,000 and $2,744,000 for 1996 and 1994, respectively. The company's effective tax rate for these periods (2.6% and 26.5% in 1996 and 1994, respectively) is primarily a result of non-tax deductible goodwill amortization related to purchase acquisitions, offset by tax-exempt interest earnings, U.S. Federal net operating loss carryforwards and Canadian investment tax credits. The company recorded an income tax benefit of approximately $6,569,000 in 1995, primarily as a result of reducing the deferred tax valuation allowance related to the realizability of certain tax credits, and other tax assets and the carryback and recapture of previously paid U.S. Federal taxes and management's determination that certain Canadian investment tax credit carryforwards would be realized in the near future. At December 31, 1996, Orbital had approximately $120,000,000 of U.S. Federal net operating loss carryforwards and $3,000,000 of U.S. Federal research and experimental tax credit carryforwards which, subject to certain annual limitations, are available to reduce future U.S. Federal income tax obligations. At December 31, 1996 and 1995, Orbital provided an allowance of $54,432,000 and $68,021,000, respectively, against certain of its consolidated deferred tax assets. EXTRAORDINARY GAIN ON SALE OF ASSETS In the fourth quarter of 1996, the company's wholly-owned subsidiary, MacDonald, Dettwiler and Associates (MDA), sold substantially all the assets of The PSC Communications Group, Inc. for approximately $13,000,000, resulting in a gain of approximately $3,600,000. The gain on sale of $1,980,000, net of tax, has been recorded as an extraordinary item since the assets were acquired through the acquisition of MDA in 1995, which was accounted for as a pooling of interests. LIQUIDITY AND CAPITAL RESOURCES The company's growth has required substantial capital to fund both an expanding business base and significant research and development and capital expenditures. The company has funded these requirements to date, and expects to fund its requirements in the future, through cash generated by operations, working capital, loan facilities, asset-based financings, joint venture arrangements, and private and public equity and debt offerings. Additionally, the company has historically made strategic acquisitions of businesses and routinely evaluates potential acquisition candidates. The company expects to continue to pursue potential acquisitions that it believes would enhance its business. The company has historically financed its acquisitions, and expects to finance its future acquisitions, through cash on hand, cash generated by operations, the issuance of debt and/or equity securities, and/or asset-based financings. Cash, cash equivalents and short-term investments were $33,750,000 at December 31, 1996, and the company had short-term and long-term debt obligations outstanding of approximately $74,295,000. The outstanding debt relates primarily to advances under the company's line of credit facilities, secured and unsecured notes, and fixed asset financings. Cash and cash equivalents included approximately $11,604,000 of cash reserved against outstanding letters of credit. Orbital's current ratio was 1.5 at December 31, 1996, compared to 1.7 and 1.4 at December 31, 1995 and 1994, respectively. In December 1996 and June 1995, the company issued and sold 1,200,000 and 2,000,000 shares, respectively, of its Common Stock in private placements to various offshore institutional investors, receiving net proceeds of approximately $20,000,000 and $32,400,000, respectively. 16 20 On August 14, 1996, the company completed the redemption of the remaining $55,880,000 outstanding principal amount of its 6.75% Convertible Subordinated Debentures due 2003. The outstanding principal amount was converted into 3,887,304 shares of Common Stock. Orbital amended its $20,000,000 unsecured note agreement during the third quarter of 1996 to facilitate compliance with certain financial covenants as well as to permit the completion of the ORBCOMM Global debt financing. In connection with this amendment, the interest rate on the note was increased from 10.5% to 11.5%, effective July 1, 1996. The unsecured note contains certain covenants with respect to fixed charge ratio, leverage ratio and tangible net worth, and includes certain cross-default provisions. The company is currently considering restructuring or refinancing this debt. The company's primary revolving credit facility provides for total borrowings from an international syndicate of six banks of up to $65,000,000, subject to a defined borrowing base comprised of certain receivables. Approximately $8,000,000 of borrowings were outstanding under the facility at December 31, 1996, and the available facility limit was approximately $36,000,000. At December 31, 1996, the average interest rate on outstanding borrowings under this facility was approximately 7.5%. Borrowings are secured by receivables and certain other assets. The facility prohibits the payment of cash dividends and contains certain covenants with respect to the company's working capital, fixed charge ratio, leverage ratio and tangible net worth, and expires in September 1997. Orbital plans to extend this facility in 1997. The company also maintains two additional revolving credit facilities, under which approximately $23,200,000 was outstanding at December 31, 1996. The borrowing capacity of the two additional agreements was approximately $35,000,000, consisting of a $10,000,000 line of credit collateralized by substantially all the assets of Magellan and an unsecured $25,000,000 demand line of credit. On August 7, 1996, ORBCOMM Global issued and sold $170,000,000 of senior unsecured notes due 2004 (the "Notes") to institutional investors. The Notes bear interest at a fixed rate of 14%, and provide for noteholder participation in future ORBCOMM Global service revenues. Net proceeds from the sale of the Notes are being applied to (i) the design, construction, launch, operation and marketing of ORBCOMM Global services, (ii) operating and management expenses (including cost contingencies) and (iii) the first two years of interest on the Notes. The Notes are fully and unconditionally guaranteed on a joint and several basis by the company's majority owned subsidiary, Orbital Communications Corporation, and by Teleglobe Mobile Partners; the guarantee is non-recourse to Orbital. The company's operations provided net cash of approximately $14,521,000 during 1996. The company also invested approximately $21,546,000 in ORBCOMM Global, incurred $10,355,000 in capital expenditures related to ORBIMAGE satellite imaging systems and incurred approximately $39,844,000 in capital expenditures for various launch vehicle, satellite and other production and test equipment to support future growth. Orbital expects that the capital required for the design, development, construction, marketing and initial operations of its ORBIMAGE commercial satellite imaging business will be approximately $225,000,000. The company has invested approximately $60,000,000 to date on imaging satellites and related ground systems that are currently operating, in the final testing phase, or under design and development. Orbital expects to invest up to $30,000,000 in ORBIMAGE satellite imaging projects in 1997. In addition, Orbital is exploring alternatives for raising capital to fund the remaining costs of such projects, including customer financing and the issuance of securities at the ORBIMAGE subsidiary level. 17 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report 19 Consolidated Statements of Operations 20 Consolidated Balance Sheets 21 Consolidated Statements of Stockholders' Equity 22 Consolidated Statements of Cash Flows 23 Notes to Consolidated Financial Statements 24
18 22 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in note 1A, the accompanying consolidated balance sheets as of December 31, 1996 and 1995, and the consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1996 and 1995 have been restated. KPMG LLP Washington, D.C. February 5, 1997, except as to note 1A, which is as of April 17, 2000 19 23 CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 1996 ------------------------ (RESTATED) Revenues $ 449,787 Costs of goods sold 332,581 --------------- Gross profit 117,206 Research and development expenses 23,068 Selling, general and administrative expenses 77,247 Amortization of goodwill 3,134 --------------- Income (loss) from operations 13,757 Net investment income (expense), net of interest expense of $1,412, $2,952, and $1,740, respectively (49) Equity in earnings (losses) of affiliates (7,008) Non-controlling interests in (earnings) losses of consolidated subsidiaries 1,473 Acquisition expenses -- --------------- Income (loss) before provision (benefit) for income taxes, extraordinary item and cumulative effect of accounting change 8,173 Provision (benefit) for income taxes 211 --------------- Income (loss) before extraordinary item and cumulative effect of accounting change 7,962 Extraordinary item - gain on sale of assets, net of tax 1,980 Cumulative effect of accounting change, net of taxes -- --------------- Net income (loss) $ 9,942 =============== NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE: Income (loss) before extraordinary item and cumulative effect of accounting change $ 0.27 Extraordinary item--gain on sale of assets, net of tax 0.07 Cumulative effect of accounting change, net of tax -- --------------- $ 0.34 =============== Shares used in computing net income (loss) per common and common equivalent share 29,137,361 =============== NET INCOME (LOSS) PER COMMON SHARE, ASSUMING FULL DILUTION: Income (loss) before extraordinary item and cumulative effect of accounting change $ 0.30 Extraordinary item--gain on sale of assets, net of tax 0.04 Cumulative effect of accounting change, net of tax -- --------------- $ 0.34 =============== Shares used in computing net income (loss) per common share, assuming dilution 31,616,119 =============== FOR THE YEARS ENDED DECEMBER 31, 1995 1994 ------------------------ ---------------------- (RESTATED) Revenues $ 359,840 $ 301,576 Costs of goods sold 271,146 216,417 --------------- --------------- Gross profit 88,694 85,159 Research and development expenses 28,558 17,259 Selling, general and administrative expenses 64,170 53,165 Amortization of goodwill 3,221 2,360 --------------- --------------- Income (loss) from operations (7,255) 12,375 Net investment income (expense), net of interest expense of $1,412, $2,952, and $1,740, respectively 1,131 (244) Equity in earnings (losses) of affiliates (644) (1,264) Non-controlling interests in (earnings) losses of consolidated subsidiaries 427 -- Acquisition expenses (3,441) (503) --------------- --------------- Income (loss) before provision (benefit) for income taxes, extraordinary item and cumulative effect of accounting change (9,782) 10,364 Provision (benefit) for income taxes (6,569) 2,744 --------------- --------------- Income (loss) before extraordinary item and cumulative effect of accounting change (3,213) 7,620 Extraordinary item - gain on sale of assets, net of tax -- -- Cumulative effect of accounting change, net of taxes (2,377) -- --------------- --------------- Net income (loss) $ (5,590) $ 7,620 =============== =============== NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE: Income (loss) before extraordinary item and cumulative effect of accounting change $ (0.12) $ 0.33 Extraordinary item--gain on sale of assets, net of tax -- -- Cumulative effect of accounting change, net of tax (0.09) -- --------------- --------------- $ (0.21) $ 0.33 =============== =============== Shares used in computing net income (loss) per common and common equivalent share 26,207,746 23,191,553 =============== =============== NET INCOME (LOSS) PER COMMON SHARE, ASSUMING FULL DILUTION: Income (loss) before extraordinary item and cumulative effect of accounting change $ (0.12) $ 0.32 Extraordinary item--gain on sale of assets, net of tax -- -- Cumulative effect of accounting change, net of tax (0.09) -- ---------------- --------------- $ (0.21) $ 0.32 ================ =============== Shares used in computing net income (loss) per common share, assuming dilution 26,207,746 27,309,336 =============== ===============
See accompanying notes to consolidated financial statements. 20 24 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1996 1995 ----------------- ------------------ ASSETS (RESTATED) (RESTATED) CURRENT ASSETS: Cash and cash equivalents, including restricted cash of $11,604 and $10,700, respectively $ 27,923 $ 15,317 Short-term investments, at market 5,827 19,713 Receivables, net 140,973 116,761 Inventories, net 27,159 38,527 Deferred income taxes and other current assets 5,952 6,886 ----------- ----------- TOTAL CURRENT ASSETS 207,834 197,204 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $69,534 and $53,614, respectively 126,888 105,901 INVESTMENTS IN AFFILIATES, net 88,394 75,020 EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED, less accumulated amortization of $15,942 and $13,695, respectively 69,512 75,395 DEFERRED INCOME TAXES AND OTHER ASSETS 16,985 19,380 ----------- ----------- TOTAL ASSETS $ 509,613 $ 472,900 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings and current portion of long-term obligations $ 38,969 $ 11,907 Accounts payable 26,611 25,903 Accrued expenses 40,019 48,115 Deferred revenue 31,180 32,501 ----------- ----------- TOTAL CURRENT LIABILITIES 136,779 118,426 ----------- ----------- LONG-TERM OBLIGATIONS, net of current portion 35,326 96,990 OTHER LIABILITIES 15,523 19,740 ----------- ----------- TOTAL LIABILITIES 187,628 235,156 ----------- ----------- NON-CONTROLLING INTERESTS IN NET ASSETS OF CONSOLIDATED SUBSIDIARIES (1,810) (422) COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock, par value $.01; 10,000,000 shares authorized: Series A Special Voting Preferred Stock, one share authorized and outstanding -- -- Class B Preferred Stock, 10,000 shares authorized and outstanding -- -- Common Stock, par value $.01; 40,000,000 shares authorized, 32,160,598 and 26,766,029 shares outstanding, after deducting 15,735 shares held in treasury 322 268 Additional paid-in capital 323,592 247,580 Unrealized gains on short-term investments 14 68 Cumulative translation adjustment (3,681) (3,356) Retained earnings (accumulated deficit) 3,548 (6,394) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 323,795 238,166 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 509,613 $ 472,900 =========== ===========
See accompanying notes to consolidated financial statements. 21 25 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ---------------------------------------- ADDITIONAL SHARES AMOUNT PAID-IN CAPITAL --------------------- ----------------- --------------- BALANCE, DECEMBER 31, 1993 21,725,693 $ 217 $ 177,379 Shares issued to employees and directors 107,387 2 1,619 Shares issued in purchase business combination 2,424,242 24 30,976 Adjustment to recast year end of pooled company -- -- -- Transactions of pooled companies -- -- 56 Translation adjustment -- -- -- Net income -- -- -- Unrealized losses on short-term investments -- -- -- ------------ ------- ----------- BALANCE, DECEMBER 31, 1994 24,257,322 243 210,030 Shares issued to employees and directors 300,011 3 1,857 Shares issued in private offering 2,000,000 20 32,366 Conversion of convertible debentures 208,696 2 2,914 Adjustment to recast year end of pooled company -- -- -- Transactions of pooled company -- -- 413 Translation adjustment -- -- -- Net loss -- -- -- Unrealized gains on short-term investments -- -- -- ------------ ------- ----------- BALANCE, DECEMBER 31, 1995 (restated) 26,766,029 268 247,580 Shares issued to employees and directors 298,916 3 2,163 Shares issued in private offering 1,200,000 12 20,251 Conversion of convertible debentures 3,895,653 39 53,598 Translation adjustment -- -- -- Net income -- -- -- Unrealized losses on short-term investments -- -- -- ------------ ------- ----------- BALANCE, DECEMBER 31, 1996 (restated) 32,160,598 $ 322 $ 323,592 ============ ======= =========== UNREALIZED GAINS (LOSSES) ON CUMULATIVE RETAINED EARNINGS SHORT-TERM TRANSLATION (ACCUMULATED INVESTMENTS ADJUSTMENT DEFICIT) ----------- ----------------------- ----------------------- BALANCE, DECEMBER 31, 1993 $ 12 $ (2,335) $ (5,884) Shares issued to employees and directors -- -- -- Shares issued in purchase business combination -- -- -- Adjustment to recast year end of pooled company -- -- (1,138) Transactions of pooled companies -- -- (355) Translation adjustment -- (776) -- Net income -- -- 7,620 Unrealized losses on short-term investments (474) -- -- -------- ---------- ----------- BALANCE, DECEMBER 31, 1994 (462) (3,111) 243 Shares issued to employees and directors -- -- -- Shares issued in private offering -- -- -- Conversion of convertible debentures -- -- -- Adjustment to recast year end of pooled company -- -- (1,047) Transactions of pooled company -- -- -- Translation adjustment -- (245) -- Net loss -- -- (5,590) Unrealized gains on short-term investments 530 -- -- -------- ---------- ----------- BALANCE, DECEMBER 31, 1995 (restated) 68 (3,356) (6,394) Shares issued to employees and directors -- -- -- Shares issued in private offering -- -- -- Conversion of convertible debentures -- -- -- Translation adjustment -- (325) -- Net income -- -- 9,942 Unrealized losses on short-term investments (54) -- -- -------- ---------- ----------- BALANCE, DECEMBER 31, 1996 (restated) $ 14 $ (3,681) $ 3,548 ======== ========== =========== TOTAL ------------------ BALANCE, DECEMBER 31, 1993 $ 169,389 Shares issued to employees and directors 1,621 Shares issued in purchase business combination 31,000 Adjustment to recast year end of pooled company (1,138) Transactions of pooled companies (299) Translation adjustment (776) Net income 7,620 Unrealized losses on short-term investments (474) ----------- BALANCE, DECEMBER 31, 1994 206,943 Shares issued to employees and directors 1,860 Shares issued in private offering 32,386 Conversion of convertible debentures 2,916 Adjustment to recast year end of pooled company (1,047) Transactions of pooled company 413 Translation adjustment (245) Net loss (5,590) Unrealized gains on short-term investments 530 ----------- BALANCE, DECEMBER 31, 1995 (restated) 238,166 Shares issued to employees and directors 2,166 Shares issued in private offering 20,263 Conversion of convertible debentures 53,637 Translation adjustment (325) Net income 9,942 Unrealized losses on short-term investments (54) ----------- BALANCE, DECEMBER 31, 1996 (restated) $ 323,795 ===========
See accompanying notes to consolidated financial statements. 22 26 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 ------------------ ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: (RESTATED) (RESTATED) NET INCOME (LOSS) $ 9,942 $ (5,590) $ 7,620 ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Depreciation and amortization expense 25,096 22,229 17,198 Equity in losses of affiliates 7,008 644 1,264 Non-controlling interests in losses of consolidated subsidiaries (1,473) (427) -- Loss (gain) on sale of fixed assets and investments 226 (2,196) 4 Cumulative effect of accounting change -- 2,377 -- CHANGES IN ASSETS AND LIABILITIES: (Increase) decrease in receivables, net (27,712) (739) 12,536 (Increase) decrease in inventories, net 10,261 (12,082) (3,638) (Increase) decrease in other current assets -- 115 5,215 (Increase) decrease in other non-current assets 2,085 (8,878) 169 Decrease in accounts payable and accrued expenses (9,318) (4,687) (10,929) Increase (decrease) in deferred revenue 1,360 7,558 (22,609) Increase (decrease) in other liabilities (2,954) 942 2,761 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 14,521 (734) 9,591 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (39,844) (17,265) (29,939) Proceeds from sales of assets, net 9,518 293 -- Purchases of available-for-sale investment securities (5,623) (61,685) (35,731) Sales of available-for-sale investment securities 11,041 49,168 42,255 Maturities of available-for-sale investment securities 8,220 8,100 7,789 Investments in and advances to affiliates (23,458) (20,201) (15,208) Payment for business acquisition -- -- (45,063) ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (40,146) (41,590) (75,897) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings net of (repayments) 26,200 (17,483) 9,405 Principal payments on long-term obligations (7,502) (5,749) (1,883) Net proceeds from issuance of long-term obligations -- 20,000 28,730 Fees associated with conversion of debentures (2,571) -- -- Net proceeds from issuances of common stock 22,429 34,246 1,753 Adjustment to recast pooled company's year end -- (1,047) (1,138) ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 38,556 29,967 36,867 ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (325) (245) (776) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,606 (12,602) (30,215) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,317 27,919 58,134 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,923 $ 15,317 $ 27,919 ============ ============ ============
See accompanying notes to consolidated financial statements. 23 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Orbital Sciences Corporation (together with its subsidiaries, "Orbital" or the "company"), a Delaware corporation, is an international space and information systems company that designs, manufactures, operates and markets a broad range of affordable space and ground infrastructure systems, satellite access products and satellite-delivered services. Space and ground infrastructure systems include launch vehicles, satellites, electronics and sensors, and satellite ground systems and software; satellite access products include satellite navigation and communications products; and satellite-delivered services include global messaging and remote imaging services. Disaggregated financial information is presented in Note 2. PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 financial statement presentation. All financial amounts are stated in U.S. dollars unless otherwise indicated. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Orbital, all wholly and partially owned subsidiaries controlled by Orbital, and partnerships in which Orbital directly or indirectly controls the general partner interests. All material transactions and accounts among consolidated entities have been eliminated in consolidation. REVENUE RECOGNITION Orbital recognizes revenues on long-term infrastructure 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 long-term fixed-price contracts are recognized based on costs incurred in relation to total estimated costs, or based on specific delivery terms and conditions. To the extent that estimated costs of completion are adjusted, revenue and profit recognized from a particular contract will be affected in the period of the adjustment. Anticipated contract losses are recognized as they become known. Revenues from sales of access products and satellite services are generally recognized when the product is shipped or the service is performed. FOREIGN CURRENCY Orbital's foreign operating entities are in a number of countries and deal in a number of foreign currencies. The financial results of foreign operations are translated to U.S. dollars using the current 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 1996, 1995 and 1994 were approximately $325,000, $245,000 and $776,000, respectively. Translation gains and losses relating to foreign operations that are a direct and integral component or extension of Orbital's domestic operations, and therefore are dependent on the U.S. dollar, are reported currently as a component of net income. 24 28 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, 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. In 1995, Orbital expensed $3,000,000 of costs related to the termination of a reusable launch vehicle development program. Such costs are included as research and development expenses. 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 and Software 3 to 10 years Satellite Systems Estimated useful life of satellite Leasehold Improvements Shorter of estimated useful life or lease term In 1995, the company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which (i) requires that long-lived assets "to be held and used" be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, (ii) requires that long-lived assets "to be disposed of" be reported at the lower of carrying amount or fair value less cost to sell and (iii) provides guidelines and procedures for measuring an impairment loss that are significantly different from previous guidelines and procedures. The cumulative effect of adopting SFAS 121 on prior years' earnings, related to the impairment in the carrying amount of certain assets to be disposed of that supported Orbital's orbit transfer vehicle product line, was approximately $2,377,000, net of tax benefit of $1,783,000, and is reported in the 1995 consolidated statement of operations. The effect of adopting SFAS 121 on income from continuing operations for 1996 and 1995 was not material. Orbital's policy is to review its long-lived assets, including investments in affiliates, specialized equipment used to support specific space-related products and satellite systems, 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 reasonably possible that the company's current estimate that it will recover the carrying amount of its long-lived assets from future operations may change. INCOME TAXES The company recognizes income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. STOCK-BASED COMPENSATION Prior to January 1, 1996, the company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related 25 29 interpretations. Pursuant to APB 25, compensation expense is recorded only to the extent that the current market price of the underlying stock exceeded the exercise price on the date of grant. On January 1, 1996, the company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which requires companies to (i) recognize as expense the fair value of all stock-based awards on the date of grant, or (ii) continue to apply the provisions of APB 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123 (See Note 13). INCOME (LOSS) PER SHARE Income (loss) per common and common equivalent share is calculated using the weighted average number of common shares (including the Exchangeable Shares (See Note 4)) and common equivalent shares, to the extent dilutive, outstanding during the periods. Income (loss) per common share assuming full dilution is calculated using the weighted average number of common shares (including the Exchangeable Shares) and common equivalent shares outstanding during the periods, plus the effects of an assumed conversion of the company's Convertible Debentures, after giving effect to all net income adjustments that would result from the assumed conversion. The Convertible Debentures were converted to Orbital common shares on August 14, 1996 (See Note 10). Any reduction of less than 3% in the aggregate has not been considered dilutive in the calculation and presentation of income (loss) per common share assuming full dilution. Common equivalent shares are comprised solely of stock options (See Note 13). Since the Exchangeable Shares have voting and economic rights identical to Orbital common shares, the Exchangeable Shares have been included as common shares in the accompanying consolidated balance sheets. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Orbital considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Investments in securities that do not meet the definition of cash equivalents are classified as short-term investments. Since Orbital does not intend to hold its investments in debt and equity securities until maturity and does not actively trade the securities to maximize trading gains, Orbital classifies these securities as "available-for-sale" and, accordingly, reports such securities at fair value plus accrued interest. Any temporary excess (deficiency) of market value over (under) the underlying cost of the short-term investment is excluded from current period earnings and is reported as unrealized gains (losses) as a separate component of stockholders' equity. At December 31, 1996 and 1995, the company had approximately $11,604,000 and $10,700,000, respectively, of cash restricted in support of outstanding letters of credit. INVENTORIES Inventories consist of components and raw materials inventory, work-in-process inventory and finished goods inventory and are generally stated at the lower of cost or net realizable value on a first-in, first-out ("FIFO") or specific identification basis. Inventories, net of allowances for obsolescence of $5,100,000 and $3,800,000 in 1996 and 1995, respectively, consisted of the following:
DECEMBER 31, (IN THOUSANDS) 1996 1995 ------------------------------------ ---------------- ---------- Components and raw materials $ 19,090 $ 17,756 Work-in-process 6,962 19,430 Finished goods 1,107 1,341 ---------- ---------- Total $ 27,159 $ 38,527 ========== ==========
Components and raw materials are purchased to support future production efforts. Work-in-process inventory consists primarily of (i) costs incurred under long-term fixed-price contracts accounted for using the percentage-of-completion method of accounting applied on a units of delivery basis, and (ii) partially assembled commercial products, and generally includes direct production costs and certain allocated indirect costs (including an allocation of general and administrative costs). Work-in-process inventory has been reduced by contractual progress payments received of $26,696,000 and $2,631,000 at December 31, 1996 and 1995, respectively. Finished goods inventory consists of fully assembled commercial products awaiting shipment. 26 30 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 infrastructure products. Orbital also builds and operates satellite systems used in providing commercial services. 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. The company also capitalizes certain internal costs incurred in developing software to be used to support various programs and/or products. Capitalized costs generally include direct software coding costs and certain allocated indirect costs, and exclude general and administrative and research and development costs. Amortization of capitalized costs begins when the software systems are placed in service. No amortization expense is included in the accompanying consolidated statements of operations as such software systems have not yet been placed in service. INVESTMENTS IN AFFILIATES The company uses the equity method of accounting for its investments in and earnings of affiliates in which the company has the ability to significantly influence, but not control, such affiliate's 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 share of the affiliate's income and is reduced to reflect its share of the affiliate's losses. Orbital's investment is also increased to reflect contributions to, and decreased to reflect distributions received from, the affiliate. Any excess of the amount of Orbital's investment over the amount of the underlying equity in each affiliate's net assets is amortized in a manner similar to goodwill. The company capitalizes interest costs on equity method investments when such affiliate has significant assets under construction and has not yet commenced principal operations. During 1996 and 1995, the company capitalized interest on investments in affiliates of approximately $6,890,000 and $5,414,000, respectively. The company uses the cost method of accounting for investments in affiliates in which it cannot control or significantly influence operations. The company provides a valuation allowance against an investment in an affiliate when it is determined that recovery of all or part of the investment is not probable. At December 31, 1996 and 1995, approximately $1,100,000 of allowance had been provided to fully reserve certain investments in affiliates. Approximately $2,000,000 of gain on the sale of an investment was realized in 1995 when Orbital sold one such investment. The gain was reported in net investment income in the 1995 consolidated statement of operations. No such gains from sales of investments were realized in 1996 or 1994. EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED The company amortizes the excess of purchase price over net assets acquired related to prior business combinations on a straight-line basis over their estimated useful life, generally 20-40 years. Orbital periodically assesses and evaluates the recoverability of such assets based on current facts and circumstances and the operational viability of its acquired businesses. The company recognizes an impairment loss when the sum of expected future cash flows is less than the carrying amount of the asset. WARRANTIES The company occasionally accepts warranty clauses in its commercial and government long-term 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. Orbital has not recorded any liability for potential warranty claims on its existing contracts because these expenses, if any, are not expected to have a material adverse effect on the company's financial condition or results of operations. The company at times provides limited warranties on certain commercial products and accrues an estimate of expected warranty costs based on historical experience. 27 31 1A. RESTATEMENTS Management has determined to restate its previously issued consolidated financial statements as of and for the years ended December 31, 1996 and 1995 with respect to its accounting treatment for the matters described below. The following table summarizes the various adjustments by financial statement line item for 1996 and 1995. The impact of these matters on the unaudited interim financial results for 1996 and 1995 is summarized in Note 14.
Consolidated Statements of Operations (In thousands, except per share data) For The Years Ended December 31, ------------------------------------------------------------------ 1996 ------------------------------------------------------------------ As Previously Reported Adjustments Restated -------- ----------- -------- Revenues $ 461,435 $ (11,648) (c) (d) (e) (f) $ 449,787 Costs of goods sold 336,261 (3,680) (c) (e) (f) 332,581 Research and development expenses 22,179 889 (c) (e) 23,068 Selling, general and administrative expenses 76,019 1,228 77,247 Net investment income (expense) (1,123) 1,074 (a) (f) (49) Equity in earnings (losses) of affiliates (6,454) (554) (b) (f) (7,008) Provisions for income taxes 1,831 (1,620) (d) 211 Extraordinary item - gain on sales of assets, net of tax -- 1,980 (d) 1,980 Net income (loss) 15,907 9,942 Net income (loss) per common share, basic and assuming full dilution 0.55 0.34 ------------------------------------------------------------------ 1995 ------------------------------------------------------------------ As Previously Reported Adjustments Restated -------- ----------- Revenues $ 364,320 $ (4,480) (c) (f) $ 359,840 Costs of goods sold 268,016 3,130 (c) (f) 271,146 Research and development expenses 28,512 46 (c) 28,558 Selling, general and administrative expenses 63,427 743 (f) 64,170 Net investment income (expense) 639 492 (a) (f) 1,131 Equity in earnings (losses) of affiliates (759) 115 (f) (644) Provisions (benefit) for income taxes (1,302) (5,267) (f) (6,569) Net income (loss) (4,848) (5,590) Net income (loss) per common share, basic and assuming full dilution (0.19) (0.21)
28 32
CONSOLIDATED BALANCE SHEETS (In thousands) 12/31/96 As 12/31/96 Previously As Reported Adjustments Restated -------- ----------- -------- Cash and cash equivalents $ 26,859 $ 1,064 $ 27,923 Receivables, net 144,774 (3,801) (c) 140,973 Deferred income taxes and other current assets 6,475 (523) 5,952 Property, plant and equipment, net 127,862 (974) (a) (c) (g) 126,888 Investments in affiliates, net 86,524 1,870 (a) 88,394 Deferred income taxes and other assets 9,720 7,265 16,985 Short-term borrowings and current portion of long-term obligations 38,519 450 (g) 38,969 Accounts payable 25,789 822 26,611 Accrued expenses 32,372 7,647 40,019 Deferred revenues 30,741 439 (b) 31,180 Long-term obligations 33,076 2,250 (g) 35,326 Retained earnings 10,255 (6,707) 3,548
12/31/95 As 12/31/95 Previously As Reported Adjustments Restated -------- ----------- -------- Receivables, net $ 118,358 $ (1,597) (c) (g) $ 116,761 Deferred taxes and other current assets 7,330 (444) (g) 6,886 Property, plant and equipment, net 105,875 26 (a) (c) 105,901 Investments in affiliates, net 74,063 957 (a) (g) 75,020 Deferred income taxes and other assets 12,330 7,050 (g) 19,380 Accrued expenses 41,474 6,641 (g) 48,115 Accumulated deficit (5,652) (742) (6,394)
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 investment in ORBCOMM Global, L.P. ("ORBCOMM") or ("ORBCOMM Global"). (a) Previously, the company's consolidated financial statements reflected the company's capitalization of interest expense on various assets, including on its equity investment in ORBCOMM. As reflected in the restated consolidated financial statements presented herein, Orbital has revised the capitalization of interest on certain assets including its equity method investment in ORBCOMM. These revisions include the compounding impact of interest, and the reduction of eligible investment amounts for losses recognized for equity method investors. These revisions had the effect of decreasing interest expense in 1996 and 1995 by $952,000 and $985,000, respectively. 29 33 (b) Previously, the company's consolidated financial statements did not reflect the amortization of previously deferred profits in connection with its sales of both satellites and ground stations to ORBCOMM. As reflected in the restated consolidated financial statements presented herein, Orbital is amortizing such deferred profits over the estimated lives of both the satellites and the ground stations. This revision had the effect of increasing the company's equity in losses of affiliates by approximately $439,000 in 1996. Asset Restatement Adjustments (c) The company has historically capitalized certain costs associated with certain product enhancements. 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. These revisions resulted in an increase (decrease) in research and development expenses, costs of goods sold and revenues for 1996 of $1,338,000, ($204,000) and ($4,791,000), respectively, and for 1995 of $46,000, $10,000 and ($1,257,000), respectively. Other Restatement and Reclassification Adjustments (d) In October 1996, the company sold substantially all the assets of PSC Communications Group, Inc. resulting in a gain of approximately $3,600,000. The gain which was previously reported in revenue has been reclassified as an extraordinary gain of $1,980,000, net of taxes of $1,620,000. (e) The 1996 statement of operations has been reclassified to decrease revenues by $4,464,000 and to decrease cost of goods sold and research and development expenses by $4,014,000 and $450,000, respectively, to reflect changes in certain contingent liabilities. (f) Certain other reclassification adjustments were made to the 1996 and 1995 statements of operations that resulted in increases (decreases) to revenues, cost of goods sold, selling, general and administrative expenses, net investment income (expense), equity in earnings (losses) of affiliates and provision (benefit) for income taxes for 1996 of $1,207,000, ($538,000), $0, $89,000, ($115,000) and $0 and for 1995 of ($3,223,000), $3,120,000, $743,000, $493,000, $115,000 and $7,050,000, respectively. The tax benefit of $1,783,000 was also netted against the cumulative effect of the accounting change with a corresponding decrease in the benefit for income taxes in 1995. (g) Property, plant and equipment increased by $2,700,000 and short-term and long-term obligations increased by $450,000 and $2,250,000, respectively, as a result of recording certain capital leases for equipment in 1996 that had been previously accounted for as operating leases. As reflected in the restated consolidated financial statements, the company has recorded certain other adjustments, the net effect of which is presented in the table. None of these entries is significant individually or in the aggregate. 2. DISAGGREGATED FINANCIAL INFORMATION INDUSTRY SEGMENT INFORMATION Orbital's operations have been classified into three industry segments, "Space and Ground Infrastructure Systems," "Satellite Access Products" and "Satellite-Delivered Services." Space and Ground Infrastructure Systems include: launch vehicles, including space and suborbital launch vehicles and reusable launch vehicles; satellites and other space systems; electronics and sensors, including space sensors and instruments, as well as avionics and other electronics equipment; and ground systems and software, including satellite ground systems and various software products. Satellite Access Products include satellite navigation and communications products. Satellite-Delivered Services include satellite-based global data communications services and satellite-based remote imaging services. 30 34 The following table presents revenues, operating income (loss), identifiable assets, capital expenditures, depreciation and amortization and impairment losses by industry segment for 1996, 1995 and 1994. Operating income (loss) is total revenues less costs of goods sold, research and development expenses, selling, general and administrative expenses and amortization of goodwill. Identifiable assets are those assets used in the operations of each industry segment. There were no significant intersegment sales or transfers during 1996, 1995 and 1994.
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 ---------------------------------------------- ----------------- ----------------- ---------------- SPACE AND GROUND (RESTATED) (RESTATED) INFRASTRUCTURE SYSTEMS: Revenues $ 377,166 $ 296,109 $ 252,905 Operating income (loss) 16,291 (5,816) 12,554 Identifiable assets 369,672 363,749 353,430 Capital expenditures 23,829 15,091 27,322 Depreciation and amortization 21,954 21,150 16,150 Impairment losses, net of taxes -- 2,377 -- SATELLITE ACCESS PRODUCTS: Revenues $ 71,188 $ 52,531 $ 38,517 Operating income 4,902 3,291 3,801 Identifiable assets 32,376 27,431 22,387 Capital expenditures 3,402 1,204 708 Depreciation and amortization 944 532 581 SATELLITE-DELIVERED SERVICES: Revenues $ 1,433 $ 11,200 $ 10,154 Operating loss (7,436) (4,730) (3,980) Equity in earnings (losses) of affiliates (7,008) (644) (1,264) Non-controlling interest in (earnings) losses of consolidated subsidiaries 1,473 427 -- Identifiable assets 107,565 81,720 65,225 Capital expenditures 12,613 970 1,909 Depreciation and amortization 2,198 547 467 CONSOLIDATED: Revenues $ 449,787 $ 359,840 $ 301,576 Operating income (loss) 13,757 (7,255) 12,375 Equity in earnings (losses) of affiliates (7,008) (644) (1,264) Non-controlling interest in (earnings) losses of consolidated subsidiaries 1,473 427 -- Identifiable assets 509,613 472,900 441,042 Capital expenditures 39,844 17,265 29,939 Depreciation and amortization 25,096 22,229 17,198 Impairment losses, net of taxes -- 2,377 --
DOMESTIC AND NON-U.S. OPERATIONS The following table presents Orbital's revenues, operating income (loss) and identifiable assets by major operating location:
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 --------------------------------------- ----------------- ----------------- --------------- REVENUES: (RESTATED) (RESTATED) United States $ 380,482 $ 286,434 $ 221,946 Canada and Mexico 65,350 68,997 74,408 United Kingdom and other 3,955 4,409 5,222 --------------- --------------- --------------- TOTAL $ 449,787 $ 359,840 $ 301,576 =============== =============== =============== OPERATING INCOME (LOSS): United States $ 11,098 $ (10,476) $ 9,662 Canada and Mexico 2,416 3,628 2,796 United Kingdom and other 243 (407) (83) --------------- ---------------- ---------------- TOTAL $ 13,757 $ (7,255) $ 12,375 =============== ================ =============== IDENTIFIABLE ASSETS: United States $ 459,237 $ 426,313 $ 396,228 Canada and Mexico 46,984 44,048 42,302 United Kingdom and other 3,392 2,539 2,512 ------------ ------------ ------------ Total $ 509,613 $ 472,900 $ 441,042 =============== =============== ===============
31 35 MAJOR CUSTOMERS AND EXPORT SALES Orbital's sales by geographic area are as follow:
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 ---------------------- ----------------- ----------------- ---------------- (RESTATED) (RESTATED) United States $ 337,917 $ 271,227 $ 213,606 Canada 46,742 45,558 46,839 Europe 33,752 23,594 24,468 Far East 17,517 15,242 13,998 Middle East and other 13,859 4,219 2,665 ----------- ----------- ----------- Total $ 449,787 $ 359,840 $ 301,576 =========== =========== ===========
Approximately 45%, 40% and 45% of the company's revenues in 1996, 1995 and 1994, respectively, were generated under contracts with the U.S. Government and its agencies or under subcontracts with the U.S. Government's prime contractors. 3. INVESTMENTS IN AFFILIATES ORBCOMM PARTNERSHIPS In 1993, the company's majority owned subsidiary, Orbital Communications Corporation ("OCC"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), an affiliate of Teleglobe Inc., formed a partnership, ORBCOMM Global, for the design, development, construction, integration,testing and operation of a low-Earth orbit satellite communications system (the "ORBCOMM System"). OCC and Teleglobe Mobile are each 50% general partners in ORBCOMM Global. OCC and Teleglobe Mobile have contributed approximately $75,275,000 and $84,525,000, respectively, through December 31, 1996. 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 Global 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 Global; (ii) OCC controls the operational and financial affairs of ORBCOMM USA; and (iii) Teleglobe Mobile controls the operational and financial affairs of ORBCOMM International. Since OCC is unable to control, but is able to exercise significant influence over, ORBCOMM Global's and ORBCOMM International's operating and financial policies, the company is accounting for its investments in ORBCOMM Global and ORBCOMM International using the equity method of accounting. Since OCC is able to control the operational and financial affairs of ORBCOMM USA, the company consolidates the accounts of ORBCOMM USA. Orbital is the primary supplier of the communications satellites, launch vehicles and certain ground systems to ORBCOMM Global, and successfully launched the first two ORBCOMM System satellites in April 1995. During 1996, 1995 and 1994, Orbital recorded contract revenues on sales to ORBCOMM Global of approximately $47,215,000, $49,187,000 and $30,048,000, respectively, and eliminated as equity in earnings (losses) of affiliates 50% of its profits on those sales since ORBCOMM Global is capitalizing substantially all its purchases from Orbital. At December 31, 1996 and 1995, Orbital had approximately $3,400,000 and $8,900,000, respectively, in receivables from ORBCOMM Global. Additionally, since 1995 Orbital has provided certain administrative services to ORBCOMM Global, ORBCOMM USA and ORBCOMM International, such as facility space, utilities, administrative supplies and certain other administrative services. During 1996 and 1995, Orbital received payments of approximately $1,295,000 and $297,000, respectively, for such services. At December 31, 1996, ORBCOMM Global had total assets, total liabilities and total partners' capital of $329,509,000, $191,568,000 and $137,941,000, respectively. ORBCOMM Global recorded approximately $420,000 in revenues and $19,480,000 in losses for the year ended December 31, 1996. 32 36 Based on its current assessment of the overall business prospects of the ORBCOMM partnerships and the ORBCOMM System, the company currently believes its investment in ORBCOMM Global is fully recoverable. If in the future, the ORBCOMM business is not successful, the company may be required to expense part or all of its investment. RADARSAT INTERNATIONAL INC. The company owns an approximate 25% equity interest in Radarsat International Inc. ("RSI"), a Canadian-based company specializing in satellite-based remote imaging. RSI successfully launched its first remote imaging satellite in November 1995 and began generating revenues in 1996. Orbital is accounting for its investment in RSI using the equity method of accounting. EARTHWATCH, INCORPORATED The company owns an approximate one percent equity interest in EarthWatch, Incorporated, a U.S.-based company developing high-resolution commercial satellite imaging services. Orbital accounts for this investment using the cost method of accounting. 4. BUSINESS COMBINATIONS PURCHASE TRANSACTIONS On August 11, 1994, the company acquired all the outstanding common stock of Fairchild Space and Defense Corporation ("Fairchild") from Matra Aerospace, Inc. (the "Fairchild Acquisition"). As a result of the Fairchild Acquisition, the company expanded its satellites, electronics and related product lines and technology and production capabilities. The Fairchild Acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price of approximately $71,000,000 (consisting of 2,424,242 shares of the company's Common Stock, $40,000,000 in cash and approximately $800,000 in transaction expenses) was allocated to assets and liabilities acquired based on estimates of fair values as of the date of acquisition. The excess of purchase price over net assets acquired is being amortized on a straight-line basis over 40 years. Fairchild's results of operations for the 19-week period ended December 31, 1994 are included in Orbital's 1994 consolidated results of operations. In October 1996, the company's wholly-owned subsidiary, MacDonald Dettwiler and Associates ("MDA") sold substantially all the assets of The PSC Communications Group Inc. for approximately $13,000,000, resulting in a gain of approximately $3,600,000. The gain on sale of $1,980,000, net of tax, has been recorded as an extraordinary item since the assets were acquired through the acquisition of MDA in 1995, which was accounted for as a pooling of interests. POOLING OF INTERESTS TRANSACTIONS On December 28, 1994, the company acquired all the outstanding common stock of Magellan Corporation ("Magellan") from Magellan's former shareholders in a tax-free merger (the "Magellan Acquisition"). As a result of the Magellan Acquisition, Orbital develops, manufactures, markets and sells global satellite-based navigation and communications access products for consumer and industrial markets worldwide. The Magellan Acquisition was consummated by exchanging 2,640,441 shares of the company's Common Stock for all of Magellan's outstanding common stock. The company also granted 409,556 options to acquire Orbital Common Stock to Magellan employees who, at the date of the acquisition, held options to acquire Magellan common stock. The Magellan Acquisition is accounted for using the pooling of interests method of accounting and, accordingly, Orbital's historical consolidated financial statements have been restated to include Magellan's financial position, results of operations and cash flows. Merger expenses relating to the Magellan Acquisition of approximately $500,000 were charged to earnings during the three months ended December 31, 1994 and are included in acquisition expenses in the accompanying 1994 consolidated statement of operations. 33 37 Prior to the acquisition, Magellan's financial results were prepared on a June 30 fiscal year basis. Orbital's consolidated financial statements for the year ended December 31, 1994 include Magellan's financial results for the twelve-month period ended December 31, 1994. The effect of recasting Magellan's year end for 1994 has been charged to Orbital's retained earnings as of January 1, 1994. The charge to retained earnings eliminated the effect of including Magellan's results of operations for the six-month period ended June 30, 1994 of $1,138,000 in Orbital's 1994 consolidated results of operations. Magellan's revenues for the same six-month period were approximately $18,500,000. On November 17, 1995, the company acquired all the outstanding common shares of MacDonald, Dettwiler and Associates, Ltd. ("MDA") from MDA's former shareholders in a merger designed to be tax free to MDA's Canadian shareholders (the "MDA Acquisition"). As a result of the MDA Acquisition, Orbital is a leading supplier of commercial satellite imaging ground systems capable of handling all major optical and radar imaging satellites. Orbital also provides advanced space-qualified software, air traffic control systems and defense electronics products through MDA. Pursuant to the terms of the MDA Acquisition, a newly established, wholly owned Canadian subsidiary of Orbital ("Acquisition Subsidiary") issued exchangeable shares (the "Exchangeable Shares") in exchange for all the issued and outstanding MDA common shares. The Exchangeable Shares have voting and economic rights with respect to Orbital identical to Orbital Common Stock and are exchangeable into Orbital Common Stock at the option of the holders. As part of the MDA Acquisition, Acquisition Subsidiary also issued 10,000 shares of Class B Preferred Stock to a financial advisor in satisfaction of a portion of the fees owed to that advisor. Additionally, Orbital issued one share of Series A Special Voting Preferred Stock to a voting trust to act as a voting trustee on behalf of the holders of the Exchangeable Shares. The Orbital Series A Special Voting Preferred Stock has voting rights, privileges and preferences required to secure the voting rights relating to the Orbital Common Stock granted for the benefit of the holders of the Exchangeable Shares. The MDA Acquisition was consummated by issuing 4,087,126 Exchangeable Shares for all of MDA's outstanding common shares. The company also granted 328,399 options to acquire Orbital Common Stock to MDA employees who, at the date of the acquisition, held options to acquire MDA common shares. The MDA Acquisition is accounted for using the pooling of interests method of accounting and, accordingly, Orbital's historical consolidated financial statements have been restated to include MDA's financial position, results of operations and cash flows. Merger expenses relating to the MDA Acquisition of approximately $3,400,000 were charged to earnings during the three months ended December 31, 1995 and are included in acquisition expenses in the accompanying 1995 consolidated statement of operations. Prior to the acquisition, MDA's financial results were prepared on a March 31 fiscal year basis. Orbital's restated financial statements for 1994 include MDA's historical financial results for its fiscal year ended March 31, 1995. Orbital's consolidated financial statements for the year ended December 31, 1995 include MDA's financial results for the twelve-month period ended December 31, 1995. The effect of recasting MDA's year end for 1995 has been charged to Orbital's retained earnings as of January 1, 1995. The charge to retained earnings eliminated the effect of including MDA's results of operations for the three-month period ended March 31, 1995 of $1,047,000 in Orbital's 1995 and 1994 consolidated results of operations. MDA's revenues for the same three-month period were approximately $20,634,000. 5. SHORT-TERM INVESTMENTS The following table sets forth the aggregate amortized cost, aggregate fair value and gross unrealized gains and losses for Orbital's short-term investments in debt securities:
DECEMBER 31, (IN THOUSANDS) 1996 1995 --------------------- ------------------ ----------------- Amortized cost $ 5,813 $ 19,645 Fair value 5,827 19,713 Unrealized gains 14 70 Unrealized losses -- (2) ----------------- --------- ----------
Orbital recognized net losses of approximately $261,000 on sales of short-term investments in 1995 and had no such losses in 1996. Debt securities (at fair value) with contractually scheduled maturities scheduled to mature in 1997 and through 2001 are in the amounts of $1,470,000 and $4,357,000, respectively. No securities mature after 2001. 34 38 6. RECEIVABLES AND ACCRUED EXPENSES The components of receivables are as follows:
DECEMBER 31, (IN THOUSANDS) 1996 1995 -------------------------------------- ------------------- ------------------ (RESTATED) (RESTATED) Billed and billable $ 73,505 $ 63,119 Recoverable costs and accrued profit not billed 59,069 46,691 Retainages due upon contract completion 9,767 7,724 Allowance for doubtful accounts (1,368) (773) ----------- ----------- Total $ 140,973 $ 116,761 =========== ===========
Approximately 53% of recoverable costs and accrued profit not billed and retainages due upon contract completion at December 31, 1996 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. At December 31, 1996 and 1995, $33,690,000 and $26,470,000, respectively, were receivable from non-U.S. customers. The company enters into forward exchange contracts to hedge against foreign currency fluctuations on certain receivables and payables denominated in such 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 outstanding foreign exchange contracts at December 31, 1996 to (purchase) sell foreign currencies, along with current market values:
(U.S. DOLLARS, IN THOUSANDS) ------------------------------------------------------------------------------------------------- FOREIGN CURRENCY CURRENT UNREALIZED CURRENCY HEDGED CONTRACT MARKET GAIN HEDGED AGAINST AMOUNT VALUE (LOSS) ----------------------------------- ---------------------------- ---------- --------------- Belgian Francs CD $3,043 $ 2,885 $ 158 Belgian Francs PS 2 2 -- Italian Lira CD (23) (22) (1) ECU CD 10,484 9,638 846 ECU PS 678 619 59 French Francs CD (50) (45) (5) Pounds Sterling CD (410) (409) (1) Japanese Yen CD 365 329 36 Malaysian Riggits CD 8,038 8,168 (130) Norwegian Kroner CD 1,127 1,082 45 U.S. Dollars CD 6,068 6,168 (100) ------------------------------------------------------------------------------------------------- CD = Canadian Dollars PS = Pounds Sterling
35 39 Accrued expenses consist of the following:
DECEMBER 31, (IN THOUSANDS) 1996 1995 ------------------------------ ------------------ ------------------ (RESTATED) (RESTATED) Payroll, payroll taxes and fringe benefits $ 20,422 $ 17,856 Payable to subcontractors 8,660 11,552 Accrued contract costs 2,027 9,787 Other accrued expenses 8,910 8,920 ---------- ---------- Total $ 40,019 $ 48,115 ========== ==========
7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, (IN THOUSANDS) 1996 1995 -------------------------------------- ------------------- ------------------ (RESTATED) (RESTATED) Land $ 1,422 $ 1,422 Buildings and leasehold improvements 21,239 17,455 Machinery and equipment 116,209 90,000 Equipment and satellite systems under construction 47,221 43,298 Software and technical drawings 10,331 7,340 Accumulated depreciation and amortization (69,534) (53,614) ------------ ----------- Total $ 126,888 $ 105,901 ============ ===========
Interest expense of approximately $8,156,000, $6,685,000 and $5,500,000 was capitalized during 1996, 1995 and 1994, respectively, as part of the historical cost of equipment under construction, satellite systems under construction and investments in affiliates. SATELLITE SYSTEMS Orbital and Orbital Imaging Corporation ("ORBIMAGE"), a wholly owned subsidiary of the company, have constructed or are in the process of constructing several of their own satellite systems that provide or will provide high-resolution imaging, multi-spectral imaging and other Earth observation services to commercial and government customers. Generally, the company does not begin construction of a specific project until financing has been arranged or a customer has committed to purchase future imaging services generated by or provided from specific satellite systems. Orbital expenses the costs of developing and constructing these systems until such time that the technological and economic feasibility have been established. Once established, Orbital capitalizes remaining construction costs, net of non-refundable payments received from customers. Any refundable advance payments for imagery received from customers are deferred until such time as the imagery is delivered. Equipment and satellite systems under construction includes capitalized costs totaling approximately, $26,562,000 and $14,910,000 at December 31, 1996 and 1995, respectively, relating to various imaging satellite systems that are either operating or under construction. 8. SHORT-TERM BORROWINGS The company has a revolving credit facility that provides for total borrowings from an international syndicate of six banks of up to $65,000,000, subject to a defined borrowing base composed of certain receivables. At December 31, 1996 and 1995, approximately $8,000,000 and $3,000,000, respectively, of borrowings were outstanding against an available facility limit of approximately $35,700,000 and $23,500,000, respectively. The interest rate charged under the facility is a variable rate based on the prime rate, the Federal Funds rate or adjusted LIBOR. As of December 31, 1996, the interest rate on outstanding borrowings under this facility was approximately 7.5%. Borrowings are secured by receivables and certain other assets. The facility prohibits the payment of cash dividends and contains certain covenants with respect to the company's working capital, fixed charge ratio, leverage ratio and tangible net worth, and expires in September 1997. 36 40 In September 1995, Orbital entered into a $7,000,000 unsecured demand line of credit with an international bank, which was expanded to $25,000,000 in 1996. The line is repayable upon demand and bears interest at the prime rate or LIBOR. At December 31, 1996, the interest rate on outstanding borrowings under this line of credit was approximately 6%. At December 31, 1996, approximately $17,500,000 of borrowings were outstanding against this line of credit. There were no such borrowings outstanding at December 31, 1995. The company increased another line of credit with a domestic bank to $10,000,000 during 1996, subject to a defined borrowing base. At December 31, 1996 and 1995, $5,700,000 and $2,000,000, respectively, was outstanding against an available facility limit of $6,110,000 and $3,000,000, respectively. The interest rate on outstanding borrowings was approximately 8.25% at December 31, 1996. The facility is secured by substantially all the assets of Magellan and contains certain covenants with respect to Magellan's working capital, profitability, leverage ratio and tangible net worth. 9. LONG-TERM OBLIGATIONS The following sets forth the company's long-term obligations, excluding capital lease obligations (See Note 10):
DECEMBER 31, (IN THOUSANDS) 1996 1995 --------------------------------------------------- ------------------ ------------------ 7.00% Secured Note, principal and interest due monthly through December 1998 $ 1,275 $ 1,876 7.74-9.35% Secured Notes, principal and interest due monthly through September 1997-October 1999 12,554 17,816 8.95% Secured Bank Note, principal and interest due monthly through September 1999 2,284 2,310 5.16% Secured Bank Notes, principal and interest due monthly through August 2003 1,631 4,340 11.5% Unsecured Note, interest due semi-annually, principal due June 2001 20,000 20,000 6.75% Convertible Subordinated Debentures, interest due semi- annually, principal due 2003 -- 56,000 ---------- ------------ 37,744 102,342 Less current portion (6,115) (6,084) ---------- ------------ Total $ 31,629 $ 96,258 ========== ============
The 7.00% secured note is collateralized by certain equipment located at the company's Pomona, California facility. The 7.74-9.35% secured notes are collateralized by certain equipment located at the company's Germantown, Maryland facility. The 8.95% secured bank note was collateralized by the company's satellite integration and test facility located in Dulles, Virginia. The company chose to repay this note in February 1997. The company has two secured bank borrowing agreements, totaling approximately $44,000,000, of which $19,400,000 was available at December 31, 1996. The secured bank notes, pursuant to an intercreditor agreement between two international banks, provide for borrowings at a variable rate (5.16% at December 31, 1996), and are collateralized by MDA's receivables, inventory and certain other assets. Orbital amended its 11.5% unsecured note during the third quarter of 1996 to facilitate compliance with certain financial covenants as well as to permit the completion of the ORBCOMM Global debt financing (see below). In connection with this amendment, the interest rate on the note increased from 10.5% to 11.5% effective July 1, 1996. The unsecured note contains certain covenants with respect to fixed charge ratio, leverage ratio and tangible net worth, and includes certain cross-default provisions. On August 14, 1996, the company completed the redemption of the remaining $55,880,000 outstanding principal amount of its 6.75% Convertible Subordinated Debentures due 2003 (the "Debentures"). Pursuant to the terms of the indenture governing the Debentures, the holders had the option of redeeming their holdings for cash or converting their holdings into Orbital Common Stock at a predetermined conversion rate. The company entered into a standby underwriting agreement with an investment bank whereby the investment bank agreed, subject to customary conditions, 37 41 to purchase from the company shares of its Common Stock in an amount to provide sufficient proceeds to the company to satisfy any redemptions by the holders of the Debentures. As a result of the conversion by the holders and the standby arrangement, the remaining outstanding principal amount of the Debentures was converted into 3,887,304 shares of Common Stock. On August 7, 1996, ORBCOMM Global 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 Global service revenues. The ORBCOMM Notes are fully and unconditionally guaranteed on a joint and several basis by OCC and by Teleglobe Mobile; the guarantee is non-recourse to Orbital. The fair value of Orbital's long-term obligations at December 31, 1996 and 1995 is estimated at approximately $38,521,000 and $106,000,000, respectively, based on quoted market prices or on current rates offered for debt of similar remaining maturities. Scheduled maturities of long-term debt for 1997, 1998, 1999, 2000 and 2001 are $6,115,000, $5,349,000, $12,329,000, $7,024,000 and $6,927,000, respectively. 10. LEASE COMMITMENTS Aggregate minimum rental commitments under non-cancelable operating and capital leases (primarily for office space and equipment) at December 31, 1996 are as follows (restated):
(IN THOUSANDS) OPERATING CAPITAL ----------------------------- ------------- ------------- 1997 $ 10,378 $ 1,827 1998 9,611 1,525 1999 9,091 1,400 2000 8,942 850 2001 8,334 70 2002 and thereafter 32,775 -- ----------- ---------- $ 79,131 5,672 =========== Less: Interest at 10% (321) Less: Current portion (1,654) ---------- Total $ 3,697 ==========
Rent expense under operating leases for 1996, 1995 and 1994 was $12,300,000, $11,215,000 and $10,624,000, respectively. 11. INCOME TAXES The provisions (benefit) for income taxes consist of the following:
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 -------------------------------- ----------------- ----------------- ---------------- (RESTATED) (RESTATED) CURRENT PROVISION: U.S. Federal $ -- $ 33 $ 563 Foreign 211 1,180 756 State -- -- 732 DEFERRED PROVISION: U.S. Federal $ -- $ (5,623) $ 342 Foreign -- (2,159) (93) State -- -- 444 --------- ---------- --------- Total $ 211 $ (6,569) $ 2,744 ========= ========== =========
38 42 The income tax provisions (benefit) are different from those computed using the statutory U.S. Federal income tax rate as set forth below:
YEARS ENDED DECEMBER 31, 1996 1995 1994 ---------------- ---------------- ------------- (RESTATED) (RESTATED) U.S. Federal statutory rate 35.0% (34.0)% 34.0% Intangible amortization 21.9 10.2 9.2 Foreign income taxes, net (21.4) (10.8) (1.4) Change in valuation allowance (43.6) 249.7 -- Other, net 10.7 (282.3) (15.3) ---- ------- ----- Effective Rate 2.6% (67.2)% 26.5% === ===== ====
The tax effects of significant temporary differences are as follows:
DECEMBER 31, (IN THOUSANDS) 1996 1995 ---------------------------------------------- ----------------- --------- TAX ASSETS: (RESTATED) Non-deductible financial statement accruals $ 37,603 $ 34,684 U.S. Federal net operating loss Carryforward 51,628 44,655 Intangible assets 6,865 6,865 U.S. Federal and foreign tax credit carryforward 16,952 19,587 ----------- ------------ 113,048 105,791 Valuation allowance (54,432) (68,021) ----------- ------------ Tax assets, net $ 58,616 $ 37,770 =========== ============ TAX LIABILITIES: Percentage of completion accounting $ 3,349 $ 2,555 Excess tax depreciation 5,280 7,198 Excess deductions for tax reporting purposes 27,280 18,007 ----------- ------------ Tax liabilities $ 35,909 $ 27,760 =========== ============
The company established deferred tax assets in connection with its 1994 Fairchild Acquisition (See Note 4) of $35,446,000, and deferred tax liabilities of $2,337,000. The company also established a valuation allowance of approximately $33,109,000 against certain deferred tax assets acquired in connection with the Fairchild Acquisition. In 1996 and 1994, approximately 56.6% and 27.9%, respectively, of the company's income before provision for income taxes and cumulative effect of an accounting change was generated from foreign sources. In 1995, approximately $2,100,000 of income before benefit for income taxes and cumulative effect of an accounting change was generated from foreign sources. The company had Federal net operating loss and tax credit carryforwards of approximately $120,000,000 and $3,000,000, respectively, at December 31, 1996 that may be utilized through the year 2012, subject to certain annual limitations and other restrictions, of which portions expire beginning in 2001. 12. COMMON STOCK AND STOCK OPTIONS In 1996 and 1995, the company issued and sold 1,200,000 and 2,000,000 shares, respectively, of its Common Stock in private placements to various offshore investors, receiving net proceeds of approximately $20,300,000 and $32,400,000, respectively. The company's 1990 Stock Option Plan (the "1990 Plan") provides for grants of either incentive or non-qualified stock options to officers, employee directors and general employees of the company and its subsidiaries. Under the terms of the 1990 Plan, incentive stock options may not be granted at less than 100% of the fair market value of the company's Common Stock at the date of grant, and non-qualified options may not be granted at less than 85% of the fair market value of the company's Common Stock at the date of grant. Each option under the 1990 Plan vests 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 1990 Plan currently provides for the granting of up to 2,975,000 shares of the company's Common Stock. The company also maintains a plan that provides solely for automatic grants of non-qualified stock options to eligible non-employee directors of the company. 39 43 In January 1997, Orbital's Board of Directors approved the company's 1997 Stock Option and Incentive Plan (the "1997 Plan"), subject to stockholder approval. The 1997 Plan will provide for an additional 1,600,000 shares of the company's Common Stock to be available for grants of options and restricted stock to officers, directors, employees and consultants to the company. Incentive and non-qualified stock options must be granted with an exercise price not less than 100% of the stock's fair market value at the date of grant. OCC adopted a stock option plan in 1992 (the "ORBCOMM Plan"). The ORBCOMM Plan provides for grants of incentive and non-qualified stock options to purchase OCC common stock to officers and employees of ORBCOMM Global and the company. Under the terms of the ORBCOMM Plan, incentive stock options may not be granted at less than 100% of the fair market value, and non-qualified options may not be granted at less than 85% of the fair market value, of OCC common stock at the date of grant as determined by a committee consisting of two OCC Board members and two members appointed by Teleglobe Mobile. The options vest at a rate set forth by the Board of Directors in each individual option agreement, generally in one-fourth increments over a four-year period. Certain provisions of the ORBCOMM Plan require OCC to repurchase, with cash or promissory notes, the common stock acquired pursuant to the options. The cash repurchase amount is restricted by the terms of the ORBCOMM Notes to an amount not to exceed $1,000,000 in any one year. During 1996, OCC repurchased 47,760 shares of OCC common stock acquired by current and former employees pursuant to OCC option exercises. The following tables summarize information regarding options under the company's stock option plans (including option plans assumed by the company as a result of the Magellan and MDA acquisitions) and the ORBCOMM Plan for the last three years: ORBITAL OPTIONS
WEIGHTED NUMBER OF OPTION PRICE AVERAGE OUTSTANDING SHARES PER SHARE EXERCISE PRICE AND EXERCISABLE ------ --------- -------------- --------------- OUTSTANDING AT DECEMBER 31, 1993 1,324,198 $1.82 - $ 20.00 $ 9.92 558,422 Granted 978,560 $3.51 - $ 22.00 $17.63 Exercised (107,387) $3.51 - $ 15.30 $12.72 Cancelled/Expired (78,476) $10.20 - $ 22.00 $19.28 ----------- OUTSTANDING AT DECEMBER 31, 1994 2,116,895 $1.82 - $ 22.00 $13.02 997,981 Granted 553,966 $7.47 - $ 18.81 $16.97 Exercised (300,011) $3.51 - $ 15.30 $ 6.29 Cancelled/Expired (130,325) $3.51 - $ 22.00 $20.39 ----------- OUTSTANDING AT DECEMBER 31, 1995 2,240,525 $1.82 - $ 22.00 $14.16 1,133,713 Granted 1,372,000 $12.25 - $ 17.63 $13.26 Exercised (298,916) $1.82 - $ 17.75 $ 7.20 Cancelled/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 ===========
OPTIONS OUTSTANDING ---------------------------------------------------------------------------------- NUMBER WEIGHTED AVERAGE RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISE PRICES AT DEC. 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE ------------------------ -------------------------- -------------------------- -------------------------- $ 1.82 - $12.25 939,144 6.2 years $9.71 $ 12.96 - $13.71 1,018,164 7.8 years $13.52 $ 13.75 - $22.00 767,902 7.1 years $16.71 ----------- $ 1.82 - $22.00 2,725,210 7.1 years $13.10 =========== OPTIONS EXERCISABLE ------------------------------------------------ NUMBER EXERCISABLE WEIGHTED AVERAGE AT DEC. 31, 1996 EXERCISE PRICE ---------------- -------------------- 491,976 $ 8.55 433,576 $13.54 398,764 $16.57 ----------- 1,324,316 $12.60 ===========
40 44 OCC OPTIONS
WEIGHTED NUMBER OF OPTION PRICE AVERAGE OUTSTANDING SHARES PER SHARE EXERCISE PRICE AND EXERCISABLE ------ --------- -------------- --------------- OUTSTANDING AT DECEMBER 31, 1993 496,274 $1.50 - $ 12.50 $ 3.81 184,966 Granted 118,650 $5.25 - $ 12.50 $13.42 Exercised (4,186) $1.50 - $ 4.00 $ 1.76 Cancelled/Expired (11,664) $1.50 - $ 13.00 $ 8.17 --------- OUTSTANDING AT DECEMBER 31, 1994 599,074 $1.50 - $ 14.00 $ 5.64 298,657 Granted -- N/A N/A Exercised (8,936) $1.50 - $ 13.00 $ 3.87 Cancelled/Expired (44,238) $1.50 - $ 13.00 $ 6.74 --------- OUTSTANDING AT DECEMBER 31, 1995 545,900 $1.50 - $ 14.00 $ 5.56 411,086 Granted 154,500 $17.00 - $ 25.00 $20.50 Exercised (67,270) $1.50 - $ 13.00 $ 2.43 Cancelled/Expired (34,300) $1.50 - $ 17.00 $13.81 --------- OUTSTANDING AT DECEMBER 31, 1996 598,830 $1.50 - $ 25.00 $ 9.40 393,903 =========
OPTIONS OUTSTANDING --------------------------------------------------------------------------------- NUMBER WEIGHTED AVERAGE RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISE PRICES AT DEC. 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE --------------- ---------------- ---------------- -------------- $ 1.50 - $4.00 283,040 5.8 years $ 2.37 $ 5.25 - $17.00 248,290 7.5 years $13.18 $ 25.00 - $25.00 67,500 9.3 years $25.00 ----------------- $ 1.50 - $25.00 598,830 6.9 years $ 9.40 ================= OPTIONS EXERCISABLE --------------------------------------------------- NUMBER EXERCISABLE WEIGHTED AVERAGE AT DEC. 31, 1996 EXERCISE PRICE ---------------- -------------- 283,040 $ 2.37 110,863 $11.33 0 N/A --------- 393,903 $ 4.89 ---------
During 1996, Magellan and ORBIMAGE each adopted a 1996 Stock Option Plan (the "Magellan Plan" and the "ORBIMAGE Plan," respectively) pursuant to which incentive or non-qualified options to purchase up to 7,000,000 shares of Magellan common stock and 2,800,000 shares of ORBIMAGE common stock may be granted to Magellan and Orbital employees, consultants or advisors in the case of the Magellan Plan, and ORBIMAGE and Orbital employees, consultants or advisors in the case of the ORBIMAGE Plan. Under both plans, stock options may not be granted with an exercise price less than 85% of the stock's fair market value at the date of grant, as determined by the respective Boards of Directors and approved by Orbital's Audit and Finance Committee. The Magellan and ORBIMAGE options generally vest incrementally over a three-year period. During 1996, Magellan granted 6,915,900 options pursuant to the Magellan Plan at $1.10 per share, the fair market value at the date of grant of Magellan common stock. Of these grants, 322,300 were cancelled in 1996, and 667,539 options are exercisable at December 31, 1996. Certain provisions of the Magellan Plan require Magellan to repurchase the common stock acquired pursuant to the options. Also during 1996, ORBIMAGE granted 1,408,000 options pursuant to the ORBIMAGE Plan at $3.60 per share, the fair market value at the date of grant of ORBIMAGE common stock. Of these grants, 352,000 are exercisable at December 31, 1996. The weighted average remaining contractual life of outstanding options was approximately ten years for each of the Magellan and ORBIMAGE Plans at December 31, 1996.
ADDITIONAL EXPECTED SHARES DIVIDEND RISK-FREE AVAILABLE VOLATILITY YIELD INTEREST RATE ------------- -------------------------------------------------------- --------------------------- DEC. 31, 1996 1996 1995 1996 1995 1996 1995 ------------------------------ -------------------------- ------------- ------------- -------------------------- Orbital Plans 231,955 56% 58% 0% 0% 5.3% 7.0% ORBCOMM Plan 20,778 30% N/A 0% 0% 5.6% N/A Magellan Plan 406,400 30% N/A 0% 0% 6.4% N/A ORBIMAGE Plan 1,392,000 30% N/A 0% 0% 5.8% N/A AVERAGE WEIGHTED AVERAGE EXPECTED LIFE FAIR VALUE (IN YEARS) PER SHARE ---------------------------------------------------------- 1996 1995 1996 1995 -------------------------- ------------- --------------- 4.5 4.5 $13.26 $ 16.97 4.5 N/A 20.50 N/A 4.5 N/A 1.10 N/A 4.5 N/A 3.60 N/A
13. STOCK-BASED COMPENSATION On January 1, 1996, the company adopted SFAS 123. The company uses the Black-Scholes option pricing model to determine the pro forma impact to the company's net income and earnings per share. The model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the option being valued, and requires certain assumptions, such as the expected amount of time an option will be outstanding until it is 41 45 exercised or it expires, to calculate the weighted average fair value per share of stock options granted. This information and the assumptions used for 1996 and 1995 for all option plans is summarized as follows. The company recorded compensation expense of approximately $300,000, $55,000 and $234,000 related to the various option plans for the years ended December 31, 1996, 1995 and 1994, respectively. Had the company determined compensation expense based on the fair value at the grant date for stock options in accordance with the alternative method prescribed by SFAS 123, the company's net loss and primary and fully diluted loss per share, would have been ($743,000) and ($0.03), respectively, for the year ended December 31, 1996, while net loss and primary and fully diluted loss per share would have been ($7,515,000) and ($0.29), respectively, for the year ended December 31, 1995. Pro forma net income reflects only options granted in 1996 and 1995 and, therefore, may not be representative of the effects for future periods. During 1996, the company issued 150,000 stock appreciation rights that vest over a three-year period. Payment is dependent on appreciation of the company's Common Stock over the vesting period. The company recorded approximately $175,000 in compensation expense during 1996 for this issuance. 14. SUPPLEMENTAL DISCLOSURES DEFINED CONTRIBUTION PLANS At December 31, 1996, the company had four defined contribution plans (the "Plans") in accordance with Section 401(k) of the Internal Revenue Code of 1986, as amended. Generally, all full-time employees are eligible for participation in the Plan applicable to their location. Company contributions to the Plans are made based on certain plan provisions and at the discretion of the Board of Directors, and were approximately $5,818,000, $5,015,000 and $2,991,000 during 1996, 1995 and 1994, respectively. Total company contributions to foreign defined contribution plans during 1996, 1995 and 1994 were $1,279,000, $1,518,000 and $1,436,000, respectively. CASH FLOWS Cash payments for interest and income taxes were as follows:
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 --------------------------------------- ---------------- ---------------- --------------- Interest paid $ 10,860 $ 9,906 $ 11,831 Income taxes paid, net of refunds 1,327 1,339 2,447
The company paid approximately $40,800,000 in cash and issued Common Stock with a fair value of approximately $31,000,000 in connection with the 1994 Fairchild Acquisition in return for approximately $95,000,000 in assets, and the company assumed or established liabilities of approximately $23,200,000. 42 46 SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Management has determined to restate its previously issued consolidated financial statements for each of the quarters in 1996 and 1995 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 (in thousands, except share data):
(IN THOUSANDS, QUARTER ENDED EXCEPT SHARE DATA) MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ------------------------------ ------------- ---------------- ---------------- --------------- 1996 (as previously reported) Revenues $ 104,894 $ 116,512 $ 119,571 $ 120,458 Gross profit 32,312 32,888 31,875 28,099 Income from operations 5,872 7,324 7,124 3,522 Net income 3,128 3,839 4,456 4,484 Net income per common and dilutive share 0.12 0.14 0.15 0.14 1995 (as previously reported) Revenues $ 88,975 $ 81,766 $ 95,817 $ 97,762 Gross profit 25,513 20,730 25,076 24,985 Income (loss) from operations 4,614 (972) 3,683 (6,179) Net income (loss) before cumulative effect of accounting change 3,015 (1,626) 1,757 (3,837) Net income (loss) (1,139) (1,626) 1,757 (3,837) Net income (loss) per common and dilutive share (0.05) (0.07) 0.06 (0.14) 1996 (as restated) Revenues $ 104,801 $ 115,063 $ 119,903 $ 110,020 Gross Profit 33,063 32,336 30,368 21,439 Income (loss) from operations 5,458 6,191 6,574 (4,466) Net income (loss) 2,965 3,054 4,082 (159) Net income (loss) per common and dilutive share 0.11 0.11 0.14 (0.01) 1995 (as restated) Revenues $ 89,203 $ 81,994 $ 96,045 $ 92,598 Gross Profit 25,572 20,789 25,135 17,198 Net income (loss) from operations 4,614 (972) 3,683 (14,580) Net income (loss) before cumulative effect of accounting changes 1,390 (1,432) 2,039 (5,210) Net income (loss) (987) (1,432) 2,039 (5,210) Net income (loss) per common share (0.04) (0.06) 0.08 (0.19)
43 47 EQUITY METHOD ACCOUNTING RESTATEMENT ADJUSTMENTS Previously, the company's consolidated financial statements reflected the company's capitalization of interest expense on various assets, including on its equity investment in ORBCOMM. As reflected in the restated consolidated financial statements presented herein, Orbital has revised the capitalization of interest on certain assets, including its equity method investment in ORBCOMM. These revisions include the compounding impact of interest, and the reduction of eligible investment amounts for losses recognized for equity method investors. These revisions had the effect of increasing (decreasing) interest expense for each quarter of 1996 and 1995 as follows (in thousands):
March 31 June 30 September 30 December 31 1996 $ ( 322) $ (383) $ (300) $ 53 1995 $ (155) $ (193) $ (271) (366)
Previously, 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 1996. ASSET RESTATEMENT ADJUSTMENTS The company has historically capitalized and depreciated certain product enhancements. Previously, the company's consolidated financial statements reflected such costs as capitalized assets in 1996 and 1995. As reflected in the company's restated consolidated financial statements, the company has expensed all previously capitalized enhancement costs. These revisions resulted in a decrease in operating income as follows (in thousands):
March 31 June 30 September 30 December 31 1996 $ 209 $ 1,132 $ 1,643 $ 2,941 1995 $ 0 $ 0 $ 0 $ 1,313
The company has recorded certain other adjustments, the net effect of which is not significant individually or in the aggregate. 44 48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is included in Item 4A above and under the caption "Election of Directors -- Directors to be Elected at the 1997 Annual Meeting, -- Directors Whose Terms Expire in 1998 and -- Directors Whose Terms Expire in 1999" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement filed pursuant to Regulation 14A on or about March 26, 1997 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 Termination of Employment Agreements" and "Information Concerning the Board and Its Committees" of the Proxy Statement filed pursuant to Regulation 14A on or about March 26, 1997 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 26, 1997 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 26, 1997 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 Operations C. Consolidated Balance Sheets D. Consolidated Statements of Stockholders' Equity E. Consolidated Statements of Cash Flows F. Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENTS OF 50-PERCENT OWNED SUBSIDIARY AND FINANCIAL STATEMENT SCHEDULES. 45 49 The financial statements of ORBCOMM Global, L.P. were previously transmitted with Orbital's Form 10K filed with the Securities and Exchange Commission on March 26,1997. 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 Statement Schedule II Valuation and Qualifying Accounts 3. EXHIBITS. A complete listing of exhibits required is given in the Exhibit Index that precedes the exhibits filed with this report. (b) Reports on Form 8-K On December 23, 1996, the Company filed a Current Report on Form 8-K reporting, pursuant to Item 9, its sale of 1.2 million shares of common stock on December 13, 1996, in a transaction exempt from registration pursuant to Regulation S under the Securities Act. (c) See Item 14(a)(3) of this report. (d) See Item 14(a)(2) of this report. 46 50 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized. ORBITAL SCIENCES CORPORATION DATED: June 26, 2000 By /s/ Jeffrey V. Pirone ------------------------------------- Jeffrey V. Pirone Executive Vice President and Chief Financial Officer 47 51 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS ORBITAL SCIENCES CORPORATION Under date of February 5, 1997, except as to note 1A, which is as of April 17, 2000, we reported on the consolidated balance sheets of Orbital Sciences Corporation and subsidiaries as of December 31, 1996 and 1995, 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, 1996, included in the Company's 1996 annual report on 1996 Form 10K/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 1996 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 the 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, 1996 and 1995, and for each of the years in the two-year period ended December 31, 1996 has been restated. KPMG LLP Washington, D.C. February 5, 1997, except as to note 1A, which is as of April 17, 2000 48 52 ORBITAL SCIENCES CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS IN THOUSANDS)
COLUMN A COLUMN B ------------------------------------------------------- -------------------------------------------------------------- ADDITIONS ------------------------------- BALANCE AT CHARGED TO COSTS DESCRIPTION START OF PERIOD AND EXPENSES ------------------------------------------------------- --------------------------- ------------------------------ YEAR ENDED DECEMBER 31, 1994 Allowance for doubtful accounts $ 587 $ 230 Allowance for obsolete inventory 2,260 216 Allowance for unrecoverable investments - - Deferred income tax valuation reserve 14,456 - YEAR ENDED DECEMBER 31, 1995 (Restated) Allowance for doubtful accounts $ 859 $ 108 Allowance for obsolete inventory 3,936 580 Allowance for unrecoverable investments 3,100 - Deferred income tax valuation reserve 43,596 21,445 YEAR ENDED DECEMBER 31, 1996 (Restated) Allowance for doubtful accounts $ 773 $ 603 Allowance for obsolete inventory 3,778 667 Allowance for unrecoverable investments 1,100 - Deferred income tax valuation reserve 68,021 - COLUMN A COLUMN C COLUMN D COLUMN E ------------------------------------------------------- --------------------------------------------------------------------------- ADDITIONS ----------------------------- CHARGED/ CREDITED TO BALANCE AT DESCRIPTION OTHER ACCOUNTS (1) DEDUCTIONS (2) END OF PERIOD ------------------------------------------------------- ----------------------------- ----------------------- ----------------- YEAR ENDED DECEMBER 31, 1994 Allowance for doubtful accounts $ 42 $ - $ 859 Allowance for obsolete inventory 1,571 (111) 3,936 Allowance for unrecoverable investments 3,100 - 3,100 Deferred income tax valuation reserve 29,308 (168) 43,596 YEAR ENDED DECEMBER 31, 1995 (Restated) Allowance for doubtful accounts $ - $ (194) $ 773 Allowance for obsolete inventory - (738) 3,778 Allowance for unrecoverable investments - (2,000) 1,100 Deferred income tax valuation reserve 2,980 - 68,021 YEAR ENDED DECEMBER 31, 1996 (Restated) Allowance for doubtful accounts $ - $ (8) $ 1,368 Allowance for obsolete inventory 685 (32) 5,098 Allowance for unrecoverable investments - - 1,100 Deferred income tax valuation reserve - (13,589) 54,432
(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, adjustments required to recast pooled company's year end as described in Note (4) to the consolidated financial statements incorporated by reference elsewhere herein, and certain reclassifications of deferred tax accounts. (2) - Deduction for revaluation of allowance account. 49 53 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. In addition, the registrant has executed certain instruments reflecting long-term debt, the total amount of which does not exceed 10% of the total assets of the registrant and it subsidiaries on a consolidated basis. In accordance with section 4(iii) of Item 601 under Regulation S-K, the registrant agrees to furnish to the Securities and Exchange Commission copies of each instrument relating to such long-term debt not otherwise filed herewith or incorporated herein by reference.
EXHIBIT NO. DESCRIPTION ---------- -------------------------------------------------------------------------------------------- 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. 3.1.1 Certificate of Designation for the Company's Series A Special Preferred Voting Stock (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3 (File Number 333-08769) filed and effective on July 25, 1996). 3.2 By-Laws of Orbital Sciences Corporation, as amended on July 27, 1995 (incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4 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). 9 Voting and Exchange Trust Agreement between the Company, MacDonald Dettwiler Holdings Inc. and State Street Bank and Trust Company (incorporated by reference to Exhibit 9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.1 Amended and Restated Credit Agreement, dated as of September 27, 1994 among the Company, Orbital Imaging Corporation and Fairchild Space and Defense Corporation, the Banks listed therein, Morgan Guaranty Trust Company of New York, as Administrative Agent and J.P. Morgan Delaware, as Collateral Agent (the "Credit Agreement") (incorporated by reference to Exhibit 10.6 to the Company's Report on Form 10-Q for the quarter ended September 30, 1994). 10.1.1 Amendment No. 1 to the Credit Agreement, dated as of October 26, 1994 (incorporated by reference to Exhibit 10.6.1 to the Company's Annual Report on Form 10-K, for the fiscal year dated December 31, 1995). 10.1.2 Amendment No. 2 to the Credit Agreement, dated as of July 5, 1995 (incorporated by reference to Exhibit 10.6.3 to the Company's Report on Form 10-Q for the quarter ended June 30, 1995). 10.1.3 Amendment No. 3 to the Credit Agreement, dated as of August 23, 1995 (incorporated by reference to Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter ended September 30, 1995). 10.1.4 Amendment No. 4 to the Credit Agreement, dated as of November 15, 1995 (incorporated by reference to Exhibit 10.1.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.1.5 Amendment No. 5 to the Credit Agreement , dated as of July 19, 1996 (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1996). 10.1.6 Amendment No. 6 to the Credit Agreement (previously filed). 10.2 Note Agreement, dated as of June 14, 1995 between the Corporation and The Northwestern Mutual Life Insurance Company (the "NWML Note Agreement") (incorporated by reference to Exhibit 4.7.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1995). 10.2.1 1st Amendment to the NWML Note Agreement ,dated as of June 30, 1995, between the Corporation and The Northwestern Mutual Life Insurance Company (incorporated by reference to the Company's Report on Form 10-Q for the quarter ended September 30, 1995). 10.2.2 Second Amendment to the NWML Note Agreement, dated as of March 15, 1996 (incorporated by reference to Exhibit 10.2.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.2.3 Third Amendment to NWML Note Agreement, dated as of July 13, 1996 (incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended June 30, 1996). 10.3 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
50 54 Exhibit 10.7 to the Company's Report on Form 10-Q for the quarter ended September 30, 1994). 10.4 Security Agreement dated as of June 30, 1992 among the Company, J.P. Morgan Delaware, as Collateral Agent and American Security Bank, N.A., as Audit Agent (incorporated by Reference to Exhibit 10.6.1 to the Company's Report on Form 10-Q for the quarter ended September 30, 1994). 10.5 Master Security Agreement dated as of August 31, 1994 between Fairchild Space and Defense Corporation and General Electric Capital Corporation (incorporated by reference to Exhibit 10.7 to the Company's Report on Form 10-Q for the Quarter ended September 30, 1994). 10.6 Orbital Sciences Corporation 1990 Stock Option Plan, restated as of April 27, 1995 (incorporated by reference to Exhibit 10.5.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1995).* 10.7 Orbital Sciences Corporation 1990 Stock Option Plan for Non-Employee Directors, restated as of April 27, 1995 (incorporated by reference to Exhibit 10.5.2 to the Company's Report on Form 10-Q for the quarter ended June 30, 1995).* 10.8 Orbital Communications Corporation Restated 1992 Stock Option Plan, restated as of September 12, 1995 (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 1 0.8.1 Amendment to Orbital Communications Corporation Restated 1992 Stock Option Plan, dated February 5, 1997 (previously filed).* 10.9 Orbital Sciences Corporation 1995 Deferred Compensation Plan (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).* 10.10 Magellan Corporation 1996 Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter ended June 30, 1996).* 10.11 Orbital Imaging Corporation 1996 Stock Option Plan (previously filed).* 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 (previously filed).* 10.13 Form of Indemnification Agreement entered into between the Company and Directors, Executive Officers and certain other Officers of the Company (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1 (File Number 33-33453) filed on February 9, 1990 and effective on April 24, 1990).* 10.13.1 Amendment dated October 22, 1992 to form of Indemnification Agreement entered into between the Company and Directors, Executive Officers and certain other Officers of the Company (incorporated by reference to Exhibit 19 to the Company's Report on Form 10-Q for the Quarter Ended September 30, 1992).* 10.14 Participation Agreement dated August 20, 1992 by and between ITT Commercial Finance Corp. and the Company, as amended through August 26, 1992 (incorporated by reference to Exhibit 19.14 to Amendment No. 2 to the Company's Report on Form 10-Q for the Quarter Ended September 30, 1992). 10.15 Master Agreement, restated 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. 10.16 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 (previously filed). 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 Support Agreement between the Company and MacDonald, Dettwiler Holdings, Inc., dated November 17, 1995 (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form
51 55 10-K for the fiscal year ended December 31, 1995) 11 Statement re: Computation of Earnings Per Share (transmitted herewith). 21 Subsidiaries of the Company (previously filed). 23.1 Consent of KPMG LLP (transmitted herewith). 23.2 Consent of KPMG LLP with respect to financial statements of ORBCOMM Global, L.P. (transmitted herewith). 27 Financial Data Schedule for year ended December 31, 1996 (such schedule is furnished for the information of the Securities and Exchange Commission and is not to be deemed "filed" as part of the Form 10-K/A or therwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934) (transmitted herewith).
---------- * Management Contract or Compensatory Plan or Arrangement. 52