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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT ON
FORM 10-K
For the fiscal year ended December 31, 1998
COMMISSION FILE NUMBER 0-18287
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ORBITAL SCIENCES CORPORATION
(Exact name of registrant as specified in charter)
DELAWARE 06-1209561
(State of Incorporation of Registrant) (I.R.S. Employer I.D. No.)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166
(Address of principal executive offices)
(703) 406-5000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01
(LISTED ON THE NEW YORK STOCK EXCHANGE)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing sales price as reported on the New York
Stock Exchange on March 22, 1999 was approximately $767,918,943.
As of March 22, 1999, 37,182,819 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement dated March 29,
1999 are incorporated by reference in Part III of this Report.
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TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I
ITEM 1. Business.................................................... 1
ITEM 2. Properties.................................................. 11
ITEM 3. Legal Proceedings........................................... 12
ITEM 4. Submission of Matters to a Vote of Security Holders......... 12
ITEM 4A. Executive Officers of the Registrant........................ 12
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 14
ITEM 6. Selected Financial Data..................................... 15
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 23
ITEM 8. Financial Statements and Supplementary Data................. 24
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 53
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 53
ITEM 11. Executive Compensation...................................... 53
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 53
ITEM 13. Certain Relationships and Related Transactions.............. 53
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 53
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Pegasus(R) is a registered trademark and service mark of Orbital Sciences
Corporation; Taurus(R) is a registered trademark of Orbital Sciences
Corporation; Orbital(TM) is a trademark of Orbital Sciences Corporation;
OrbView(R) and ORBIMAGE(R) are registered service marks of Orbital Imaging
Corporation; and ORBCOMM(R) is a registered service mark of ORBCOMM Global L.P.
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PART I
ITEM 1. BUSINESS
BACKGROUND
Orbital Sciences Corporation, together with its subsidiaries, is a leading
space and information systems company that designs, manufactures, operates and
markets a broad range of space-related products and services. Our products and
services are grouped into three general business sectors: space and ground
infrastructure systems, satellite access products and satellite services. Space
and ground infrastructure systems include launch vehicles, satellites and
related space systems, electronics and sensor systems, and satellite ground
systems and software. Satellite access products include satellite-based
navigation, positioning and communications products and transportation
management systems. Satellite services include satellite-based two-way mobile
data communications services, satellite-based remote imaging services, and new
initiatives relating to satellite-based automotive information services and
satellite-based voice communications services.
Orbital was incorporated in Delaware in 1987 to consolidate the assets,
liabilities and operations of Space Systems Corporation and Orbital Research
Partners, L.P. Since inception, it has been our strategy to develop and grow a
core integrated business of space systems technologies and products, starting
with the design and manufacturing of small satellites and lightweight rockets
and other inexpensive space systems intended to capitalize on the commercial
development of space. A major part of this strategy has centered on
market-expanding innovations that we have pioneered. For example, in 1990, we
introduced the world's first privately-developed space launch vehicle; in 1992,
we operated the first commercial orbit transfer vehicle; in 1995, we launched
the first operational low-orbit commercial communications satellites; in 1997,
we deployed the first small geosynchronous television broadcast satellite and
also launched the first privately-owned remote imaging satellite; and in 1998,
we shipped the first hand-held satellite communications device.
In the last ten years, we have also expanded our space-based product lines
through a number of acquisitions and strategic investments. For example, in 1994
and 1997, we acquired Fairchild Space and Defense Corporation and the space
systems and communications service businesses of CTA Incorporated ("CTA"),
respectively, broadening our satellite system and subsystem development and
production capabilities and expanding our product lines by adding various
sophisticated electronics products and transportation management systems. We
further enhanced our transportation management systems product line with the
1998 acquisition of Raytheon Company's transportation management systems
business. Through our 1994 acquisition of Magellan Corporation ("Magellan"), we
expanded our technology base and product lines into the consumer markets for
hand-held receivers for Global Positioning System, or GPS, satellite-based
navigation and positioning. We expanded our GPS business with the 1997
acquisition of the satellite-aided automotive navigation product line from
Rockwell International Corporation and the 1997 merger of Magellan with Ashtech
Inc. ("Ashtech"), a developer and supplier of high-precision GPS products,
components and technologies. In 1995, we acquired MacDonald, Dettwiler and
Associates Ltd. ("MDA"), a leading supplier of commercial satellite imaging
ground stations and related information processing software based in Vancouver,
British Columbia.
In 1990, we developed the "ORBCOMM" concept and in 1993, our subsidiary,
Orbital Communications Corporation ("OCC"), and Teleglobe Mobile Partners
("Teleglobe Mobile"), an affiliate of Teleglobe Inc., formed ORBCOMM Global,
L.P. ("ORBCOMM") for the design, development, construction, integration, testing
and operation of a low-Earth orbit satellite communications system known as the
ORBCOMM System. OCC and Teleglobe Mobile are each 50% general partners in
ORBCOMM. Additionally, OCC is a 2% partner in ORBCOMM USA, L.P. ("ORBCOMM USA")
and Teleglobe Mobile is a 2% general partner in ORBCOMM International Partners,
L.P. ("ORBCOMM International"), two partnerships formed to market the ORBCOMM
System. ORBCOMM is a 98% general partner in each of the two marketing
partnerships. We control and, therefore, consolidate ORBCOMM USA's results of
operations. We do not control ORBCOMM's or ORBCOMM International's operational
or financial affairs and therefore do not consolidate their results of
operations.
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In 1992, we established a subsidiary, Orbital Imaging Corporation
("ORBIMAGE"), to develop and operate commercial remote imaging satellites and to
market the products and services derived from such satellites. ORBIMAGE raised
equity in private placements of preferred stock in 1997 and 1998, and as a
result we own approximately 60% of ORBIMAGE. Based on certain rights granted to
the preferred equity investors, we do not control ORBIMAGE's operational or
financial affairs and therefore do not consolidate its results of operations.
We have also begun to pursue additional satellite-based services
opportunities. In early 1999, we formed a subsidiary, Orbital Navigation
Corporation ("ORBNAV"), to develop, operate and market, directly or through
joint ventures, satellite-aided automotive guidance and related value-added
information services for the rental car, private passenger car, commercial
delivery vehicle and emergency vehicle markets. ORBNAV plans to leverage
Magellan's satellite access products, ORBCOMM's satellite data network and other
technologies to pursue growth opportunities in these markets. ORBNAV's current
focus is on developing the rental car market through a joint venture with The
Hertz Corporation. In 1998, we also made a strategic investment in CCI
International N.V. ("CCI"), a company formed to offer satellite-based voice
communications services. We own approximately 40% of the equity interests in CCI
in the form of nonvoting preferred stock with various protective provisions, and
we have entered into a contract for the construction and launch of CCI's
satellites. We do not control CCI's operational or financial affairs and
therefore do not consolidate its results of operations.
DESCRIPTION OF ORBITAL'S PRODUCTS AND SERVICES
Our products and services are grouped into three general business sectors:
space and ground infrastructure systems, satellite access products and satellite
services. Our overall business is not seasonal to any significant extent.
SPACE AND GROUND INFRASTRUCTURE SYSTEMS
Our space and ground infrastructure systems sector currently includes
launch vehicles, satellites and related space systems, electronics and sensor
systems, and satellite ground systems and software products, and is described
more fully below.
Launch Vehicles. We developed and produce the Pegasus and Taurus space
launch vehicles that place small satellites into Earth orbit. Our Pegasus launch
vehicle is launched from beneath our L-1011 carrier aircraft to deploy
satellites weighing up to 1,000 pounds into low-Earth orbit. The Taurus launch
vehicle is a ground-launched derivative of the Pegasus vehicle that can carry
payloads weighing up to 3,000 pounds to low-Earth orbit and payloads weighing up
to 800 pounds to geosynchronous orbit.
The Pegasus has performed a total of 26 missions, including six successful
launches in 1998 and one successful mission so far in 1999. The Taurus has
performed a total of three launches, including two successful missions in 1998.
Customers for Pegasus launch services currently include the National Aeronautics
and Space Administration ("NASA"), the U.S. Air Force, the Defense Advanced
Research Projects Agency ("DARPA"), ORBCOMM and ORBIMAGE. Customers for Taurus
missions currently include the U.S. Air Force, South Korea's space agency and
ORBIMAGE.
Under a research and development contract with NASA, we are designing and
constructing three X-34 unmanned reusable launch vehicles that will be launched
from our L-1011 carrier aircraft. The X-34 will test and demonstrate advanced
reusable launch system technologies and materials as part of NASA's program that
is focused on the development of next-generation, lower cost launch vehicles. We
have completed the detailed design of the X-34, have constructed and shipped one
vehicle to the launch test site and are constructing two other vehicles. The
first test flight of the X-34 is currently scheduled for later in 1999. NASA has
contracted with us to conduct up to 27 test flights using the X-34.
We also produce suborbital launch vehicles, which place payloads into a
variety of high-altitude trajectories but, unlike space launch vehicles, do not
place payloads into orbit around the Earth. Our suborbital launch products
include suborbital vehicles and their principal subsystems, payloads carried by
such vehicles, and related launch support installations and systems used in
their assembly and operation. Customers typically use our suborbital launch
vehicles to launch scientific and other payloads and for defense-related
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applications such as target signature and interceptor experiments. Our primary
customers for suborbital launch vehicles include various branches of the U.S.
military. We conducted three successful suborbital launches in 1998 and, since
1982, we (including a predecessor company) have performed 102 suborbital
missions.
Orbital's space launch technology is also the basis for several other space
and suborbital programs. We are currently performing work under a suborbital
contract with the U.S. Air Force to combine surplus government ballistic missile
equipment with Pegasus and Taurus launch vehicle technology to conduct up to 24
space and suborbital launch missions over the next several years. In addition,
under NASA's Hyper-X project, we are building several Pegasus-derivative rockets
to explore technologies that could be applied to hypersonic aircraft of the
future.
Satellites and Related Space Systems. We design and manufacture small and
medium-class satellites to be used in low-Earth orbit, or LEO, and in
geosynchronous orbit, or GEO. In addition, we are in the process of designing
small and medium-class satellites to be used in medium-Earth orbit, or MEO. Our
satellites are used by various commercial and governmental customers for a wide
range of communications, broadcasting, remote imaging, scientific and military
missions. Since 1982, we (including two predecessor companies) have built and
delivered 74 satellites.
Twenty Orbital-built satellites were deployed during 1998, including 18
ORBCOMM communications satellites. Customers for our LEO and MEO satellites
include NASA, the U.S. Air Force, DARPA, the Canadian Space Agency, ORBCOMM,
ORBIMAGE and CCI, while Japan's Broadcast Satellite Systems Corporation has
ordered two GEO direct-to-home broadcast satellites from Orbital.
We design and manufacture various other space systems, including satellite
command and data handling, attitude control and structural subsystems for a
variety of government and commercial customers. In addition, we provide a broad
range of spacecraft design and engineering services as well as specialized
space-related analytical engineering services for U.S. government agencies,
including NASA, the Jet Propulsion Laboratory, the Department of Defense ("DoD")
and the Department of Energy.
Electronics and Sensor Systems. Orbital develops and manufactures defense
electronics products, including advanced avionics and data management systems
for aircraft flight operations and ground support applications. These systems
collect, process and store mission-critical data for, among other things,
mission planning and flight operations, and manage on-board equipment for
aircraft and similar platforms. The primary customers for data management
systems are the U.S. Navy, the U.S. Air Force, and various DoD prime contractors
and foreign governments. We are the leading supplier of certain avionics systems
and products, including mission data equipment for the U.S. Navy and data
transfer equipment and digital terrain systems for the U.S. Air Force and
foreign military customers. In addition, we provide stores management systems,
including weapons arming and firing functions for use on tactical aircraft and
helicopters. The avionics systems and products are deployed on a number of
platforms, including the F-4, F-14, F-16, F-18 and F-22 aircraft and the LAMPS
helicopter. The U.S. Army is also a customer for land combat vehicle-based
systems that are derived from Orbital's avionics systems.
Orbital also produces satellite-borne scientific sensors and instruments,
such as atmospheric ozone monitoring instruments and environmental sensors. For
example, our instruments have successfully operated in space, measuring ozone
concentrations around the world. We also developed and produced an atmospheric
monitoring system for use on the International Space Station. We provide sensors
performing similar functions for U.S. Navy nuclear submarines, and we are
developing sensors for the DoD for use in the detection of chemical or
biological weapons. In addition, Orbital manufactures and markets sensors that
analyze gas properties for commercial customers in the chemical, biotechnology,
pharmaceutical and steel industries.
Satellite Ground Systems and Software. Through our MDA subsidiary, we are
the leading supplier of turn-key commercial imaging satellite ground stations
and a provider of advanced image processing software used in such stations. In
recent years, our ground systems have also expanded to include
software-intensive products designed for air and sea navigation systems, along
with a variety of military applications including naval mine-hunting operations,
artillery command and control, radar deception and logistics support.
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Of approximately 45 major non-military imaging satellite ground stations
around the world, Orbital has been the prime contractor or a major supplier in
the construction of 35 ground stations in 19 countries. These ground stations
are designed to receive and process data from the eight major civil and
commercial Earth observation satellites currently in operation. Orbital also
develops and markets software that generates and processes imagery from
satellites and airborne sensors. Customers for our ground stations and Earth
information systems and system upgrades include the European and Canadian space
agencies as well as ORBIMAGE, EarthWatch, Incorporated and various other
commercial and government customers in the United States, Brazil, China, Europe
and Japan.
We also produce automated aeronautical information and air traffic control
systems. Faster and less expensive to operate than traditional manual systems,
automated aeronautical information systems provide pilots and other users with
aeronautical and meteorological information on a timely basis. Customers for our
aeronautical systems products include the military and civil aviation
authorities in various countries such as Australia, Belgium, Canada, Malaysia,
Norway and Switzerland.
We are building on our expertise in satellite image processing software by
expanding into land-oriented information systems. In 1998, the British Columbia
government selected MDA to operate and enhance the province's electronic
information access system, which provides the public with electronic access to a
series of land-related government databases, such as land titles, tax records
and property assessment information.
SATELLITE ACCESS PRODUCTS
Our satellite access products include the satellite-based navigation,
positioning and communications products of our Magellan subsidiary, as well as
transportation management systems, as described more fully below.
GPS Navigation, Positioning and Communications Products. Magellan's
product line consists of inexpensive satellite-based navigation and positioning
products for consumer markets as well as GPS products that are used for
professional and other high-precision industrial applications. Its consumer
products are marketed to recreational marine and general aviation customers and
outdoor recreation users such as campers, hunters and hikers. In 1998, Magellan
introduced the GSC 100, a hand-held satellite communications device that
combines GPS and communications functions. The GSC 100 represents the first
generation of Magellan products that will be used in conjunction with the
ORBCOMM System described below.
Professional and industrial applications include using GPS for precision
surveying, guiding aircraft under low-visibility conditions, monitoring
movements of the Earth's surface for researchers, and managing natural
resources. In addition, some of Magellan's higher-performance products
incorporate technology that provides access to both the U.S. GPS satellites and
GLONASS, the comparable Russian satellite navigation system, which improves
performance and accuracy.
Magellan has also entered the market for GPS-based car navigation products
with its automotive navigation system, which uses GPS information to provide
electronic map guidance to individual motorists. Magellan's automotive
navigation system is currently in use in approximately 6,000 Hertz rental cars.
Magellan recently introduced its second-generation vehicle navigation system,
which has greater functionality and improved features to address broader private
passenger vehicle and rental car markets. As one of the first opportunities we
are pursuing through our ORBNAV initiative, we have agreed with Hertz to enter
into an exclusive joint venture, subject to negotiation of final documentation,
whereby Hertz will offer Magellan's new automotive navigation systems in 50,000
of its rental cars in the U.S., Canada and Europe.
Magellan also pursues technology license agreements whereby Magellan
licenses its GPS and GLONASS technology to manufacturers of GPS consumer and
industrial products. Magellan has entered into such license arrangements with a
Mitsubishi subsidiary, Philips Semiconductor and Matsushita Electric Works.
In the first quarter of 1999, Magellan and Japan-based Topcon Corporation
entered into a preliminary agreement to form a joint venture to develop and sell
GPS-based positioning products for the surveying, industrial geographic
information systems, mapping and machine control markets. Under the terms of the
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agreement, which is subject to negotiation of final documentation, Magellan will
transfer certain assets and technology in exchange for cash, royalties, rights
in technology and a 30% ownership interest. Topcon also will contribute assets
to the venture in exchange for a 70% ownership interest.
In connection with the 1997 merger of Ashtech with Magellan, Orbital
entered into a stockholders' agreement with certain substantial stockholders of
Ashtech. The Ashtech stockholders were granted certain rights with respect to
Magellan, including, among others, the right to designate two members of
Magellan's seven-member board of directors and to demand registration of their
Magellan common stock after the earlier of 180 days after an initial public
offering of the common stock of Magellan or December 31, 1999. Orbital and
former Ashtech stockholders own approximately 66% and 34%, respectively, of
Magellan.
Transportation Management Systems. Orbital also produces satellite-related
vehicle location and fleet management systems that have been used primarily for
metropolitan mass transit operators. Our ORBTRAC transportation management
systems combine GPS vehicle tracking technology with local area wireless
terrestrial communications to help manage public bus and light rail systems,
provide for voice and data communications and transmit precise GPS-based
location information in emergency situations. The 1998 acquisition of Raytheon
Company's transportation management systems business expanded our
satellite-based vehicle location products to include fleet management software
for utilities and other companies. Customers for our transportation management
systems include the metropolitan mass transit authorities in Chicago, New York,
Oakland, Philadelphia, Houston and Detroit, as well as a number of smaller state
and municipal transit systems and vehicle fleets.
SATELLITE SERVICES
In Orbital's satellite services sector, our ORBCOMM and ORBIMAGE affiliates
are developing and providing satellite-based services to address markets for
global two-way data communications and digital imagery of the Earth's surface.
We have also begun to pursue additional satellite-provided services
opportunities in the markets for automotive information services through ORBNAV.
As a result of our equity investment in CCI, our satellite services sector also
includes the development of a satellite-based voice communications system.
ORBCOMM Communications Services. The ORBCOMM System consists of global
space and ground segments designed to provide continuous low-cost monitoring,
tracking and messaging communications coverage over most of the Earth's surface.
ORBCOMM is currently providing commercial service primarily in the monitoring
and tracking applications. The system is intended to be a reliable,
cost-effective method of providing fixed asset monitoring, mobile asset tracking
and data messaging services to a broad range of industrial and commercial
customers around the world, enabling customers to collect data from multiple
locations, track assets on a global basis and transmit and receive messages
outside the coverage area of terrestrial services. It is designed to permit
subscribers to use inexpensive communicators to send and receive short messages,
high-priority alerts and other information, such as the location and condition
of automobiles, trucks, railcars, industrial equipment, shipping vessels and
other remote or mobile assets. We expect that the ability to send and receive
data and messages without the geographic limitations of existing terrestrial
communications systems will stimulate the growth of new markets for
satellite-based monitoring, tracking and messaging communications and will be
used to supplement terrestrial-based communications systems by providing
relatively low-cost wide area geographic coverage in areas those systems are
unable to reach.
The ORBCOMM System initial network consists of a constellation of 28 small
LEO satellites, with a satellite control center that operates and positions the
satellites, fixed and mobile communicators used by subscribers to transmit
messages to and receive messages from the satellites, and regional ground
gateway systems that transmit and control the flow of data and message
communications and other information for the system. A gateway generally
consists of a satellite tracking station that sends signals to and receives
signals from the satellites and a message switching system that processes the
message traffic.
There are currently four operational U.S. gateway stations located in New
York, Washington, Arizona and Georgia. Gateways are also planned to be owned and
operated by ORBCOMM licensees in strategic locations around the world. These
licensees are responsible for obtaining the necessary regulatory approvals for
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operating the ORBCOMM System in their regions. Gateways located in Italy,
Brazil, and Japan, providing coverage for significant portions of Europe and
South America and all of Japan, have successfully completed acceptance testing.
ORBCOMM's international licensees in Italy and Brazil commenced commercial
service for their respective regions in early 1999, and Japan is expected to
commence commercial service shortly. ORBCOMM has agreements with several
manufacturers for the development and manufacture of hand-held communicators
used by individuals and various types of industrial communicators that monitor
fixed and mobile assets. Subscriber communicator manufacturers include
Panasonic, Magellan and Scientific Atlanta.
Orbital is completing construction of ORBCOMM's equatorial plane of seven
satellites, scheduled for launch on a Pegasus vehicle later in 1999. Orbital and
ORBCOMM have also entered into a procurement agreement valued at up to $72
million, under which Orbital has agreed to build and launch an additional seven
satellites on a fixed-price basis, with options to build and launch up to an
additional 22 satellites. Orbital also provides ORBCOMM with certain
administrative services, generally on a cost-reimbursable basis.
Orbital developed the "ORBCOMM" concept in 1990, and in 1993 formed the
ORBCOMM partnership with Teleglobe Mobile for the design, development,
construction, integration, testing and operation of the ORBCOMM System. OCC and
Teleglobe Mobile each hold a 50% interest in ORBCOMM and have invested
approximately $110,000,000 and $118,000,000, respectively, through December 31,
1998. OCC and Teleglobe Mobile also formed two marketing partnerships, ORBCOMM
USA and ORBCOMM International, each with the exclusive right to market the
ORBCOMM System in the U.S. and internationally, respectively.
Pursuant to the terms of the partnership agreements, OCC indirectly holds a
51% interest in ORBCOMM USA, with the result that OCC acting alone can generally
control the operational and financial affairs of ORBCOMM USA, and Teleglobe
Mobile indirectly holds a 51% interest in ORBCOMM International, with the result
that Teleglobe Mobile acting alone can generally control the operational and
financial affairs of ORBCOMM International. Since OCC is unable to control, but
is able to exercise significant influence over, ORBCOMM's and ORBCOMM
International's operational and financial affairs, we account for our
investments in ORBCOMM and ORBCOMM International using the equity method of
accounting. Since OCC is able to control the operational and financial affairs
of ORBCOMM USA, we consolidate ORBCOMM USA's results of operations.
In accordance with the equity method of accounting, we recognize 100% of
the revenues earned and costs incurred on sales of products and services to
ORBCOMM. We also recognize as equity in earnings (losses) of affiliates our
proportionate share of ORBCOMM's profits and losses. To the extent ORBCOMM
capitalizes its purchases from Orbital, we eliminate as equity in earnings
(losses) of affiliates approximately 50%, our current equity ownership in
ORBCOMM, of our profits and losses from sales to ORBCOMM.
We believe that ORBCOMM will require significant additional funding in
1999. Orbital and ORBCOMM are currently in the process of exploring financing
alternatives to fund future capital expenditures and to fund ORBCOMM's
operations costs. Such alternatives include, but are not limited to, additional
capital contributions from ORBCOMM's existing partners or other strategic
investors, vendor financing, deferred invoicing, equity or debt transactions and
other strategic alternatives. There can be no assurance that any financing will
be completed or available on terms commercially acceptable to ORBCOMM. During
1998, Orbital deferred invoicing ORBCOMM for approximately $35,144,000 of work
performed under our ORBCOMM satellite and launch procurement agreement. During
1999, we may defer up to $25,000,000 of invoicing for work performed for
ORBCOMM. One-half of the deferred invoice amounts has been, and is expected to
continue to be, advanced to Orbital by an affiliate of Teleglobe Inc.
Orbital anticipates that start-up of the ORBCOMM System will continue to
produce substantial operating losses through 1999. There can be no assurance
that an adequate market will develop for ORBCOMM services, that ORBCOMM will
achieve profitable operations or that we will recover any of our past or
anticipated investment in ORBCOMM.
ORBIMAGE Imagery Services. ORBIMAGE operates, and is further developing, a
fleet of satellites that collect, process and distribute digital imagery of the
Earth's surface, the atmosphere and weather conditions. ORBIMAGE's imaging
products and services are designed to provide customers with timely and
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competitively priced information concerning, among other things, the location
and movement of military assets, urban growth, forestry and crop health, land
and ocean-based natural resources and weather patterns and wind conditions.
In April 1995, ORBIMAGE launched its first satellite, OrbView-1, which
provides to NASA dedicated weather-related imagery and meteorological products.
ORBIMAGE's second satellite, OrbView-2 (operated under a licensing agreement
with Orbital), commenced commercial service in 1997 and is used by ORBIMAGE to
deliver high-quality multi-spectral ocean imagery and land surface imagery to
government and commercial customers. ORBIMAGE expects to launch two additional
satellites, OrbView-3 and OrbView-4, in 1999 and 2000, respectively. We believe
that OrbView-3 and OrbView-4 will be among the first commercial satellites with
high-resolution imagery capability and that OrbView-4 will be the world's first
satellite with commercially available hyperspectral imaging capability. As of
December 31, 1998, ORBIMAGE and MDA entered into a license agreement whereby
ORBIMAGE agreed to acquire from MDA the exclusive worldwide rights to distribute
and sell radar imagery from the RadarSat-2 satellite that is expected to be
operational in 2002. Orbital is constructing the RadarSat-2 satellite and ground
system, which are being financed by the Canadian Space Agency, the anchor
customer for RadarSat-2 imagery.
Under the procurement agreement between Orbital and ORBIMAGE, Orbital is
producing and launching the OrbView-3 and OrbView-4 satellites, and is
constructing the related ground segment on a fixed-price basis. Orbital also
provides ORBIMAGE with administrative services and technical support, generally
on a cost-reimbursable basis.
In February 1998, ORBIMAGE completed a private financing of $150,000,000
units consisting of 11 5/8% Senior Notes due 2005 and warrants to purchase an
aggregate of approximately 3% of ORBIMAGE's outstanding common stock.
Concurrently, the existing preferred stockholders of ORBIMAGE exercised an
option to purchase additional preferred stock of ORBIMAGE, resulting in
additional net proceeds to ORBIMAGE of approximately $21,000,000. The preferred
stockholders have certain demand registration rights with respect to their
shares after June 30, 2002.
We own approximately 60% of ORBIMAGE, with the remainder owned primarily by
the preferred stockholders. As a result of certain rights granted to the
preferred stockholders, including the right to elect certain directors and have
such directors participate in significant management decisions, we do not
control the operational and financial affairs of ORBIMAGE. In accordance with
the equity method of accounting, we recognize 100% of the revenues earned and
costs incurred on sales of products and services to ORBIMAGE. We also recognize
as equity in earnings (losses) of affiliates our proportionate share of
ORBIMAGE's profits and losses. To the extent ORBIMAGE capitalizes its purchases
from Orbital, we eliminate as equity in earnings (losses) of affiliates
approximately 60%, our current equity ownership in ORBIMAGE, of our profits and
losses from sales to ORBIMAGE.
As of December 31, 1998, we had invested approximately $83,000,000 in
ORBIMAGE. We anticipate that ORBIMAGE will incur operating losses at least
through 1999. There can be no assurance that an adequate market will develop for
ORBIMAGE's products and services, that it will achieve profitable operations or
that we will recover our investment in ORBIMAGE.
ORBNAV Automotive Information Services. We established ORBNAV in early
1999 to develop, operate and market, directly or through joint ventures,
satellite-aided automotive guidance and related value-added information services
for the rental car, private passenger car, commercial delivery vehicle and
emergency vehicle markets. ORBNAV's initial focus is on developing the rental
car market through an exclusive joint venture for which final documentation is
currently under negotiation with Hertz, which venture will initially purchase
50,000 Magellan automotive navigation systems for installation in Hertz rental
cars. Through ORBNAV, Orbital intends to invest up to $30,000,000 in exchange
for a 60% interest, while Hertz intends to invest up to $20,000,000 and provide
initial marketing services in exchange for a 40% interest in the joint venture.
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CCI Voice Communications. In 1998, we made a strategic investment in CCI.
CCI was formed to develop, construct and operate a constellation of satellites
offering satellite-based voice communications services in the world's equatorial
regions. Pursuant to the terms of our stock purchase agreement, we have agreed,
subject to the satisfaction by CCI of various operational and financial
milestones, to purchase up to $50,000,000 of CCI's nonvoting convertible
preferred shares, and we have an option to purchase an additional $50,000,000 of
such preferred shares. In connection with the stock purchase transaction, we
also entered into a satellite and launch vehicle procurement contract valued at
approximately $480,000,000 for the satellites (and a price to be determined for
the launch vehicles in the event we procure them). We have also agreed, subject
to satisfaction of various conditions, to provide vendor financing.
We own approximately 40% of CCI, with the remainder owned by outside
investors. Our preferred shares in CCI are nonvoting, but pursuant to the terms
of such shares, we have approval rights with respect to significant management
decisions. Our approval rights may become diluted to the extent additional
investors in CCI purchase preferred shares with similar terms. Though we do not
control CCI, we are able to exercise significant influence over CCI's
operational and financial affairs, and we currently account for our investment
in CCI using a modified equity method of accounting. In accordance with the
modified equity method of accounting, we recognize 100% of the revenues earned
and costs incurred on sales of products and services to CCI, and we recognize
100% of CCI's profits and losses. As of December 31, 1998, we had purchased
$22,000,000 of the preferred shares and had not provided any vendor financing.
There can be no assurance that CCI will achieve its financial or operational
milestones, some of which entail raising additional capital, or that an adequate
market will develop for CCI's products and services, and we may be required to
write off all, or a portion, of our investment.
RECENT DEVELOPMENTS
On March 12, 1999, Orbital and Magellan signed a merger agreement with
Lowrance Electronics, Inc., a leading manufacturer of marine and recreational
electronics using GPS-satellite navigation and sonar technology. Under the terms
of the merger, Orbital will acquire all the outstanding common stock of Lowrance
and Lowrance shareholders will receive between 745,000 and 1,250,000 shares of
Orbital common stock, based on the fair market value of Orbital common stock
prior to closing. Lowrance will be merged into Magellan at the closing and
Orbital's ownership of Magellan following the merger will increase to
approximately 85%. We expect the transaction to close in the second half of
1999. Closing is subject to regulatory approval and Lowrance shareholder
approval.
On March 18, 1999, MDA and Toronto-based Spar Aerospace Limited signed an
asset purchase agreement pursuant to which MDA will acquire Spar's space
robotics division for approximately $43,000,000 in cash, one-half of which is
payable upon closing, with the other half payable a year following closing. The
Spar acquisition will expand our product lines to include advanced robotics
primarily for the manned space market. We expect the transaction to close in the
second quarter of 1999, subject to customary closing conditions.
COMPETITION
Orbital believes that competition for sales of its products and services is
based on performance and other technical features, price, reliability,
scheduling and customization.
The primary domestic competition for the Pegasus and Taurus launch vehicles
comes from the Athena launch vehicles developed by Lockheed Martin Corporation.
In addition, Pegasus may face competition from launch systems derived from U.S.
government surplus ballistic missiles. The Israeli Shavit vehicle and other
potential foreign launch vehicles could also pose competitive challenges to
Pegasus, although U.S. government policy currently prohibits the launch of
foreign vehicles from U.S. territory. Competition for Taurus could come from
surplus Titan II launch vehicles, although a very limited inventory remains, and
from the Russian Kosmos SL-8 launch vehicle. Competition to Pegasus and Taurus
vehicles also exists in the form of partial or secondary payload capacity on
larger boosters including the Ariane, Atlas and Delta launch vehicles. Our
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primary competitors in the suborbital launch vehicle product line are Coleman
Research Corporation, Lockheed Martin and Space Vector Corporation.
Our satellites and satellite subsystems products compete with products and
services produced or provided by government entities and numerous private
entities, including TRW Inc., Ball Aerospace and Technology Corporation,
Lockheed Martin, GM Hughes Electronics Corporation and Spectrum Astro, Inc. Our
airborne and ground-based electronics, data management systems, defense-oriented
avionics products and software systems, aviation systems and space sensors and
instruments face competition from several established manufacturers, including
Smiths Industries, Lockheed Sanders and Honeywell Inc. Our main competitors in
the area of satellite ground stations include Datron Systems Inc., Matra Marconi
Space N.V. and Hughes-STX Corp. Our satellite access products primarily face
competition from Trimble Navigation Ltd., Garmin International, Philips
Automotive Electonics, Alpine Electronics and Clarion. The main competitors to
our transportation management systems are Rockwell and Harris Corporation.
ORBCOMM may face competition from numerous existing and proposed
satellite-based and terrestrial systems providing data communications services.
ORBIMAGE may face competition from U.S. and foreign governmental entities and
private entities, including Space Imaging EOSAT and EarthWatch, that provide or
are seeking to provide satellite-based imagery products.
Many of our competitors are larger and have substantially greater resources
than we do. Furthermore, the possibility exists that other domestic or foreign
companies or governments, some with greater experience in the space industry and
greater financial resources than Orbital, will seek to produce products or
services that compete with our products or services. Any such foreign competitor
could benefit from subsidies from or other protective measures by its home
country.
RESEARCH AND DEVELOPMENT
We expect to continue to invest in product-related research and
development, to conceive and develop new products and services, to enhance
existing products and services and to seek customer and, where appropriate,
third-party strategic investments in these products and services. Our research
and development expenses, excluding direct customer-funded development, were
approximately $44,597,000, $26,355,000 and $22,179,000, respectively, for the
fiscal years ended December 31, 1998, 1997 and 1996.
PATENTS AND TRADEMARKS
We rely, in part, on patents, trade secrets and know-how to develop and
maintain our competitive position and technological advantage. We hold and have
applications pending for various U.S. and foreign patents relating to the
Pegasus vehicle, our satellites, certain of our GPS products, and other systems
and products. Certain of the trademarks and service marks used in connection
with our products and services have been registered with the U.S. Patent and
Trademark Office, the Canadian Intellectual Property Office and certain other
foreign trademark authorities.
COMPONENTS, RAW MATERIALS AND CARRIER AIRCRAFT
We purchase a significant percentage of our product components, including
rocket propulsion motors, structural assemblies, electronic equipment and
computer chips, from third parties. We also occasionally obtain from the U.S.
government parts and equipment that are used in the production of our products
or in the provision of our services. We have not experienced material difficulty
in obtaining product components or necessary parts and equipment and we believe
that alternative sources of supply would be available, although increased costs
and possible delays could be incurred in securing alternative sources of supply.
Our ability to launch our Pegasus vehicle depends on the availability of an
aircraft with the capability of carrying and launching such space launch
vehicle. We own the modified Lockheed L-1011 carrier aircraft that is used for
the Pegasus vehicle and will be used for the X-34 and one suborbital program. In
the event that the L-1011 carrier aircraft were to be unavailable, we would
experience significant delays, expenses and loss of revenues as a result of
having to acquire and modify a new carrier aircraft.
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U.S. GOVERNMENT CONTRACTS
During 1998, 1997 and 1996, approximately 46%, 38% and 45%, respectively,
of our total annual revenues were derived from contracts with the U.S.
government and its agencies or from subcontracts with the U.S. government's
prime contractors. Most of our U.S. government contracts are funded
incrementally on a year-to-year basis. Changes in government policies,
priorities or funding levels through agency or program budget reductions by the
U.S. Congress or executive agencies or the imposition of budgetary constraints
could materially adversely affect our financial condition or results of
operations. Customers that accounted for 10% or more of our consolidated 1998
revenues were NASA, DoD and ORBIMAGE.
The accuracy and appropriateness of our direct and indirect costs and
expenses under our contracts with the U.S. government are subject to extensive
regulation and audit by the Defense Contract Audit Agency or by other
appropriate agencies of the U.S. government. These agencies have the right to
challenge our cost estimates or allocations with respect to any such contract.
Additionally, a substantial portion of payments to Orbital under U.S. government
contracts are provisional payments that are subject to potential adjustment upon
audit by such agencies. We believe that any adjustments likely to result from
inquiries or audits of our contracts will not have a material adverse impact on
our financial condition or results of operations. Since Orbital's inception, we
have not experienced any material adjustments as a result of any such inquiries
or audits.
Orbital's major contracts with the U.S. government fall into three
categories: firm fixed-price contracts, fixed-price incentive fee contracts and
cost-plus-fee contracts. Under firm fixed-price contracts, work performed and
products shipped are paid for at a fixed price without adjustment for actual
costs incurred in connection with the contract. Therefore, we bear the risk of
loss due to increased cost, although some of this risk may be passed on to
subcontractors. Under fixed-price government contracts, we may receive progress
payments, generally in an amount equal to between 80% and 95% of monthly costs
and profits, or we may receive milestone payments upon the occurrence of certain
program achievements, with final payments occurring at project completion.
Fixed-price incentive fee contracts provide for sharing by Orbital and the
customer of unexpected costs incurred or savings realized within specified
limits, and may provide for adjustments in price depending on actual contract
performance other than costs. Costs in excess of the negotiated maximum
(ceiling) price and the risk of loss by reason of such excess costs are borne by
Orbital, although some of this risk may be passed on to subcontractors. Under a
cost-plus-fee contract, we recover our actual allowable costs incurred and
receive a fee consisting of a base amount that is fixed at the inception of the
contract and/or an award amount that is based on the U.S. government's
subjective evaluation of the contractor's performance in terms of the criteria
stated in the contract.
All of our U.S. government contracts and, in general, our subcontracts with
the U.S. government's prime contractors provide that such contracts may be
terminated at will by the U.S. government or the prime contractor, respectively.
Furthermore, any of these contracts may become subject to a government-issued
stop work order under which we would be required to suspend production. In the
event of a termination at will, Orbital would normally be entitled to recognize
the purchase price for delivered items, reimbursement for allowable costs for
work in process and an allowance for reasonable profit thereon or adjustment for
loss if completion of performance would have resulted in a loss. From time to
time we experience contract suspensions and terminations.
REGULATION
Our ability to pursue our business activities is regulated by various
agencies and departments of the U.S. government and, in certain circumstances,
the governments of other countries. Commercial space launches require licenses
from the U.S. Department of Transportation (the "DoT") and operation of our
L-1011 aircraft requires licenses from certain agencies of the DoT, including
the Federal Aviation Administration. Construction, launch and operation of
commercial communications satellites, including the ORBCOMM communications
network and CCI's business, require licenses from the U.S. Federal
Communications Commission (the "FCC") and frequently require the approval of
international and individual country regulatory authorities. ORBCOMM has
received the necessary FCC regulatory authority to operate its
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system. ORBCOMM's international licensees have obtained or are responsible for
obtaining the necessary international regulatory licenses. In addition,
commercial remote imagery satellite systems such as those developed by ORBIMAGE
require licenses from the U.S. Department of Commerce (the "DoC") and the FCC
for the construction, launch and operation of remote imaging satellites.
ORBIMAGE has the necessary DoC licenses and its FCC license to construct, launch
and operate the OrbView-3 and OrbView-4 satellites. ORBIMAGE has applied to DoC
to amend its OrbView-4 license to permit the commercial distribution of
hyperspectral imagery from such satellite. The DoC has indicated that its
approval may be subject to certain limitations, such as delaying release of
imagery or degrading spatial resolution of imagery for commercial uses. Exports
of our products, services and technical information frequently require licenses
from the U.S. Department of State or the DoC.
There can be no assurance that we will be successful in our efforts to
obtain necessary licenses or regulatory approvals. The inability of Orbital,
ORBCOMM, ORBIMAGE or CCI to secure or maintain any necessary licenses or
approvals or significant delays in obtaining such licenses or approvals could
have a material adverse effect on the financial condition or results of
operations of Orbital.
BACKLOG
Orbital's contract backlog is attributable to its space and ground
infrastructure systems business. Our firm backlog at December 31, 1998 and 1997
was approximately $1,826,000,000 and $1,040,000,000, respectively. As of
December 31, 1998, approximately 41% of our firm backlog was with the U.S.
government and its agencies or from subcontracts with the U.S. government's
prime contractors. Firm backlog consists of aggregate contract values for firm
product orders, excluding the portion previously included in operating revenues
on the basis of percentage of completion accounting, and including government
contract orders not yet funded in the amounts of approximately $1,300,000,000
and $435,000,000 as of December 31, 1998 and 1997, respectively. Approximately
55% of total firm backlog is currently scheduled to be performed beyond 1999.
Firm backlog excludes unexercised contract options and undefinitized new
contracts having an aggregate potential contract value at December 31, 1998 of
approximately $2,220,000,000.
EMPLOYEES
As of December 31, 1998, Orbital (including ORBCOMM and ORBIMAGE) had
approximately 4,400 full-time permanent employees. We do not have any collective
bargaining agreements with our employees and believe our employee relations are
good.
ITEM 2. PROPERTIES
Orbital owns or leases over 1,700,000 square feet of office, engineering
and manufacturing space in various locations throughout the world. In 1998, we
purchased a parcel of real estate adjacent to our corporate headquarters in
Northern Virginia to expand our satellite-related engineering, manufacturing and
operations facilities at this site, which will allow us to consolidate our
existing Northern Virginia and portions of our Maryland work force in a single
integrated site. Orbital expects to convey portions of this land to a
third-party developer shortly so that construction of the buildings can
commence. As such buildings are completed, Orbital expects to lease the
buildings pursuant to long-term leases.
In 1993, Orbital entered into a 12-year lease agreement for approximately
100,000 square feet of office and engineering space in Dulles, Virginia, which
serves as its corporate headquarters. We own a 59,000 square-foot manufacturing
facility on land adjacent to the Dulles office facility that has office,
engineering and manufacturing space. We intend to increase the size of this
facility by approximately 50,000 to 75,000 square feet over the next year.
Orbital also leases approximately 73,000 square feet of office, engineering and
manufacturing space in McLean, Virginia; 400,000 square feet of office,
engineering and manufacturing space in Germantown, Maryland; 345,000 square feet
of office, engineering and manufacturing space in Chandler, Arizona; 182,000
square feet of office and engineering space in Richmond, British Columbia;
135,000 square feet of office, engineering and manufacturing space in Pomona,
California; 75,000 square feet of office, engineering and manufacturing space in
San Dimas, California; and 82,500 square feet of office, engineering and
manufacturing space in Santa Clara, California. We lease or own other smaller
facilities, offices or
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manufacturing space around the United States, in Canada and in Russia. Although
completion of our existing and pending contracts may in the future require
additional manufacturing capacity, we believe that our existing facilities are
adequate for our near-term requirements and that such facilities, along with
those to be constructed, will be adequate for our medium-term requirements.
ITEM 3. LEGAL PROCEEDINGS
In the first quarter of 1999, a number of class action lawsuits were filed
in federal court in the Eastern District of Virginia against Orbital, an officer
and an officer/director, alleging violations of the federal securities laws
during the period from April 21, 1998 through February 16, 1999 and seeking
monetary damages. In December 1998, Thomas van der Heyden filed a lawsuit in the
Circuit Court for Montgomery County, Maryland alleging that Orbital is in actual
or anticipatory breach of obligations allegedly imposed on Orbital in a judgment
in a previous action brought by plaintiff against CTA. The plaintiff claims that
he is entitled to a sum exceeding $30 million from Orbital, as
successor-in-interest to CTA. We believe that the allegations in the legal
proceedings described above are without merit and intend to vigorously defend
against the allegations. In addition, under the terms of the CTA acquisition, we
believe we are entitled to indemnification from CTA for all or a part of any
damages arising from the van der Heyden litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter submitted to a vote of our security holders during the
fourth quarter of 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of the
executive officers of Orbital as of March 1, 1999. All executive officers are
elected annually and serve at the discretion of the Board of Directors.
NAME AGE POSITION
---- --- --------
David W. Thompson.................... 44 Chairman of the Board, President and Chief Executive
Officer
James R. Thompson.................... 62 Director, Executive Vice President and General Manager/
Launch Systems Group
Robert R. Lovell..................... 62 Executive Vice President and General Manager/Space
Systems Group
John P. Huyett....................... 45 Executive Vice President and General Manager/Satellite
Access Products Group
Robert D. Strain..................... 42 Executive Vice President and General Manager/Electronics
and Sensor Systems Group
Daniel E. Friedmann.................. 42 Executive Vice President and General Manager/Systems
Integration and Software Group
Jeffrey V. Pirone.................... 38 Executive Vice President and Chief Financial Officer
Michael D. Griffin................... 49 Executive Vice President and Chief Technical Officer
Antonio L. Elias..................... 49 Senior Vice President for Advanced Programs
Leslie C. Seeman..................... 46 Senior Vice President, General Counsel and Secretary
- - ------------------------
David W. Thompson is a co-founder of Orbital and has been Chairman of the
Board, President and Chief Executive Officer of Orbital since 1982. Prior to
founding Orbital, Mr. Thompson was employed by Hughes Electronics Corporation as
special assistant to the President of its Missile Systems Group and by NASA at
the Marshall Space Flight Center as a project manager and engineer, and also
worked on the Space Shuttle's autopilot design at the Charles Stark Draper
Laboratory. Mr. Thompson serves as Chairman of Magellan, Chairman and Chief
Executive Officer of ORBIMAGE and as a director of ORBCOMM and CCI. Mr. Thompson
is a Fellow of the American Institute of Aeronautics and Astronautics, the
American Astronautical Society and the Royal Aeronautical Society.
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James R. Thompson (who is not related to David W. Thompson) has been
Executive Vice President and General Manager/Launch Systems Group since 1993 and
a director of Orbital since 1992. Mr. Thompson was Executive Vice President and
Chief Technical Officer of Orbital from 1991 to 1993. He was Deputy
Administrator of NASA from 1989 to 1991. From 1986 until 1989, Mr. Thompson was
Director of NASA's Marshall Space Flight Center. He was Deputy Director for
Technical Operations at Princeton University's Plasma Physics Laboratory from
1983 through 1986. Before that, he had a 20-year career with NASA at the
Marshall Space Flight Center. He is a director of Nichols Research Corp. and
SPACEHAB Incorporated.
John P. Huyett has been Executive Vice President and General Manager,
Satellite Access Products since January 1, 1999. Mr. Huyett also serves,
effective January 1, 1999, as President and Chief Executive Officer of Magellan.
Mr. Huyett joined Magellan as its Vice President and Chief Financial Officer in
1998. From 1993 through 1998, Mr. Huyett was the Vice President and Chief
Financial Officer of Avant! Corporation and its predecessor, Integrated Silicon
Systems, a software company. From 1985 through 1993, Mr. Huyett was a partner at
KPMG LLP. Mr. Huyett is a director of Magellan.
Robert R. Lovell has been Executive Vice President and General
Manager/Space Systems Group since 1997. From 1994 to 1997, he was Senior Vice
President for Special Projects at Orbital. Mr. Lovell previously served as
Executive Vice President and General Manager/Space Systems Group from 1993 to
1994. From 1990 to 1993, he was President/Space Systems Division of Orbital and,
from 1987 to 1989, he served as Vice President/Space Applications. From 1980 to
1987, Mr. Lovell was employed by NASA as Director of the Communications Division
in the Office of Space Science and Applications. Before that, he had an 18-year
career with NASA at the Lewis Research Center. Mr. Lovell is a director of CCI.
Michael D. Griffin has been Executive Vice President and Chief Technical
Officer since 1997. From 1996 to 1997, Dr. Griffin served as Executive Vice
President/Space Systems Group. Dr. Griffin joined Orbital in 1995 when he was
appointed Senior Vice President and Chief Technical Officer. From 1994 to 1995,
he was Senior Vice President for Program Development at Space Industries
International. From 1991 to 1994, he served as Chief Engineer of NASA and, from
1989 to 1991, was Deputy Director for Technology at the Strategic Defense
Initiative Organization. Dr. Griffin is a director of Magellan.
Robert D. Strain has been Executive Vice President and General
Manager/Electronics and Sensor Systems Group since 1996. From 1994 until 1996,
he was Vice President for Finance and Manufacturing at Orbital. Prior to that he
served in a variety of senior-level financial positions with Fairchild Space and
Defense Corporation, including Vice President of Finance, Treasurer and
Controller.
Daniel E. Friedmann has been Executive Vice President and General
Manager/Systems Integration and Software Group since 1996. He continues to serve
as President and Chief Executive Officer of Orbital's subsidiary, MDA, a
position he has held since 1995. From 1992 to 1995, he served as Executive Vice
President and Chief Operating Officer of MDA. Between 1979 and 1992, he held a
variety of positions at MDA, including serving as Vice President of various
divisions.
Jeffrey V. Pirone has been Executive Vice President and Chief Financial
Officer since 1996. From 1993 until 1996, Mr. Pirone served as Vice President
and Controller of Orbital. Mr. Pirone joined Orbital as Controller in 1991, and
prior to that was a Senior Manager at KPMG LLP. Mr. Pirone is a director of
Magellan and ORBCOMM.
Antonio L. Elias has been Senior Vice President for Advanced Programs since
August 1997. From January 1996 until August 1997, Dr. Elias served as Senior
Vice President and Chief Technical Officer. From May 1993 through December 1995
he was Senior Vice President for Advanced Projects and was Senior Vice
President/Space Systems Division from 1990 to April 1993. He was Vice
President/Engineering of Orbital from 1989 to 1990 and was Chief Engineer from
1986 to 1989. From 1980 to 1986, Dr. Elias was an Assistant Professor of
Aeronautics and Astronautics at Massachusetts Institute of Technology.
Leslie C. Seeman has been Senior Vice President of Orbital since 1993 and
General Counsel and Secretary of Orbital since 1989. From 1989 to 1993, she was
also Vice President of Orbital, and from 1987 to 1989, Ms. Seeman was Assistant
General Counsel of Orbital. From 1984 to 1987, she was General Counsel of
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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 22, 1999, there were 1,325 Orbital stockholders of record.
Our common stock began trading on the New York Stock Exchange ("NYSE") on
July 10, 1998 under the symbol ORB. Prior to that our common stock was traded on
the Nasdaq National Market under the symbol ORBI. The range of high and low
sales prices of Orbital common stock from 1996 through 1998, as reported on
Nasdaq or the NYSE, as applicable, was as follows:
1998 HIGH LOW
---- ---- ---
4th Quarter................................................. $44 1/4 $19 1/2
3rd Quarter................................................. $39 1/4 $17 3/4
2nd Quarter................................................. $50 $32 1/4
1st Quarter................................................. $46 1/2 $29
1997 HIGH LOW
---- ---- ---
4th Quarter................................................. $30 3/4 $21
3rd Quarter................................................. $25 $15 7/8
2nd Quarter................................................. $18 $12 3/4
1st Quarter................................................. $19 1/4 $13 3/4
1996 HIGH LOW
---- ---- ---
4th Quarter................................................. $21 7/8 $16 1/4
3rd Quarter................................................. $20 $16 3/8
2nd Quarter................................................. $19 7/8 $13
1st Quarter................................................. $16 1/8 $11 3/4
We have never paid any cash dividends on our common stock. We presently
intend to retain future earnings for working capital and product development and
therefore do not anticipate paying cash dividends on our common stock at any
time in the foreseeable future. In addition, we are prohibited from paying cash
dividends under an existing credit facility.
The transfer agent for our Common Stock is:
The First National Bank of Boston
c/o Boston Equiserve
P.O. Box 8040
Boston, MA 02266-8040
Telephone: (617) 575-3170 or (800) 730-4001
www.bostonequiserve.com
The trustee for our 5% convertible subordinated notes due 2002 is:
Deutsche Bank AG, New York Branch
31 W. 52nd St.
New York, NY 10019
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto
included in this Report. The consolidated operating data and other data for the
three-year period ended December 31, 1998 and the consolidated balance sheet
data at December 31, 1998 and 1997 are derived from and should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in this Report. The consolidated operating data and other data for the
years ended December 31, 1995 and 1994 and the consolidated balance sheet data
at December 31, 1996, 1995 and 1994 are derived from audited consolidated
financial statements not included or incorporated by reference herein.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
OPERATING DATA:
Revenues....................................... $ 734,277 $ 605,975 $ 461,435 $ 364,320 $ 301,576
Costs of goods sold............................ 546,721 456,772 336,261 268,016 216,417
---------- ---------- ---------- ---------- ----------
Gross profit................................... 187,556 149,203 125,174 96,304 85,159
Research and development expenses.............. 44,597 26,355 22,179 28,512 17,259
Selling, general and administrative expenses... 109,727 89,502 76,019 63,427 53,165
Amortization of excess of purchase price over
net assets acquired.......................... 7,939 3,852 3,134 3,221 2,360
---------- ---------- ---------- ---------- ----------
Income from operations......................... 25,293 29,494 23,842 1,144 12,375
Net investment income (expense)................ 2,567 1,475 (1,123) 639 (244)
Equity in earnings (losses) of affiliates...... (45,092) (26,034) (6,454) (759) (1,264)
Non-controlling interests in (earnings) losses
of consolidated subsidiaries................. 10,610 2,638 1,473 427 --
Gain on sale of subsidiary equity.............. 4,793 21,810 -- -- --
Acquisition expenses........................... -- (4,343) -- (3,441) (503)
---------- ---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for
income taxes and cumulative effect of
accounting change............................ (1,829) 25,040 17,738 (1,990) 10,364
Provision (benefit) for income taxes........... 4,543 2,035 1,831 (1,302) 2,744
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
accounting change............................ (6,372) 23,005 15,907 (688) 7,620
Cumulative effect of accounting change, net of
taxes........................................ -- -- -- (4,160) --
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ (6,372) $ 23,005 $ 15,907 $ (4,848) $ 7,620
========== ========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE(1):
Income (loss) before cumulative effect of
accounting change............................ $ (0.18) $ 0.71 $ 0.55 $ (0.03) $ 0.33
Cumulative effect of accounting change......... -- -- -- (0.16) --
---------- ---------- ---------- ---------- ----------
$ (0.18) $ 0.71 $ 0.55 $ (0.19) $ 0.33
========== ========== ========== ========== ==========
Shares used in computing net income (loss) per
common share................................. 35,624,888 32,283,138 29,137,361 26,207,746 23,191,553
========== ========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE, ASSUMING
DILUTION(2):
Income (loss) before cumulative effect of
accounting change............................ $ (0.18) $ 0.69 $ 0.55 $ (0.03) $ 0.32
Cumulative effect of accounting change......... -- -- -- (0.16) --
---------- ---------- ---------- ---------- ----------
$ (0.18) $ 0.69 $ 0.55 $ (0.19) $ 0.32
========== ========== ========== ========== ==========
Shares used in computing net income (loss) per
common share, assuming dilution.............. 40,336,587 33,980,747 31,616,119 30,103,858 27,309,336
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Cash and investments........................... $ 25,686 $ 15,126 $ 32,686 $ 35,030 $ 40,345
Net working capital............................ 53,330 50,198 83,673 87,553 57,449
Total assets................................... 962,738 793,992 500,770 466,908 441,042
Short-term borrowings.......................... 26,814 29,317 38,519 11,907 28,977
Long-term obligations, net..................... 181,281 198,394 33,076 96,990 86,068
Stockholders' equity........................... 510,573 355,101 330,502 238,908 206,943
- - ------------------------
(1) Net income (loss) per common share is calculated using the weighted average
number of shares outstanding during the periods.
(2) Net income (loss) per common share, assuming dilution, is calculated using
the weighted average number of shares and dilutive equivalent shares
outstanding during the periods, plus the effect of an assumed conversion of
our convertible subordinated notes.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
With the exception of historical information, the matters discussed below
under the headings "Recent Developments," "Results of Operations" and "Liquidity
and Capital Resources" and elsewhere in this Annual Report on Form 10-K include
forward-looking statements that involve risks and uncertainties, many of which
are beyond our control. We wish to caution readers that a number of important
factors, including those identified below in "Outlook: Issues and
Uncertainties," may affect our actual results and may cause actual results to
differ materially from those in any forward-looking statement.
Our products and services are grouped into three general business sectors:
space and ground infrastructure systems, satellite access products and satellite
services. Space and ground infrastructure systems include launch vehicles,
satellites and related space systems, electronics and sensor systems, and
satellite ground systems and software. Satellite access products include
satellite-based navigation, positioning and communications products and
transportation management systems. Satellite services include satellite-based
two-way mobile data communications services, satellite-based remote imaging
services, our new ORBNAV initiative relating to satellite-based automotive
information services and satellite-based voice communications services provided
by ORBCOMM and ORBIMAGE and to be provided by ORBNAV and CCI, respectively.
We are accounting for our investments in ORBCOMM, ORBIMAGE and CCI using
the equity method of accounting. In accordance with the equity method of
accounting, we recognize as equity in earnings (losses) of affiliates our
proportionate share of ORBCOMM's and ORBIMAGE's profits and losses. In
accordance with a modified equity method of accounting, we currently recognize
as equity in earnings (losses) of affiliates 100% of CCI's profits and losses.
We also recognize 100% of the revenues earned and costs incurred on sales of
products and services to these entities. However, as these companies are
currently capitalizing substantially all system construction costs, including
amounts paid to Orbital, we eliminate as equity in earnings (losses) of
affiliates our proportionate share of our profits and losses from sales to
ORBCOMM, ORBIMAGE and CCI, respectively.
RECENT DEVELOPMENTS
In April 1998, we sold 3,450,000 shares of our common stock in a public
offering at $45.81 per share, generating net proceeds of approximately
$150,000,000.
In July 1998, our common stock began trading on the New York Stock Exchange
under the ticker symbol "ORB." Our stock had previously traded on the Nasdaq
National Market under the symbol "ORBI."
In August 1998, we entered into a stock purchase agreement with CCI
pursuant to which we agreed, subject to the satisfaction by CCI of certain
milestones and conditions, to purchase up to $50,000,000 of CCI's non-voting
convertible preferred shares, with an option to purchase an additional
$50,000,000 of preferred shares, and to provide vendor financing. In connection
with the execution of the stock purchase agreement, we entered into a satellite
and launch vehicle procurement contract with CCI valued at approximately
$480,000,000 for the satellites (and a price to be determined for the launch
vehicles in the event we procure them). As of December 31, 1998, we had
purchased $22,000,000 of the preferred shares and had not provided any vendor
financing. Should CCI not achieve its financial or operational milestones, some
of which entail raising capital, or if an adequate market for its products and
services should not develop, we may be required to write off all, or a portion,
of this investment.
In October 1998, we adopted a stockholder rights plan in which preferred
stock purchase rights were granted as a dividend at the rate of one right for
each share of common stock to stockholders of record on November 13, 1998. The
plan is designed to deter coercive or unfair takeover tactics. The rights become
exercisable only if a person or group in the future becomes the beneficial owner
of 15% or more of our common stock, or announces a tender or exchange offer that
would result in its ownership of 15% or more of our common stock. Each right,
when exercisable, entitles the holder to purchase one-one thousandth of a share
of Series B Junior Participating Preferred Stock. Under certain circumstances,
each holder of a right will
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be able to exercise the right and receive common stock having a value equal to
two times the exercise price. The rights are generally redeemable by our Board
of Directors at a redemption price of $0.005 per right and expire on October 31,
2008.
On December 31, 1998, we acquired the transportation systems business of
Raytheon Company for approximately $21,000,000 in cash. We merged the acquired
business into our existing transportation management systems business.
RESULTS OF OPERATIONS
The following table shows our revenues, gross profits and gross margins by
major product category within each business sector for each of the years ended
December 31, 1998, 1997 and 1996:
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
GROSS GROSS GROSS
REVENUES PROFITS MARGIN REVENUES PROFITS MARGIN REVENUES PROFITS MARGIN
-------- -------- ------ -------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS)
SPACE AND GROUND
INFRASTRUCTURE
SYSTEMS................. $617,126 $153,998 25% $534,419 $131,209 25% $388,814 $101,867 26%
Launch Vehicles......... 173,178 38,539 22 121,631 28,631 24 108,478 23,356 22
Satellites.............. 237,533 54,376 23 233,989 56,940 24 105,148 22,406 21
Electronics and Sensor
Systems............... 111,033 34,494 31 100,554 26,236 26 92,070 26,608 29
Satellite Ground Systems
and Software.......... 95,382 26,589 28 78,245 19,402 25 83,118 29,497 36
SATELLITE ACCESS
PRODUCTS................ 116,392 33,556 29 71,384 18,205 26 71,188 25,134 35
SATELLITE SERVICES........ 759 2 N/A 172 (211) N/A 1,433 (1,827) N/A
-------- -------- --- -------- -------- --- -------- -------- ---
CONSOLIDATED TOTALS....... $734,277 $187,556 26% $605,975 $149,203 25% $461,435 $125,174 27%
======== ======== === ======== ======== === ======== ======== ===
REVENUES
Our consolidated revenues for the years ended December 31, 1998, 1997 and
1996 were $734,277,000, $605,975,000 and $461,435,000, respectively.
Space and Ground Infrastructure Systems. Revenues from our space and
ground infrastructure systems sector increased to $617,126,000 in 1998, from
$534,419,000 in 1997 and $388,814,000 in 1996.
Revenues from our launch vehicles increased to $173,178,000 in 1998, from
$121,631,000 in 1997 and $108,478,000 in 1996. The increase in revenues in 1998
and 1997 was attributable to a number of factors, including increased work
performed under contracts received for our Taurus launch vehicle, a significant
increase in new orders for our Pegasus and suborbital launch vehicles and
increased work performed on the X-34 reusable launch vehicle.
Revenues from sales of satellites increased to $237,533,000 in 1998, from
$233,989,000 in 1997 and $105,148,000 in 1996. Satellite revenues remained
generally consistent from 1997 to 1998 as work on several programs were
completed concurrent with the receipt of new satellite orders. The substantial
increase in 1997 satellite revenues was primarily due to new satellite orders
received in the second half of 1996 and in 1997. Revenues in 1998 and 1997 also
included approximately $51,471,000 and $54,090,000, respectively, of sales
generated by the satellite contracts we acquired from CTA in August 1997.
Revenues from electronics and sensor systems increased to $111,033,000 in
1998, from $100,554,000 in 1997 and $92,070,000 in 1996. The increase in 1998
and 1997 revenues was primarily attributable to work performed on new orders for
defense electronics products received during 1997 and early 1998.
Revenues from satellite ground systems and software products increased to
$95,382,000 in 1998, from $78,245,000 in 1997 and $83,118,000 in 1996. The
increase in 1998 revenues is primarily due to work performed on orders received
in 1997 and 1998, including work on a new remote imaging system. The decrease in
1997 revenues from 1996 revenues was primarily due to the sale in late 1996 of a
software-related business that had generated 1996 revenues of approximately
$15,755,000.
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Orbital's space and ground infrastructure systems sector revenues included
sales to ORBCOMM of approximately $35,479,000, $57,988,000 and $47,215,000 in
1998, 1997 and 1996, respectively, and to ORBIMAGE of approximately $89,006,000
and $88,618,000 in 1998 and 1997, respectively. This sector's revenues also
included $6,556,000 from sales to CCI in 1998 (none in earlier years). We expect
1999 sales to our satellite services affiliates to be less than those recorded
in 1998 primarily because the basic ORBCOMM satellite construction and launch
program is nearing completion.
Satellite Access Products. Revenues from sales of consumer, high-precision
and automotive satellite-based positioning and navigation products, satellite
communications products and transportation management systems increased to
$116,392,000 in 1998, from $71,384,000 in 1997 and $71,188,000 in 1996. Revenues
in 1998 included approximately $44,636,000 of sales generated by our
high-precision navigation products that were acquired as a result of the
December 1997 merger of Ashtech with our Magellan subsidiary. Although 1998
revenues from satellite access products were greater than 1997 revenues,
revenues were below our expectations due to increased competition in consumer
products and slower sales of automotive navigation products.
Gross Profit/Costs of Goods Sold
Costs of goods sold include the costs of personnel, materials, subcontracts
and overhead related to commercial products and under various development and
production contracts. Gross profit depends on a number of factors, including our
mix of contract types and costs incurred thereon in relation to estimated costs.
Our consolidated gross profit for 1998, 1997 and 1996 was $187,556,000 (26% of
revenues), $149,203,000 (25% of revenues) and $125,174,000 (27% of revenues),
respectively.
Space and Ground Infrastructure Systems. Gross profit from our space and
ground infrastructure systems sector was $153,998,000 (25% of sector revenues),
$131,209,000 (25% of sector revenues) and $101,867,000 (26% of sector revenues)
for 1998, 1997 and 1996, respectively.
Gross profit margins from our space and ground infrastructure systems
sector for 1998 were generally consistent with 1997 margins. Gross profit
margins were slightly higher in 1996 due to the inclusion of higher margins from
a software-related business that was part of our ground systems business and was
sold in late 1996. Gross profit margins in this sector are impacted by
management's periodic assessments and reevaluations of programmatic risks
included in estimated costs to complete long-term contracts.
Satellite Access Products. Gross profit from our satellite access products
sector was $33,556,000 (29% of sector revenues), $18,205,000 (26% of sector
revenues) and $25,134,000 (35% of sector revenues) for 1998, 1997 and 1996,
respectively. The overall increase in 1998 gross profit margins when compared to
1997 margins is due to the inclusion of higher margin, high-precision
positioning and navigation product lines acquired from Ashtech offset, in part,
by lower margins achieved on other consumer and automotive navigation product
sales. The decrease in gross profit margins from 1996 to 1997 was due to lower
unit sales prices for consumer products and certain fourth quarter 1997
reorganizational charges incurred by Magellan.
During 1998, Magellan disposed of approximately $12,500,000 of obsolete
inventory that was offset, in part, by previously established inventory
obsolescence reserves. Magellan continues to face increased competition, which
places significant pressure on individual product lifetimes and inventory
levels. Gross profit in 1998 was reduced by approximately $7,300,000 of
increased inventory obsolescence reserves.
Research and Development Expenses
Research and development expenses represent our self-funded product
development activities and exclude direct customer-funded development. Research
and development expenses during 1998, 1997 and 1996 were $44,597,000 (6% of
revenues), $26,355,000 (4% of revenues) and $22,179,000 (5% of revenues),
respectively. Research and development spending during these periods related
primarily to the development of
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new or improved satellite access products, improved launch vehicles, and new
satellite initiatives. Research and development expenses in 1998 also included
approximately $5,000,000 of costs related to identifying and resolving certain
technical issues arising on ORBCOMM data communications satellites.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include the costs of
marketing, advertising, promotion and other selling expenses, as well as the
costs of the finance, legal, administrative and general management functions of
Orbital. Selling, general and administrative expenses for 1998, 1997 and 1996
were $109,727,000 (15% of revenues), $89,502,000 (15% of revenues) and
$76,019,000 (17% of revenues), respectively. While selling, general and
administrative expenses as a percentage of revenues was consistent from 1998 to
1997, the total amount of selling, general and administrative costs increased
substantially, primarily as a result of growth in our space and ground
infrastructure systems sector and the impact of various business and product
line acquisitions. The decrease in selling, general and administrative expenses
as a percentage of revenues in 1997 from 1996 was primarily attributable to
significant growth in space and ground infrastructure systems revenues, along
with only modest growth in selling, general and administrative expenses
attributable to those product lines.
Net Investment Income (Expense)
Net investment income (expense) was $2,567,000, $1,475,000 and ($1,123,000)
for 1998, 1997 and 1996, respectively. Investment income reflected interest
earnings on short-term investments and realized gains and losses on investments,
reduced by interest expense on outstanding debt of $3,982,000, $429,000 and
$2,486,000 in 1998, 1997 and 1996, respectively. Interest expense was net of
capitalized interest of approximately $17,842,000, $9,700,000 and $7,300,000 in
1998, 1997 and 1996, respectively.
Equity in Earnings (Losses) of Affiliates and Non-Controlling Interests in
(Earnings) Losses of Consolidated Subsidiaries
Equity in earnings (losses) of affiliates and non-controlling interests in
(earnings) losses of consolidated subsidiaries were ($34,482,000), ($23,396,000)
and ($4,981,000) for 1998, 1997 and 1996, respectively. These amounts primarily
represent (i) elimination of proportionate profits or losses on sales of
infrastructure products to ORBCOMM, ORBIMAGE and CCI, (ii) our proportionate
share of ORBCOMM's, ORBCOMM International Partners, L.P.'s and ORBIMAGE's
earnings and losses for 1998, (iii) 100% of CCI's earnings and losses for 1998,
and (iv) non-controlling stockholders' proportionate share of ORBCOMM USA,
L.P.'s and Magellan's current period earnings and losses. The increases in 1998
and 1997 were primarily due to increased operational and system depreciation
expenses and resulting losses at ORBCOMM. We expect equity in earnings (losses)
of affiliates to increase in 1999 primarily due to increased losses at ORBCOMM.
Gain on Sale of Subsidiary Equity
We recorded a gain on sale of subsidiary equity of $4,793,000 and
$21,810,000 in 1998 and 1997, respectively. The 1998 gain related to the
issuance of additional equity by our ORBIMAGE affiliate. The 1997 gain related
to the issuance of additional equity by our Magellan subsidiary.
Provision for Income Taxes
We recorded consolidated income tax provisions of $4,543,000, $2,035,000
and $1,831,000 for 1998, 1997 and 1996, respectively. Our provisions for these
periods were entirely due to foreign taxes attributable to our Canadian
operations.
At December 31, 1998, we had U.S. federal net operating loss carryforwards
(portions of which expire beginning in 2004) of approximately $278,000,000, U.S.
research and experimental income tax credit carryforwards of approximately
$3,148,000, and foreign investment income tax credit carryforwards (subject to
expiration in 2008) of approximately $5,000,000. Such net operating loss
carryforwards and tax credits are
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subject to certain limitations and other restrictions. At December 31, 1998 and
1997, we provided a valuation reserve of $71,139,000 and $49,588,000,
respectively, against certain of our consolidated deferred tax assets.
Net Income (Loss)
Our consolidated net income (loss) for the years ended December 31, 1998,
1997 and 1996 was ($6,372,000), $23,005,000 and $15,907,000, respectively. Our
space and ground infrastructure systems sector generated net income of
approximately $52,521,000, $45,670,000 and $27,474,000 for 1998, 1997 and 1996,
respectively. Our satellite access products sector reported net losses of
$16,318,000 for 1998, as compared to net income of $5,638,000 in 1997 and
$4,520,000 in 1996. Our satellite services sector generated net losses of
$42,575,000, $28,303,000 and $16,087,000 in 1998, 1997 and 1996, respectively,
and such losses are expected to increase in 1999 primarily as a result of
increased losses at ORBCOMM.
During 1998, our satellite access products sector continued to face
increased competition in consumer products and slower sales of automotive
navigation products, placing pressure on revenues and margins. Magellan has
introduced new products and is implementing cost savings measures intended to
moderate the unfavorable trends experienced in 1998 in this sector. In addition,
this sector incurred significant costs in 1998 associated with the integration
and restructuring of Ashtech and Magellan and research and development with
respect to new products and enhancements of existing products. Net income for
1997 included a $21,810,000 gain on the issuance of Magellan stock.
LIQUIDITY AND CAPITAL RESOURCES
Our growth has required substantial capital to fund expanding working
capital needs, investments in affiliates, certain business acquisitions, new
business initiatives, research and development and capital expenditures. We have
funded these requirements to date, and expect to fund our future requirements,
through cash generated by operations, working capital, loan facilities,
asset-based financings, joint venture arrangements and private and public equity
and debt offerings. We expect to continue to pursue potential acquisitions, new
business opportunities and equity investments that we believe would enhance our
businesses and to fund such transactions through existing cash, loan facilities,
joint ventures, the issuance of equity and/ or debt securities, asset-based
financings, and cash generated by operations.
At December 31, 1998, cash and investments were $25,686,000, and we had
total debt obligations outstanding of approximately $208,095,000. The
outstanding debt is comprised of our $100,000,000 5% convertible subordinated
notes, advances under our line of credit facilities, secured and unsecured
notes, and asset-based financings. Cash and investments at December 31, 1998
included approximately $7,757,000 of cash and short-term investments restricted
against outstanding letters of credit. Our current ratio was 1.2 at December 31,
1998 and 1997.
In 1998, we amended and restated our primary credit facility to increase
the maximum amount available under a revolving line of credit from $100,000,000
to $200,000,000 and to modify certain financial covenants. At December 31, 1998,
$36,000,000 was outstanding on the facility. During the first quarter of 1999,
the facility was amended to modify a financial covenant to provide full
availability under the facility. The interest rate charged under the facility is
a variable rate based on the prime rate or LIBOR. The weighted average interest
rate on borrowings outstanding under this facility at December 31, 1998 was
7.5%. The facility is secured by accounts receivable, prohibits the payment of
cash dividends, contains certain covenants with respect to our working capital
levels, fixed charges ratio, leverage ratio and net worth, and expires in
December 2002.
During 1998, we provided $34,500,000 in capital to ORBCOMM. We currently
estimate that our share of additional funding for ORBCOMM's 1999 capital needs
could exceed $30,000,000, of which $18,450,000 has been contributed so far in
1999. We expect to fund our share of ORBCOMM's capital needs through existing
resources, including our primary credit facility. In addition, during 1998,
Orbital deferred invoicing ORBCOMM for approximately $35,144,000 of work
performed under our ORBCOMM satellite and launch procurement agreement. During
1999, we may defer up to $25,000,000 of invoicing for work done under our
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ORBCOMM procurement agreement. One-half of the deferred invoice amounts has
been, and is expected to continue to be, advanced to Orbital by an affiliate of
Teleglobe Inc.
Our operations provided net cash of approximately $48,205,000 during 1998.
Also during 1998, in addition to our investment in ORBCOMM, we invested
approximately (i) $22,000,000 in CCI, (ii) $48,263,000 in capital expenditures
for various satellite and launch vehicle production, manufacturing and test
equipment and office equipment, and (iii) $22,751,000 in business acquisitions.
In the event CCI meets various operational and financial milestones, we may
invest an additional $28,000,000 in CCI over the next two years.
We are expanding our offices and satellite-related engineering,
manufacturing and operations facilities adjacent to our Dulles, Virginia
headquarters. Construction is scheduled to commence in the first half of 1999
and we expect completion in 2001. To finance the majority of this expansion,
Orbital is pursuing various financing alternatives, including third-party debt
financings and a "build-to-suit" agreement.
On March 18, 1999, MDA and Toronto-based Spar Aerospace Limited signed an
asset purchase agreement pursuant to which MDA will acquire Spar's robotics
division for approximately $43,000,000 in cash. The transaction is expected to
close during the second quarter of 1999. Approximately one-half of the purchase
price will be paid at closing and the balance is payable one year from closing.
We expect to fund the first installment of the purchase price through an
existing credit facility, and have received a commitment from a lender to
finance the second installment due in 2000.
In late 1998, we agreed to enter into an exclusive $50,000,000 joint
venture with Hertz whereby Hertz will offer Magellan's automotive navigation
systems in its rental cars in the U.S., Canada and Europe. The agreement, which
is subject to negotiation of the joint venture documents, contemplates that we
will receive a 60% interest in the venture in exchange for a $30,000,000
investment to be made during 1999 and 2000.
We expect that our capital needs for 1999 will be provided by working
capital, cash flows from operations, existing or new credit facilities, and
operating lease arrangements. To support further business expansion, we may also
consider equity and debt financings.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 becomes effective June 15, 1999
and will require the company to disclose additional information on its hedging
activities.
Also in 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
Initial application by the company of SOP 98-5 was as of January 1, 1998. This
SOP requires costs of start-up activities and organization costs to be expensed
as incurred. SOP 98-5 also amended certain sections of Statement of Position
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" ("SOP 81-1"), which addresses revenue recognition on
long-term contracts using the percentage-of-completion method of accounting. The
impact of adopting SOP 98-5 in 1998 was not significant.
YEAR 2000 ISSUES
We have developed a plan to prepare for potential "Year 2000" issues with
respect to various operational, technical and financial computer-related
systems. The plan has been designed to minimize risk to Orbital and its
customers using a standard industry five-phase approach. The five phases are
awareness, assessment, renovation, validation and implementation. We have
substantially completed the awareness and assessment phases, including
preparation of a comprehensive inventory of potentially affected systems. In
many cases renovation work is well underway and validation testing has begun
with respect to certain critical systems.
We currently plan to achieve our overall goal of Year 2000 readiness in
mid-1999. The first half of 1999 will be devoted to renovating, validating and
implementing our corrective action plan by reprogramming
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affected software when appropriate and feasible, obtaining vendor-provided
software upgrades when available and completely replacing affected systems when
necessary.
The total costs to implement the plan, which costs include the already
planned replacement of existing systems to support our overall growth, are
estimated to be well less than one percent of 1998 revenues. Approximately 70%
of the estimated costs to implement the plan have been incurred to date and the
remaining costs are expected to be incurred in the remainder of 1999. All costs,
including the cost of internal personnel, outside consultants, system
replacements and other equipment, will be expensed as incurred, except for
long-lived assets, which will be capitalized in accordance with our
capitalization policies. We have not postponed the implementation or upgrade of
other systems as a result of focusing on the Year 2000 plan.
As part of the plan, formal communication with our suppliers, customers and
other service providers has been initiated. To date, however, we have not
determined whether "Year 2000" issues affecting key suppliers, significant
customers (including the U.S. government), or critical service providers will
materially impact our cash flows or operating results. A "reasonably likely
worst case" scenario of the Year 2000 issue for Orbital could include: isolated
performance problems with engineering, financial and administrative systems;
isolated interruption of deliveries from critical suppliers; product liability
or warranty issues; and the temporary inability of key customers to pay amounts
due to Orbital. Contingency plans are being prepared, and will be implemented if
necessary, including having sufficient liquidity available to sustain a
temporary interruption of cash receipts during early 2000 and the identification
of alternative suppliers for critical components. There can be no assurance that
we have identified, or will identify, all "Year 2000" affected systems,
suppliers, customers and service providers, or that our corrective action plan
will be timely and successful.
OUTLOOK: ISSUES AND UNCERTAINTIES
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor, in certain circumstances, for forward-looking statements made by or on
behalf of Orbital. Orbital and its representatives may from time to time make
written or verbal forward-looking statements, including statements contained in
our filings with the SEC and in the report to stockholders. All statements that
address operating performance, events or developments that we expect or
anticipate will occur in the future, including statements relating to our sales
and earnings growth, statements expressing general optimism about future
operating results, statements relating to our belief about the outcome of
pending litigation, and statements relating to our achievement of Year 2000
readiness are forward-looking statements within the meaning of the Act. The
forward-looking statements are and will be based on management's then-current
views and assumptions regarding future events and operating performance.
The following are some of the factors that could cause actual results to
differ materially from information contained in our forward-looking statements:
Most of the products we and our affiliates develop and manufacture are
technologically advanced and sometimes novel systems that must function under
demanding operating conditions and are subject to significant technological
change and innovation. We have occasionally experienced product failures or
other operational problems. In addition to any costs resulting from product
warranties or required remedial action, product failures may result in increased
costs or loss of revenues due to postponement or cancellation of subsequently
scheduled operations or product deliveries.
Our financial performance generally, as well as the recoverability of our
investments in ORBCOMM, ORBIMAGE and CCI and any other company in which we make
a strategic investment, and investments that we make in the development of new
technologies for new products or existing product enhancements, depend on
several factors including, among other things, the successful and timely funding
and implementation of innovative and novel technologies involving complex
systems in a cost-effective manner, the establishment and expansion of
commercial markets and customer acceptance, competition and such entities'
ability to raise necessary capital. If we conclude at any time that our
investments are not recoverable, we may be required to write off part or all of
such investments.
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Historically, we have made strategic acquisitions of businesses, and we
routinely evaluate potential acquisition candidates that we believe would
enhance our business. We have also historically pursued strategic alliances
through joint ventures, and we routinely evaluate similar opportunities. Such
transactions commonly involve certain risks including, among others,
assimilating the acquired operations, technologies and personnel and maintaining
appropriate standards, controls, procedures and policies, entering markets in
which we have little or no direct prior experience, potentially losing key
employees of acquired organizations, the diversion of management attention from
other ongoing business concerns and resolving potential disputes with joint
venture partners.
At December 31, 1998, approximately 41% of our total firm contract backlog
was derived from contracts with the U.S. government and its agencies or from
subcontracts with prime contractors to the U.S. government. Most of our
government contracts are funded incrementally on a year-to-year basis. Changes
in government policies, priorities or funding levels through agency or program
budget reductions by the U.S. Congress or executive agencies could materially
adversely affect our financial condition or results of operations. Furthermore,
contracts with the U.S. government may be terminated or suspended by the U.S.
government at any time, with or without cause. Such contract suspensions or
terminations could result in unreimbursable expenses or charges or otherwise
adversely affect our business.
The accuracy and appropriateness of our direct and indirect costs and
expenses under our contracts with the U.S. government are subject to extensive
regulation and audit by the Defense Contract Audit Agency or by other
appropriate agencies of the U.S. government. These agencies have the right to
challenge our cost estimates or allocations with respect to any such contract. A
substantial portion of payments to us under U.S. government contracts are
provisional payments that are subject to potential adjustment upon audit by such
agencies.
The majority of our contracts, particularly for our space and ground
infrastructure systems, are long-term contracts. We recognize revenues on
long-term contracts using the percentage of completion method of accounting,
whereby revenue, and therefore profit, is recognized based on actual costs
incurred in relation to total estimated costs to complete the contract or based
on specific delivery terms and conditions. Revenue recognition and
profitability, if any, from a particular contract may be adversely affected to
the extent that original cost estimates, estimated costs to complete or
incentive or award fee estimates are revised, delivery schedules are delayed, or
progress under a contract is otherwise impeded.
The costs and other effects of pending or possible litigation or
governmental investigations could have an adverse effect on our business and
could divert the attention of management from ongoing business matters.
Virtually all our products and services face significant competition from
existing competitors, many of whom are larger and have substantially greater
resources than we do. Furthermore, the possibility exists that other domestic or
foreign companies or governments will seek to produce products or services that
compete with our products or services. A foreign competitor could benefit from
subsidies from, or other protective measures by, its home country.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material exposure to interest rate changes,
commodity price changes, foreign currency fluctuations, or similar market risks,
although it does enter into forward exchange contracts to hedge against specific
foreign currency fluctuations, principally with respect to the Canadian dollar.
23
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ 25
Consolidated Statements of Earnings......................... 26
Consolidated Balance Sheets................................. 27
Consolidated Statements of Stockholders' Equity............. 28
Consolidated Statements of Cash Flows....................... 29
Notes to Consolidated Financial Statements.................. 30
24
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Orbital Sciences Corporation:
We have audited the accompanying consolidated balance sheets of Orbital
Sciences Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orbital
Sciences Corporation and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Washington, D.C.
February 16, 1999, except as to note 12
which is as of March 18, 1999
25
28
ORBITAL SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues.............................................. $ 734,277 $ 605,975 $ 461,435
Costs of goods sold................................... 546,721 456,772 336,261
----------- ----------- -----------
Gross profit.......................................... 187,556 149,203 125,174
Research and development expenses..................... 44,597 26,355 22,179
Selling, general and administrative expenses.......... 109,727 89,502 76,019
Amortization of excess of purchase price over net
assets acquired..................................... 7,939 3,852 3,134
----------- ----------- -----------
Income from operations................................ 25,293 29,494 23,842
Net investment income, net of interest expense of
$3,982, $429 and $2,486, respectively............... 2,567 1,475 (1,123)
Equity in earnings (losses) of affiliates............. (45,092) (26,034) (6,454)
Non-controlling interests in (earnings) losses of
consolidated subsidiaries........................... 10,610 2,638 1,473
Gain on sales of subsidiary equity.................... 4,793 21,810 --
Acquisition expenses.................................. -- (4,343) --
----------- ----------- -----------
Income (loss) before provision for income taxes....... (1,829) 25,040 17,738
Provision for income taxes............................ 4,543 2,035 1,831
----------- ----------- -----------
Net income (loss)..................................... $ (6,372) $ 23,005 $ 15,907
=========== =========== ===========
Net income (loss) per common share.................... $ (0.18) $ 0.71 $ 0.55
=========== =========== ===========
Shares used in computing net income (loss) per common
share............................................... 35,624,888 32,283,138 29,137,361
=========== =========== ===========
Net income (loss) per common share, assuming
dilution............................................ $ (0.18) $ 0.69 $ 0.55
=========== =========== ===========
Shares used in computing net income (loss) per common
share, assuming dilution............................ 40,336,587 33,980,747 31,616,119
=========== =========== ===========
See accompanying notes to consolidated financial statements.
26
29
ORBITAL SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
1998 1997
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 17,764 $ 6,391
Restricted cash and short-term investments, at
market................................................ 7,922 8,735
Receivables, net....................................... 205,409 180,204
Inventories, net....................................... 64,710 59,239
Deferred income taxe