<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Quarterly Report Amendment No.1 Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended
MARCH 31, 1999
ORBITAL IMAGING CORPORATION
(Commission File No. 333-49583)
DELAWARE 54-1660268
- ---------------------------------------- ----------------------------------
(State of Incorporation) (IRS Identification number)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166 (703) 406-5000
- ---------------------------------------- ----------------------------------
(Address of principal executive (Telephone number)
offices)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 25,214,000 shares of common
stock outstanding as of May 10, 1999.
<PAGE> 2
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORBITAL IMAGING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
------
DECEMBER 31, MARCH 31,
1998 1999
-------------------- --------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,082 $ 20,298
Available-for-sale securities, at fair value 34,401 16,274
Restricted held-to-maturity securities, at amortized cost 16,724 16,798
Receivables and other current assets, net 3,199 2,260
-------------------- --------------------
Total current assets 79,406 55,630
Restricted held-to-maturity securities, at amortized cost 7,813 -
Property, plant and equipment, at cost, less accumulated
depreciation of $7,360 and $8,336, respectively 15,956 17,277
Satellites and related rights, at cost, less accumulated
depreciation and amortization of $22,367 and
$24,518, respectively 196,598 215,453
Other assets 8,196 8,346
-------------------- --------------------
Total assets $ 307,969 $ 296,706
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 16,879 $ 9,165
Current portion of deferred revenue 8,522 8,393
Deferred tax liabilities 580 -
-------------------- --------------------
Total current liabilities 25,981 17,558
Senior notes 141,620 141,814
Deferred revenue, net of current portion 23,698 21,607
Deferred tax liabilities 3,190 3,150
Capitalized lease obligation, net of current portion 108 80
-------------------- --------------------
Total liabilities 194,597 184,209
Preferred stock subject to repurchase, par value $0.01; 10,000,000
shares authorized;
Series A 12% cumulative convertible, 2,000,000 shares
authorized, 687,576 shares issued and outstanding,
respectively (liquidation value of $70,133 and $72,196,
respectively) 64,954 67,017
Stockholders' equity:
Common stock, par value $0.01; 75,000,000 shares authorized;
25,214,000 shares issued and outstanding 252 252
Additional paid-in-capital 87,541 87,699
Accumulated deficit (39,375) (42,471)
-------------------- --------------------
Total stockholders' equity 48,418 45,480
-------------------- --------------------
Total $ 307,969 $ 296,706
==================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ORBITAL IMAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------
1998 1999
----------------------- -----------------------
<S> <C> <C>
Revenues $ 2,417 $ 3,316
Direct expenses 4,189 4,025
----------------------- -----------------------
Gross loss (1,772) (709)
Selling, general and administrative expenses 987 1,893
----------------------- -----------------------
Loss from operations (2,759) (2,602)
Interest income, net of interest expense of $2,156 in 1998 1,043 949
----------------------- -----------------------
Loss before benefit for income taxes (1,716) (1,653)
Benefit for income taxes (1,716) (620)
----------------------- -----------------------
Net loss $ - $ (1,033)
======================= =======================
Loss per common share - basic and assuming dilution $ (0.06) $ (0.12)
Loss available to common stockholders $ (1,438) $ (3,096)
Weighted average shares outstanding:
Basic 25,214,000 25,214,000
Assuming dilution 37,818,206 43,595,532
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ORBITAL IMAGING CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited; In Thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ - $ (1,033)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, amortization and other 3,463 3,136
Deferred tax benefit (1,716) (620)
Changes in assets and liabilities:
Increase in receivables and other current assets (526) (578)
(Increase) decrease in other assets (264) 256
Increase (decrease) in accounts payable and accrued expenses 2,981 (7,715)
Increase (decrease) in deferred revenue 942 (2,220)
------------ -----------
Net cash provided by (used in) operating activities 4,880 (8,774)
Cash flows from investing activities:
Capital expenditures (17,436) (22,875)
Purchases of held-to-maturity securities (32,896) -
Purchases of available-for-sale securities (9,801) (7,350)
Maturities of held-to-maturity securities - 8,471
Maturities of available-for-sale securities 5,400 21,458
Sales of available-for-sale securities 999 4,386
------------ -----------
Net cash (used in) provided by investing activities (53,734) 4,090
Cash flows from financing activities:
Net proceeds (costs) from issuance of long-term obligations 136,576 (73)
Repayment of capitalized lease obligation - (28)
Net proceeds from issuance of common stock warrants 8,690 -
Net proceeds from issuance of preferred stock subject to
repurchase 21,318 -
------------ -----------
Net cash provided by (used in) financing activities 166,584 (101)
------------ -----------
Increase (decrease) in cash and cash equivalents 117,730 (4,785)
Cash and cash equivalents, beginning of period 10,883 25,083
------------ -----------
Cash and cash equivalents, end of period $ 128,613 $ 20,298
============ ===========
Supplemental cash flow information:
Interest paid $ - $ 8,719
============ ===========
Non-cash item:
Capitalized compensatory stock options $ - $ 158
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ORBITAL IMAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1997 25,214,000 $ 252 $ 75,285 $ (26,532) $ 49,005
Issuance of common stock warrants - - 9,000 - 9,000
Accrual of preferred stock dividends - - 1,438 (1,438) -
--------------------- ------------- -------------- ------------
Balance as of March 31, 1998 25,214,000 $ 252 $ 85,723 $ (27,970) $ 58,005
===================== ============= ============== ============
Balance as of December 31, 1998 25,214,000 $ 252 $ 87,541 $ (39,375) $ 48,418
Issuance of stock options - - 158 - 158
Accrual of preferred stock dividends - - - (2,063) (2,063)
Net loss - - - (1,033) (1,033)
--------------------- ------------- -------------- ------------
Balance as of March 31, 1999 25,214,000 $ 252 $ 87,699 $ (42,471) $ 45,480
===================== ============= ============== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ORBITAL IMAGING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial information reflects all adjustments, consisting of
normal recurring adjustments, considered necessary for a fair presentation of
the information. Certain information and footnote disclosure normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted following the instructions,
rules and regulations prescribed by the Securities and Exchange Commission
("SEC"). Although management believes that the disclosures provided are adequate
to make the information presented not misleading, you should read these
unaudited interim condensed consolidated financial statements in conjunction
with the audited financial statements and associated footnotes for the year
ended December 31, 1998, which are included in Orbital Imaging Corporation's
Form 10-K filed with the SEC. Operating results for the three months ended March
31, 1999 are not necessarily indicative of the results that may be expected for
the full year.
We will refer to Orbital Imaging Corporation as "ORBIMAGE."
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of
ORBIMAGE and its wholly owned subsidiary. All material intercompany transactions
and accounts have been eliminated in consolidation.
Cash and Cash Equivalents
ORBIMAGE considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Stock-Based Compensation
To the extent that ORBIMAGE grants stock options to non-employee consultants
or advisors, ORBIMAGE records costs equal to the fair value of the options
granted as of the measurement date as determined using a Black-Scholes model.
ORBIMAGE capitalizes the cost of stock options granted to non-employee
consultants or advisors working on the construction of satellites. The
capitalized costs are recorded as part of the historical cost of the satellites
and will be amortized over the asset's useful life when placed in service. No
compensation expense has been recognized in connection with stock option grants
to employees in the accompanying
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statements of operations.
Income Taxes
ORBIMAGE has recorded its interim income tax benefit based on estimates of
the effective tax rate expected to be applicable for the full fiscal year.
Estimated effective rates recorded during interim periods may be periodically
revised, if necessary, to reflect current estimates.
Reclassifications
Certain reclassifications have been made to the 1998 financial statements to
conform to the 1999 financial statement presentation. Preferred stock and
additional paid-in capital totaling $7,000 and $65 million, respectively, as of
December 31, 1998 were reclassified from stockholders' equity to preferred
stock subject to repurchase.
(3) INTEREST CAPITALIZATION
ORBIMAGE capitalizes interest costs in connection with the construction of
satellites and related ground segments and systems. The capitalized interest is
recorded as part of the historical cost of the asset to which it relates and
will be amortized over the asset's useful life when placed in service. For the
three months ended March 31, 1998 and 1999, capitalized interest totaled $1.7
million and $4.7 million, respectively.
(4) RELATED PARTY TRANSACTIONS
ORBIMAGE incurred and capitalized costs of approximately $15.4 million and
$16.4 million for the three months ended March 31, 1998 and 1999, respectively
under a procurement contract with Orbital Sciences Corporation ("Orbital"),
ORBIMAGE's majority stockholder, for the purchase of various satellites and
ground systems. ORBIMAGE incurred and expensed costs of approximately $0.5
million and $0.4 million for the three months ended March 31, 1998 and 1999,
respectively, under an administrative services agreement with Orbital.
(5) COMPREHENSIVE INCOME (LOSS)
For the three months ended March 31, 1998 and 1999, there were no material
differences between net loss as reported and comprehensive income (loss).
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(6) LOSS PER COMMON SHARE
The computations of basic and diluted loss per common share for the three
months ended March 31, 1998 and 1999 were as follows (in thousands, except share
data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1999
---- ----
<S> <C> <C>
Numerator for basic and diluted loss per common share:
Net loss $ - $ (1,033)
Preferred stock dividends (1,438) (2,063)
-------------- -------------
Loss available to common stockholders $ (1,438) $ (3,096)
============== =============
Denominator for basic loss per common
share -- weighted average shares 25,214,000 25,214,000
Effect of dilutive securities:
Preferred stock 11,541,475 16,488,633
Warrants 510,512 1,312,746
Stock options 552,218 580,153
-------------- -------------
Denominator for diluted loss per common
share -- adjusted weighted average
shares assuming dilution 37,818,205 43,595,532
============== =============
</TABLE>
<TABLE>
<S> <C> <C>
Loss per common share -- basic and diluted
$ (0.06) $ (0.12)
=========== =========
</TABLE>
(7) PREFERRED STOCK SUBJECT TO REPURCHASE
The activity in the preferred stock subject to repurchase was as follows for
the three months ended March 31, 1998 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
SHARES AMOUNT
--------------------------------
<S> <C> <C>
Balance as of December 31, 1997 392,887 $ 36,355
Shares issued in private offering, net 227,295 21,275
Accrual of preferred stock dividends - 1,438
--------------------------------
Balance as of March 31, 1998 620,182 $ 59,068
============== =============
Balance as of December 31, 1998 687,576 $ 64,954
Accrual of preferred stock dividends - 2,063
--------------------------------
Balance as of March 31, 1999 687,576 $ 67,017
============== =============
</TABLE>
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(8) SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes reporting standards for a company's operating segments and related
disclosures about its products, services, geographic areas and major customers.
ORBIMAGE adopted SFAS No. 131 effective January 1, 1998. SFAS No. 131 requires
comparative segment information; however, ORBIMAGE operated as a single segment
for the three months ended March 31, 1998 and 1999.
ORBIMAGE recognized revenues related to contracts with the National
Aeronautics and Space Administration of approximately $2.3 million and $2.4
million for the three months ended March 31, 1998 and 1999, respectively,
representing approximately 97% and 72%, respectively, of total revenues
recognized during those periods.
(9) SUBSEQUENT EVENTS
On April 22, 1999, ORBIMAGE completed a debt offering raising net proceeds of
approximately $68.1 million. Out of the net proceeds of the offering, ORBIMAGE
purchased approximately $7.4 million of U.S. Treasury securities to fund the
interest payments on the senior notes through March 1, 2000.
On April 26, 1999, ORBIMAGE granted 774,323 options to purchase shares of
common stock to employees, directors and consultants. The stock options were
granted with an exercise price of $6.25 and generally vest in one-third
increments over a three-year period. ORBIMAGE will expense the value of the
70,250 compensatory options that were issued to consultants totaling $0.2
million over the three-year vesting period of the options.
On May 1, 1999, ORBIMAGE declared a preferred stock dividend of 41,256
shares payable in kind.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
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 has entered into a procurement
agreement with Orbital to purchase the OrbView-1,
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OrbView-3 and OrbView-4 satellites, including launch services, and the U.S.
ground system necessary to operate the satellites and to collect, process and
distribute imagery. Under the procurement agreement, ORBIMAGE also acquired a
license to operate and control the OrbView-2 satellite (the "OrbView-2
License"). Under a license agreement with Orbital and its wholly owned Canadian
subsidiary, MacDonald, Dettwiler and Associates, Ltd. ("MDA"), ORBIMAGE has
acquired the exclusive worldwide rights to market and sell imagery from
RadarSat-2 (the "RadarSat-2 License") and has in turn granted these rights to
MDA. MDA will own and operate the RadarSat-2 satellite and provide operations,
data reception, processing, archiving, marketing and distribution services to
ORBIMAGE. Orbital also provides certain administrative services to ORBIMAGE such
as accounting, tax, human resources and benefit-related services.
ORBIMAGE expects OrbView-3 to be operational in the first quarter of 2000,
OrbView-4 to be operational in the fourth quarter of 2000 and RadarSat-2 to be
operational in early 2002.
In February 1998, ORBIMAGE issued $150 million of units (the "1998
Offering"), each unit consisting of $1,000 principal amount of 11 5/8% senior
notes due 2005 and one warrant to purchase 8.75164 shares of ORBIMAGE common
stock. In April 1999, ORBIMAGE issued $75 million in principal amount of 11 5/8%
senior notes due 2005 (the "1999 Offering").
Business Acquisition. In April 1998, ORBIMAGE acquired substantially all of
the assets of TRIFID Corporation ("TRIFID") for $5.0 million. TRIFID provides
sophisticated image processing software, geographic information database and
production systems, imaging sensor design and related engineering services to
both governmental and commercial customers. The acquisition provides ORBIMAGE
with the technical personnel and production capability required to generate
high-resolution imagery and derived products.
Revenues. ORBIMAGE's principal source of revenue is the sale of satellite
imagery to customers, value-added resellers and distributors. ORBIMAGE is
performing under several long-term sales contracts to provide imagery products
and receives contractual payments in advance of product delivery. In these
circumstances, ORBIMAGE initially records deferred revenue for the total amount
of the payment and recognizes revenue over the contractual delivery period. As
of March 31, 1999, ORBIMAGE had approximately $30.0 million of deferred revenue
related primarily to advance payments for OrbView-2 imagery.
System Depreciation. ORBIMAGE depreciates its satellites over the design life
of each satellite. ORBIMAGE is amortizing the cost of the OrbView-2 License over
the design life of the OrbView-2 satellite. ORBIMAGE intends to amortize the
cost of OrbView-3, OrbView-4 and the RadarSat-2 License over the design lives of
the satellites, estimated to be five, five and seven years, respectively.
ORBIMAGE depreciates the ground systems used to operate the satellites and
collect, process and distribute imagery over the estimated lives of the assets,
generally eight years. Depreciation begins when the satellites and ground
systems are placed in service.
Interest Expense. Interest on the senior notes together with amortization of
debt discount, is
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capitalized as the historical costs of assets under construction, when
appropriate. ORBIMAGE expects to capitalize a significant portion of its
interest expense through 2001 as it completes construction of the OrbView-3 and
OrbView-4 satellites and makes payments due under the RadarSat-2 License.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
Revenues. Revenues for the three months ended March 31, 1998 and 1999 were
approximately $2.4 million and $3.3 million, respectively. The increase in 1999
revenues was primarily due to the acquisition of TRIFID. Revenues during the
three months ended March 31, 1999 included $0.6 million in sales generated from
the image processing business acquired from TRIFID in April 1998.
Direct Expenses. Direct expenses include the costs of operating and
depreciating the OrbView-1 satellite, the OrbView-2 License, and the related
ground system. Satellite operating costs primarily consist of labor expenses.
Direct expenses for the three months ended March 31, 1998 and 1999 were
approximately $4.2 million and $4.0 million, respectively. ORBIMAGE expects
direct expenses to increase when OrbView-3, OrbView-4 and RadarSat-2 are placed
in operation.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses include the costs of marketing, advertising,
promotion and other selling expenses, as well as the costs of the finance,
administrative and general management functions of ORBIMAGE. SG&A expenses were
approximately $1.0 million and $1.9 million for the three months ended March 31,
1998 and 1999, respectively. The increase in SG&A expenses in 1999 was primarily
attributable to the increase in salaries and related benefits as ORBIMAGE
expanded its operations.
Interest Income and Interest Expense. Interest income reflects interest
earnings on investments made primarily with proceeds from ORBIMAGE's financing
activities. Interest expense reflects interest incurred on the senior notes
issued pursuant to the 1998 Offering and the 1999 Offering, net of applicable
capitalized interest. Interest income for the three months ended March 31, 1999
was approximately $0.9 million. Interest income was approximately $1.0 million
for the three months ended March 31, 1998, which is net of interest expense of
approximately $2.2 million. For the three months ended March 31, 1998 and 1999,
capitalized interest in connection with the construction of the OrbView-3 and
OrbView-4 satellites and related ground system totaled $1.7 million and $4.7
million, respectively. The capitalized interest is recorded as part of the
historical cost of the assets to which it relates and will be amortized over the
assets' useful lives when placed in service.
Benefit for Income Taxes. ORBIMAGE recorded income tax benefits of
approximately $1.7 million and $0.6 million for the three months ended March 31,
1998 and 1999, respectively. The tax benefits result from net operating losses
generated during the period in addition to decreases in deferred tax liabilities
for depreciation of satellite assets, which had been previously deducted for tax
purposes.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, ORBIMAGE had approximately $36.6 million of cash, cash
equivalents and available-for-sale securities. On April 22, 1999, ORBIMAGE
completed the 1999 Offering raising net proceeds of approximately $68.6 million.
On February 25, 1998, ORBIMAGE completed the 1998 Offering raising net proceeds
of $144.6 million. The total effective interest rate on the senior notes,
including the debt discount, is approximately 13.6%. Out of the net proceeds of
the two offerings, ORBIMAGE purchased approximately $39.0 million of U.S.
Treasury securities to fund the interest payments on the senior notes through
March 1, 2000. As of March 31, 1999, restricted held-to-maturity securities
totaled $16.8 million.
Operating activities provided cash of approximately $4.9 million and used
cash of $8.8 million during the three months ended March 31, 1998 and 1999,
respectively. The decrease in operating cash flow from 1998 to 1999 is primarily
attributable to decreases in accounts payable and accrued expenses, and deferred
revenue of $7.7 million and $2.2 million, respectively.
Investing activities used cash of approximately $53.7 million and provided
cash of $4.1 million for the three months ended March 31, 1998 and 1999,
respectively. The increase in the cash provided by investing activities from
1998 to 1999 is attributable primarily to the purchase of the pledged securities
and the net maturities (net of purchases) of available-for-sale securities,
partially offset by increased capital expenditures. After completion of its
private equity and debt financings in 1998 and 1999, ORBIMAGE invested the
proceeds from the financings in various short- and long-term investments,
consisting primarily of commercial paper and U.S. Treasury securities.
Capital expenditures related primarily to the construction of OrbView-3 and
OrbView-4 for the three months ended March 31, 1998 and 1999 were approximately
$15.7 million and $18.2 million (excluding capitalized interest). The total cost
of the OrbView-1, OrbView-3 and OrbView-4 satellites, the OrbView-2 License and
the related U.S. ground systems, is estimated to be approximately $285 million,
which amount does not include contracts of approximately $31 million to be
funded by the U.S. Air Force through a contract with Orbital. Of this amount, as
of March 31, 1999, ORBIMAGE had incurred costs of approximately $241 million,
excluding insurance.
Through the third quarter of 2000, when OrbView-4 is expected to be launched,
we expect to incur capital expenditures of approximately $90 million for the
OrbView-3 and OrbView-4 satellites and the RadarSat-2 License. Of this amount,
approximately $60 million will be used for the OrbView-3 and OrbView-4
satellites and $30 million will be used for the RadarSat-2 License. In total,
ORBIMAGE's cost of the RadarSat-2 License will be approximately $60 million,
which amount does not include approximately $140 million to be funded by the
Canadian Space Agency ("CSA") through a contract with MDA. We expect to make
installment payments on the RadarSat-2 License through the operational date of
RadarSat-2, which we expect to be in early 2002. ORBIMAGE expects to fund future
capital expenditures as well as
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negative cash flows from operating activities using the net proceeds of the
recently completed 1999 Offering, together with available cash, cash equivalents
and securities.
ORBIMAGE does not expect to generate net positive cash flow from operations
sufficient to fund both operations and capital expenditures before the fourth
quarter of 2000, when both OrbView-3 and OrbView-4 are expected to be
operational. While ORBIMAGE believes it has sufficient resources to meet its
requirements through that time, additional funding may be necessary in the event
of an OrbView-3 or OrbView-4 launch delay, cost increases or unanticipated
expenses. We cannot assure you that additional capital will be available, if
needed, on favorable terms or on a timely basis, if at all. ORBIMAGE has
incurred losses since its inception, and management believes that it will
continue to do so at least through mid-2000. ORBIMAGE's ability to become
profitable and generate positive cash flow is dependent on the continued
expansion of commercial services, adequate customer acceptance of ORBIMAGE's
products and services and numerous other factors. We cannot assure you that the
market will accept our products and services.
"YEAR 2000" COMPLIANCE
The year 2000 presents potential concerns for computer hardware and software
applications. The consequences of this may include systems failures and business
process interruption. The problem may exist for many kinds of software and
hardware, including mainframes, mini computers, PCs and embedded systems.
ORBIMAGE has completed an assessment of the potential Year 2000 issues for
various financial, technical and operational computer-related systems. This
assessment consisted of reviewing software code and hardware system components
to determine whether a system failure or miscalculations causing disruption of
operations could occur as a result of the system's inability to distinguish
between the year 2000 and the year 1900. ORBIMAGE intends to correct any Year
2000 issues, or develop alternative "work-around" procedures that address the
problem by June 1999. ORBIMAGE has also inquired of its primary vendor, Orbital,
whether products and services provided by Orbital may be adversely affected by
the Year 2000 issue. Orbital has informed ORBIMAGE that it has identified no
material Year 2000 issues affecting its provision of administrative services.
Orbital has substantially completed the awareness and assessment phases of its
Year 2000 plan and intends to achieve a goal of Year 2000 readiness in mid-1999.
Our largest customers are U.S. government agencies. If these agencies'
systems are not Year 2000 compliant, payments they owe us could be delayed. A
significant delay in payments could have a material impact on ORBIMAGE's
financial results.
ORBIMAGE does not currently anticipate that addressing Year 2000 problems for
its internal systems will have a material impact on its operations or financial
results. ORBIMAGE expects that it will spend no more than $500,000 on Year 2000
compliance. There can be, however, no assurance that costs associated with
addressing Year 2000 issues will not be greater than anticipated, or that Year
2000 problems will be identified on a timely basis and that corrective actions
undertaken by ORBIMAGE or its primary vendor will be completed before any Year
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2000 problems occur. All costs, including the cost of internal personnel,
outside consultants, systems replacements and other equipment, will be expensed
as incurred, except for long-lived assets, which will be capitalized in
accordance with ORBIMAGE's capitalization policies. ORBIMAGE will develop
contingency plans if it appears that it or its key supplier will not be Year
2000 compliant and the noncompliance is expected to have a material adverse
impact on ORBIMAGE's operations.
OUTLOOK: ISSUES AND UNCERTAINTIES
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
safe harbor, in some circumstances, for forward-looking statements made by or on
behalf of ORBIMAGE. ORBIMAGE and its representatives may from time-to-time make
written or verbal forward-looking statements, including statements contained in
ORBIMAGE's filings with the Securities and Exchange Commission. All statements
that address operating performance, events, or developments that ORBIMAGE
expects or anticipates will occur in the future, including statements relating
to ORBIMAGE's sales and earnings growth or statements expressing general
optimism about future operating results, are forward-looking statements within
the meaning of the Act. The forward-looking statements are and will be based on
management's then-current views and assumptions regarding future events and
operating performance. The following are some of the factors that could cause
actual results to differ materially from information contained in ORBIMAGE's
forward-looking statements.
LIMITED HISTORY OF OPERATIONS AND NET LOSSES -- GIVEN OUR LIMITED OPERATING
HISTORY AND NET LOSSES, OUR FUTURE PROSPECTS ARE UNCERTAIN.
Limited operating and financial data. We did not begin commercial service
until 1995, when we launched OrbView-1. We have a history of net losses from
operations and have generated only limited revenues from the operations of
OrbView-1 and OrbView-2 and our image processing business.
Our business plan depends upon:
- the timely construction and deployment of OrbView-3, OrbView-4 and
RadarSat-2 and development of the related ground systems; and
- our ability to develop a customer base and distribution channels for
our imagery products and services.
Given ORBIMAGE's limited operating history, and in light of the risks,
expenses, difficulties and delays encountered in a high technology, highly
regulated industry, we cannot assure you that OrbView-3, OrbView-4 or RadarSat-2
will be constructed and deployed in accordance with our schedule or that we will
be able to develop a sufficiently large revenue-generating customer base to
compete successfully in the remote imaging industry.
Expectation of continued losses. Our business strategy requires significant
capital
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expenditures. We will incur a substantial portion of these expenditures before
we generate significant revenues. Combined with our operating expenses, these
capital expenditures cause negative cash flow until we establish an adequate
revenue-generating customer base. We had an accumulated deficit of approximately
$42.5 million through March 31, 1999. We expect losses to continue through 2000,
and we do not expect to generate net positive cash flow from operations
sufficient to fund both operations and capital expenditures until both OrbView-3
and OrbView-4 are operational, currently expected to be in the fourth quarter of
2000. We cannot assure you that the OrbView satellites will become operational
on this timetable, or at all, or that we will achieve or sustain any positive
cash flow or profitability thereafter. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
POTENTIAL ADDITIONAL CAPITAL REQUIREMENTS -- OUR INABILITY TO FUND POTENTIAL
ADDITIONAL CAPITAL REQUIREMENTS COULD DELAY SATELLITE CONSTRUCTION AND
DEPLOYMENT.
We believe that the net proceeds of the recently complete debt offering,
together with cash on hand, expected cash flows from operations and advance
payments from customers will be sufficient to fund our operations through the
fourth quarter of 2000. We cannot assure you that we will generate sufficient
cash from operations to pay for our anticipated capital expenditures, or that
these expenditures will fall within our estimates. If we do not generate
sufficient cash flow by the fourth quarter of 2000, or if our capital
expenditures exceed our estimates, we would need additional capital.
A significant portion of our capital requirements are related to developing,
constructing and launching the OrbView satellites, constructing and activating
the related U.S. ground systems and acquiring the RadarSat-2 License. While most
of these costs are currently fixed under agreements with Orbital, we cannot
assure you that these costs will not increase over time. For example, in
December 1998, we agreed to cost increases of $17 million under our procurement
agreement with Orbital. We will pay for launch and on-orbit insurance and
technological assistance for OrbView-3, OrbView-4 and RadarSat-2 on a cost-plus
or cost-reimbursable basis. Many factors outside our control influence the costs
of these and other items and services, and we may need to raise more capital if
any of these costs increase materially.
We may also need to raise additional capital if, for example:
- significant delays occur in deploying OrbView-3, OrbView-4 or
RadarSat-2;
- we do not enter into agreements with customers, value-added resellers
or distributors for high-resolution imagery in the time frames or on the
terms that we anticipate;
- our estimated net operating deficit increases because we incur
significant unanticipated expenses, such as costs for resolving satellite
operational difficulties;
- we have to modify all or part of OrbView-3 and OrbView-4 or ground
system designs to meet changed or unanticipated market, regulatory or
technical requirements; or
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<PAGE> 16
- we decide to further expand our fleet of satellites or to acquire
additional imagery distribution rights through licensing arrangements or
otherwise.
If these or other events occur, we cannot assure you that we could raise
additional capital on favorable terms, on a timely basis or at all. A
substantial shortfall in funding would delay or prevent deployment of one or
both of the high-resolution OrbView satellites and the RadarSat-2 satellite.
SCHEDULE DELAYS -- DELAYS IN THE COMMERCIAL OPERATION OF OUR SATELLITES COULD
ADVERSELY AFFECT OUR BUSINESS.
We could experience delays in the commercial operation of OrbView-3,
OrbView-4 and/or RadarSat-2 from a variety of causes, including:
- delays in designing, constructing, integrating or testing the
satellites, satellite components and related ground systems;
- delayed or unsuccessful launches;
- subcontractor or manufacturer delays;
- delays in receiving the licenses necessary to construct and operate
the satellite systems;
- delays under our procurement agreement with Orbital, or delays under
the CSA Contract, including delays by CSA in procuring a launch vehicle on
a timely basis for RadarSat-2; or
- other events beyond our control.
The perceived and actual timing of satellite launches may affect competition
in the remote imaging industry. We previously encountered significant delays in
the design, production and testing of the OrbView-2 satellite that was launched
in August 1997. We have also experienced slight delays in the production
schedule of OrbView-3 and OrbView-4. Significant delays in the deployment of
OrbView-3, OrbView-4 or RadarSat-2 could increase pre-launch operating costs,
delay revenues, result in revocation of our FCC licenses and negatively affect
our marketing efforts. The perception of potential delays also could affect our
marketing efforts. We cannot assure you that any of these satellites will be
launched or deployed on a timely basis.
LAUNCH FAILURES -- A LAUNCH VEHICLE FAILURE WOULD ADVERSELY AFFECT OUR ABILITY
TO DELIVER IMAGERY PRODUCTS AND SERVICES.
Satellite launches are subject to significant risks, including partial or
complete launch vehicle
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failure. Launch vehicle failure may cause disabling damage to or loss of a
satellite or may result in a failure to deliver the satellite to its proper
orbit. We have contracted with Orbital to launch OrbView-3 on a Pegasus launch
vehicle, which has flown 26 missions and has a greater than 90% success rate.
However, there are several additional Pegasus launches planned before
OrbView-3's scheduled launch, and the failure of any one of those launch
vehicles could result in delayed deployment of OrbView-3. The Pegasus is
launched from beneath Orbital's modified Lockheed L-1011 aircraft. If Orbital's
L-1011 aircraft is unavailable, we could experience significant delays. Orbital
would have to acquire and modify a new carrier aircraft or we would have to
arrange to deploy OrbView-3 using an alternative launch vehicle. We cannot
assure you that Orbital could obtain another aircraft and properly modify the
aircraft or that we could obtain alternate launch services on a timely basis, or
at all. We have contracted with Orbital to launch OrbView-4 on its Taurus launch
vehicle, which has flown three missions to date, all of which were successful.
We expect CSA to provide a launch vehicle for RadarSat-2, which has not yet been
identified. We cannot assure you that OrbView-3, OrbView-4 or RadarSat-2 will be
successfully launched. A launch failure of OrbView-3, OrbView-4 or RadarSat-2 or
the failure of CSA to provide a launch vehicle for RadarSat-2 could negatively
affect our business, financial condition, results of operations, our ability to
deliver our products and services.
MARKET ACCEPTANCE -- WE CANNOT ASSURE YOU THAT THE MARKET WILL ACCEPT OUR
PRODUCTS AND SERVICES.
Our success depends on existing markets accepting our imagery products and
services and our ability to develop new markets. Our business plan is based on
the assumption that we will generate significant future revenues from sales of
high-resolution imagery produced by OrbView-3, OrbView-4 and RadarSat-2 to
existing markets and new markets. High-resolution satellite imagery is not yet
commercially available. Consequently, it is difficult to predict accurately the
ultimate size of the market and the market acceptance of products and services
based on this type of imagery. Our strategy to target certain markets for our
satellite imagery relies on a number of assumptions, some or all of which may be
incorrect. Actual markets could vary materially from the potential markets that
we have identified.
We cannot accurately predict whether our products and services will achieve
market acceptance or whether the market will demand our products and services on
terms we find acceptable. Market acceptance depends on a number of factors,
including the spatial and spectral quality, scope, timeliness, sophistication
and price of our imagery products and services and the availability of
substitute products and services. Lack of significant market acceptance of our
products and services, particularly our high-resolution imagery products and
services, delays in acceptance, or failure of certain markets to develop would
negatively affect our business, financial condition and results of operations.
TECHNOLOGICAL AND IMPLEMENTATION RISKS -- WE CANNOT ASSURE YOU THAT OUR
SATELLITES WILL OPERATE AS DESIGNED.
The designs for OrbView-3 and OrbView-4 are complete, and the design for
RadarSat-2 is in progress. These satellites' designs may require modifications
to achieve the desired performance
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criteria, which could result in delays in satellite deployment. Each of these
satellites will employ advanced technologies and sensors that will be subject to
severe environmental stresses during launch or in space that could affect the
satellites' performance. Employing advanced technologies is further complicated
by the fact that the satellites will be in space. Hardware component problems in
space could require premature satellite replacement, with attendant costs and
revenue losses. In addition, human operators may execute improper implementation
commands that negatively impact a satellite's performance.
We cannot assure you that OrbView-3, OrbView-4 or RadarSat-2 will operate
successfully in space, or that each of these satellites will perform or continue
operating throughout their expected design lives. Even if these satellites are
launched and operated properly, minor technical flaws in the satellites' sensors
could significantly degrade their performance, which could materially affect our
ability to market our products successfully.
We have not procured a spare high-resolution OrbView satellite, nor do we
maintain an inventory of long lead-time parts for these satellites. If either
OrbView-3 or OrbView-4 were to fail prematurely, we could experience significant
delays while procuring the necessary spares or replacement parts to replace or
repair the satellite. Procurement delays would negatively affect our business,
results of operations and financial condition. In addition, we would be required
to allocate, earlier than expected, additional capital expenditures to replace a
satellite. We cannot assure you that we would have on hand, or be able to obtain
in a timely manner, the necessary funds to cover accelerated replacement and
repair costs of a satellite if it fails prematurely.
We do not presently have plans to construct and launch a replacement
satellite for OrbView-2 if it fails prematurely. Similarly, there is no
provision for a replacement RadarSat-2 satellite in the event of a premature
failure. Permanent loss of OrbView-2 or RadarSat-2 could adversely affect our
operations and financial condition.
LIMITED LIFE OF SATELLITES -- SATELLITES HAVE LIMITED DESIGN LIVES AND ARE
EXPENSIVE TO REPLACE.
Satellites have limited useful lives. We determine a satellite's useful life,
or its design life, using a complex calculation involving the probabilities of
failure of the satellite's components from design or manufacturing defects,
environmental stresses or other causes. The design lives of our satellites are
as follows:
<TABLE>
<CAPTION>
SATELLITE EXPECTED DESIGN LIFE
- --------------------------------------------------------
<S> <C>
OrbView-1 3 years (launched in April 1995),
although it continues to operate
OrbView-2 7 1/2 years (launched in August
1997)
OrbView-3 5 years
OrbView-4 5 years
RadarSat-2 7 years
</TABLE>
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The expected design lives of these satellites are affected by a number of
factors, including the quality of construction, the expected gradual
environmental degradation of solar panels, the durability of various satellite
components and the orbits in which the satellites are placed. Random failure of
satellite components could cause damage to or loss of a satellite before the end
of its design life. In rare cases, electrostatic storms or collisions with other
objects could damage our satellites. We cannot assure you that each satellite
will remain in operation for its expected design life. We expect the performance
of each satellite to decline gradually near the end of its design life, although
this has not yet happened with OrbView-1.
We anticipate using funds generated from operations to develop follow-on
high-resolution satellites. If we do not generate sufficient funds from
operations, and if we are unable to obtain financing from outside sources, we
will not be able to deploy follow-on satellites to replace OrbView-3 or
OrbView-4 at the end of their expected design lives. We cannot assure you that
we will be able to raise additional capital, on favorable terms or on a timely
basis, if at all, to develop follow-on high-resolution satellites.
INSURANCE -- LIMITED INSURANCE MAY NOT COVER ALL RISKS OF LOSS.
We maintain or expect to maintain the following insurance policies:
- OrbView-1. OrbView-1 is not insured.
- OrbView-2. We have a renewable on-orbit insurance policy for OrbView-2
to cover losses up to $12 million for its current operational year. We have
not yet determined the amounts and types of coverage, if any, we will
purchase for OrbView-2 in the future.
- OrbView-3 and OrbView-4. The Indentures require us to maintain launch,
on-orbit checkout and on-orbit operations insurance for OrbView-3 and
OrbView-4. This insurance may not be sufficient to cover the cost of a
replacement high-resolution satellite.
- RadarSat-2. We will purchase up to $60 million of insurance coverage
for the RadarSat-2 License against launch or on-orbit failure of the
RadarSat-2 satellite. This insurance would allow us to recover our initial
capital investment in the RadarSat-2 License, but would not be sufficient
to cover additional business losses or the cost of a replacement radar
satellite.
We may find it difficult to insure certain risks, such as partial degradation
of functionality of a satellite. Insurance market conditions or factors outside
our control at the time we buy the required insurance, such as failure of a
satellite using similar components or a similar launch vehicle, could cause
premiums to be significantly higher than current estimates. These factors could
cause other terms to be significantly less favorable than those currently
available, may result in limits on amounts of coverage that we can obtain or may
prevent us from obtaining insurance at all. Furthermore, we cannot assure you
that proceeds from insurance we are able to purchase will be sufficient to
replace a satellite due to cost increases and other factors beyond our control.
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COMPETITION -- WE MAY BE UNABLE TO REPAY THE SENIOR NOTES IF WE DO NOT
SUCCESSFULLY COMPETE IN THE REMOTE IMAGING INDUSTRY.
Our products and services will compete with satellite and aircraft-based
imagery and related products and services offered by a range of private and
government providers. Certain of these entities may have greater financial,
personnel and other resources than we have. Our major potential competitors for
high-resolution satellite imagery include:
- Space Imaging EOSAT, which has announced plans to launch its first
one-meter high-resolution satellite in mid-1999;
- EarthWatch, which has announced plans to launch its one-meter
high-resolution satellite in late 1999; and
- West Indian Space, Ltd., which has announced plans to launch and
operate the Earth Remote Observation System constellation of
high-resolution commercial imaging satellites.
The U.S. government and foreign governments also may develop, construct,
launch and operate remote imaging satellites that generate imagery competitive
with our products and services. In addition, the U.S. government will probably
continue to rely on government-owned and operated systems for certain highly
classified satellite-based high-resolution imagery.
We believe we will have a competitive advantage because we expect to have
sufficient pricing flexibility to be a low-price commercial provider within our
targeted markets and applications due to the relatively lower cost of our
satellite systems as compared to those of our competitors. But the low marginal
cost of producing satellite imagery once a satellite is operating could cause
adverse pricing pressure, decreased profits or even losses. Our competitors or
potential competitors with greater resources than ours could in the future offer
satellite-based imagery or other products having more attractive features than
our products. New technologies, even if not ultimately successful, could
negatively affect our marketing efforts. More importantly, if competitors
develop and launch satellites with more advanced capabilities and technologies
than ours, this competition could harm our business.
DEPENDENCE ON SUPPLIER -- DEPENDENCE ON ONE SUPPLIER COULD RESULT IN DELAYS IF
THE SUPPLIER FAILS TO PERFORM, AND OUR RECOURSE AGAINST THE SUPPLIER IS LIMITED.
We depend on one supplier, Orbital:
- to design, develop and launch OrbView-3 and OrbView-4 and to
construct the U.S. ground system for these satellites;
- to design, develop and construct the RadarSat-2 satellite and the
Canadian ground system; and
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- through its wholly owned subsidiary MDA, to operate RadarSat-2, and
to receive, process, and archive RadarSat-2 imagery.
We also rely on the OrbView-2 License from Orbital to market the OrbView-2
imagery, and will rely on the RadarSat-2 License from Orbital's wholly owned
subsidiary, MDA, to market the RadarSat-2 imagery. We expect to continue to rely
on third parties, including Orbital and MDA, to design, construct or launch
satellites for us and to modify the existing ground systems to accommodate these
satellites. Orbital's obligations to provide design, construction and launch
services for the OrbView satellites are governed by a procurement agreement
between us and Orbital. If Orbital fails to perform its obligations adequately
under the procurement agreement, we would be forced to delay deployment of
OrbView-3 and/or OrbView-4 until we located an alternative provider. Orbital's
liability to us for claims under the procurement agreement is limited to $10
million. We also rely on Orbital and MDA to design and construct the RadarSat-2
satellite. Neither Orbital nor MDA is liable to us for any costs or other
damages arising from schedule delays in the operation of the high-resolution
OrbView satellites or RadarSat-2.
Under a services agreement with Orbital, Orbital has agreed to provide us
with various administrative and operational functions on a cost reimbursable or
cost-plus fee basis. These functions include on-orbit mission operations and
anomaly resolution for OrbView-2, OrbView-3 and OrbView-4. If Orbital fails to
perform its obligations under the services agreement, we may not be able to
operate these satellites properly. The services agreement terminates for each
OrbView satellite three years after the launch of each satellite. We cannot
assure you that we will be able to renew the services agreement on favorable
terms, or at all. In addition, a material adverse change in Orbital or its
financial condition or the condition of one of its subcontractors could
adversely affect Orbital's ability to perform under the procurement agreement or
the services agreement. We have not identified any alternate providers. In any
case, we can provide no assurance that an alternate provider would be available
or, if available, would be available on terms favorable to us or to Orbital.
DEPENDENCE ON DISTRIBUTOR -- DEPENDENCE ON A SINGLE DISTRIBUTOR FOR RADARSAT-2
IMAGERY COULD RESULT IN MARKETING AND DISTRIBUTION DELAYS IF THE DISTRIBUTOR
FAILS TO PERFORM.
As of December 31, 1998, we acquired the RadarSat-2 License from MDA and
granted MDA an exclusive unrestricted worldwide license, including the right to
sublicense with our prior consent, to market and sell RadarSat-2 imagery. MDA
will perform all RadarSat-2 marketing operations, subject to our supervision and
approval. MDA's failure to successfully market RadarSat-2 imagery would have a
material adverse effect on our ability to distribute and sell radar imagery,
which would materially adversely affect our business.
POTENTIAL CONFLICTS OF INTEREST WITH ORBITAL -- WE RELY ON ORBITAL FOR CERTAIN
OPERATIONS AND SERVICES THAT ARE CRITICAL TO OUR BUSINESS. ORBITAL'S INTERESTS
MAY CONFLICT WITH OURS.
Orbital owns approximately 55% of our outstanding voting stock on a fully
diluted basis. Certain of our executive officers and directors are also
employees and/or directors of Orbital. These relationships may produce conflicts
on matters involving both ORBIMAGE and Orbital.
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Although we have adopted policies we believe will prevent a conflict from
arising, these policies cannot ensure that a conflict will not arise.
We have several agreements with Orbital, including a procurement agreement
relating to OrbView-1, OrbView-3, OrbView-4 and the related ground system, the
OrbView-2 License, the RadarSat-2 License, a services agreement and a
non-compete agreement, each of which is material to our business. Orbital's
interests as an equity holder in our business may at times conflict with our
interests under these agreements, and may conflict with your interests as a
holder of the Notes. Our recourse against Orbital is limited in the event of
breaches by Orbital under the procurement agreement or the RadarSat-2 License.
Orbital provides certain products and services to our direct competitors.
Under our non-compete agreement with Orbital, which terminates on the earlier of
June 30, 2003, the first anniversary of an initial public offering of our common
stock or the occurrence of certain other events, Orbital cannot sell turn-key
satellite optical imaging systems (i.e., satellite, sensors, launch vehicles and
ground system) to anyone other than to ORBIMAGE. Orbital can, however, sell
radar systems and components of optical systems to our current or future
customers or competitors. For example, MDA has a contract to provide certain
ground system work to EarthWatch relating to its planned one-meter satellite
system. As a result of an acquisition, Orbital holds approximately a 4% equity
interest in EarthWatch. We expect to compete directly with EarthWatch. MDA also
holds an approximate 70% equity interest in Radarsat International Inc. ("RSI"),
a company that markets imagery from the RadarSat-1 satellite. MDA has a contract
to acquire the remaining shares of RSI. Although RadarSat-2 uses more advanced
imaging technology than the technology employed by RadarSat-1, these two
satellites have certain overlapping capabilities, making RSI a potential
competitor.
GOVERNMENT REGULATION -- FAILURE TO OBTAIN REGULATORY APPROVALS COULD RESULT IN
SERVICE INTERRUPTIONS.
Domestic. Our business generally requires licenses from the U.S. Department
of Commerce ("DoC") and the U.S. Federal Communications Commission ("FCC"). Our
operation of OrbView-1 does not require such licenses because the only customer
for OrbView-1 imagery is the U.S. government. Our DoC licenses to operate
OrbView-2, OrbView-3 and OrbView-4 expire in 2004.
We cannot assure you that the DoC will renew these licenses when they expire.
If the DoC does not renew these licenses our business would be materially
adversely affected.
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The DoC license for OrbView-4 imagery restricts the resolution for
hyperspectral imagery sold commercially. The license also imposes certain
limitations on our ability to process and distribute imagery outside of the
United States. These limitations may affect our ability to market and sell
hyperspectral imagery, and accordingly could have an adverse effect on our
financial condition and results of operations.
While we do not believe a DoC license is required for RadarSat-2, and Orbital
has informed us that it does not believe a DoC license will be required in
connection with MDA's operation of RadarSat-2, DoC may impose a licensing
requirement for RadarSat-2 in the future. If the DoC imposed a license
requirement and we were not able to obtain a license on acceptable terms, our
financial condition and results of operations would be materially adversely
affected.
Under the DoC licenses, the U.S. government can interrupt service during
certain periods of national emergency. In addition, the Canadian government can
interrupt RadarSat-2 service during certain periods of national emergency. The
prospect of actual or threatened interruptions could adversely affect our
ability to market our products to certain foreign distributors or end-users.
We currently operate OrbView-2 under Orbital's renewal application for an
experimental FCC license. We cannot assure you that the FCC will grant any
future renewals. If the FCC does not renew this license, we would not be able to
operate the OrbView-2 satellite in the United States.
Our application with the FCC for a license to launch and operate the
OrbView-3 and OrbView-4 satellites was granted in February 1999 and our
applications to operate the associated ground systems were granted in May 1999.
These licenses will expire in 10 years, but may be revoked for failure to
comply with their terms or failure to meet certain construction and launch
milestones.
International. All satellite systems operating internationally must follow
general international regulations and the specific laws of the countries in
which satellite imagery is downlinked.
The CSA has agreed to coordinate with the International Telecommunication
Union to secure the necessary authorizations to operate the RadarSat-2
satellite in Canada and the FCC is undertaking the ITU coordination process on
behalf of Orbview-3 and OrbView-4. The CSA's or the FCC's failure to obtain the
necessary coordination in a timely manner could have a material adverse
effect on our business, financial condition and results of operations.
Our customers or distributors are responsible for obtaining local regulatory
approval from the
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governments in the countries in which they do business to receive imagery
directly from the OrbView-2 satellite, the high-resolution OrbView satellites
and RadarSat-2. If these regional distributors are not successful in obtaining
the necessary approvals, we will not be able to distribute real time remote
imagery in those regions. Our inability to offer service in a significant number
of foreign countries could negatively affect our business. In addition,
regulatory provisions in countries where we wish to operate may impose unduly
burdensome restrictions on our operations. Our business may also be adversely
affected if the national authorities where we plan to operate adopt treaties,
regulations or legislation unfavorable to foreign companies.
Launch license. Commercial U.S. space launches require licenses from the U.S.
Department of Transportation ("DoT"). Under our procurement agreement with
Orbital, Orbital must ensure that the appropriate DoT commercial launch licenses
are in place for the OrbView-3 and OrbView-4 satellite launches. We cannot
assure you that Orbital will continue to be successful in its efforts to obtain
the necessary licenses or regulatory approvals. Orbital's inability to secure
necessary licenses or approvals could delay launches. Delays could harm our
business, financial condition and results of operations and our ability to
service our debt.
Export License. In connection with certain distributor agreements, we expect
to supply our international customers with ground stations that enable these
customers to downlink data directly from the high-resolution OrbView satellites.
Exporting these ground stations may require that we obtain an export license
from the DoC or the U.S. Department of State. Orbital also requires an export
license from the Department of State in connection with the export of certain
components of the RadarSat-2 satellite, which will be constructed by Orbital in
the U.S. and delivered to MDA in Canada. If the DoC or the Department of State
does not issue these export licenses, or if these licenses are significantly
delayed, our financial condition and results of operations could be materially
adversely affected.
RISKS ASSOCIATED WITH DISTRIBUTORS AND RESELLERS -- FOREIGN DISTRIBUTORS AND
VALUE-ADDED RESELLERS MAY NOT EXPAND COMMERCIAL MARKETS.
We will rely on foreign regional distributors to market and sell
internationally a significant portion of our imagery from OrbView-3, OrbView-4
and RadarSat-2. We expect our existing and future foreign regional distributors
to act on behalf of, or contract directly with, foreign governments to sell
imagery for national security and related purposes. These regional distributors
may not have the skill or experience to develop regional commercial markets for
our products and services. If we fail to enter into regional distribution
agreements on a timely basis or if our foreign regional distributors fail to
market and sell our imagery products and services successfully, these failures
would negatively impact our business, financial condition and results of
operations, and our ability to service our debt.
We intend to rely on value-added resellers to develop, market and sell our
products and services to address certain target markets. If our value-added
resellers fail to develop, market and sell OrbView products and services
successfully, this failure would negatively affect our business, financial
condition and results of operations, and our ability to service our debt.
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RISK ASSOCIATED WITH INTERNATIONAL OPERATIONS -- OUR INTERNATIONAL BUSINESS
EXPOSES US TO RISKS RELATING TO INCREASED REGULATION AND POLITICAL OR ECONOMIC
INSTABILITY IN FOREIGN MARKETS.
We expect to derive substantial revenues from international sales of products
and services. International operations are subject to certain risks, such as:
- changes in domestic and foreign governmental regulations and
licensing requirements;
- deterioration of once-friendly relations between the United States
and the foreign entity;
- increases in tariffs and taxes and other trade barriers; and
- changes in political and economic stability, including fluctuations
in the value of foreign currencies, which may make payment in U.S. dollars
more expensive for foreign customers.
These risks are beyond our control and could have a material adverse effect
on our business.
GOVERNMENT CONTRACTS -- WE DEPEND ON CONTRACTS WITH GOVERNMENT AGENCIES FOR A
SUBSTANTIAL PORTION OF OUR REVENUES. GOVERNMENT AGENCIES CAN TERMINATE THEIR
CONTRACTS AT ANY TIME.
Revenues from government contracts accounted for approximately 76%, 95% and
94% of our revenues for 1996, 1997 and 1998, respectively. At December 31, 1998,
contracts with U.S. government agencies constituted approximately 72% of our
backlog. Government agencies may terminate or suspend their contracts at any
time, with or without cause, or may change their policies, priorities or funding
levels by reducing agency or program budgets or by imposing budgetary
constraints. If a government agency terminates or suspends any of its contracts
with us or Orbital, or changes its policies, priorities, or funding levels,
these actions would have a material adverse effect on our business, financial
condition and results of operations. Specifically, if the Air Force terminates
or suspends its contract with Orbital and we wish to proceed with our
hyperspectral program, we would incur the remaining cost of upgrading OrbView-4
with hyperspectral capability. Similarly, if the CSA terminates the CSA contract
and we wish to proceed with our own radar program, we would have to incur the
cost of constructing, deploying and operating our own radar satellite system.
CHANGE OF CONTROL -- THE HOLDERS OF SERIES A PREFERRED STOCK COULD TAKE CONTROL
OF OUR BOARD OF DIRECTORS UPON CERTAIN EVENTS.
We are a party to a stockholders' agreement with the holders of our Series A
preferred stock. This stockholders' agreement and our charter contain provisions
relating to the election of directors.
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Our charter permits the Series A holders to designate additional members to
the board of directors and thus gain control of the board of directors if:
- we fail to pay timely dividends or to repurchase the Series A
preferred stock in somecircumstances; or
- Orbital does not start the integration and testing of the OrbView-4
spacecraft by November 15, 1999. We may extend the date by 30 days under
some circumstances.
If the Series A holders designated these additional directors, the Series A
directors would control our management and policies and could make decisions
affecting the control of ORBIMAGE. These additional directors would serve until
the event giving rise to their appointment has been resolved. Even without the
appointment of these additional directors, the Series A holders have de facto
control over certain corporate actions enumerated in the stockholders'
agreement, because these actions require the approval of at least one of the
Series A directors. These actions include the merger, consolidation, liquidation
or sale of substantially all of our assets, the issuance of equity securities in
certain circumstances, and the incurrence of certain indebtedness of more than
$500,000.
FINANCING CHANGE OF CONTROL OFFER -- WE MAY NOT HAVE THE ABILITY TO RAISE THE
FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE
INDENTURES.
Upon the occurrence of certain change of control events, we will be required
to offer to repurchase all outstanding senior notes at a price equal to 101% of
the principal amount and to offer to repurchase all of the outstanding Series A
preferred stock, subject to the senior rights of the senior note holders. It is
possible that we will not have sufficient funds at the time of the change of
control to make the required repurchases. If we are not able to make the
required repurchases, we would be in default under the indentures governing the
notes.
26
<PAGE> 27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 1999, ORBIMAGE had senior notes outstanding of $141.8 million
with a fair value of $145.5 million as estimated by quoted market prices. The
senior notes mature on March 1, 2005. Interest on the senior notes accrues at a
rate of 11.625% per annum and is payable semi-annually in arrears on March 1 and
September 1. ORBIMAGE purchased U.S. Treasury securities in an amount sufficient
to pay the interest on the senior notes through March 1, 2000.
As of March 31, 1999, held-to-maturity securities restricted for the payment
of interest on the senior notes totaled $16.8 million. ORBIMAGE does not have
any derivative financial instruments as of March 31, 1999, and believes that the
interest rate risk associated with its senior notes and the market risk
associated with its securities are not material to the results of operations of
ORBIMAGE. The available-for-sale securities subject ORBIMAGE's financial
position to interest rate risk.
27
<PAGE> 28
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - A complete listing of exhibits required is given in
the Exhibit Index that precedes the exhibits filed with this
report.
(b) Reports on Form 8-K - Not applicable.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORBITAL IMAGING CORPORATION
DATED: June 14 , 1999 By: /s/ Gilbert D. Rye
-- ------------------
Gilbert D. Rye, President
and Chief Operating Officer
DATED: June 14 , 1999 By: /s/ Armand D. Mancini
-- ---------------------
Armand D. Mancini, Vice President
and Principal Financial Officer
29
<PAGE> 30
EXHIBIT INDEX
The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
Exhibit Number Description
<S> <C>
3.1+ Second Amended and Restated Certificate of Incorporation of
ORBIMAGE.
3.2+ Bylaws of ORBIMAGE.
4.1 Specimen certificate of 11 5/8% Series C Senior Note due 2005
(included in Exhibit 4.5 hereto).
4.2 Specimen certificate of 11 5/8% Series D Senior Notes due 2005
(substantially in the same form as the certificate included in
Exhibit 4.5 hereto).
4.3+ Indenture dated as of February 25, 1998, by and between ORBIMAGE
and Marine Midland Bank, n/k/a HSBC Bank USA, as trustee for the 11
5/8% Senior Notes due 2005 of ORBIMAGE.
4.4++ Amended and Restated Stockholders' Agreement dated as of February
25, 1998, by and among ORBIMAGE, Orbital and the holders of Series
A preferred stock named therein.
4.5 Indenture dated as of April 22, 1999 by and between
ORBIMAGE and HSBC Bank USA, f/k/a Marine Midland Bank, as
trustee, for the 11 5/8% Senior Notes due 2005 of
ORBIMAGE.
4.6 Registration Rights Agreement dated as of April 22, 1999, by and
among ORBIMAGE, Bear Stearns & Co. and Merrill Lynch & Co. as at
the initial purchasers.
4.7 Pledge Agreement dated as of April 22, 1999 by and between
HSBC Bank USA, f/k/a Marine Midland Bank as collateral
agent.
10.2+** Amended and Restated Procurement Agreement dated February 26, 1998
by and between ORBIMAGE and Orbital.
10.3+ Amended and Restated Administrative Services Agreement
dated December 31, 1997 by and between ORBIMAGE and
Orbital.
</TABLE>
30
<PAGE> 31
<TABLE>
<S> <C>
10.4+ Non-Competition and Teaming Agreement dated as of May 8, 1997 by
and between ORBIMAGE and Orbital.
10.5+ OrbView-2 License Agreement dated as of May 8, 1997 by and between
ORBIMAGE and Orbital.
10.6+** Distributor License Agreement dated as of January 31, 1997, as
amended from time to time, by and between ORBIMAGE and Samsung
Aerospace Industries, Ltd.
10.7+ Form of Indemnification Agreement between ORBIMAGE and its
directors and officers.
10.8+ ORBIMAGE 1996 Stock Option Plan.
10.10* RadarSat-2 Master Agreement dated as of December 31, 1998 by and
among Orbital, MDA and ORBIMAGE.
10.11* Hyperspectral Imaging Data Agreement dated December 31, 1998 by and
between Orbital and ORBIMAGE.
10.12* Amendment No. 1 to Amended and Restated ORBIMAGE System Procurement
Agreement dated as of December 31, 1998 by and between Orbital and
ORBIMAGE.
10.13 Purchase Agreement dated April 19, 1999 by and among ORBIMAGE, Bear
Stearns & Co. and Merrill Lynch & Co. as the initial purchasers.
10.14 Amendment No. 1 dated as of April 1, 1999 to the RadarSat-2 Master
Agreement dated as of December 31, 1998 by and among Orbital,
MacDonald Dettwiler and Associates Ltd. and ORBIMAGE.
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C>
11 Statement re computation of loss per common share
(included in the notes to condensed consolidated financial
statements).
27 Financial Data Schedule.
+ Incorporated by reference to the identically numbered exhibit to ORBIMAGE's registration
statement on Form S-4, as amended (Reg. No. 333-49583).
++ Incorporated by reference to Exhibit 4.9 to ORBIMAGE's registration statement on Form S-4,
as amended (Reg. No. 333-49583)
* Incorporated by reference to the identically numbered exhibit to ORBIMAGE's registration
statement on Form S-1, as amended (Reg. No. 333-67697).
** Confidential treatment was granted pursuant to Rule 406 under the Securities Act of 1933,
in connection with ORBIMAGE's registration statement on Form S-4, as amended (Reg. No.
333-49583). Certain portions of the exhibit have been omitted. The omitted portions of
such exhibits have been separately filed with the Commission.
</TABLE>
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS AS OF AND FOR THE THREE MONTHS ENDED MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIREITY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 20,298
<SECURITIES> 33,072
<RECEIVABLES> 2,260
<ALLOWANCES> 53
<INVENTORY> 0
<CURRENT-ASSETS> 55,630
<PP&E> 232,730
<DEPRECIATION> (32,854)
<TOTAL-ASSETS> 296,706
<CURRENT-LIABILITIES> 17,558
<BONDS> 141,814
67,017
0
<COMMON> 252
<OTHER-SE> 45,228
<TOTAL-LIABILITY-AND-EQUITY> 296,706
<SALES> 3,316
<TOTAL-REVENUES> 3,316
<CGS> 4,025
<TOTAL-COSTS> 4,025
<OTHER-EXPENSES> 1,893
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (949)
<INCOME-PRETAX> (1,653)
<INCOME-TAX> (620)
<INCOME-CONTINUING> (1,033)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,033)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
