<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED
JUNE 30, 2000
ORBITAL IMAGING CORPORATION
(COMMISSION FILE NO. 333-49583)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 54-1660268
(STATE OF INCORPORATION) (IRS IDENTIFICATION NUMBER)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166 (703) 406-5000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (TELEPHONE NUMBER)
</TABLE>
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 August 10, 2000.
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<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORBITAL IMAGING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, JUNE 30,
1999 2000
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 4,855 $ 10,877
-------- --------
Available-for-sale securities, at fair value.................... 32,407 15,602
Restricted held-to-maturity securities, at amortized cost....... 12,932 -
Receivables and other current assets, net of allowances of $80
and $80, respectively........................................... 5,525 8,307
-------- --------
Total current assets....................................... 55,719 34,786
Property, plant and equipment, at cost, less accumulated
depreciation of $10,841 and $12,578, respectively............... 31,937 34,957
Satellites and related rights, at cost, less accumulated
depreciation and amortization of $30,973 and
$35,276, respectively........................................... 261,622 271,477
Other assets.......................................................... 10,560 9,845
-------- --------
Total assets.................................................... $359,838 $351,065
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................... $ 14,341 $ 14,245
Current portion of deferred revenue............................. 9,277 8,730
-------- --------
Total current liabilities.................................. 23,618 22,975
Senior notes.......................................................... 214,575 215,264
Deferred revenue, net of current portion.............................. 15,334 11,152
Deferred tax liabilities.............................................. 77 -
-------- --------
Total liabilities............................................... 253,604 249,391
Preferred stock subject to repurchase, par value $0.01; 10,000,000
shares authorized; Series A 12% cumulative convertible, 2,000,000
shares authorized, 772,561 and 818,916 shares issued and
outstanding, respectively (liquidation value of $78,801 and
$83,529, respectively)............................................ 91,563 99,783
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...................................... 87,285 87,376
Accumulated deficit............................................. (72,866) (85,737)
-------- ---------
Total stockholders' equity...................................... 14,671 1,891
-------- --------
Total liabilities and stockholders' equity...................... $359,838 $351,065
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 3
ORBITAL IMAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues.......................................... $ 3,410 $ 6,873 $ 6,725 $ 13,217
Direct expenses................................... 4,330 7,287 8,354 14,268
---------- ---------- ---------- ----------
Gross loss........................................ (920) (414) (1,629) (1,051)
Selling, general and administrative expenses...... 2,890 2,609 4,843 5,066
---------- ---------- ---------- ----------
Loss from operations.............................. (3,810) (3,023) (6,472) (6,117)
Interest income................................... 207 646 1,156 1,389
---------- ---------- ---------- ----------
Loss before benefit for income taxes.............. (3,603) (2,377) (5,316) (4,728)
Benefit for income taxes.......................... (1,327) - (1,947) (77)
---------- ---------- ---------- ----------
Net loss.......................................... $ (2,276) $ (2,377) $ (3,369) $ (4,651)
========== ========== ========== ==========
Loss per common share - basic and diluted (1)..... $ (0.23) $ (0.26) $ (0.39) $ (0.51)
Loss available to common stockholders............. $ (5,697) $ (6,568) $ (9,758) $ (12,871)
Weighted average shares outstanding - basic 25,214,000 25,214,000 25,214,000 25,214,000
and diluted (1).................................
</TABLE>
----------
(1) All potentially dilutive securities, such as preferred stock subject to
repurchase, warrants and stock options, are antidilutive for each period
presented.
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, 1998..... 25,214,000 $ 252 $86,782 $(53,070) $33,964
Issuance of compensatory stock
options........................ - - 209 - 209
Preferred stock dividends...... - - - (6,389) (6,389)
Net loss....................... - - - (3,369) (3,369)
---------- ----- ------- -------- -------
BALANCE AS OF JUNE 30, 1999......... 25,214,000 $ 252 $86,991 $(62,828) $24,415
========== ===== ======= ======== =======
BALANCE AS OF DECEMBER 31, 1999..... 25,214,000 $ 252 $87,285 $(72,866) $14,671
Issuance of compensatory stock
options........................ - - 91 - 91
Preferred stock dividends...... - - - (8,220) (8,220)
Net loss....................... - - - (4,651) (4,651)
--------- ----- ------- -------- -------
BALANCE AS OF JUNE 30, 2000......... 25,214,000 $ 252 $87,376 $(85,737) $ 1,891
========== ===== ======= ======== =======
</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>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 2000
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (3,369) $ (4,651)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, amortization and other................ 6,535 7,317
Deferred tax benefit................................ (1,947) (77)
Changes in assets and liabilities:
Increase in receivables and other current assets.... (1,058) (2,588)
Decrease in other assets............................ 225 89
Decrease in accounts payable and accrued expenses... (4,544) (96)
Decrease in deferred revenue........................ (4,328) (4,729)
---------- ---------
NET CASH USED IN OPERATING ACTIVITIES.......................... (8,486) (4,735)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................... (40,428) (18,835)
Purchases of restricted held-to-maturity securities............ (7,306) -
Purchases of available-for-sale securities..................... (10,908) (22,312)
Maturities of restricted held-to-maturity securities........... 8,471 12,984
Maturities of available-for-sale securities.................... 30,458 38,920
Sales of available-for-sale securities......................... 5,877 -
--------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES............ (13,836) 10,757
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term obligations............ 68,082 -
Repayment of capitalized lease obligation...................... (57) -
---------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................... 68,025 -
--------- --------
INCREASE IN CASH AND CASH EQUIVALENTS............................... 45,703 6,022
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................... 25,082 4,855
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................ $ 70,785 $ 10,877
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid..................................................... $ 8,719 $ 13,083
========= ========
NON-CASH ITEMS:
Preferred stock dividends...................................... $ 6,389 $ 8,220
Capitalized compensatory stock options......................... 85 81
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ORBITAL IMAGING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(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, 1999, which are included in Orbital Imaging
Corporation's Form 10-K filed with the SEC. Operating results for the six months
ended June 30, 2000 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.
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. Due to ORBIMAGE's history
of tax losses, net deferred tax assets are accounted for on the basis that it is
more likely than not that ORBIMAGE will not realize the tax benefits from the
deferred tax assets.
(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.
Capitalized interest totaled $5.5 million and $7.1 million for the three months
ended June 30, 1999 and 2000, respectively, and $10.1 million and $14.2 million
for the six months ended June 30, 1999 and 2000, respectively.
(4) RELATED PARTY TRANSACTIONS
In June 2000, the amended stock purchase agreement between ORBIMAGE and
Orbital Sciences Corporation ("Orbital"), ORBIMAGE's majority stockholder, was
terminated. Under the amended stock purchase agreement, Orbital was required to
purchase up to $12.5 million worth of common stock under certain circumstances,
and up to an aggregate of $25 million in the event of certain launch delays. In
connection with the termination of the amended stock purchase agreement,
ORBIMAGE and Orbital also amended their system procurement agreement to require
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Orbital to advance ORBIMAGE on January 31, 2001, $20 million previously paid by
ORBIMAGE under the procurement agreement. Orbital will be entitled to reinvoice
ORBIMAGE for this amount on the earlier of nine months after the launch of
OrbView-4 or six months after the launch of OrbView-3, but in no event earlier
than November 30, 2001. The amended procurement agreement also requires Orbital
to pay ORBIMAGE a $2.5 million cash penalty if OrbView-4 is not launched by May
31, 2001, and an additional $2.5 million cash penalty if neither OrbView-3 nor
OrbView-4 is launched by July 31, 2001. Concurrently with the foregoing
transactions, ORBIMAGE entered into an agreement with Orbital under which
Orbital agreed to broker a renegotiation of ORBIMAGE's RadarSat-2 license
agreement with MacDonald, Dettwiler and Associates Ltd. ("MDA"), Orbital's
Canadian subsidiary, which may result in a reduction in ORBIMAGE's RadarSat-2
license fee and system operation payments to MDA, in exchange for a reduction in
ORBIMAGE's current world-wide exclusive distribution territory for RadarSat-2.
If such an agreement is consummated, Orbital's $20 million advance obligation
under the amended procurement agreement would terminate.
ORBIMAGE incurred and capitalized costs of approximately $10.1 million
and $0.2 million for the three months ended June 30, 1999 and 2000,
respectively, and $26.5 million and $1.8 million for the six months ended June
30, 1999 and 2000, respectively, under the procurement agreement with Orbital
for the purchase of various satellites and ground systems. ORBIMAGE incurred and
expensed costs of approximately $0.7 million for each of the three months ended
June 30, 1999 and 2000, respectively, and $1.1 million and $1.5 million for the
six months ended June 30, 1999 and 2000, respectively, under an administrative
services agreement with Orbital.
(5) COMPREHENSIVE INCOME (LOSS)
For the six months ended June 30, 1999 and 2000, there were no material
differences between net loss as reported and comprehensive income (loss).
(6) LOSS PER COMMON SHARE
The computations of basic and diluted loss per common share for the three
months and six months ended June 30, 1999 and 2000 were as follows (in
thousands, except share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
-------- --------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator for basic and diluted loss per
common share:
Net loss...................................... $ (2,276) $ (2,377) $ (3,369) $ (4,651)
Preferred stock dividends..................... (3,421) (4,191) (6,389) (8,220)
----------- ----------- ----------- -----------
Loss available to common stockholders............ $ (5,697) $ (6,568) $ (9,758) $ (12,871)
=========== =========== =========== ===========
Denominator for basic and diluted loss per common
share -- weighted average shares (1).......... 25,214,000 25,214,000 25,214,000 25,214,000
Loss per common share -- basic and diluted (1)... $(0.23) $(0.26) $(0.39) $(0.51)
====== ====== ====== ======
</TABLE>
----------
(1) All potentially dilutive securities, such as preferred stock subject to
repurchase, warrants and stock options, are antidilutive for each
period presented.
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(7) INCOME TAXES
The income tax benefit for the three months and six months ended June 30,
1999 and 2000 were different from those computed using the statutory U.S.
Federal income tax rate as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
-------- --------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. Federal statutory rate...................... (34.0)% (34.0)% (34.0)% (34.0)%
State income taxes............................... (1.7) (1.7) (1.7) (1.7)
Valuation allowance.............................. - 35.7 - 34.1
Other............................................ (1.1) - (0.9) -
---- --- ---- ---
Effective rate................................... (36.8)% - % (36.6)% (1.6)%
==== === ==== ===
</TABLE>
The net deferred tax asset of $1.6 million as of June 30, 2000 is fully
reserved by a valuation allowance.
(8) SENIOR NOTES
Interest on ORBIMAGE's senior notes due 2005 accrues at a rate of 11 5/8%
per annum and is payable semi-annually in arrears on March 1 and September 1. On
March 1, 2000, restricted held-to-maturity securities and the related accrued
interest were used to pay the semi-annual interest due on the senior notes of
$13.1 million.
(9) PREFERRED STOCK SUBJECT TO REPURCHASE
The activity in the preferred stock subject to repurchase was as follows
for the six months ended June 30, 1999 and 2000 (dollars in thousands):
<TABLE>
<CAPTION>
SHARES AMOUNT
------ ------
<S> <C> <C>
BALANCE AS OF DECEMBER 31, 1998................ 687,576 $ 78,489
Preferred stock dividends paid in shares.... 41,256 4,205
Accrual of preferred stock dividends........ - 2,184
---------- ----------
BALANCE AS OF JUNE 30, 1999.................... 728,832 $ 84,878
========== ==========
BALANCE AS OF DECEMBER 31, 1999................ 772,561 $ 91,563
Preferred stock dividends paid in shares.... 46,355 5,373
Accrual of preferred stock dividends........ - 2,847
---------- ----------
BALANCE AS OF JUNE 30, 2000.................... 818,916 $ 99,783
========== ==========
</TABLE>
(10) STOCK OPTION PLAN
ORBIMAGE granted 422,347 options to purchase shares of common stock to
employees and directors during the six months ended June 30, 2000. The stock
options were granted with an exercise price of $7.25 and vest in one-third
increments over a three-year period.
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(11) SEGMENT INFORMATION
For the six months ended June 30, 1999 and 2000, ORBIMAGE operated as a
single segment. ORBIMAGE recognized revenues related to contracts with the
National Aeronautics and Space Administration of approximately $2.3 million for
each of the three months ended June 30, 1999 and 2000, respectively, and $4.7
million and $4.6 million for the six months ended June 30, 1999 and 2000,
respectively, representing approximately 69%, 17%, 71% and 24%, respectively, of
total revenues recognized during those periods.
(12) SUBSEQUENT EVENTS
On July 24, 2000, ORBIMAGE granted 100,000 options to purchase shares of
common stock to employees. The stock options were granted with an exercise price
of $7.25 and vest in one-third increments over a three-year period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Orbital Imaging Corporation ("ORBIMAGE") operates and is further
developing a fleet of satellites that collect, process and distribute digital
imagery of the Earth's surface, atmosphere and weather conditions. ORBIMAGE has
entered into a system procurement agreement with Orbital Sciences Corporation
("Orbital"), ORBIMAGE's majority stockholder, to purchase the OrbView-1,
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 from the satellites. 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
Canadian subsidiary, MacDonald, Dettwiler and Associates Ltd. ("MDA"), ORBIMAGE
has acquired the exclusive worldwide distribution rights to the RadarSat-2
satellite (the "RadarSat-2 License"), and, in turn, has appointed MDA as its
exclusive distributor of RadarSat-2 imagery. MDA will own and operate RadarSat-2
and will provide ORBIMAGE with operations, data reception, processing,
archiving, marketing and distribution services. Radarsat International Inc.
("RSI"), a wholly-owned subsidiary of MDA, has also appointed ORBIMAGE as a
non-exclusive distributor of Radarsat-1 satellite imagery in the United States.
Orbital also provides certain administrative services to ORBIMAGE such as
accounting, tax, human resources and benefit-related services pursuant to an
administrative services agreement.
Orbital has informed ORBIMAGE that it expects to launch OrbView-4 in the
second quarter of 2001 and OrbView-3 in the third quarter of 2001. MDA has
announced that it expects RadarSat-2 to be launched in 2003.
Revenues. ORBIMAGE's principal source of revenue is the sale of satellite
imagery to customers, value-added resellers and distributors, and the sale of
ground stations to distributors. ORBIMAGE has entered into several long-term
sales contracts to provide imagery products and, in certain circumstances,
receives contractual payments in advance of product delivery. ORBIMAGE initially
records deferred revenue for the total amount of the advance payments under
these contracts and recognizes revenue over the contractual delivery period. As
of June 30, 2000, ORBIMAGE had approximately $19.9 million of deferred revenue
related primarily to advance payments for OrbView-2 imagery. In 1999, ORBIMAGE
commenced construction of two OrbView-3 and OrbView-4 distributor ground
stations. Revenue on these contracts is recognized using the
percentage-of-completion method of accounting.
Direct Expenses. Direct expenses include the costs of operating the
OrbView-1 satellite and operating and depreciating (i) the OrbView-2 License,
(ii) the related ground systems, and (iii) construction costs related to the
OrbView-3 and OrbView-4 distributor-owned ground stations. Satellite operating
costs primarily consist of labor expenses.
System Depreciation. ORBIMAGE is amortizing the cost of the OrbView-2
License over the seven and one-half year 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 from the
satellites over the estimated lives of the assets, generally eight years.
Depreciation begins when the satellites and ground systems are placed in
service.
Interest Expense. In 1999, ORBIMAGE issued $75 million in principal
amount of 11 5/8% senior notes due 2005 (the "1999 Offering"). In 1998, ORBIMAGE
issued $150 million of units, 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 (the "1998 Offering"). Interest on the senior notes,
together with amortization of debt discount, is capitalized as the historical
costs of assets under construction and will be amortized over the assets' useful
lives when placed in service. 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.
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RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000
Revenues. Revenues were $3.4 million and $6.9 million for the three
months ended June 30, 1999 and 2000, respectively, and $6.7 million and $13.2
million for the six months ended June 30, 1999 and 2000, respectively. The
increase in 2000 revenues was primarily due to the construction of OrbView-3 and
OrbView-4 distributor ground stations, which generated $1.9 million and $4.6
million in revenues for the three months and six months ended June 30, 2000,
respectively. There were no such construction revenues for the comparable 1999
periods.
Direct Expenses. Direct expenses were $4.3 million and $7.3 million for
the three months ended June 30, 1999 and 2000, respectively, and $8.4 and $14.3
million for the six months ended June 30, 1999 and 2000, respectively. The
increase in 2000 direct expenses was primarily due to the construction costs of
OrbView-3 and OrbView-4 distributor ground stations, which were $2.3 million and
$4.7 million for the three months and six months ended June 30, 2000,
respectively. There were no such construction costs for the comparable 1999
periods. 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 $2.9 million and $2.6 million for the three months ended June 30,
1999 and 2000, respectively, and $4.8 million and $5.1 million for the six
months ended June 30, 1999 and 2000, respectively. The decrease in SG&A expenses
in 2000 for the three-month period was attributable to a more favorable
allocation of general and administrative costs to contract-related activities
versus that of the prior year. The increase in SG&A expenses in 2000 for the
six-month period was primarily attributable to increases 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 was $0.2 million and $0.6 million for the
three months ended June 30, 1999 and 2000, respectively, and $1.2 million and
$1.4 million for the six months ended June 30, 1999 and 2000, respectively.
Capitalized interest in connection with the construction of the OrbView-3 and
OrbView-4 satellites and related ground system and the RadarSat-2 License
totaled $5.5 million and $7.1 million for the three months ended June 30, 1999
and 2000, respectively, and $10.1 million and $14.2 million for the six months
ended June 30, 1999 and 2000, respectively.
Benefit for Income Taxes. ORBIMAGE recorded an income tax benefit of $1.3
million for the three months ended June 30, 1999, and $1.9 million and $77,000
for the six months ended June 30, 1999 and 2000, respectively. No income tax
benefit or provision was recorded for the three months ended June 30, 2000. The
tax benefits result from net operating losses generated during the periods. As
of June 30, 2000, ORBIMAGE recorded a valuation allowance related to the net
deferred tax asset of $1.6 million due to the potential inability to utilize net
operating losses. No such valuation allowance was recorded as of June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, ORBIMAGE had approximately $26.5 million of cash,
cash equivalents and available-for-sale securities.
On April 22, 1999, ORBIMAGE completed the 1999 Offering, raising net
proceeds of approximately $68.1 million. On February 25, 1998, ORBIMAGE
completed the 1998 Offering, raising net proceeds of approximately $144.6
million. The total effective interest rate on the senior notes, including the
debt discount, is approximately 13.4%.
Operating activities used cash of approximately $8.5 million and $4.7
million during the six months ended June 30, 1999 and 2000, respectively. The
decrease in cash flow used in operations is primarily attributable to a
significantly smaller decrease in accounts payable and accrued expenses as
compared to the same period in 1999, and was partially offset by a greater
increase in receivables and other current assets as compared to the same period
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in 1999.
Investing activities used cash of approximately $13.8 million for the six
months ended June 30, 1999 and provided $10.8 million of cash for the six months
ended June 30, 2000. The variance from 1999 to 2000 is attributable primarily to
decreased capital expenditures. Capital expenditures related primarily to the
construction of OrbView-3 and OrbView-4 for the six months ended June 30, 1999
and 2000 were approximately $40.4 million and $18.8 million, respectively. The
total cost of the OrbView-1, OrbView-3 and OrbView-4 satellites, the OrbView-2
License and the related U.S. ground system, is estimated to be approximately
$311.3 million, net of approximately $31 million which will be funded by the
U.S. Air Force through a contract with Orbital. Of this amount, as of June 30,
2000, ORBIMAGE had spent approximately $270 million. ORBIMAGE expects to spend
approximately $18 million on capital expenditures through the third quarter of
2001, when both OrbView-3 and OrbView-4 are currently expected to be
operational, and an additional $24 million in on-orbit incentives once OrbView-4
and OrbView-3 become operational.
ORBIMAGE's acquisition of the RadarSat-2 License will cost $60 million,
of which $30 million was paid in 1999. Approximately $260 million of
RadarSat-2's $320 million estimated total cost will be funded by the Canadian
Space Agency ("CSA") through a contract with MDA. ORBIMAGE's remaining payments
for the RadarSat-2 License will not exceed $15 million in 2001, $10 million in
2002, and $5 million upon the successful on-orbit checkout of RadarSat-2.
ORBIMAGE expects to use cash on hand, cash from operations, and the Orbital
advance under the amended system procurement agreement described above, to fund
the RadarSat-2 License payments. ORBIMAGE is also currently pursuing additional
capital sources to fund the RadarSat-2 License payments. ORBIMAGE cannot assure
you that additional capital will be available on favorable terms or on a timely
basis, if at all. In addition, there can be no assurance that Orbital will be
able to fulfill its advance obligation.
ORBIMAGE believes that it currently has sufficient resources to meet its
capital requirements through the fourth quarter of 2000. ORBIMAGE does not
expect to generate net positive cash flow from operations sufficient to fund
both operations and capital expenditures until 2002. We are currently pursuing
other financing sources. ORBIMAGE cannot assure you that additional financing
will be available 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 for the foreseeable future. ORBIMAGE's ability to become
profitable and generate positive cash flow is dependent on a timely launch of
one of the OrbView high-resolution satellites and the continued expansion of
commercial services, adequate customer acceptance of ORBIMAGE's products and
services and numerous other factors.
OUTLOOK: ISSUES AND UNCERTAINTIES
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a safe harbor, in certain circumstances, for forward-looking statements made by
or on behalf of ORBIMAGE. ORBIMAGE and its representatives may from time-to-time
make written or oral 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 launch
dates, sufficiency of and ability to raise capital and 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 preliminary
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.
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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, distribution channels and
value-added enhancements 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 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 $85.7 million through June 30, 2000. We expect losses
to continue through the third quarter of 2001, and we do not expect to generate
net positive cash flow from operations sufficient to fund both operations and
capital expenditures until 2002. 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.
POTENTIAL ADDITIONAL CAPITAL REQUIREMENTS -- OUR INABILITY TO FUND POTENTIAL
ADDITIONAL CAPITAL REQUIREMENTS COULD DELAY SATELLITE CONSTRUCTION AND
DEPLOYMENT.
ORBIMAGE believes that it currently has sufficient resources to meet its
capital requirements through the fourth quarter of 2000. ORBIMAGE does not
expect to generate net positive cash flow from operations sufficient to fund
both operations and capital expenditures until 2002. We are currently pursuing
other financing sources. ORBIMAGE cannot assure you that additional financing
will be available on favorable terms or on a timely basis, if at all.
Pursuant to the terms of the amended system procurement agreement with
Orbital described above, Orbital is obligated to advance ORBIMAGE $20 million,
although Orbital's advance obligation terminates if we renegotiate the terms of
our RadarSat-2 License agreement with MDA, as described above. There can be no
assurance that Orbital will be able to fulfill its advance obligation. Orbital's
inability to fulfill its advance obligation could have a material effect on
ORBIMAGE's financial condition and results of operations. In such an event, we
cannot assure you that additional capital will be available on favorable terms
or on a timely basis, if at all.
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 and
MDA, we cannot assure you that these costs will not increase over time. For
example, in March 2000, we agreed to a cost increase of $14 million under our
system 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
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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;
- we decide to increase our value-added product development costs; or
- 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 or on a timely basis or at all. A
substantial shortfall in funding would delay or prevent deployment of OrbView-3,
OrbView-4 or RadarSat-2.
SCHEDULE DELAYS - ADDITIONAL DELAYS IN THE COMMERCIAL OPERATION OF OUR
SATELLITES COULD ADVERSELY AFFECT OUR BUSINESS.
We have previously experienced delays in the launch schedules of
OrbView-3 and OrbView-4. We have recently experienced additional delays in the
production schedules of OrbView-4, OrbView-3 and RadarSat-2, which have
resulted in the delay of the launch dates of these satellites to the second
quarter of 2001, third quarter of 2001 and 2003, respectively.
We could experience additional 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, or restrictions on, the licenses necessary to
construct and operate the satellite systems;
- delays under our procurement agreement with Orbital, or delays under
the CSA contract with MDA; or
- other events beyond our control.
The perceived and actual timing of satellite launches may affect
competition in the remote sensing industry. Additional 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 OrbView-3 and OrbView-4 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.
In addition, under certain agreements with certain OrbView-3 and
OrbView-4 regional distributors, the distributors have the right to terminate
their agreements because of the recent OrbView-4 and OrbView-3 launch delays.
We are renegotiating these termination rights, but we cannot assure you that
our efforts will be successful. In the event these distributors terminate
their agreements, we cannot assure you that we will be able to find replacement
distributors on terms acceptable to us or in a timely manner, if at all. Our
ability to replace these distributors could have an adverse effect on our
business.
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 failure. Launch vehicle failure may cause disabling
damage to, or loss of, a satellite or may result in a failure to deliver the
satellite
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to its proper orbit. We have contracted with Orbital to launch OrbView-3 on a
Pegasus launch vehicle, which has flown 29 missions and has a success rate of
approximately 90%. 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, if
at all. We have contracted with Orbital to launch OrbView-4 on its Taurus launch
vehicle, which has flown five missions to date, all of which were successful.
CSA has selected a Boeing Delta II launch vehicle, which has flown 87 missions
and has a success rate of approximately 98%, for RadarSat-2. 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 could negatively affect our
business, financial condition, results of operations and our ability to deliver
our products and services and service our debt.
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 only became
commercially available in late 1999. 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. The satellite designs may require modifications to
achieve the desired performance 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 the high-resolution OrbView
satellites. If there is a failure in an OrbView-4 satellite subsystem that is
common to the OrbView-3 satellite (e.g., the sensor), such failure may result in
a delay of the OrbView-3 launch.
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.
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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>
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.
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 senior note 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 existing and potential
competitors for high-resolution satellite imagery include:
- Space Imaging EOSAT, which launched its high-resolution satellite in
September 1999;
- EarthWatch, which is expected to launch its first high-resolution
satellite in the second half of 2000, and is also constructing a second
high-resolution satellite; and
- ImageSat International (formerly known as West Indian Space, Ltd.),
which has announced plans to launch its first high-resolution imaging
satellite by the end of 2000. ImageSat has also announced plans to
launch eight additional high-resolution satellites over the next three
to four years.
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 PRIMARY 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;
- through its subsidiary, MDA, to construct the OrbView-3 and 4
distributor ground system; and
- through its subsidiary, MDA, to design, develop and construct
RadarSat-2 and the related Canadian ground system, integrate and
operate RadarSat-2, and 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 MDA to market the RadarSat-2 imagery
pursuant to a sublicense of our exclusive marketing rights under the RadarSat-2
License. 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 our system procurement agreement with Orbital. If Orbital fails to perform
its obligations adequately under the procurement agreement, we would be forced
to delay deployment of OrbView-4 and/or OrbView-3 until we located an
alternative provider. Orbital's liability to us for claims under the procurement
agreement is limited to $10 million. In addition, if MDA fails to perform its
obligations under the OrbView-3 and 4 distributor ground system agreement, it
could have a material adverse effect on ORBIMAGE's business. We also rely on 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
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operation of OrbView-3, OrbView-4 or RadarSat-2.
Under an administrative 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, if 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.
We acquired the RadarSat-2 License from MDA and granted MDA an exclusive
unrestricted worldwide sublicense 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 50.6% of our outstanding voting stock on a fully diluted
basis. Two of our directors are also directors of Orbital, and one of our
officers is also an employee of Orbital. These relationships may produce
conflicts on matters involving both ORBIMAGE and Orbital. 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 system 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. We also have
several agreements with Orbital's subsidiary, MDA, including the RadarSat-2
License and an agreement under which MDA will provide the OrbView-3 and 4
distributor ground system. Orbital's interests as an equity holder in our
business may at times conflict with our interests under these agreements, and
may conflict with the interests of the senior noteholders. Our recourse against
Orbital is limited in the event of breaches by Orbital under the procurement
agreement and 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. Orbital holds, both directly and indirectly, an equity interest in
EarthWatch of less than five percent. We expect to compete directly with
EarthWatch. MDA also owns 100% of the capital stock of RSI, a company that
markets imagery from the RadarSat-1 satellite. RSI has appointed ORBIMAGE as a
non-exclusive distributor of RadarSat-1 imagery in the United States. 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 these licenses
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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.
The DoC license for OrbView-4 hyperspectral imagery restricts the
resolution of the OrbView-4 hyperspectral imagery sold commercially and
restricts our ability to process and distribute imagery. These resolution
restrictions and other 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. In April 1999, we appealed the
terms of our hyperspectral license to the DoC. Our appeal concluded in June
2000, but we were not successful in obtaining any material changes to the terms
of the license.
The DoC has informed ORBIMAGE that Orbital must obtain a DoC license for
the RadarSat-2 satellite by virtue of its controlling ownership of MDA.
Additionally, the DoC has informed ORBIMAGE that it is not required to obtain a
DoC license to function as a RadarSat-2 distributor. If Orbital cannot obtain
the DoC license on acceptable terms, our financial condition and results of
operations would be materially adversely affected.
The DoC licenses provide that the U.S. government can interrupt service
during periods of national emergency. Actual or threatened interruptions could
adversely affect our ability to market our products abroad. In addition, the DoC
has the right to review and approve our agreements with international customers
for high-resolution optical imagery. These reviews could delay or prohibit us
from executing these agreements. Canada does not currently have licensing
requirements similar to the DoC's requirements, but has proposed legislation,
which would regulate the ownership and operation of remote sensing satellites.
Currently, the Canadian government can interrupt RadarSat-2 service during
certain periods of national emergency.
Our renewal application for an experimental FCC license for OrbView-2 was
granted effective January 1999. This license expires in January 2003 and may be
revoked for failure to comply with its terms.
Our application with the FCC for a license to launch and operate
OrbView-3 and OrbView-4 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 RadarSat-2 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 governments in the countries in which they do
business to receive imagery directly from OrbView-2, OrbView-3, OrbView-4 and
RadarSat-2. If these regional distributors are not successful in obtaining the
necessary approvals, we will not be able to distribute real time OrbView or
RadarSat-2 imagery in those regions. Our inability to offer real time 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 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.
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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 OrbView-3 and OrbView-4.
Exporting these ground stations may require us to obtain export licenses from
the DoC or the U.S. Department of State. If the DoC or the Department of State
do not issue these export licenses, or if these licenses are significantly
delayed, or if restrictions are imposed on these licenses, 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.
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
a particular foreign country;
- 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 81% and
64% of our revenues for the three months ended June 30, 1999 and 2000,
respectively, and approximately 83% and 58% for the six months ended June 30,
1999 and 2000, respectively. As of June 30, 2000, contracts with U.S. government
agencies constituted approximately 23% 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 Orbital or ORBIMAGE, 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 hyperspectral data
purchase 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. ORBIMAGE and Orbital are currently in a dispute with
the Air Force regarding certain constructive changes to the Air Force
hyperspectral contract imposed by the Orb-View-4 hyperspectral license described
above, which if not resolved,
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could result in the termination of the contract. Similarly, if the CSA
terminates the CSA contract for RadarSat-2 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 THE OCCURRENCE OF 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.
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
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 all or 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 SENIOR
NOTE 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 senior note
indentures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2000, ORBIMAGE had senior notes outstanding of $215.3
million with a fair value of $102.3 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 did not have any derivative financial instruments as of June 30,
2000, and believes that the interest rate risk associated with its senior notes
and the market risk associated with its available-for-sale 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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ORBIMAGE was a party to an administrative appeal before DoC regarding the
terms of its OrbView-4 hyperspectral license. The appeal was concluded in June
2000. For a full description of this proceeding, please see "Government
Regulation - Failure to obtain regulatory approval could result in service
interruptions," under "Outlook: Issues and Uncertainties."
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
On July 13, 2000, ORBIMAGE filed Form 8-K to announce (i) the termination
of its amended stock purchase agreement with Orbital; (ii) the amendment
of its system procurement agreement with Orbital; (iii) its new agreement
with Orbital for Orbital to broker a renegotiation of the RadarSat-2
License agreement with MDA; and (iv) the delay of the RadarSat-2 launch
from late 2002 to 2003.
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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: August 11, 2000 By: /s/ Gilbert D. Rye
------------------
Gilbert D. Rye, President
and Chief Executive Officer
DATED: August 11, 2000 By: /s/ Armand D. Mancini
---------------------
Armand D. Mancini, Vice President
and Chief Financial Officer
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<PAGE> 24
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.
4.2+++ Specimen certificate of 11 5/8% Series D
Senior Notes due 2005.
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 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.
4.8(b) Amended and Restated Orbital Imaging
Corporation 1996 Stock Option Plan as
amended and restated through August 18,
1999.
4.9(b) Stock Purchase Agreement dated as of October
26, 1999 by and between ORBIMAGE and
Orbital.
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.
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.
10.10* RadarSat-2 Master Agreement dated as of
December 31, 1998 by
</TABLE>
<PAGE> 25
<TABLE>
<S> <C>
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.
10.14+++ 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, MDA
and ORBIMAGE.
10.15(a)** ORBIMAGE Distribution Agreement dated March
18, 1999 by and between ORBIMAGE and NTT
Data Corporation.
10.16(a)** ORBIMAGE Distribution Agreement dated
February 8, 1999 by and between ORBIMAGE and
Geographic Information Services and
Technology Transfer NetCorp, Inc.
10.17(a)** Amendment No. 1 dated as of March 17, 1999
to the Distribution Agreement dated February
8, 1999 by and among ORBIMAGE and Geographic
Information Services and Technology Transfer
NetCorp, Inc.
10.18(a)** ORBIMAGE Ground Station Contract No.
OGS-99-02-01 dated as of May 26, 1999 by and
between ORBIMAGE and MDA.
10.19(b)*** OGS Order and Amendment No. 1 to ORBIMAGE
Ground Stations Contract No. OGS-99-02-01
dated August 10, 1999 by and between
ORBIMAGE and MDA.
10.20(b)*** OGS Order and Amendment No. 2 to ORBIMAGE
Ground Stations Contract No. OGS-99-02-01
dated September 30, 1999 by and between
ORBIMAGE and MDA.
10.21(b)*** Amendment No. 3 to ORBIMAGE Ground Stations
Contract No. OGS-99-02-01 dated October 6,
1999 by and between ORBIMAGE and MDA.
10.22(b)*** ORBIMAGE Ground Station Contract Contract
Number: OGS-IMI-C-01-301 dated July 26, 1999
by and between ORBIMAGE and Image
Measurements, Inc.
10.23(b)*** ORBIMAGE Distribution Agreement dated as of
August 4, 1999 by and between ORBIMAGE and
Spot Image.
10.24(b)*** ORBIMAGE Ground Station Contract (Contract
Number: OGS-Spot-C-01-300 dated as of August
4, 1999 by and between ORBIMAGE and Spot
Image.
10.25(b)*** VAR Agreement dated as of August 4, 1999 by
and between ORBIMAGE and Spot Image
Corporation.
10.26(b) Amendment No. 2 to RadarSat-2 Master
Agreement dated as of October 26, 1999 among
ORBIMAGE, Orbital and MDA.
10.27(b)*** Amendment No. 2 to Amended and Restated
ORBIMAGE System Procurement Agreement dated
as of September 15, 1999 between Orbital and
ORBIMAGE.
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C>
10.28(b)*** Data License and Distribution Agreement
dated November 3, 1999 between RadarSat
International, Inc. and ORBIMAGE
10.29(c) Amendment No. 1 to Stock Purchase Agreement
dated as of March 30, 2000 between ORBIMAGE
and Orbital.
10.30(c) Amendment No. 3 to ORBIMAGE System
Procurement Agreement dated as of March 30,
2000 between ORBIMAGE and Orbital.
10.31(d) Amendment No. 4 to Amended and Restated
ORBIMAGE System Procurement Agreement dated
as of June 29, 2000 between ORBIMAGE and
Orbital.
10.32(d) Letter agreement dated June 29, 2000 between
ORBIMAGE and Orbital regarding RadarSat-2
Master Agreement dated as of December 31,
1998 between ORBIMAGE, Orbital and MDA, as
amended.
11 Statement re computation of loss per common
share (included in the notes to condensed
consolidated financial statements).
27(d) Financial Data Schedule.
</TABLE>
+ 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 quarterly report on Form 10-Q for the three months ended March
31, 1999 (Commission file 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.
*** Confidential treatment was granted pursuant to Rule 406 under the
Securities Act of 1933, in connection with ORBIMAGE's Quarterly Report on
Form 10-Q for the three months ended September 30, 1999 (Commission file
No. 333-49583). Certain portions of the exhibit have been omitted. The
omitted portions of the exhibit have been separately filed with the
Commission.
(a) Incorporated by reference to the identically numbered exhibit to
ORBIMAGE's registration statement on Form S-4, as amended (Registration
No. 333-80035).
(b) Incorporated by reference to the identically numbered exhibit to
ORBIMAGE's quarterly report on Form 10-Q for the three months ended
September 30, 1999 (Commission File No. 333-49583).
(c) Incorporated by reference to the identically numbered exhibit to
ORBIMAGE's quarterly report on Form 10-Q for the three months ended March
31, 2000 (Commission File No. 333-49583).
(d) Filed herewith.
