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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT AMENDMENT NO. 2 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 OFFICES) (TELEPHONE NUMBER)
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.
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<PAGE> 2
EXPLANATORY NOTE
In consultation with its new independent auditors retained in July 1999,
Orbital Imaging Corporation ("ORBIMAGE") determined that it would restate its
condensed financial statements for the quarter ended June 30, 1998, the quarter
ended September 30, 1998, and its financial statements for the year ended
December 31, 1998, and its condensed consolidated financial statements for the
quarter ended March 31, 1999, the quarter ended June 30, 1999 and the quarter
ended September 30, 1999. This amendment includes in Item 1 such restated
condensed consolidated financial statements for the three months ended March
31, 1999, and other information relating to such restated condensed
consolidated financial statements, including Management's Discussion and
Analysis of Financial Condition and Results of Operations (Item 2). Information
regarding the effect of the restatement on ORBIMAGE's results of operations for
the three months ended March 31, 1999 is included in Item 2 of this amendment
and in the Notes to Condensed Consolidated Financial Statements included in
Item 1 of this amendment.
Except for Items 1, 2 and 6, no other information included in the original
report on Form 10-Q is amended by this amendment. For current information
regarding risks, uncertainties and other factors that may affect ORBIMAGE's
future performance, please see the "Risk Factors" included in Item 7 of
ORBIMAGE's Annual Report on Form 10-K for the year ended December 31, 1999.
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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, MARCH 31,
1998 1999
---- ----
Current assets: (RESTATED) (RESTATED)
<S> <C> <C>
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........................................... 196,709 215,421
Other assets.......................................................... 8,194 8,344
-------- --------
Total assets.................................................... $308,078 $296,672
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
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.......................................................... 142,622 142,791
Deferred revenue, net of current portion.............................. 23,698 21,607
Deferred tax liabilities.............................................. 3,216 3,176
Capitalized lease obligation, net of current portion.................. 108 80
-------- --------
Total liabilities............................................... 195,625 185,212
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).......................................... 78,489 81,457
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...................................... 86,782 86,882
Accumulated deficit............................................ (53,070) (57,131)
-------- --------
Total stockholders' equity...................................... 33,964 30,003
-------- --------
Total........................................................... $308,078 $296,672
======== ========
</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
---- ----
(RESTATED) (RESTATED)
<S> <C> <C>
Revenues.......................................... $ 2,417 $ 3,316
Direct expenses................................... 4,189 4,025
----------- -----------
Gross loss........................................ (1,772) (709)
Selling, general and administrative expenses...... 1,024 1,953
----------- -----------
Loss from operations.............................. (2,796) (2,662)
Interest income................................... 1,043 949
----------- -----------
Loss before benefit for income taxes.............. (1,753) (1,713)
Benefit for income taxes.......................... (1,716) (620)
----------- -----------
Net loss.......................................... $ (37) $ (1,093)
============ ===========
Loss per common share - basic and diluted (1)..... $ (0.49) $ (0.16)
Loss available to common stockholders............. $ (12,425) $ (4,061)
Weighted average shares outstanding - basis and
diluted (1)....................................... 25,214,000 25,214,000
</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, 1997..... 25,214,000 $ 252 $75,285 $(26,532) $49,005
Issuance of common stock
warrants....................... - - 7,594 - 7,594
Deemed dividend on issuance of
preferred stock subject to
repurchase................ - - - (9,975) (9,975)
Issuance of stock options...... - - 50 - 50
Preferred stock dividends...... - - - (2,413) (2,413)
Net loss....................... - - - (37) (37)
--------- ----- ------- -------- -------
BALANCE AS OF MARCH 31, 1998
(RESTATED)...................... 25,214,000 $ 252 $82,929 $(38,957) $44,224
========== ===== ======= ======== =======
BALANCE AS OF DECEMBER 31, 1998
(RESTATED)...................... 25,214,000 $ 252 $86,782 $(53,070) $33,964
Issuance of stock options....... - - 100 - 100
Preferred stock dividends....... - - - (2,968) (2,968)
Net loss........................ - - - (1,093) (1,093)
--------- ----- ------- -------- -------
BALANCE AS OF MARCH 31, 1999
(RESTATED)..................... 25,214,000 $ 252 $86,882 $(57,131) $30,003
========== ===== ======= ======== =======
</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
---- ----
(RESTATED) (RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $ (37) $ (1,093)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, amortization and other............ 3,492 3,172
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........ 4,872 (8,798)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (17,428) (22,850)
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........ (53,726) 4,115
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (costs) from issuance of long-term obligations 137,672 (73)
Repayment of capitalized lease obligation.................. - (28)
Net proceeds from issuance of common stock warrants........ 7,594 -
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 (4,784)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................. 10,883 25,082
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................ $ 128,613 $ 20,298
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................................. $ - $ 8,719
========= ========
NON-CASH ITEMS:
Deemed dividend on issuance of preferred stock subject to
repurchase.................................................... $ 9,975 $ -
Preferred stock dividends..................................... 2,413 2,968
Capitalized compensatory stock options........................ 13 50
</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/A 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."
On February 25, 1998, ORBIMAGE issued $150 million of units (the "1998
Offering"), each unit consisted 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 consultation with its new independent auditors retained in July 1999,
the valuation of the warrants issued in connection with the 1998 Offering was
restated from $9.0 million to $7.9 million based on an independent third party
valuation, which resulted in reducing the debt discount and additional paid in
capital. The Series A Preferred Stock sold on February 25, 1998 was deemed to
have a beneficial conversion feature totaling $10.0 million as a result of the
difference between the common stock fair value based on an independent third
party valuation and the conversion price of the preferred stock. This difference
is a deemed dividend to the holders of the preferred stock. The preferred stock
dividends paid in shares during 1998 were also deemed to have a beneficial
conversion feature as a result of the difference between the conversion price of
the preferred stock and the underlying value of the common stock. Additionally,
the stock options issued to employees during 1998 were deemed to be compensatory
based on the difference between the exercise price and the common stock fair
value based on an independent third party valuation. As a result of these
changes, ORBIMAGE's loss before income taxes, benefit for income taxes, net
loss, preferred stock dividends, loss available to common stockholders and loss
per common share-basic and diluted were restated as follows for the three months
ended March 31, 1998 and 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1999
---- ----
<S> <C> <C>
ORIGINALLY REPORTED:
Loss before income taxes....................... $ (1,716) $ (1,653)
Benefit for income taxes....................... (1,716) (620)
----------- ------------
Net loss....................................... - (1,033)
Preferred stock dividends...................... (1,438) (2,063)
----------- ------------
Loss available for common stockholders......... $ (1,438) $ (3,096)
=========== ============
Loss per common share - basic and diluted (1).. $ (0.06) $ (0.12)
=========== ============
RESTATED:
Loss before income taxes....................... $ (1,753) $ (1,713)
Benefit for income taxes....................... (1,716) (620)
----------- ------------
Net loss....................................... (37) (1,093)
Preferred stock dividends...................... (12,388) (2,968)
----------- ------------
Loss available for common stockholders......... $ (12,425) $ (4,061)
=========== ============
Loss per common share - basic and diluted (1).. $ (0.49) $ (0.16)
=========== ============
</TABLE>
(1) All potentially dilutive securities, such as preferred stock subject to
repurchase, warrants and stock options, are antidilutive for each period
presented.
(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.
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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.
Compensation expense is recognized over the vesting period for stock option
grants to employees that have market values in excess of the strike price.
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.
(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
---- ----
(RESTATED) (RESTATED)
<S> <C> <C>
Numerator for basic and diluted loss per
common share:
Net loss...................................... $ (37) $ (1,093)
Preferred stock dividends..................... (12,388) (2,968)
---------------- ----------------
Loss available to common stockholders............ $ (12,425) $ (4,061)
================ ================
Denominator for basic and diluted loss per
common share -- weighted average shares (1)... 25,214,000 25,214,000
Loss per common share -- basic and diluted (1)... $ (0.49) $ (0.16)
================== =================
</TABLE>
- ----------------
(1) All potentially dilutive securities, such as preferred stock subject
to repurchase, warrants and stock options, are antidilutive for each
period presented.
(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
Deemed dividend on issuance of preferred
stock subject to repurchase............... - 9,975
Accrual of preferred stock dividends........ - 2,413
---------- ----------
BALANCE AS OF MARCH 31, 1998 (RESTATED)........ 620,182 $ 70,018
========== ==========
BALANCE AS OF DECEMBER 31, 1998 (RESTATED)..... 687,576 $ 78,489
Accrual of preferred stock dividends........ - 2,968
---------- ----------
BALANCE AS OF MARCH 31, 1999 (RESTATED)........ 687,576 $ 81,457
========== ==========
</TABLE>
(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.
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(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.
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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, 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 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.
Restatement. In consultation with its new independent auditors retained in
July 1999, ORBIMAGE determined that it would restate its condensed financial
statements for the quarter ended June 30, 1998, the quarter ended September 30,
1998, and its financial statements for the year ended December 31, 1998, and
its condensed consolidated financial statements for the quarter ended March 31,
1999, the quarter ended June 30, 1999 and the quarter ended September 30, 1999.
See Note (1) of the Notes to Condensed Consolidated Financial Statements.
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.
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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 $2.0 million (restated) 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.
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 $68.1
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 13.4% (restated). 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
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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 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 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.
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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 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 $57.1 million (restated) 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
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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
- 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.
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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 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 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-
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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>
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
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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.
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
- through its wholly owned subsidiary MDA, to operate RadarSat-2, and
to receive, process, and archive RadarSat-2 imagery.
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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.
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
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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.
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 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
20
<PAGE> 21
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.
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.
21
<PAGE> 22
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.
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; 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.
22
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 1999, ORBIMAGE had senior notes outstanding of $142.8
million (restated) 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.
23
<PAGE> 24
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.
24
<PAGE> 25
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: March 30, 2000 By: /s/ Gilbert D. Rye
------------------
Gilbert D. Rye, President
and Chief Executive Officer
DATED: March 30, 2000 By: /s/ Armand D. Mancini
----------------------
Armand D. Mancini, Vice President
and Chief Financial Officer
25
<PAGE> 26
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 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.
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.
</TABLE>
<PAGE> 27
<TABLE>
<S> <C> <C>
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.
11 Statement re computation of loss per common share
(included in the notes to condensed consolidated
financial statements).
27 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
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> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY 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> 0
<INVENTORY> 0
<CURRENT-ASSETS> 55,630
<PP&E> 232,698
<DEPRECIATION> (32,854)
<TOTAL-ASSETS> 296,672
<CURRENT-LIABILITIES> 17,558
<BONDS> 142,791
81,457
0
<COMMON> 252
<OTHER-SE> 29,751
<TOTAL-LIABILITY-AND-EQUITY> 296,672
<SALES> 3,316
<TOTAL-REVENUES> 3,316
<CGS> 4,025
<TOTAL-COSTS> 4,025
<OTHER-EXPENSES> 1,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (949)
<INCOME-PRETAX> (1,713)
<INCOME-TAX> (620)
<INCOME-CONTINUING> (1,093)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,093)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
