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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
SEPTEMBER 30, 2000
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 November 10, 2000.
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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)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1999 2000
---- ----
Current assets:
Cash and cash equivalents....................................... $ 4,855 $ 3,776
Available-for-sale securities, at fair value.................... 32,407 2,190
Restricted held-to-maturity securities, at amortized cost....... 12,932 -
Receivables and other current assets, net of allowances of $80
and $94, respectively......................................... 5,525 10,774
-------- --------
Total current assets....................................... 55,719 16,740
Property, plant and equipment, at cost, less accumulated
depreciation of $10,841 and $13,418, respectively............... 31,937 35,933
Satellites and related rights, at cost, less accumulated
depreciation and amortization of $30,973 and
$37,427, respectively........................................... 261,622 278,930
Other assets.......................................................... 10,560 9,477
-------- --------
Total assets.................................................... $359,838 $341,080
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses........................... $ 14,341 $ 9,071
Current portion of deferred revenue............................. 9,277 8,862
-------- -------
Total current liabilities.................................. 23,618 17,933
Senior notes.......................................................... 214,575 215,700
Deferred revenue, net of current portion.............................. 15,334 9,061
Deferred tax liabilities.............................................. 77 -
-------- --------
Total liabilities............................................... 253,604 242,694
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
$85,986, respectively)............................................ 91,563 104,055
Stockholders' equity (deficit):
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 87,423
Accumulated deficit............................................. (72,866) (93,344)
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Total stockholders' equity (deficit)............................ 14,671 (5,669)
-------- ---------
Total liabilities and stockholders' equity (deficit)............ $359,838 $341,080
======== ========
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)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 2000 1999 2000
---- ---- ---- ----
Revenues........................................................ $ 6,410 $ 5,907 $ 13,135 $ 19,124
Direct expenses................................................. 5,830 7,315 14,183 21,583
------------ ----------- ------------ -----------
Gross profit (loss)............................................. 580 (1,408) (1,048) (2,459)
Selling, general and administrative expenses.................... 3,533 2,392 8,377 7,458
------------ ----------- ------------ -----------
Loss from operations............................................ (2,953) (3,800) (9,425) (9,917)
Interest income................................................. 608 465 1,764 1,854
------------ ----------- ------------ -----------
Loss before benefit for income taxes............................ (2,345) (3,335) (7,661) (8,063)
Benefit for income taxes........................................ (855) - (2,802) (77)
------------ ----------- ------------ -----------
Net loss........................................................ $ (1,490) $ (3,335) $ (4,859) $ (7,986)
============= ============ ============= ============
Loss per common share - basic and diluted (1)................... $ (0.19) $ (0.30) $ (0.58) $ (0.81)
Loss available to common stockholders........................... $ (4,768) $ (7,606) $ (14,526) $ (20,478)
Weighted average shares outstanding - basic and diluted (1)..... 25,214,000 25,214,000 25,214,000 25,214,000
- ----------
(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 (DEFICIT)
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL
------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ------- -----
BALANCE AS OF DECEMBER 31, 1998.................. 25,214,000 $ 252 $ 86,782 $ (53,070) $ 33,964
Issuance of compensatory stock options....... - - 325 - 325
Preferred stock dividends.................... - - - (9,667) (9,667)
Net loss..................................... - - - (4,859) (4,859)
---------- ------- ---------- ------------ ----------
BALANCE AS OF SEPTEMBER 30, 1999................. 25,214,000 $ 252 $ 87,107 $ (67,596) $ 19,763
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BALANCE AS OF DECEMBER 31, 1999.................. 25,214,000 $ 252 $ 87,285 $ (72,866) $ 14,671
Issuance of compensatory stock options....... - - 138 - 138
Preferred stock dividends.................... - - - (12,492) (12,492)
Net loss..................................... - - - (7,986) (7,986)
---------- ------- ---------- ------------ ----------
BALANCE AS OF SEPTEMBER 30, 2000................. 25,214,000 $ 252 $ 87,423 $ (93,344) $ (5,669)
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See accompanying notes to condensed consolidated financial statements.
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ORBITAL IMAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $ (4,859) $ (7,986)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, amortization and other............ 10,167 11,123
Deferred tax benefit............................ (2,802) (77)
Changes in assets and liabilities:
Increase in receivables and other current assets (1,827) (4,931)
Decrease in other assets........................ 104 84
Decrease in accounts payable and accrued expenses (10,960) (5,270)
Decrease in deferred revenue.................... (5,265) (6,688)
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NET CASH USED IN OPERATING ACTIVITIES...................... (15,442) (13,745)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (65,886) (30,214)
Purchases of restricted held-to-maturity securities........ (7,306) -
Purchases of available-for-sale securities................. (34,020) (23,491)
Maturities of restricted held-to-maturity securities....... 19,691 12,984
Maturities of available-for-sale securities................ 25,800 44,545
Sales of available-for-sale securities..................... 5,878 8,842
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES........ (55,843) 12,666
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term obligations........ 68,062 -
Repayment of capitalized lease obligation.................. (108) -
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NET CASH PROVIDED BY FINANCING ACTIVITIES.................. 67,954 -
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DECREASE IN CASH AND CASH EQUIVALENTS........................... (3,331) (1,079)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................. 25,082 4,855
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CASH AND CASH EQUIVALENTS, END OF PERIOD........................ $ 21,751 $ 3,776
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SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................................. $ 20,578 $ 26,162
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NON-CASH ITEMS:
Preferred stock dividends..................................... $ 9,667 $ 12,492
Capitalized compensatory stock options........................ 135 121
See accompanying notes to condensed consolidated financial statements.
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ORBITAL IMAGING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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 nine months ended
September 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) LIQUIDITY
As of September 30, 2000, ORBIMAGE had approximately $6.0 million of cash,
cash equivalents and available-for-sale securities. In addition, Orbital
Sciences Corporation, ORBIMAGE's majority stockholder ("Orbital"), is obligated
to advance ORBIMAGE $20 million on January 31, 2001 pursuant to a June 2000
amendment to their system procurement agreement (the "Orbital Advance").
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.
ORBIMAGE currently has sufficient resources to meet its capital and
operating requirements through January 2001. In January 2001, ORBIMAGE expects
to be obligated to make a $15 million payment to MacDonald, Dettwiler and
Associates Ltd., a Canadian publicly traded company approximately 52 percent
owned by Orbital ("MDA"), under a license agreement with MDA pursuant to which
ORBIMAGE has acquired the exclusive worldwide distribution rights to the
RadarSat-2 satellite (the "RadarSat-2 License"). ORBIMAGE is also scheduled to
make a $13.1 million interest payment on the senior notes on March 1, 2001.
ORBIMAGE intends to satisfy the January 2001 RadarSat-2 License payment with
the proceeds from the Orbital Advance described above. In addition, the $15
million RadarSat-2 License payment due in January 2001 may be deferred until
January 2002 if ORBIMAGE and MDA consummate an agreement currently being
negotiated under which ORBIMAGE would grant MDA a one-year option to
repurchase all or a portion of ORBIMAGE's worldwide RadarSat-2 distribution
rights (the "RadarSat-2 Option"). There can be no assurance that Orbital will
be able to fulfill its obligations with respect to the Orbital Advance or that
ORBIMAGE will consummate the RadarSat-2 Option. ORBIMAGE is currently pursuing
other financing sources to meet its capital and operating requirements,
including new equity and debt financing and further investments from its
existing shareholders. There can be no assurance that additional financing
will be available on favorable terms or on a timely basis, if at all.
(4) 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 $6.5 million and $7.3 million for the three months
ended September 30, 1999 and 2000, respectively, and $16.6 million and $21.5
million for the nine months ended September 30, 1999 and 2000, respectively.
(5) RELATED PARTY TRANSACTIONS
ORBIMAGE incurred and capitalized costs of approximately $16.8 million and
$3.0 million for the three months ended September 30, 1999 and 2000,
respectively, and $44.4 million and $4.8 million for the nine months ended
September 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 $0.6 million for each of the three
months ended
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September 30, 1999 and 2000, respectively, and $1.7 million and $2.2 million for
the nine months ended September 30, 1999 and 2000, respectively, under an
administrative services agreement with Orbital.
(6) COMPREHENSIVE INCOME (LOSS)
For the nine months ended September 30, 1999 and 2000, there were no
material differences between net loss as reported and comprehensive income
(loss).
(7) LOSS PER COMMON SHARE
The computations of basic and diluted loss per common share for the three
months and nine months ended September 30, 1999 and 2000 were as follows (in
thousands, except share data):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 2000 1999 2000
---- ---- ---- ----
Numerator for basic and diluted loss per
common share:
Net loss...................................... $ (1,490) $ (3,335) $ (4,859) $ (7,986)
Preferred stock dividends..................... (3,278) (4,271) (9,667) (12,492)
----------- ----------- ----------- -----------
Loss available to common stockholders............ $ (4,768) $ (7,606) $ (14,526) $ (20,478)
=========== =========== =========== ===========
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)... $(0.19) $(0.30) $(0.58) $(0.81)
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(1) All potentially dilutive securities, such as preferred stock subject to
repurchase, warrants and stock options, are antidilutive for each
period presented.
(8) INCOME TAXES
The income tax benefit for the three months and nine months ended September
30, 1999 and 2000 were different from those computed using the statutory U.S.
Federal income tax rate as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 2000 1999 2000
---- ---- ---- ----
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 - 35.6
Other............................................ (0.8) - (0.9) -
---- ----- ----- ----
Effective rate................................... (36.5)% - (36.6)% (0.1)%
==== ===== ===== ====
The net deferred tax asset of $2.4 million as of September 30, 2000 is fully
reserved by a valuation allowance.
(9) 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.
The balance of restricted held-to-maturity securities and related accrued
interest was used for the March 1, 2000 interest payment.
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(10) PREFERRED STOCK SUBJECT TO REPURCHASE
The activity in the preferred stock subject to repurchase was as follows for
the nine months ended September 30, 1999 and 2000 (dollars in thousands):
SHARES AMOUNT
------ ------
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........ - 5,462
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BALANCE AS OF SEPTEMBER 30, 1999............... 728,832 $ 88,156
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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........ - 7,119
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BALANCE AS OF SEPTEMBER 30, 2000............... 818,916 $ 104,055
========== ==========
(11) STOCK OPTION PLAN
ORBIMAGE granted 522,347 options to purchase shares of common stock to
employees and directors during the nine months ended September 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.
(12) SEGMENT INFORMATION
For the nine months ended September 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 $2.4 million and
$2.2 million for the three months ended September 30, 1999 and 2000,
respectively, and $7.1 million and $6.8 million for the nine months ended
September 30, 1999 and 2000, respectively, which represent approximately 38%,
37%, 54% and 35%, respectively, of total revenues recognized during those
periods.
(13) SUBSEQUENT EVENTS
On November 1, 2000, ORBIMAGE declared a preferred stock dividend of 49,136
shares payable in kind.
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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"). Orbital also provides certain administrative services
to ORBIMAGE such as accounting, tax, human resources and benefit-related
services pursuant to an administrative services agreement.
Under a license agreement with Orbital and MacDonald, Dettwiler and
Associates Ltd., a Canadian publicly traded company approximately 52
percent owned by Orbital ("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.
ORBIMAGE acquired the RadarSat-2 License for $60 million, $30 million of which
has been paid to date. A $15 million RadarSat-2 License payment will be due in
2001, and ORBIMAGE expects to be invoiced for this payment in January 2001.
ORBIMAGE is negotiating an agreement with MDA under which MDA would defer
invoicing ORBIMAGE for the January 2001 $15 million RadarSat-2 License payment
until January 2002 in exchange for ORBIMAGE granting MDA a one-year option to
repurchase all or a portion of ORBIMAGE's worldwide RadarSat-2 distribution
rights (the "RadarSat-2 Option"). Under a license agreement with Radarsat
International Inc., a wholly-owned subsidiary of MDA ("RSI"), ORBIMAGE is also a
non-exclusive distributor of RadarSat-1 satellite imagery in the United States.
Orbital has informed ORBIMAGE that Orbital 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 September 30, 2000, ORBIMAGE had approximately $17.9 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
2000
Revenues. Revenues were $6.4 million and $5.9 million for the three months
ended September 30, 1999 and 2000, respectively, and $13.1 million and $19.1
million for the nine months ended September 30, 1999 and 2000, respectively. The
revenue decrease in 2000 for the three-month period resulted principally from
lower sales volume on OrbView-2 and aerial imagery products in 2000 and from
completion of a contract to provide imagery products from OrbView-1 in the
second quarter of 2000. The increase in 2000 for the nine-month period resulted
from the generation of revenues from construction of OrbView-3 and OrbView-4
distributor ground stations throughout 2000 as compared to a partial period in
1999. Revenues generated from the construction of these distributor ground
stations were $1.8 million and $2.4 million for the three months ended September
30, 1999 and 2000, respectively, and $1.8 million and $7.9 million for the nine
months ended September 30, 1999 and 2000, respectively.
Direct Expenses. Direct expenses were $5.8 million and $7.3 million for the
three months ended September 30, 1999 and 2000, respectively, and $14.2 and
$21.6 million for the nine months ended September 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 $1.6 million and $2.7 million for the three months ended September 30,
2000, respectively, and $1.6 million and $7.5 million for the nine months ended
September 30, 1999 and 2000, 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 $3.5 million and $2.4 million for the three months ended September
30, 1999 and 2000, respectively, and $8.4 million and $7.5 million for the nine
months ended September 30, 1999 and 2000, respectively. The decrease in SG&A
expenses in 2000 for the three-month and nine-month periods was principally
attributable to an accrual of approximately $0.6 million for administrative
expenses recorded in the third quarter of 1999 that were allocable to U.S.
government contracts. On October 6, 2000, ORBIMAGE reorganized its operations,
resulting in a headcount reduction of 20 employees. The costs associated with
the reorganization were not significant.
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 $0.6 million and $0.5 million for the
three months ended September 30, 1999 and 2000, respectively, and $1.8 million
and $1.9 million for the nine months ended September 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 $6.5 million and $7.3 million for the three months ended
September 30, 1999 and 2000, respectively, and $16.6 million and $21.5 million
for the nine months ended September 30, 1999 and 2000, respectively.
Benefit for Income Taxes. ORBIMAGE recorded an income tax benefit of $0.9
million for the three months ended September 30, 1999, and $2.8 million and
$77,000 for the nine months ended September 30, 1999 and 2000, respectively. No
income tax benefit or provision was recorded for the three months ended
September 30, 2000. The tax benefits result from net operating losses generated
during the periods. As of September 30, 2000, ORBIMAGE recorded a valuation
allowance related to the net deferred tax asset of $2.4 million due to the
potential inability to utilize net operating losses. No such valuation allowance
was recorded as of September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
On April 22, 1999, ORBIMAGE completed the 1999 Offering, raising net
proceeds of approximately $68.1
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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%.
As of September 30, 2000, ORBIMAGE had approximately $6.0 million of cash,
cash equivalents and available-for-sale securities. In addition, Orbital is
obligated to advance ORBIMAGE $20 million on January 31, 2001 pursuant to a June
2000 amendment to the system procurement agreement (the "Orbital Advance").
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.
ORBIMAGE currently has sufficient resources to meet its capital and
operating requirements through January 2001. In the first quarter of 2001,
ORBIMAGE expects to be obligated to make a $15 million payment to MDA for the
RadarSat-2 License and is scheduled to make a $13.1 million interest payment on
the senior notes on March 1, 2001. ORBIMAGE intends to satisfy the January 2001
RadarSat-2 License payment with the proceeds from the Orbital Advance described
above. In addition, the $15 million RadarSat-2 License payment due in January
2001 may be deferred until January 2002 pursuant to the RadarSat-2 Option
described above. There can be no assurance that Orbital will be able to fulfill
its obligations with respect to the Orbital Advance or that ORBIMAGE will
consummate the RadarSat-2 Option. ORBIMAGE is currently pursuing other
financing sources to meet its capital and operating requirements, including new
equity and debt financing and further investments from its existing
shareholders. There can be no assurance that additional financing will be
available on favorable terms or on a timely basis, if at all.
Operating activities used cash of approximately $15.4 million and $13.7
million during the nine months ended September 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
in 1999.
Investing activities used cash of approximately $55.8 million for the nine
months ended September 30, 1999 and provided $12.7 million of cash for the nine
months ended September 30, 2000. The variance from 1999 to 2000 is attributable
primarily to decreased capital expenditures and to an increase in net maturities
(net of purchases) of available-for-sale securities. Capital expenditures for
the nine months ended September 30, 1999 and 2000 were approximately $65.9
million and $30.2 million, respectively, and related primarily to the
construction of OrbView-3 and OrbView-4. 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 September 30, 2000, ORBIMAGE had
spent approximately $275 million. ORBIMAGE expects to spend approximately $12
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. As described
above, ORBIMAGE is currently negotiating the RadarSat-2 Option with MDA under
which, among other things, the $15 million January 2001 RadarSat-2 License
payment would be deferred until January 2002.
ORBIMAGE has incurred losses since its inception, and management believes
that it will continue to do so for the foreseeable future. ORBIMAGE does not
expect to generate net positive cash flow from operations sufficient to fund
both operations and capital expenditures until 2002. 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.
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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.
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 $93.3 million through September 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.
LIQUIDITY AND CAPITAL RESOURCES - WE MAY BE UNABLE TO FUND OUR NEAR-TERM
LIQUIDITY NEEDS AND OUR POTENTIAL ADDITIONAL CAPITAL REQUIREMENTS.
ORBIMAGE currently has sufficient resources to meet its capital and
operating requirements through January 2001. In the first quarter of 2001,
ORBIMAGE expects to be obligated to make a $15 million payment to MDA for the
RadarSat-2 License and is scheduled to make a $13.1 million interest payment on
the senior notes on March 1, 2001. ORBIMAGE intends to satisfy the January 2001
RadarSat-2 License payment with the proceeds from the Orbital Advance described
above. In addition, the $15 million RadarSat-2 License payment due in January
2001 may be deferred until January 2002 pursuant to the RadarSat-2 Option
described above. There can be no assurance that Orbital will be able to
fulfill its obligations with respect to the Orbital Advance or that ORBIMAGE
will consummate the RadarSat-2 Option. ORBIMAGE is currently
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pursuing other financing sources to meet its capital and operating
requirements, including new equity and debt financing and further investments
from its existing shareholders. There can be no assurance that additional
financing 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 additional 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;
- - 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-4,
OrbView-3 and RadarSat-2. As a result of these delays, we now expect these
satellites to be launched in the second quarter of 2001, the 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;
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- - 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, one of our OrbView-3 and OrbView-4 regional distributors has
the right to terminate its agreement with ORBIMAGE because of the most recent
OrbView-4 launch delay. We are renegotiating this termination right, but we
cannot assure you that our efforts will be successful. In the event the
distributor terminates its agreement, we cannot assure you that we will be able
to find a replacement distributor on terms acceptable to us or in a timely
manner, if at all. Our ability to replace the distributor 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 to its proper orbit. We have contracted with Orbital to launch
OrbView-3 on a Pegasus launch vehicle, which has flown 30 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 91 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.
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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.
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:
SATELLITE EXPECTED DESIGN LIFE
--------- --------------------
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
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:
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- - 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
events arising during satellite testing prior to launch or 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 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 November 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.
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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
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 approximately 50% 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
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agreement and a non-compete agreement, each of which is material to our
business. We also have several agreements with 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 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 August 2000, we submitted a claim to the DoC under
the Land Remote Sensing Act of 1992 for reimbursement of the costs of certain
technical modifications required by the hyperspectral license on national
security grounds. In October 2000, DoC rejected our reimbursement claim.
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.
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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.
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;
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- - 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 59% and 51%
of our revenues for the three months ended September 30, 1999 and 2000,
respectively, and approximately 71% and 49% for the nine months ended September
30, 1999 and 2000, respectively. As of September 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 DoC under the Orb-View-4
hyperspectral license described above, which if not resolved, 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000, ORBIMAGE had senior notes outstanding of $215.7
million with a fair value of $90.8 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 September
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
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
On October 25, 2000, ORBIMAGE filed Form 8-K to announce a reorganization
of its operations, including a headcount reduction of 20 employees.
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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: November 13, 2000 By: /s/ Gilbert D. Rye
------------------
Gilbert D. Rye, President
and Chief Executive Officer
DATED: November 13, 2000 By: /s/ Armand D. Mancini
---------------------
Armand D. Mancini, Vice President
and Chief Financial Officer
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EXHIBIT INDEX
The following exhibits are filed as part of this report.
EXHIBIT NUMBER DESCRIPTION
---------------------------------------------------------------------------------------------
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
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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.
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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(e) Financial Data Schedule.
+ Incorporated by reference to the identically numbered exhibit to ORBIMAGE's
registration statement on Form S-4, as amended (Reg. No. 333-49583).
++ Incorporated by reference to Exhibit 4.9 to ORBIMAGE's registration
statement on Form S-4, as amended (Reg. No. 333-49583).
+++ Incorporated by reference to the identically numbered exhibit to ORBIMAGE's
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).
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(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) Incorporated by reference to the identically numbered exhibit to ORBIMAGE's
quarterly report on Form 10-Q for the three months ended June 30, 2000
(Commission File No. 333-49583).
(e) Filed herewith.