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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, 1998
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
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(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
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PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORBITAL IMAGING CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
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SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- --------------
Current assets:
Cash and cash equivalents $ 62,760 $10,883
Available-for-sale securities, at fair value 27,250 11,337
Held-to-maturity securities, at amortized cost 8,242 -
Receivables and other current assets 2,217 134
--------------- --------------
Total current assets 100,469 22,354
Property, plant and equipment, at cost, less accumulated
depreciation of $6,949 and $5,144, respectively 14,720 11,054
Satellites and related rights, at cost, less accumulated
depreciation and amortization of $20,216 and
$12,947, respectively 181,829 104,226
Held-to-maturity securities, at amortized cost 16,310 -
Other assets 8,143 115
--------------- --------------
Total assets $ 321,471 $137,749
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 26,891 $4,335
Current portion of deferred revenue 8,451 7,725
Deferred tax liabilities 583 468
--------------- --------------
Total current liabilities 35,925 12,528
Long-term obligations 141,476 -
Deferred revenue, net of current portion 25,789 29,667
Deferred tax liabilities 6,590 10,194
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Total liabilities 209,780 52,389
Stockholders' equity:
Preferred stock, par value $0.01; 10,000,000 shares authorized;
Series A 12% cumulative convertible, 2,000,000 shares
authorized, 648,653 shares and 392,887 shares issued and
outstanding, respectively (liquidation value of $68,102
and $40,074, respectively) 7 4
Common stock, par value $0.01; 75,000,000 shares authorized;
25,214,000 shares issued and outstanding 252 252
Additional paid-in-capital 146,911 108,828
Unrealized gain on available-for-sale securities 6 -
Accumulated deficit (35,485) (23,724)
--------------- --------------
Total stockholders' equity 111,691 85,360
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Total liabilities and stockholders' equity $ 321,471 $137,749
=============== ==============
See accompanying notes to condensed financial statements.
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ORBITAL IMAGING CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
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Revenues $ 3,209 $ 221
Direct expenses 3,505 1,194
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Gross loss (296) (973)
Selling, general and administrative expenses 2,007 840
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Loss from operations (2,303) (1,813)
Net interest income (expense), net of interest
expense of $2,156 in 1998 (149) 498
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Loss before benefit for income taxes (2,452) (1,315)
Benefit for income taxes (322) (657)
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Net loss $ (2,130) $ (658)
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See accompanying notes to condensed financial statements.
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ORBITAL IMAGING CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
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Revenues $ 8,547 $ 525
Direct expenses 11,597 3,423
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Gross loss (3,050) (2,898)
Selling, general and administrative expenses 5,235 1,616
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Loss from operations (8,285) (4,514)
Net interest income, net of interest
expense of $4,157 in 1998 1,151 864
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Loss before benefit for income taxes (7,134) (3,650)
Benefit for income taxes (3,492) (1,095)
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Net loss $ (3,642) $ (2,555)
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See accompanying notes to condensed financial statements.
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ORBITAL IMAGING CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
-------------- ----------------
Cash flows from operating activities:
Net loss $ (3,642) $ (2,555)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, amortization and other 9,714 3,032
Deferred tax benefit (3,492) (1,095)
Changes in assets and liabilities:
Increase in receivables and other current assets (655) (276)
(Increase) decrease in other assets (315) 385
Increase in accounts payable and accrued expenses 22,275 3,566
Increase (decrease) in deferred revenue (3,152) 2,574
-------------- ----------------
Net cash provided by operating activities 20,733 5,631
Cash flows from investing activities:
Capital expenditures (89,702) (39,410)
Purchases of held-to-maturity securities (32,184) -
Purchases of available-for-sale securities (94,968) (102,778)
Maturities of held-to-maturity securities 7,568 -
Maturities of available-for-sale securities 52,472 75,008
Sales of available-for-sale securities 26,842 1,972
Payment for business acquisition (5,000) -
-------------- ----------------
Net cash used in investing activities (134,972) (65,208)
Cash flows from financing activities:
Net proceeds from issuance of long-term obligations 136,152 -
Net proceeds from issuance of common stock warrants 8,690 -
Net proceeds from issuance of preferred stock 21,274 33,758
Net proceeds from issuance of common stock - 31,318
-------------- ----------------
Net cash provided by financing activities 166,116 65,076
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Net increase in cash and cash equivalents 51,877 5,499
Cash and cash equivalents, beginning of period 10,883 -
-------------- ----------------
Cash and cash equivalents, end of period $ 62,760 $ 5,499
============== ================
Supplemental cash flow information:
Interest paid $ 9,009 $ -
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See accompanying notes to condensed financial statements.
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ORBITAL IMAGING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited interim financial
information reflects all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation of such information.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to 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, these unaudited interim condensed
financial statements should be read in conjunction with the audited financial
statements and footnotes thereto for the year ended December 31, 1997, which
are included in Orbital Imaging Corporation's Registration Statement on Form
S-4, as amended, filed with the SEC. Operating results for the three months
and nine months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the full year.
Orbital Imaging Corporation is hereafter referred to as the "Company."
(2) SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Income Taxes
The Company 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 1997 financial statements to
conform to the 1998 financial statement presentation.
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(3) BUSINESS ACQUISITION
On April 30, 1998, the Company acquired substantially all of the assets of
TRIFID Corporation ("TRIFID") for $4.0 million. Based on TRIFID meeting
revenue targets established in the acquisition agreement, the purchase price
was adjusted and the Company paid an additional $1.0 million of consideration
to TRIFID during the three months ended September 30, 1998. The acquisition
was accounted for using the purchase method of accounting and resulted in
excess of purchase price over net assets acquired of approximately $3.0
million, which is being amortized on a straight-line basis over ten years.
The following supplemental financial information presents the Company's results
of operations, on a pro forma basis, as though the TRIFID acquisition were
consummated on January 1, 1997 (in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---------------------------------------
Revenues $9,370 $3,272
Net loss (3,646) (3,141)
The allocation of purchase price to net assets acquired may be adjusted if
additional information becomes known about certain business assumptions used to
estimate the fair value of such net assets.
(4) INTEREST CAPITALIZATION
The Company 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 and nine months ended September 30, 1998, capitalized interest totaled
$2.7 million and $6.9 million, respectively.
(5) PREFERRED STOCK
In February 1998, ORBIMAGE issued 227,295 shares of Series A cumulative
convertible preferred stock (the "Preferred Stock") generating net proceeds of
approximately $21.3 million. The Preferred Stock is convertible into ORBIMAGE
common stock in an amount equal to $100 per share of Preferred Stock, divided
by the Series A Conversion Price, which is $4.17 per share of Preferred Stock.
Each share entitles the holder to receive cumulative dividends of 12% per
annum. Dividends on the Preferred Stock are cumulative and are payable on a
semi-annual basis in May and November. Under the terms of the indenture
governing the Company's 11-5/8% Senior Notes due 2005, the dividends are
payable in additional shares of Preferred Stock. In May 1998 the Company issued
28,471 shares of Preferred Stock as dividends. At September 30, 1998, the
Company had accrued dividends of approximately 32,500 shares of Preferred Stock.
(6) RELATED PARTY TRANSACTIONS
Pursuant to a procurement contract under which the Company is purchasing from
Orbital Sciences Corporation ("Orbital"), the Company's majority stockholder,
various satellites, and ground systems, the Company incurred costs of
approximately $44.5 million and $8.6 million for the three months ended
September 30, 1998 and 1997, respectively, and approximately $81.3 million and
$35.2 million for the nine months ended September 30, 1998 and 1997,
respectively. The Company incurred costs of approximately $0.6 million and
$0.3 million for the three months ended September 30, 1998 and 1997,
respectively, and approximately $1.8 million and $2.4 million for the nine
months ended September 30, 1998 and 1997, respectively, under an administrative
services agreement with Orbital.
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(7) RECENT PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of SFAS No. 130 had no impact on the
Company's net income or stockholders' equity. SFAS No. 130 requires unrealized
gains on the Company's available-for-sale securities to be included in
comprehensive income. For the three and nine months ended September 30, 1998,
comprehensive income (loss) totaled $(2.1 million) and $(3.6 million),
respectively. For the three and nine months ended September 30, 1997, there
were no differences between net loss, as reported, and comprehensive income
(loss).
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes annual and interim reporting standards for a company's operating
segments and related disclosures about its products, services, geographic areas
and major customers. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997. Adoption of SFAS No. 131 will not impact the
Company's financial position, results of operations or cash flows, and any
effect, while not yet determined by the Company, will be limited to the
presentation of its disclosures.
In January 1997, the SEC issued new rules requiring disclosure of the Company's
accounting policies for derivatives and market risk disclosure. The market
risk disclosure rules are effective for the Company in filings that include
audited financial statements for the fiscal years ending after June 15, 1998.
Adoption of the new market risk disclosure rules will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect, while not yet determined by the Company, will be limited to the
presentation of its disclosures.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997
Certain statements included in this discussion relating to funding
requirements, capital expenditures, sources and uses of funds, operating
results and "Year 2000" issues are forward-looking statements that involve
known and unknown risks, uncertainties, and other factors that may cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors may include, but are not limited
to, general and economic business conditions, launch success, satellite
performance, availability of required capital, market acceptance of new
products and technologies, the ability of customers and suppliers to assess
timely and accurately "Year 2000" issues, and U.S. government policies,
priorities and funding of programs. The actual results that the Company
achieves may differ materially from any forward-looking statements due to such
risks and uncertainties.
BUSINESS ACQUISITION. On April 30, 1998, the Company acquired
substantially all of the assets of TRIFID Corporation ("TRIFID") for $4.0
million. Based on TRIFID meeting revenue targets established in the
acquisition agreement, the purchase price was adjusted and the Company paid an
additional $1.0 million of consideration to TRIFID during the three months ended
September 30, 1998. TRIFID is an image processing and product generation
company, providing 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 the Company with the technical personnel and production
capability required to generate high-resolution imagery and derived products.
The acquisition resulted in excess of purchase price over net assets acquired
of approximately $3.0 million, which is being amortized over ten years.
REVENUES. Revenues for the three months ended September 30, 1998 and
1997 were approximately $3.2 million and $0.2 million, respectively. Revenues
for the nine months ended September 30, 1998 and 1997 were approximately $8.5
million and $0.5 million, respectively. The increase in 1998 revenues was
primarily due to the commencement of the OrbView-2 satellite's commercial
operations in November 1997. Revenues during the three months and nine months
ended September 30, 1998 also included $0.8 million and $1.2 million,
respectively in sales generated from the image processing business acquired
from TRIFID in April 1998. Revenues for the comparable 1997 periods were
attributable solely to the sale of OrbView-1 imagery products.
DIRECT EXPENSES. Direct expenses include the costs of operating and
depreciating (i) the OrbView-1 satellite, (ii) the license pursuant to which
the Company has exclusive worldwide distribution rights for OrbView-2 satellite
imagery (the "OrbView-2 License"), and (iii) the related ground assets. Direct
expenses for the three months ended September 30, 1998 and 1997
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were approximately $3.5 million and $1.2 million, respectively. Direct
expenses for the nine months ended September 30, 1998 and 1997 were
approximately $11.6 million and $3.4 million, respectively. Direct expenses
increased from the 1997 periods to the comparable 1998 periods primarily as a
result of the OrbView-2 License amortization, additional ground station
depreciation and increased operating expenses primarily related to OrbView-2,
all of which began when OrbView-2 commenced commercial operations in November
1997.
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 the Company. SG&A expenses
were approximately $2.0 million and $0.8 million for the three months ended
September 30, 1998 and 1997, respectively. SG&A expenses were approximately
$5.2 million and $1.6 million for the nine months ended September 30, 1998 and
1997, respectively. The increase in SG&A expenses in 1998 was primarily
attributable to the increase in salaries and related benefits as the Company
expanded its operations and workforce.
INTEREST INCOME AND INTEREST EXPENSE. Interest income reflects
interest earnings on investments made primarily with proceeds from the
Company's financing activities. Interest expense reflects interest incurred on
the Company's 11-5/8% Senior Notes due 2005 (the "Notes"), net of applicable
capitalized interest. Net interest income (expense) for the three months ended
September 30, 1998 and 1997 was approximately ($0.1 million) and $0.5 million,
respectively. Net interest income was approximately $1.2 million and $0.9
million for the nine months ended September 30, 1998 and 1997, respectively.
Interest expense was approximately $2.2 million and $4.2 million for the three
and nine months ended September 30, 1998, respectively. The Company had no
interest expense in the comparable 1997 periods. For the three and nine months
ended September 30, 1998, capitalized interest in connection with the
construction of the OrbView-3 and OrbView-4 satellites and related ground
segments totaled $2.7 million and $6.9 million, respectively.
BENEFIT FOR INCOME TAXES. The Company recorded an income tax benefit
of approximately $0.3 million and $0.7 million for the three months ended
September 30, 1998 and 1997, respectively. The Company recorded an income tax
benefit of approximately $3.5 million and $1.1 million for the nine months
ended September 30, 1998 and 1997, respectively. The tax benefits result from
net operating losses generated during the period offset, in part, by decreases
in deferred tax liabilities for depreciation of satellite assets, which were
previously deducted for tax purposes. The Company records its interim income
tax benefit or provision 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.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had approximately $90.0 million
of cash and cash equivalents, and unrestricted securities. The Company's
current ratio was approximately 2.8 as of September 30, 1998 compared to 1.8 as
of December 31, 1997.
On February 25, 1998, the Company issued units consisting of the Notes
and Common Stock warrants raising gross proceeds of $150.0 million (the "Units
Offering"). Interest on the Notes is payable semi-annually beginning on
September 1, 1998. Out of net proceeds of approximately $144.8 million, the
Company purchased approximately $32.9 million of U.S. Treasury securities to
pay the interest on the Notes for the first four interest payment dates, of
which $24.6 million remains as of September 30, 1998. These securities have
maturities ranging from six months to two years and were placed in a restricted
account and pledged as security for repayment of interest on the Notes. The
Notes will rank pari passu in right of payment with all existing and future
senior indebtedness of the Company, and will rank senior in right of payment to
any future subordinated indebtedness of the Company. Concurrent with the Units
Offering, the Company completed a private placement of 227,295 shares of Series
A Preferred Stock, generating approximately $21.3 million of net proceeds.
Operating activities provided net cash of approximately $20.7 million
for the nine months ended September 30, 1998. Investing activities used cash
of approximately $135.0 million for the nine months ended September 30, 1998,
primarily for the net purchases (net of sales and maturities) of short- and
long-term investments and capital expenditures. Capital expenditures for the
nine months ended September 30, 1998 were approximately $82.8 million
(excluding capitalized interest) and consisted primarily of costs relating to
the acquisition of the OrbView-3 and OrbView-4 satellites and the related U.S.
ground system. The total projected 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 $297.0 million, which includes all satellite
design, construction and launch costs, but excludes insurance costs. Of this
amount, the Company has spent approximately $213.9 million through September
30, 1998 and expects to spend an additional $83.1 million through mid-2000, the
projected deployment date of OrbView-4.
The Company expects to fund its future capital expenditures and
negative cash flows from operating activities using cash and cash equivalents
and short-term investments together with advance payments from customers. The
Company's ability to generate positive cash flow is dependent on the sale of
its products and services, adequate customer acceptance of the Company's
products and services and numerous other factors. While the Company believes
it has sufficient resources to fund the Company's operations through its
positive free cash flow (expected to occur by the end of 1999, when OrbView-3
is expected to be operational), additional funding may be necessary in the
event of an OrbView-3 or OrbView-4 launch delay, cost increases, or
unanticipated expenses. There can be no assurance that additional capital will
be available on favorable terms or on a timely basis, if at all. The Company
has incurred losses since its inception and management believes that it will
continue to do so for the foreseeable future.
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"YEAR 2000" CONSIDERATIONS
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 mainframe, mini computers, PCs and embedded
systems.
The Company has commenced an audit to assess the potential "Year 2000"
issues with respect to various financial, technical and operational
computer-related systems. This audit will consist of reviewing software code
and hardware system components to determine whether a system failure or
miscalculations causing disruption of operations might occur as a result of the
system's inability to distinguish between the year 2000 and the year 1900. The
Company believes that its internal review will be completed by the end of 1998.
The Company intends to correct any "Year 2000" issues, or develop alternative
"work-around" procedures that address the problem, as soon as problems are
identified. The Company has also inquired of its primary third-party vendor,
Orbital Sciences Corporation ("Orbital"), as to whether products or services
provided by Orbital may be adversely affected by the "Year 2000" issue.
Orbital has informed the Company that with respect to its provision of
administrative services, no material "Year 2000" issues have been identified.
Orbital is still conducting an internal review of "Year 2000" issues with
respect to the satellite systems, ground systems and launch services provided
or to be provided to ORBIMAGE, and expects to have completed its initial
assessment of any pertinent issues by the end of 1998.
The Company's largest customer consists of various agencies within the
U.S. government. If such customer's systems are not "Year 2000" compliant on a
timely basis, payments owed to ORBIMAGE could be delayed. There can be no
assurance that a significant delay in payments would not have a material impact
on the Company's financial results.
The Company does not currently anticipate that addressing "Year 2000"
problems for its internal systems will have a material impact on its operations
or financial results. 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 the Company or its primary
third-party 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 the
Company's capitalization policies. Contingency plans will be developed if it
appears the Company or its key supplier will not be "Year 2000" compliant and
such noncompliance is expected to have a material adverse impact on the
Company's operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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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 - Not applicable.
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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 10, 1998 By: /s/ Gilbert D. Rye
----------------------------------
Gilbert D. Rye, President
and Chief Operating Officer
DATED: November 10, 1998 By: /s/ Armand D. Mancini
----------------------------------
Armand D. Mancini, Vice President
and Principal Financial Officer
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EXHIBIT INDEX
The following exhibits are filed as part of this report.
Exhibit No. Description
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27 Financial Data Schedule
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