ITEM 1. BUSINESS
OVERVIEW
In 1991, Orbital Imaging Corporation (the "Company" or "ORBIMAGE") was established as an operating division of Orbital Sciences Corporation ("Orbital") to manage the development and operation of remote imaging satellites that would collect, process and distribute digital imagery of the world's land areas, oceans and atmosphere. In 1992, ORBIMAGE was incorporated in Delaware as a wholly owned subsidiary of Orbital. In 1997, ORBIMAGE consummated a private placement of Series A preferred stock with financial investors to fund a significant portion of the remaining costs of existing projects. Contemporaneously with this financing, ORBIMAGE acquired at historical cost all of the assets and liabilities of the operating division. Prior to May 8, 1997, ORBIMAGE was an operating division of Orbital. Orbital now owns approximately 57.6% of ORBIMAGE (52.1% on a fully diluted basis) and has the ability to exercise significant influence, but not control, over ORBIMAGE's operating and financial policies.
ORBIMAGE is a leading provider of global space-based imagery, and expects to provide its customers with the most comprehensive offering available of high-resolution imagery, imagery-derived products and image processing services at competitive prices. We are developing and currently operate a fleet of satellites that collect, process and distribute digital imagery of the Earth's surface (land and oceans), the atmosphere and weather conditions. Our imagery products and services are designed to provide our customers with direct access to timely and competitively priced information concerning, among other things, locations and movements of military assets, urban growth, forestry and crop health, land and ocean-based natural resources and weather patterns. In 1998, we acquired a satellite image processing company which expanded our capibility to provide sophisticated image processing software, engineering analysis and in-house image production.
In 1995, we launched our first satellite, OrbView-1, which provides dedicated weather-related imagery and meteorological products to the National Aeronautics and Space Administration ("NASA") and other government agencies. We launched our second satellite, OrbView-2, in 1997. OrbView-2 provides images of land and ocean surfaces to commercial customers, as well as to NASA and other scientific users. We believe that OrbView-2 is one of the only satellites of its kind providing daily color images of the entire Earth's surface. We expect to launch two additional satellites, OrbView-4 and OrbView-3, during the first quarter of 2001 and the second quarter of 2001, respectively. OrbView-3 and OrbView-4 will provide high-resolution imagery based on optical technology. We believe that OrbView-3 and OrbView-4 will be among the first commercial satellites with high-resolution optical imagery capability, and that OrbView-4 will be the first satellite with commercially available hyperspectral capability.
In 1998, we acquired the exclusive worldwide rights to distribute and sell imagery from RadarSat-2 (the "RadarSat License"), a high-resolution "next-generation" commercial radar imaging satellite that we expect to be launched in the fourth quarter of 2002. Unlike optical imaging technology, radar technology permits imagery to be collected in all weather conditions and at night. RadarSat-2 will have unique multipolarization capabilities that enable it to image vertical as well as horizontal features over land or water. This unique technology can be used to detect certain features on the Earth's surface, such as ice flows, oil seepage and metallic objects, more effectively than conventional optical imaging systems. RadarSat-2 is a follow-on to RadarSat-1, the Canadian Space Agency's ("CSA") medium-resolution radar imaging satellite that was launched in 1995. We expect RadarSat-2 to be the world's first satellite with commercially available high-resolution radar imagery.
REMOTE IMAGERY INDUSTRY
Remote imaging is the process of observing, measuring and recording objects or events from a distance using a variety of sensors mounted on satellites and aircraft. The market for remote sensing includes satellite development, construction and operations by both domestic and international commercial and government users who decide to build and operate their own satellite systems, as well as purchased imagery and related services currently addressable by existing imagery suppliers. Historically, in the United States, the only "commercial" operators of remote imaging satellites were quasi-governmental programs such as the low-resolution Landsat satellite systems in operation since the 1970s. The opportunities for commercialization of space-based imagery expanded significantly in 1994 when the U.S.
government implemented a policy permitting the worldwide, commercial sale of high-resolution satellite imagery.
Historically, all satellite imagery systems were either military surveillance platforms or were sponsored by large national and international civil space agencies, which used satellites to monitor meteorological conditions and environmental changes on the Earth's surface. Currently, there are a limited number of commercial providers of satellite imaging services, which collectively address only a portion of the market opportunities in the remote imaging industry. The majority of today's remote imagery comes from local or regional aerial photography firms. Although aerial imaging companies are able to achieve high spatial resolution and customize their products according to local needs, their slow response time, limited coverage area, restricted ability to fly over certain areas and high cost limit widespread use of such imagery. Many existing maps are based on out-of-date imagery because they are expensive to update. The majority of current commercial imagery sales are generated by a few providers of low-resolution satellite imaging services; however, these providers have failed to satisfy the market's growing sophistication and timeliness requirements.
As the remote imaging market develops, we expect that primary competitive factors will include:
- spatial and/or spectral resolution;
- breadth of product offering;
- frequency of revisit times;
- pricing;
- timeliness of imagery distribution; and
- extent of geographic coverage.
OrbView-2, OrbView-3, OrbView-4 and RadarSat-2 have been or are being designed to offer a number of strategic advantages over currently available low- and medium-resolution commercial remote imaging systems. These advantages include increased spatial resolution and increased spectral capability. Certain markets, such as the national security, mapping and surveying markets, require spatial resolution of three meters or less. In addition, increased spectral resolution (i.e., the ability to take highly precise color and infrared images of the Earth's surface) enables potential customers in the agriculture and fishing industries to better detect and identify crop health and map prime fishing locations. Spectral resolution also can be used in the exploration of natural resources. For example, land conditions that signify the presence of oil are easier to identify on an infrared or radar image than in a conventional black and white aerial photograph. Currently, a commercial imagery customer, such as a telecommunications company that wants to map a large, fairly remote area to determine where to place cellular towers, would hire an aerial photographer to fly an airplane over the area to take pictures, develop the film and deliver the final map to the customer. This can be time consuming and expensive. In contrast, we expect that our high-resolution satellites will be able to image over 20,000 square kilometers at one-meter resolution in a single 10-minute pass.
Similarly, countries around the world that are unable or unwilling to establish their own space programs can conduct complete border surveillance only in the areas over which aerial photographers can safely fly. We expect that OrbView-3, OrbView-4 and RadarSat-2 will be able to image areas that are not accessible by airplanes because the air space is restricted or because the areas are too remote. In addition, up-to-date maps are key for serving certain high-technology segments of the national security market, such as digital terrain modeling for aircraft and missile guidance. We believe the real-time global satellite imagery will allow customers to efficiently and cost-effectively map areas of the world that have never been photographed commercially or for which existing maps are now obsolete. This imagery will also permit users to frequently monitor agricultural, forestry and fishing areas to provide
timely information to enhance business and government effectiveness.
In addition, we expect RadarSat-2 to extend ORBIMAGE's competitive advantage over other high-resolution commercial satellite operators. RadarSat-2's high-resolution radar imaging capability will enable ORBIMAGE to provide imagery "on-demand" twenty-four hours a day regardless of light and weather conditions. RadarSat-2 will also be able to detect certain materials on the Earth's surface, such as oil seepages, ice flows and metallic objects, more effectively than optical imaging satellites.
MARKETING STRATEGY
We have been successful in penetrating the remote imaging market by entering into pre-launch contracts. We expect to increase our market penetration by entering into additional pre-launch contracts, directly targeting large customers, developing a network of international distributors and entering into strategic relationships with value-added resellers.
Pre-launch contracts. Approximately $214 million of advance payments have been provided from pre-launch contracts (directly with our customers or between Orbital and third parties). These contracts provide funding for approximately 40% of the total capital expenditures required for the deployment of our satellite systems and our acquisition of imagery distribution licenses. These contracts include the following:
- OrbView-1 was partially paid for under an $8 million pre-launch contract with NASA, $5 million of which was funded prior to launch;
- OrbView-2 was partially paid for under a $43 million pre-launch contract between Orbital and NASA, $38 million of which was funded prior to launch;
- OrbView-4's hyperspectral modifications will be partially paid for under a $33 million contract between Orbital and the U.S. Air Force, $31 million of which will be funded prior to launch. The contract includes commitments for additional post-launch imagery purchases of up to $10 million (including options); and
- RadarSat-2 will be partially paid for under a $140 million contract between MacDonald, Dettwiler and Associates Ltd., a subsidiary of Orbital ("MDA"), and CSA, all of which will be funded prior to launch.
Direct customer sales. We have a contract with the U.S. National Imagery and Mapping Agency ("NIMA") under which the U.S. government authorized the purchase of up to $100 million of OrbView-2, OrbView-3 and OrbView-4 imagery and systems upgrades. Under this contract, NIMA has committed to purchase $3 million of imagery, services and compatibility upgrades to ORBIMAGE's ground systems.
International distributors. We are developing relationships with an international network of commercial distributors while also dealing directly with potential foreign national security government customers. ORBIMAGE has entered into exclusive commercial regional distributorship agreements for the distribution of OrbView-3 and OrbView-4 images in Europe, Japan, Korea, Mexico, Central America and the Caribbean.
Value-added resellers. We are developing various value-added applications for imagery products. For example, we provide our proprietary fish-finding maps using OrbView-2 imagery to approximately 130 commercial fishing vessels. We have also entered into agreements with approximately 40 value-added resellers who already have established expertise in the production of aerial and satellite imagery-based value-added products in specific industries such as utility monitoring, oil and gas exploration, agriculture forecasting and national security. We are working with these value-added resellers to exploit existing applications and develop new products that will incorporate OrbView-3, OrbView-4 and RadarSat-2 high-resolution data.
BUSINESS STRATEGY
The key elements of our business strategy include:
Providing the most comprehensive offering of high-resolution satellite imagery at competitive prices. Building on the wide range of imagery that will be available from our fleet of OrbView satellites and RadarSat-2, we expect to offer the most comprehensive selection of commercially available satellite imagery products and services. The cost we expect to incur in the deployment and operation of our satellite systems is less than the announced costs of our competitors' existing and planned high-resolution systems. We expect that our cost structure will provide us with flexibility to competitively price our imagery products and services.
Penetrating existing markets and creating new markets. There is currently a large existing market for imagery products and services (which include mapping, construction site selection, agricultural and forestry assessment, oil, gas, and mineral exploration, scientific and environmental monitoring and national security applications). We believe we can gain market share rapidly in this existing market because of the breadth and expected pricing of our product and service offerings. Additionally, we believe that these markets will expand and further develop as commercial high-resolution satellite imagery becomes available. Furthermore, we believe we can develop new commercial applications for satellite-based imagery, including real estate assessment, travel planning and entertainment applications.
Achieving global distribution of products and services on a timely basis. We plan to expand our global market coverage by providing imagery to end-users both directly and through value-added resellers and other third party distribution channels. We intend to focus our direct distribution efforts on larger customers in the commercial, scientific, environmental and U.S. and foreign national security markets. We also expect that value-added resellers will perform application-specific processing of our imagery for various commercial markets. Internationally, we intend to market primarily through regional partners who have existing marketing and distribution infrastructures. We expect these distributors to purchase or upgrade and operate the ground imagery receiving and processing stations in their territories, which will permit them to receive, process and distribute imagery on a timely basis.
Expanding the "orbimage.com" digital catalogue. We have developed a digital catalogue located at our orbimage.com website address to collect, store and distribute imagery collected from our satellites, as well as from other satellite and aerial sources. The digital catalogue currently includes high-resolution aerial imagery of approximately 20 major North American metropolitan areas ("OrbView Cities"), as well as OrbView-2 imagery products, and will ultimately be a full-service on-line digital catalogue of OrbView high-resolution imagery products. We are currently expanding our OrbView Cities database with high-resolution aerial imagery products, and we expect to have imagery of 150 major U.S. and international metropolitan areas available by the end of 2000. We can deliver imagery from our digital catalogue to customers over the Internet or on CD.
Leveraging the expertise of Orbital. Orbital, our majority stockholder, is a space technology and satellite services company with extensive experience designing and constructing remote imaging satellites and related ground systems. We have used and will continue to use Orbital's integrated space capabilities, infrastructure and experience to develop our business in a cost-effective manner.
PRODUCTS AND SERVICES
Currently, we offer low- and medium-resolution satellite-based imagery products, as well as high-resolution aerial imagery products. In addition, once the OrbView-3, OrbView-4 and RadarSat-2 are operational, we expect to offer the most comprehensive selection of commercially available satellite-based imagery products and services. Such products and services will include high-resolution optical imagery, high-resolution radar imagery, multispectral and hyperspectral imagery and imagery processing services.
Weather, climate and atmospheric monitoring. The OrbView-1 satellite is currently providing the U.S. government with daily atmospheric and weather condition images, including images showing both clouds and global lightning information that can be used to improve tornado and hurricane forecasting, and for weather monitoring and meteorological research. The OrbView-1 satellite also provides information on the atmosphere near the Earth's horizon, including atmospheric temperature, pressure, and water vapor profiles. Because of the radio frequencies used by the OrbView-1 satellite, OrbView-1 imagery may only be sold to the U.S. government.
Ocean and land multispectral imagery. The OrbView-2 satellite detects subtle color changes in the Earth's oceans and land areas. Under a five-year contract, NASA and its researchers may downlink directly certain OrbView-2 imagery for their own research purposes. ORBIMAGE also offers licenses to university
researchers and other primarily scientific users around the world to enable them to directly downlink OrbView-2 imagery.
In addition, OrbView-2 provides value-added products that we generally can deliver within 24 hours of collection. Such products measure phytoplankton and sediment concentration in oceans and lakes, as well as the vegetative health of crops and forests on land. Scientists and environmentalists can use these and other similar imagery products to assess environmental factors that affect the oceans (including pollution levels and toxic algae events) and to facilitate "before and after" comparisons of land areas showing, for example, changes in agricultural crop and forestry growth or the erosion of coastal zones.
We also use OrbView-2 imagery to generate commercial fishing maps. We currently offer a deep ocean fishing map product targeted at larger high seas fishing fleets, and are planning to offer a coastal product targeted at sport and commercial fishing customers.
High spatial resolution optical and radar imagery. High-resolution optical imagery from our OrbView-3 and OrbView-4 satellites will enable users to identify objects as small as one-meter in size (approximately the size of a phone booth) from space. We plan to sell our high-resolution imagery products in the form of hard copies and electronic copies that can be stored and processed on a computer. We intend to base our product pricing, in part, on the level of processing required and the customer's delivery-time requirements. We will target sales of unprocessed imagery to sophisticated end-users, such as U.S. and foreign national security customers or value-added resellers who have internal capability to perform their own imagery enhancement and processing. While we intend to sell unprocessed imagery through our orbimage.com on-line digital catalogue, we believe that military and intelligence customers will also procure the necessary software from ORBIMAGE to upgrade their ground stations so that they can directly downlink and process such imagery from the satellite.
We may also offer various value-added precision-corrected products. We believe that these products will have applications in all three of our target markets, discussed below. Precision-corrected imagery is processed based upon known geographic points, terrain, elevation and topography to enable the user to identify the position of the image on the Earth's surface. These products will address the needs of customers who require detailed topographical and elevation information. One example of such a product is a digital elevation model used by military planners for aircraft flight simulation. Other examples include maps that analyze the health of vegetation in farm and forest areas, land use maps that can segment land tracts based on population density, wireless communication towers and other construction projects and land uses.
Hyperspectral imagery. Hyperspectral imagery from OrbView-4 will provide enhanced color and enhanced infrared imagery for additional applications, including environmental analysis and analysis of the presence of minerals, which will enable mining and natural resource exploration companies to more efficiently detect the location of precious minerals such as gold and silver, and other natural resources such as oil. In addition, the U.S. Air Force has stated that it intends to use hyperspectral imagery to assist in detecting, tracking and monitoring military vehicles and assets.
Radar imagery. High-resolution radar imagery from RadarSat-2, with a spatial resolution of three meters, will complement the high-resolution optical imagery available from OrbView-3 and OrbView-4. Radar and optical technology share many of the same capabilities. However, unlike optical imaging technology, radar technology permits imagery to be collected in all weather conditions and at night. Additionally, radar imagery can detect certain materials on the Earth's surface more effectively than optical imagery, such as oil seepages and ice flows, making such technology useful for offshore and onshore oil and gas exploration and ship navigation. RadarSat-2 will have unique multipolarization capabilities that enable it to image vertical as well as horizontal features over land or water.
TARGET MARKETS
We target our imagery product and service offerings toward three distinct markets: the U.S. and foreign national security market, the commercial/consumer market and the scientific/environmental market. These markets are currently serviced primarily by aerial photography or government-operated satellite imagery systems.
U.S. and foreign national security market. The U.S. government has publicly stated that demand for high-
resolution imagery, especially for use by tactical military commanders in the field, far exceeds the supply currently provided by its dedicated surveillance satellites. Commercial satellite imagery can augment current classified government satellite programs that use data, imagery and related products and services for mapping, reconnaissance, surveillance, trend analysis, mission planning, and targeting of conventional and "smart" weapons such as cruise missiles. We believe that radar imagery from RadarSat-2, which can be acquired in all weather conditions and at night, may be useful to governmental agencies during times of international conflicts when "real time" imagery is essential regardless of the time of day, weather or other conditions, such as smoke or haze. We believe that we can capture a significant share of the addressable national security market once OrbView-3 or OrbView-4 is operational.
The U.S. government has turned to commercial providers such as ORBIMAGE for a portion of its satellite imagery requirements. The U.S. Air Force is funding the hyperspectral modifications to the OrbView-4 sensor under a $33 million contract (with up to $8 million in data purchases and contract options) to acquire real-time hyperspectral imagery from OrbView-4. In 1998, we entered into a contract with NIMA under which the U.S. government authorized the purchase of up to $100 million of OrbView-2, OrbView-3 and OrbView-4 imagery and systems upgrades. Under this contract, NIMA has committed to purchase $3 million of imagery, services and compatibility upgrades to ORBIMAGE's ground systems. The Canadian Navy uses imagery from CSA's RadarSat-1 satellite to detect the presence of other ships through wave analysis and to monitor the location and movement of icebergs in connections with submarine and ship deployments. We expect navy fleets to rely on RadarSat-2 imagery for similar purposes. In addition, many foreign countries have a strong national security interest in obtaining real-time high-resolution satellite imagery that can be collected during all weather conditions and at night.
High-resolution imagery will be used by national security customers to help generate up-to-date wide area maps, gather intelligence, identify and target enemy forces and assets, plan missions and deploy resources and assess battle damage. Many countries have aerial reconnaissance aircraft, but these aircraft may be at risk if they penetrate foreign air space. The vast majority of foreign countries neither own nor have access to satellites that generate high-resolution imagery. Therefore, these countries have only three possible options to collect high-resolution satellite imagery:
- develop the technology and build and launch their own satellites;
- purchase and operate a turn-key satellite system; or
- purchase "time-share" capacity from a satellite imaging company.
Developing the technology and manufacturing expertise, and then constructing a dedicated high-resolution satellite system and the infrastructure to support it, requires a sizable financial investment and may require a substantial time commitment. Purchasing a turnkey high-resolution satellite system from a company in the United States or another country may be difficult due to export controls and safeguards relating to national security interests and licensing requirements. Purchasing a portion of the total capacity of a commercial satellite while it orbits over a foreign government customer's area of interest provides the same high-resolution imagery capability as other alternatives, but is less expensive and more readily attainable. This "time share" arrangement is the one being offered by ORBIMAGE to its regional high-resolution OrbView imagery distributors.
We are currently in discussions with several foreign national security customers, and have already entered into contracts with regional distributors that provide significant minimum imagery purchase commitments. The contract commitments made by our current regional distributors strengthens our belief that there exists substantial unmet demand for such imagery. We believe that our products and services will provide an effective means for foreign governments to acquire high-resolution imagery for national security purposes.
Commercial/consumer market. We believe that the near-term commercial/consumer market segment will include domestic and foreign companies and local governmental entities, such as municipalities, that currently use aerial photographs and medium-resolution satellite imagery products. In the long term we expect this market will also include individual consumers who will use satellite imagery from our orbimage.com digital catalogue in various
consumer-oriented applications such as real estate assessment, travel planning, education and entertainment. We have already begun targeting the market applications described below, which we believe represents attractive near-term marketing opportunities.
- Commercial fishing. We are currently marketing fishing maps designed to assist the commercial ocean fishing industry. OrbView-2's multispectral sensor has been specifically designed to distinguish the phytoplankton-rich oceanic regions from the clear oceanic regions. Many commercially important surface-feeding fish, such as tuna and swordfish, congregate at the phytoplankton-clear water boundary. Fishing fleets are using OrbView-2 imagery to accurately identify this boundary in a timely fashion. Based on customer feedback, our fishing maps significantly reduce search time and related hardware and operating costs, and are more accurate and cover a broader area than existing alternatives.
Our customers for fishing maps include 28 fishing companies comprising approximately 130 fishing vessels operated by commercial fishing companies in the United States, Asia, Europe and South America. Fishing captains view the maps transmitted daily over a satellite link to their vessels with a personal computer using our proprietary software, or receive the maps in a hard copy format via facsimile.
- Mapping and surveying. The key mapping and surveying markets that we have targeted are new construction site selection, utility infrastructure monitoring and local and regional tax assessment. High-resolution imagery is used for planning the optimal location for construction projects such as wireless communication towers, retail development, new housing developments and highways. For example, telecommunications providers use high-resolution imagery extensively to determine the topography and land use/land cover classifications within a region under consideration for new wireless service. This information enables optimal placement of new communications towers based on the radio signal transmission characteristics of the region. We believe that high-resolution imagery can also help retail businesses to select the optimal locations for new stores by providing valuable information, such as population density, residential versus industrial land use patterns, locations of competitive businesses and other factors, useful in the site selection process. The availability of radar technology which can identify metallic objects on the Earth's surface, as well as subtle geological features (such as fault lines and land elevation), will enable us to more efficiently interpret high-resolution optical imagery from OrbView-3 and OrbView-4 and generate a more comprehensive product offering in these markets.
We believe that our high-resolution OrbView imagery also will be used by gas and electric utilities, which are among the largest current high-resolution aerial imagery users. Spatial data, such as high-resolution maps showing precise locations of surface features, is critical to planning, design, construction, operation, marketing and regulatory compliance in connection with utilities' widely dispersed networks. We believe our high-resolution imagery will be useful to city, county and state tax authorities in monitoring taxable activities such as residential add-on construction and tree cutting on public and private lands.
- Agricultural. We expect agricultural applications to represent a growing market opportunity, driven by large, commercial farming customers interested in obtaining up-to-date data on the condition of their crops and fields. Today, most agricultural customers either are unable to obtain the requisite imagery, or must rely on direct on-site inspection or aerial photography at substantial expense. We believe products based on multispectral and radar satellite imagery will provide timely and valuable information on the health of crops and assist in managing the allocation of water, fertilizer and pesticides. In addition, we believe that our broad-area multispectral and radar imagery could increase the accuracy of crop-yield forecasts and benefit insurance companies, commodity traders and agricultural products brokers.
- Forestry. To date, demand for aerial imagery products in the forestry industry has been modest due to the high cost, poor resolution and lack of appropriate revisit time of existing alternatives. The availability of ORBIMAGE's high-resolution, low-cost imagery products is expected to drive forestry
industry demand for satellite imagery. In particular, we believe the multispectral and radar imagery generated by OrbView-2, OrbView-3, OrbView-4 and RadarSat-2 will be beneficial in monitoring the overall health of forests. In addition, OrbView-4's hyperspectral imagery will be useful in distinguishing tree plantations of different species and ages through pattern recognition techniques, and RadarSat-2's imagery will be useful in monitoring deforestation and land use changes. We believe this information will be beneficial both to private forest product companies and to government agencies such as the U.S. Forest Service.
- Oil, gas and mineral exploration. We believe that OrbView-3, OrbView-4 and RadarSat-2 imagery will be valuable to oil, gas and mineral exploration companies for planning operations in remote regions of the world. In many locations where such exploration occurs there is a great need for improved mapping information for activities such as equipment transport planning, seismic field-testing and drilling operations. Hyperspectral imagery from OrbView-4 will be useful for identifying promising locations for new oil, gas and mineral reserves. Spectral matching techniques can be used to identify specific "pathfinder minerals" that signify high probability locations for petroleum and other mineral reserves. Oil and gas exploration companies are using RadarSat-1 imagery products in their exploration endeavors. These companies should also benefit from RadarSat-2's multipolarization capabilities, which enable the detection of oil seepages in the oceans, as well as on land.
- Ice flow monitoring. We believe that imagery from RadarSat-2 will be valuable for potential customers engaging in marine navigation and offshore drilling operations. RadarSat-2's ability to detect the presence, size and movement of icebergs will be useful to government agencies and private companies for safely routing cargo ships and fishing vessels. In addition, RadarSat-2's ability to measure the edge of, and track the movement of, major ice flows will be valuable to oil and gas companies in managing the operation of offshore oil rigs located in the arctic regions of the world.
Scientific/environmental market. The scientific/environmental market comprises government entities, that use commercially-provided satellite imagery to monitor environmental, climate-related and meteorological phenomena, as well as commercial entities such as airlines, oil and gas companies and insurance companies, who need accurate, timely environmental information over wide geographic areas. A substantial portion of the cost of development, construction and launch of the OrbView-1, OrbView-2 and RadarSat-2 satellites have been or are being funded on a pre-launch basis through contracts with government agencies intending to rely on the imagery generated by such satellites for scientific and environmental research and monitoring. We are currently selling imagery from OrbView-2 to national government agencies such as NASA, NIMA and the National Oceanic and Atmospheric Administration ("NOAA"). NOAA has made a multiyear commitment to purchase additional OrbView-2 imagery over a three-year period. All of these agencies currently use aerial and satellite imagery for diverse applications, including weather prediction, monitoring of ocean conditions, natural disaster assessment, environmental impact studies and similar applications. Since 1995, OrbView-1 has generated information that has improved the meteorological community's ability to predict the timing and location of severe storms, including tornadoes and hurricanes. OrbView-2's ability to monitor phytoplankton levels in the world's oceans on a global basis is being used by scientists to study global climate change and by coastal fisheries to track dangerous and costly "red tide" events. Scientists and government agencies are using satellite radar imagery to map the Antarctic ice field in order to analyze the effects of glaciers and global climate changes in Antarctica. We believe the imagery available from our OrbView-3 and OrbView-4 satellites and RadarSat-2 will be helpful to government agencies in a variety of environmental applications including assessment of the damage from natural disasters such as floods, forest fires, earthquakes, severe storms and the environmental impact of industrial activities.
MARKETING AND DISTRIBUTION
We currently plan to market and distribute imagery from our satellite network through:
- our direct sales force;
- market- or application-specific value-added resellers;
- foreign regional distributors; and
- the orbimage.com digital catalogue.
Direct customer sales. Our initial strategy for direct customer sales is to market and sell our basic imagery products to U.S. government agencies or to companies with internal image processing capabilities (e.g., large oil and gas producers). Since mid-1995, we have delivered OrbView-1 atmospheric imagery directly to NASA on a daily basis. Since October 1997, NASA and its authorized researchers have been directly downlinking OrbView-2 imagery at their own ground receiving stations. We may also directly market and will distribute our products and services, such as fishing maps, to commercial and scientific customers worldwide.
We will continue to market our products and services directly to the U.S. military services, U.S. intelligence gathering agencies, other U.S. governmental customers and foreign governments that do not wish to purchase imagery products through a regional distributor. We anticipate that imagery for these customers will either be downlinked directly to the customers' existing ground receiving stations (which will be upgraded to be OrbView-compatible), or to our U.S. central ground system and then delivered to the applicable end user.
International distributors. We expect to sell high-resolution OrbView satellite imagery in international markets principally through arrangements with various regional distributors. ORBIMAGE has entered into exclusive commercial regional distributorship agreements for the distribution of OrbView-3 and OrbView-4 imagery in Europe, Japan, Korea, Mexico, Central America and the Caribbean.
Value-added resellers. While we expect to perform certain value-added services internally, we also intend to distribute our imagery to end users through value-added resellers who process imagery into complex maps and other types of enhanced products for specific markets or applications. For example, we provide our proprietary fish-finding maps using OrbView-2 imagery to approximately 130 commercial fishing vessels. We have also entered into agreements with approximately 40 value-added resellers who already have established expertise in the production of aerial and satellite imagery-based value-added products in specific industries such as utility monitoring, agriculture monitoring and national security. We are working with these value-added resellers to exploit existing applications and develop new products that will incorporate OrbView-3, OrbView-4 and RadarSat-2 high-resolution data.
orbimage.com. We also market imagery through our on-line orbimage.com digital catalogue. Orbimage.com is a comprehensive, digital-imagery catalogue of imagery derived from our satellites and other satellite and aerial sources, which allows us to deliver imagery to customers over the Internet, on CD or on computer tape. Through strategic alliances with existing imaging satellite operators, aerial photography firms and value-added resellers, we intend to gain early recognition as an electronic depository for a comprehensive digital imagery catalogue consisting of a broad range of diverse imagery products primarily targeted to the commercial/consumer and scientific/environmental markets. Currently, orbimage.com offers imagery of approximately 20 major North American metropolitan areas through our OrbView Cities program. OrbView Cities is currently being expanded to include approximately 150 major U.S. and international metropolitan areas by the end of 2000. In addition to OrbView Cities, orbimage.com also contains digital color imagery of the earth collected by OrbView-2.
RISK MITIGATION
ORBIMAGE has adopted a comprehensive strategy designed to mitigate the market, financial, and technical risks associated with developing new and existing markets and constructing, launching and operating its satellites.
- Market development. In addition to the pre-launch contracts described above, we are actively marketing our image processing capabilities while seeking to finalize pre-launch distribution agreements for OrbView-3 and OrbView-4 high-resolution imagery. We have entered into contracts with several international distributors containing minimum purchase commitments for OrbView-3 and OrbView-4 imagery, as well as for the purchase of ground stations, valued at approximately $306 million (including options). The U.S. government has also demonstrated its commitment to procure imagery from commercial sources by authorizing NIMA to enter into a contract with us for the purchase of up to $100 million of OrbView-2, OrbView-3 and OrbView-4 imagery and systems upgrades. Under this contract, NIMA has committed to purchase $3 million of imagery, services and compatibility upgrades to ORBIMAGE's ground system. To further facilitate market penetration, we have developed our own value-added products using OrbView-2 imagery and are working with a number of value-added resellers in various industries that use satellite or aerial imagery for commercial applications.
- Financial. Approximately $214 million of advance payments have been provided from pre-launch contracts (directly with our customers or between Orbital and third parties). These contracts provide funding for approximately 40% of the total capital expenditures required for the deployment of our satellite systems and our acquisition of imagery distribution licenses. By negotiating pre-launch contracts with customers we have reduced, and seek to continue to reduce, the financial risks associated with constructing and operating our satellites and ground systems. We have also limited risks associated with our satellites by entering into fixed-price contracts with Orbital to build and launch the satellites, to acquire exclusive worldwide distribution rights for radar imagery from RadarSat-2 and to construct the related ground systems. In addition, we have insured the OrbView-2 satellite against on-orbit failures and we intend to procure insurance to cover certain losses in the event of an OrbView-3, OrbView-4 or RadarSat-2 launch or satellite failure.
- Technical. U.S. government surveillance and various other space programs have already successfully deployed many of the imaging technology and sub-system components that Orbital will use in OrbView-3 and OrbView-4 and MDA will use in RadarSat-2. These satellites incorporate system redundancies for certain critical components. As a result of OrbView-3 and OrbView-4 having similar performance parameters they can provide back up for each other.
SATELLITE AND GROUND SYSTEM OPERATIONS
ORBIMAGE's basic system architecture consists of several major components:
- a fleet of advanced-technology low-Earth orbit, small imaging satellites carrying sophisticated sensors that collect specific types of land, ocean and atmospheric data;
- a central U.S. ground system that controls the satellites and that receives, processes and archives their imagery, and includes electronic cataloging and distribution capabilities; and
- foreign regional receiving and distribution centers with direct downlinking capabilities.
We believe that our system will provide global economies of scale in image collection, processing and distribution. In particular, we believe that the system will be able to collect, produce and sell high spatial- and spectral-resolution imagery worldwide on a daily basis.
The OrbView satellites represent a progression in space imaging technology and demonstrate Orbital's use of proven technologies and system experience. The incremental progression in both spatial and spectral satellite imaging capabilities among the OrbView satellites and RadarSat-2 mitigates technical risks. The OrbView satellites employ lightweight structures, advanced sensors, miniaturized electronics, and innovative technical processes designed to provide high performance at relatively low cost. In the construction of OrbView-3 and OrbView-4, Orbital is drawing upon its satellite imaging experience not only from OrbView-1 and OrbView-2, but also from large national satellite programs like Landsat 4, Landsat 5 and RadarSat-1, to minimize overall program risk. RadarSat-2 will build on the heritage of RadarSat-1. The OrbView-1 and OrbView-2 satellites are, and OrbView-3
and OrbView-4 will be, commanded and controlled from ORBIMAGE's main operations center located in Dulles, Virginia. The RadarSat-2 satellite will be operated and controlled by MDA, and/or CSA under a contract with CSA.
The following table summarizes the primary technical characteristics of the satellites.
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(1) The combined revisit time of OrbView-3 and OrbView-4 will be less than two days.
(2) The combined revisit time of OrbView-3, OrbView-4 and RadarSat-2 will be less than one day.
(3) OrbView-1 has significantly exceeded its initial three-year design life.
ORBVIEW-1 SATELLITE
The OrbView-l satellite was launched in April 1995 and contains two atmospheric sensors providing weather-related imagery to U.S. government customers. The on-board solid state recorder memory permits storage of a half-day's imagery for transmission at two megabits per second to ORBIMAGE's primary U.S. ground system.
ORBVIEW-2 SATELLITE
The OrbView-2 satellite was launched in August 1997 and we believe it is one of the only operational satellites providing global color imagery of the entire Earth's surface on a daily basis. OrbView-2 is capable of downlinking imagery to both ORBIMAGE's primary and backup ground stations and to various regional receiving stations around the world. Orbital owns the OrbView-2 satellite, and ORBIMAGE operates and controls the satellite under a license from Orbital (the "OrbView-2 License").
ORBVIEW-3 AND ORBVIEW-4 SATELLITES
OrbView-3 and OrbView-4 have been designed to provide one-meter panchromatic imagery and four-meter multispectral imagery of the Earth's surface. OrbView-4 will also provide hyperspectral capability. We expect the total annual realizable capacity of each of OrbView-3 and OrbView-4 to be approximately 400,000 to 500,000 images, depending on customer preferences for the various images available and certain operating assumptions, including cloud cover of targeted areas and availability of regional ground stations.
RADARSAT-2
The RadarSat-2 satellite will acquire imagery in all weather conditions and at night across a range of modes
that span from three-meter spatial resolution imagery with a swath width of 20 km to 100-meter spatial resolution imagery with a swath width of 500 km. RadarSat-2 will be capable of providing real-time imagery within a 4,000 kilometer radius of any ground station, and will have an annual image capacity in excess of 220,000 images.
GROUND OPERATIONS CENTERS AND IMAGE PROCESSING FACILITIES
ORBIMAGE's central U.S. ground system monitors the OrbView satellites while they are in orbit and commands the satellites as required to ensure that proper orbits are maintained, that electrical power and other operating variables stay within acceptable limits and that appropriate communications links are maintained. MDA will operate the RadarSat-2 satellite in Canada on similar terms.
The image receiving and processing center for the OrbView satellites is also located at our central U.S. facility and consists of several ground antennas capable of receiving down-linked imagery from the satellites and numerous work stations where the digital imagery streams from the satellites are processed and converted into useful imagery products. The center is designed to be capable of archiving 6,500 high-resolution OrbView satellite images per day, as well as generating a variety of geospatial products for resale.
COMPETITION
ORBIMAGE's satellite and aerial imaging competitors include:
- small regional aerial photography firms;
- a limited number of existing satellite imagery providers; and
- several anticipated high-resolution satellite imagery providers.
Existing aerial photography firms. The major source of commercial high-resolution imagery today is aerial photography. This market is very fragmented, with numerous small regional firms located all over the world. Most aerial photography firms currently use film-based technology rather than the digital camera technology used by the OrbView satellites. We expect that our satellites will provide customers with more timely and/or lower cost imagery than is provided by existing aerial photography firms.
Existing Low/Medium-Resolution Satellite Imagery Providers. OrbView-1 and OrbView-2 have no existing direct competitors for their daily panchromatic and multispectral imagery. Spot 4 (operated by Spot Image S.A.) provides multispectral imagery that is competitive with OrbView-2 in certain markets, such as agricultural assessment. There are five existing satellite-based providers of low- and medium-resolution imagery:
- Space Imaging operates the Landsat 4 and Landsat 5 satellites, which provide coverage in seven spectral bands covering the visible to infrared parts of the spectrum. The best resolution of these satellites is 30 meters in the multispectral imaging mode;
- Spot Image S.A., a French company, currently produces unprocessed imagery using three satellites with resolution capability of 10 meters in panchromatic and 20 meters in multispectral;
- RadarSat-1, operated by CSA, provides radar imagery with a resolution that varies between 10 and 100 meters. We expect RadarSat-1 to be phased out based on its seven year design life when RadarSat-2 is placed into service in 2003;
- KVR-1000, a series of Russian government satellites, provide film-based, two-meter resolution panchromatic images but operate only on a sporadic basis; and
- IRS-IC, an Indian Space Agency satellite, provides six-meter panchromatic and 25 meter multispectral imagery.
We view these providers as indirect competitors to our high-resolution OrbView satellite imagery in certain markets.
Current and Future High-Resolution Satellite Competitors. The high-resolution OrbView satellites and RadarSat-2 are expected to face significant competition in the satellite imagery market from two U.S. satellite competitors who have launched or are planning to launch high-resolution imaging satellites that will have one-meter panchromatic and four-meter multispectral capability:
- Space Imaging launched its high-resolution satellite in September 1999; and
- EarthWatch is expected to launch its first high-resolution satellite in mid-2000.
In addition, the U.S. government and foreign governments may fund the development, construction, launch and operation of remote imaging satellite systems that may compete with OrbView-2 as well as the high-resolution OrbView satellites and RadarSat-2. For example, NASA's Earth Science Program has launched a satellite that provides imagery similar to that of OrbView-2, and the European Space Agency has announced that it plans to launch the Envisat satellite in mid-2000 that will include a radar instrument with 8-meter spatial resolution that may compete with RadarSat-2. The U.S. Navy has also announced its intention to procure a satellite with low-resolution hyperspectral capability from Space Technology Development Corporation, which would retain certain commercial marketing rights. There is also an Israeli government sponsored commercial joint venture that is seeking to market commercially high-resolution imagery using Israeli remote imaging satellites. Recently, Rosvooruzhenie, a Russian company, in partnership with the Russian Defense Ministry, has announced plans to launch a high-resolution (one-meter) satellite in late 2000.
BACKLOG
ORBIMAGE's contract backlog of firm commitments at December 31, 1998 and 1999 was approximately $54 million and $116 million, respectively. As of December 31, 1998 and 1999, 72% and 25%, respectively, of ORBIMAGE's backlog was with government agencies. Contract backlog of firm commitments consists of aggregate contract value for firm product orders, excluding the portion previously included in operating revenues on the basis of imagery delivered. Contract backlog of firm commitments excludes unexercised contract options at December 31, 1999 of approximately $175 million.
EMPLOYEES
As of March 20, 2000, ORBIMAGE had 126 full-time permanent employees. None of our employees is represented by a collective bargaining agreement.
ITEM 2.
ITEM 2. PROPERTIES
ORBIMAGE currently leases approximately 23,000 square feet of office and operations space in Dulles, Virginia from Orbital at cost. See "Item 13 - Certain Relationships and Related Transactions -- Services Agreement." We also lease approximately 16,000 square feet of office and operations space in St. Louis, Missouri.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
ORBIMAGE is a party to an administrative appeal regarding the terms of its OrbView-4 hyperspectral license. For a full description of this proceeding, please see "GOVERNMENT REGULATION - FAILURE TO OBTAIN REGULATORY APPROVAL COULD RESULT IN SERVICE INTERRUPTIONS" under "OUTLOOK: ISSUES AND UNCERTAINTIES."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET OF, AND DIVIDENDS ON, REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
There is no established public trading market for ORBIMAGE's common stock. As of December 31, 1999, there were 25,214,000 shares of common stock issued and outstanding, and 23,132,961 shares of common stock are subject to outstanding options or warrants to purchase, or securities convertible into, shares of common stock.
HOLDERS
As of December 31, 1999, there were two holders of shares of ORBIMAGE's common stock.
DIVIDENDS
ORBIMAGE has never declared or paid any cash dividends on its common stock or Series A preferred stock. Moreover, the indenture governing ORBIMAGE's senior notes restricts the payment of dividends. ORBIMAGE anticipates that it will retain all future earnings, if any, generated from operations to develop and expand its business. Thus, ORBIMAGE does not expect to pay cash dividends on the common stock or Series A preferred stock at any time in the foreseeable future.
SALES OF UNREGISTERED SECURITIES
From September 30, 1995 to the present, ORBIMAGE has sold and issued the following securities on the dates and for the consideration stated below:
- On April 19, 1999, ORBIMAGE offered and sold $75 million of 11 5/8% senior notes due 2005 in the principal amount of $1,000, in a private offering exempt from registration pursuant to Rule 144A. The initial purchasers were Bear, Stearns & Co. Inc. and Merrill Lynch & Co., who subsequently resold the notes to "qualified institutional buyers" (as defined in Rule 144A). On June 25, 1999, ORBIMAGE filed an exchange offer registration statement offering to exchange a substantially similar 11 5/8% Series D senior note for each outstanding note held by the qualified institutional buyers. The proceeds from this offering were used to purchase the RadarSat-2 License, for working capital and for general corporate purposes.
- On February 25, 1998, ORBIMAGE offered and sold 150,000 units in a private offering exempt from registration pursuant to Rule 144A of the Securities Act. The initial purchasers were Bear, Stearns & Co. Inc., Merrill Lynch & Co. and NationsBanc Montgomery Securities LLC, who subsequently resold the units to "qualified institutional buyers" (as defined in Rule 144A). Each unit consisted of an 11 5/8% senior note due 2005 in the principal amount of $1,000 and a warrant to purchase 8.75164 shares of ORBIMAGE's common stock. On July 24, 1998, ORBIMAGE filed an exchange offer registration statement offering to exchange a substantially similar 11 5/8% Series B senior note for each outstanding note held by the qualified institutional buyers. The proceeds from this offering were used to purchase certain pledged securities and are being used to develop and construct satellites, ground stations, market products and services and for working capital.
- Concurrently with the units offering, ORBIMAGE issued 227,295 shares of Series A preferred stock for an aggregate purchase price of $22.7 million to a group of "accredited investors."
- On December 30, 1997, ORBIMAGE issued 14,000 shares of common stock for an aggregate purchase price of $58,380 to an individual pursuant to the exercise of certain options.
- On July 3, 1997, ORBIMAGE issued 72,605 shares of Series A preferred stock for an aggregate purchase price of $7.3 million to the Export Development Corporation, an "accredited investor."
- On May 7, 1997, ORBIMAGE issued 300,100 shares of Series A preferred stock for an aggregate purchase price of $30.0 million to a group of "accredited investors."
All of the sales of Series A preferred stock described above were made in reliance on one or more exemptions from registration under the Securities Act, including exemptions for sales to accredited investors provided for by Regulation D and exemptions for sales to non-U.S. persons outside the U.S. provided for by Regulation S promulgated under the Securities Act.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of ORBIMAGE as of and for the years ended December 31, 1995, 1996, 1997, 1998 and 1999 have been derived from the audited consolidated financial statements of ORBIMAGE. The selected historical consolidated financial data set forth below should be read in conjunction with "Item 7
ITEM 7. 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 procurement agreement with Orbital Sciences Corporation ("Orbital") to purchase the OrbView-1, OrbView-3 and OrbView-4 satellites, including launch services, and the U.S. ground system necessary to operate the satellites and to collect, process and distribute imagery. Under the procurement agreement, ORBIMAGE also acquired a license to operate and control the OrbView-2 satellite (the "OrbView-2 License"). Under a license agreement with Orbital and its Canadian subsidiary, MacDonald, Dettwiler and Associates Ltd. ("MDA"), ORBIMAGE has acquired the exclusive worldwide rights to market and sell imagery from the RadarSat-2 satellite (the "RadarSat-2 License") and has in turn granted these rights to MDA. MDA will own and operate RadarSat-2 and provide operations, data reception, processing, archiving, marketing and distribution services to ORBIMAGE. RadarSat International, Inc. ("RSI"), a wholly owned subsidiary of MDA, has also appointed ORBIMAGE as a non-exclusive distributor of RadarSat-1 satellite imagery in the United States. Orbital also provides certain administrative services to ORBIMAGE such as accounting, tax, human resources and benefit-related services.
ORBIMAGE expects to launch OrbView-4 in the first quarter of 2001 and OrbView-3 in the second quarter of 2001. ORBIMAGE expects that RadarSat-2 will be launched in the fourth quarter of 2002.
Business Acquisition. In April 1998, ORBIMAGE acquired substantially all of the assets of TRIFID Corporation ("TRIFID") for $5 million. TRIFID provides sophisticated image processing software, geographic information database and production systems, imaging sensor design and related engineering services to both governmental and commercial customers. The acquisition provides ORBIMAGE with the technical personnel and production capability required to generate high-resolution imagery and derived products.
Revenues. ORBIMAGE's principal source of revenue is the sale of satellite imagery to customers, value-added resellers and distributors and sales 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 December 31, 1999, ORBIMAGE had approximately $24.6 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 and depreciating (i) the OrbView-1 satellite, (ii) the OrbView-2 License, (iii) the related ground systems, and (iv) 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 depreciates its satellites over the design life of each satellite. 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 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 April 1999, ORBIMAGE issued $75 million in principal amount of 11 5/8% senior notes due 2005 (the "1999 Offering"). In February 1998, ORBIMAGE issued $150 million of units (the "1998 Offering"), each unit consisting of $1,000 principal amount of 11 5/8% senior notes due 2005 and one warrant to purchase 8.75164 shares of ORBIMAGE common stock. 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. The capitalized interest is recorded as part of the historical cost of the assets to which it relates and will be amortized over the assets' useful lives when placed in service.
Restatement. In consultation with its new independent auditors retained in July 1999, ORBIMAGE determined that it would restate its condensed financial statements for the quarter ended June 30, 1998, the quarter ended September 30, 1998, and its financial statements for the year ended December 31, 1998, and its condensed consolidated financial statements for the quarter ended March 31, 1999, the quarter ended June 30, 1999 and the quarter ended September 30, 1999. See Note (3) of the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Revenues. Revenues for the years ended December 31, 1997, 1998 and 1999 were approximately $2.1 million, $11.7 million and $18.6 million, respectively. The increase in 1999 revenue is primarily due to the construction of OrbView-3 and OrbView-4 distributor ground stations, which generated $4.5 million in revenue. 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 years ended December 31, 1998 and 1999 also included $1.6 million and $3.0 million, respectively, in sales generated from the image processing business acquired from TRIFID in 1998. Revenues for the year ended December 31, 1997 consisted of approximately $0.8 million and $1.3 million of OrbView-1 and OrbView-2 sales, respectively.
Direct expenses. Direct expenses for the years ended December 31, 1997, 1998 and 1999 were approximately $6.3 million, $15.2 million and $21.2 million, respectively. The increase in 1999 direct expenses is primarily due to the construction costs of OrbView-3 and OrbView-4 distributor-owned ground stations, which were $4.2 million. Direct expenses increased from 1997 to 1998 primarily as a result of the OrbView-2 License amortization, additional ground system depreciation and increased operating expenses primarily related to OrbView-2, all of which began when OrbView-2 commenced commercial operations in November 1997. ORBIMAGE expects direct expenses to increase when OrbView-3, OrbView-4 and RadarSat-2 are placed in operation.
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses include the costs of marketing, advertising, promotion and other selling expenses, as well as the costs of the finance, administrative and general management functions of ORBIMAGE. SG&A expenses were approximately $2.8 million, $7.3 million (restated) and $10.4 million for the years ended December 31, 1997, 1998 and 1999, respectively. The increases in SG&A expenses in 1998 and 1999 were primarily attributable to the increase in salaries and related benefits as ORBIMAGE expanded its operations and workforce.
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, net of applicable capitalized interest. Net interest income for the years ended December 31, 1998 and 1999 was approximately $1.9 million (restated) and $2.6 million, respectively, which is net of interest expense of approximately $4.8 million (restated) and $1.6 million. Net interest income was approximately $1.3 million for the year ended December 31, 1997, and there was no interest expense in 1997. For the years ended December 31, 1998 and 1999, capitalized interest in connection with the construction of the OrbView-3, OrbView-4 and RadarSat-2 satellites and related ground system totaled $10.9 million and $23.7 million, respectively. Capitalized interest for the year ended December 31, 1999 increased due to the completion of the 1999 Offering and larger balances of assets that are under construction.
Benefit for Income Taxes. ORBIMAGE recorded income tax benefits of approximately $3.3 million and $3.6 million for the years ended December 31, 1998 and 1999, respectively. ORBIMAGE recorded an income tax benefit of approximately $1.8 million for the period May 8, 1997 through December 31, 1997. The tax benefits result from net operating losses generated during the period, in addition to decreases in deferred tax liabilities for depreciation of satellite assets, which were previously deducted for tax purposes. Prior to May 8, 1997, ORBIMAGE was an operating division of Orbital and was included in Orbital's consolidated tax return.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, ORBIMAGE had approximately $37.3 million of cash and cash equivalents and available-for-sale securities.
In October 1999, ORBIMAGE entered into a stock purchase agreement with Orbital, which provided for Orbital to purchase up to 2,500,000 shares of common stock for a price of $10 per share in minimum $5 million increments whenever ORBIMAGE's aggregate balance of cash, cash equivalents and available-for-sale securities falls below $10 million. In March 2000 in connection with the negotiation of certain modifications to our procurement agreement with Orbital (described below), we amended the stock purchase agreement to reduce the number of shares
required to be purchased by Orbital to 1,250,000 shares from 2,500,000 shares, although that number may increase in the event of certain delays in the launch of OrbView-4.
On April 22, 1999, ORBIMAGE completed the 1999 Offering, raising gross proceeds of $75 million. On February 25, 1998, ORBIMAGE completed the 1998 Offering, raising gross proceeds of $150 million. In connection with the 1998 and 1999 Offerings, ORBIMAGE purchased approximately $32.9 million of U.S. Treasury securities to fund the interest on the senior notes through March 1, 2000. The total effective interest rate on the senior notes, including the discount attributable to the value of the warrants and issuance expenses, is approximately 13.4% (restated). Concurrent with the 1998 Offering, ORBIMAGE completed a private placement of 227,295 shares of Series A preferred stock, generating approximately $21.3 million of net proceeds. During 1997, ORBIMAGE completed two private equity placements, in which it sold 372,705 shares of Series A preferred stock, generating gross proceeds of approximately $37.3 million. Orbital also increased its common equity investment in ORBIMAGE, bringing its total equity investment to approximately $91.5 million.
Operating activities provided cash of approximately $6.3 million and $9.9 million (restated) during the years ended December 31, 1997 and 1998, respectively, and used cash of $10.5 million during the year ended December 31, 1999. The decrease in operating cash flow from 1998 to 1999 is primarily attributable to a decrease in the change in accounts payable and accrued expenses of $15.1 million. The increase in operating cash flow from 1997 to 1998 is primarily attributable to an increase in accounts payable and accrued expenses of $12.4 million.
Investing activities used cash of approximately $60.4 million, $161.2 million and $77.7 million for the years ended December 31, 1997, 1998 and 1999, respectively. The increase in the use of cash in 1997, 1998 and 1999 is attributable primarily to the net purchases (net of sales and maturities) of short- and long-term investments and increased capital expenditures in those periods. After completion of its private equity and debt financings in 1997, 1998 and 1999, ORBIMAGE invested the proceeds from the financings in various short- and long-term investments, consisting primarily of commercial paper and U.S. Treasury securities. The investments were used to fund costs under the procurement agreement between ORBIMAGE and Orbital, the RadarSat-2 License and other operating costs.
Capital expenditures for the years ended December 31, 1997, 1998 and 1999 were approximately $49 million, $108.5 million and $92.4 million, respectively, 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 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 December 31, 1999, ORBIMAGE had spent approximately $265 million. ORBIMAGE expects to spend approximately $22.5 million on capital expenditures through the third quarter of 2001, the projected deployment date of OrbView-3, and an additional $24 million in post-launch, on-orbit incentives.
ORBIMAGE's acquisition of the RadarSat-2 License will cost $60 million, of which $30 million was paid in 1999. Approximately $140 million of RadarSat-2's $200 million estimated total cost will be funded by the Canadian Space Agency ("CSA") through a contract with Orbital and MDA. The remaining payments will not exceed $15 million in 2001; $10 million in 2002; and $5 million upon the successful on-orbit checkout of RadarSat-2. ORBIMAGE expects to use cash on hand, cash from operations and also may consider raising additional capital to fund RadarSat-2 License payments.
ORBIMAGE expects to fund its future capital expenditures and negative cash flows from operating activities using cash on hand and the proceeds from Orbital's additional $12.5 million equity commitment. ORBIMAGE believes that, with Orbital's additional investment, it currently has sufficient resources to meet its requirements through the fourth quarter of 2000. ORBIMAGE does not expect to generate net positive cash flow from operations sufficient to fund both operations and capital expenditures until the third quarter of 2001, when both OrbView-3 and OrbView-4 are currently expected to be operational. We are currently pursuing other financing sources. Further, additional funding may be necessary in the event of any additional OrbView-3 or OrbView-4
launch delays, cost increases or unanticipated expenses. ORBIMAGE cannot assure you that such additional financing or funding will be available on favorable terms or on a timely basis, if at all. ORBIMAGE has incurred losses since its inception, and management believes that it will continue to do so for the foreseeable future. ORBIMAGE's ability to become profitable and generate positive cash flow is dependent on a timely launch of one of the OrbView high-resolution satellites and the continued expansion of commercial services, adequate customer acceptance of ORBIMAGE's products and services and numerous other factors.
OUTLOOK: ISSUES AND UNCERTAINTIES
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor, in certain circumstances, for forward-looking statements made by or on behalf of ORBIMAGE. ORBIMAGE and its representatives may from time-to-time make written or verbal forward-looking statements, including statements contained in ORBIMAGE's filings with the Securities and Exchange Commission. All statements that address operating performance, events, or developments that ORBIMAGE expects or anticipates will occur in the future, including 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 $72.9 million through December 31, 1999. We expect losses to continue through the second 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 both OrbView-3 and OrbView-4 are operational, currently expected to be in the third quarter of 2001. We cannot assure you that the OrbView satellites will become operational on this timetable, or at all, or that we will achieve or sustain any positive cash flow or profitability thereafter.
POTENTIAL ADDITIONAL CAPITAL REQUIREMENTS -- OUR INABILITY TO FUND POTENTIAL ADDITIONAL CAPITAL REQUIREMENTS COULD DELAY SATELLITE CONSTRUCTION AND DEPLOYMENT.
ORBIMAGE expects to fund its future capital expenditures and negative cash flows from operating activities using cash on hand and the proceeds from Orbital's additional $12.5 million equity commitment. ORBIMAGE believes that, with Orbital's additional investment, it currently has sufficient resources to meet its requirements through the fourth quarter of 2000. ORBIMAGE does not expect to generate net positive cash flow from operations sufficient to fund both operations and capital expenditures until the third quarter of 2001, when both OrbView-3 and OrbView-4 are currently expected to be operational. We are currently pursuing other financing sources. Further, additional funding may be necessary in the event of any additional OrbView-3 or OrbView-4 launch delays, cost increases or unanticipated expenses. ORBIMAGE cannot assure you that such additional financing or funding will be available on favorable terms or on a timely basis, if at all.
In October 1999, we entered into a stock purchase agreement with Orbital, which provided for Orbital to purchase up to 2,500,000 shares of common stock for a price of $10 per share. In March 2000 in connection with the negotiation of certain modifications to our procurement agreement with Orbital, we amended the stock purchase agreement to reduce the number of shares required to be purchased by Orbital to 1,250,000 shares, although that number may increase in the event of certain delays in the launch of OrbView-4. There can be no assurance that Orbital will be able to fulfill its purchase commitment. Orbital's inability to fulfill its purchase commitment could have a material effect on ORBIMAGE's financial condition and results of operations. In such an event, we cannot assure you that additional capital will be available on favorable terms or on a timely basis, if at all.
A significant portion of our capital requirements are related to developing, constructing and launching the OrbView satellites, constructing and activating the related U.S. ground systems and acquiring the RadarSat-2
License. While most of these costs are currently fixed under agreements with Orbital and MDA, we cannot assure you that these costs will not increase over time. For example, in March 2000, we agreed to a cost increase of $14 million under our procurement agreement with Orbital. In exchange for allowing us to pay this cost increase in the form of post-launch, on-orbit incentives, we also amended our stock purchase agreement with Orbital to reduce Orbital's stock purchase commitment to $12.5 million from $25 million, as described above. We will pay for launch and on-orbit insurance and technological assistance for OrbView-3, OrbView-4 and RadarSat-2 on a cost-plus or cost-reimbursable basis. Many factors outside our control influence the costs of these and other items and services, and we may need to raise more capital if any of these costs increase materially.
We may also need to raise additional capital if, for example:
- significant delays occur in deploying OrbView-3, OrbView-4 or RadarSat-2;
- we do not enter into agreements with customers, value-added resellers or distributors for high-resolution imagery in the time frames or on the terms that we anticipate;
- our estimated net operating deficit increases because we incur significant unanticipated expenses, such as costs for resolving satellite operational difficulties;
- we have to modify all or part of OrbView-3 and OrbView-4 or ground system designs to meet changed or unanticipated market, regulatory or technical requirements;
- we decide to increase our value-added product development costs; or
- we decide to further expand our fleet of satellites or to acquire additional imagery distribution rights through licensing arrangements or otherwise.
If these or other events occur, we cannot assure you that we could raise additional capital on favorable terms or on a timely basis or at all. A substantial shortfall in funding would delay or prevent deployment of OrbView-3, OrbView-4 or RadarSat-2.
SCHEDULE DELAYS - ADDITIONAL DELAYS IN THE COMMERCIAL OPERATION OF OUR SATELLITES COULD ADVERSELY AFFECT OUR BUSINESS.
We have previously experienced delays in the launch schedules of OrbView-3 and OrbView-4. We have recently experienced additional delays in the production schedules of OrbView-3 and RadarSat-2, which have resulted in the delay in the launch dates of OrbView-3 and RadarSat-2 to the second quarter of 2001 and fourth quarter of 2002, respectively. We previously encountered significant delays in the design, production and testing of the OrbView-2 satellite that was launched in August 1997.
We could experience additional delays in the commercial operation of OrbView-3, OrbView-4 and/or RadarSat-2 from a variety of causes, including:
- delays in designing, constructing, integrating or testing the satellites, satellite components and related ground systems;
- delayed or unsuccessful launches;
- subcontractor or manufacturer delays;
- delays in receiving, or restrictions on, the licenses necessary to construct and operate the satellite systems;
- delays under our procurement agreement with Orbital, or delays under the CSA contract with MDA, including delays by CSA in procuring a launch vehicle on a timely basis for RadarSat-2; or
- other events beyond our control.
The perceived and actual timing of satellite launches may affect competition in the remote imaging industry. 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 or OrbView-4 FCC licenses and negatively affect our marketing efforts. The perception of potential delays also could affect our marketing efforts. We cannot assure you that any of these satellites will be launched or deployed on a timely basis.
In addition, under our existing agreements with certain OrbView-3 and OrbView-4 regional distributors, the distributors have the right to terminate their agreements because of the recent OrbView-3 launch delay. In the event these distributors terminate these agreements, we cannot assure you that we will be able to find replacement distributors on terms acceptable to us or in a timely manner, if at all. Our ability to replace such distributors could have an adverse effect on our business.
LAUNCH FAILURES -- A LAUNCH VEHICLE FAILURE WOULD ADVERSELY AFFECT OUR ABILITY TO DELIVER IMAGERY PRODUCTS AND SERVICES.
Satellite launches are subject to significant risks, including partial or complete launch vehicle failure. Launch vehicle failure may cause disabling damage to or loss of a satellite or may result in a failure to deliver the satellite to its proper orbit. We have contracted with Orbital to launch OrbView-3 on a Pegasus launch vehicle, which has flown 28 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. We expect CSA to provide a launch vehicle for RadarSat-2, which has not yet been identified. We cannot assure you that OrbView-3, OrbView-4 or RadarSat-2 will be successfully launched. A launch failure of OrbView-3, OrbView-4 or RadarSat-2, or the failure of CSA to provide a launch vehicle for RadarSat-2, could negatively affect our business, financial condition, results of operations 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 has only very recently become commercially available. Consequently, it is difficult to predict accurately the ultimate size of the market and the market acceptance of products and services based on this type of imagery. Our strategy to target certain markets for our satellite imagery relies on a number of assumptions, some or all of which may be incorrect. Actual markets could vary materially from the potential markets that we have identified.
We cannot accurately predict whether our products and services will achieve market acceptance or whether the market will demand our products and services on terms we find acceptable. Market acceptance depends on a number of factors, including the spatial and spectral quality, scope, timeliness, sophistication and price of our imagery products and services and the availability of substitute products and services. Lack of significant market acceptance of our products and services, particularly our high-resolution imagery products and services, delays in acceptance, or failure of certain markets to develop would negatively affect our business, financial condition and results of operations.
TECHNOLOGICAL AND IMPLEMENTATION RISKS -- WE CANNOT ASSURE YOU THAT OUR SATELLITES WILL OPERATE AS DESIGNED.
The designs for OrbView-3 and OrbView-4 are complete, and the design for RadarSat-2 is in progress. These satellites' designs may require modifications to achieve the desired performance criteria, which could result in delays in satellite deployment. Each of these satellites will employ advanced technologies and sensors that will be subject to severe environmental stresses during launch or in space that could affect the satellites' performance. Employing advanced technologies is further complicated by the fact that the satellites will be in space. Hardware component problems in space could require premature satellite replacement, with attendant costs and revenue losses. In addition, human operators may execute improper implementation commands that negatively impact a satellite's
performance.
We cannot assure you that OrbView-3, OrbView-4 or RadarSat-2 will operate successfully in space, or that each of these satellites will perform or continue operating throughout their expected design lives. Even if these satellites are launched and operated properly, minor technical flaws in the satellites' sensors could significantly degrade their performance, which could materially affect our ability to market our products successfully.
We have not procured a spare high-resolution OrbView satellite, nor do we maintain an inventory of long lead-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:
The expected design lives of these satellites are affected by a number of factors, including the quality of construction, the expected gradual environmental degradation of solar panels, the durability of various satellite components and the orbits in which the satellites are placed. Random failure of satellite components could cause damage to or loss of a satellite before the end of its design life. In rare cases, electrostatic storms or collisions with other objects could damage our satellites. We cannot assure you that each satellite will remain in operation for its expected design life. We expect the performance of each satellite to decline gradually near the end of its design life.
We anticipate using funds generated from operations to develop follow-on high-resolution satellites. If we do not generate sufficient funds from operations, and if we are unable to obtain financing from outside sources, we will not be able to deploy follow-on satellites to replace OrbView-3 or OrbView-4 at the end of their expected design lives. We cannot assure you that we will be able to raise additional capital, on favorable terms or on a timely basis, if at all, to develop follow-on high-resolution satellites.
INSURANCE -- LIMITED INSURANCE MAY NOT COVER ALL RISKS OF LOSS.
We maintain or expect to maintain the following insurance policies:
- OrbView-1. OrbView-1 is not insured.
- OrbView-2. We have a renewable on-orbit insurance policy for OrbView-2 to cover losses up to $12 million for its current operational year. We have not yet determined the amounts and types of coverage, if any, we will purchase for OrbView-2 in the future.
- OrbView-3 and OrbView-4. The senior note indentures require us to maintain launch, on-orbit checkout and on-orbit operations insurance for OrbView-3 and OrbView-4. This insurance may not be sufficient to cover the cost of a replacement high-resolution satellite.
- RadarSat-2. We will purchase up to $60 million of insurance coverage for the RadarSat-2 License against launch or on-orbit failure of the RadarSat-2 satellite. This insurance would allow us to recover our initial capital investment in the RadarSat-2 License, but would not be sufficient to cover additional business losses or the cost of a replacement radar satellite.
We may find it difficult to insure certain risks, such as partial degradation of functionality of a satellite. Insurance market conditions or factors outside our control at the time we buy the required insurance, such as failure of a satellite using similar components or a similar launch vehicle, could cause premiums to be significantly higher than current estimates. These factors could cause other terms to be significantly less favorable than those currently available, may result in limits on amounts of coverage that we can obtain or may prevent us from obtaining insurance at all. Furthermore, we cannot assure you that proceeds from insurance we are able to purchase will be sufficient to replace a satellite due to cost increases and other factors beyond our control.
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 mid-2000; and
- West Indian Space, Ltd., which has announced plans to launch and operate the Earth Remote Observation System constellation of high-resolution commercial imaging satellites.
The U.S. government and foreign governments also may develop, construct, launch and operate remote imaging satellites that generate imagery competitive with our products and services. In addition, the U.S. government will probably continue to rely on government-owned and operated systems for certain highly classified satellite-based high-resolution imagery.
We believe we will have a competitive advantage because we expect to have sufficient pricing flexibility to be a low-price commercial provider within our targeted markets and applications due to the relatively lower cost of our satellite systems as compared to those of our competitors. But the low marginal cost of producing satellite imagery once a satellite is operating could cause adverse pricing pressure, decreased profits or even losses. Our competitors or potential competitors with greater resources than ours could in the future offer satellite-based imagery or other products having more attractive features than our products. New technologies, even if not ultimately successful, could negatively affect our marketing efforts. More importantly, if competitors develop and launch satellites with more advanced capabilities and technologies than ours, this competition could harm our business.
DEPENDENCE ON SUPPLIER -- DEPENDENCE ON ONE PRIMARY SUPPLIER COULD RESULT IN DELAYS IF THE SUPPLIER FAILS TO PERFORM, AND OUR RECOURSE AGAINST THE SUPPLIER IS LIMITED.
We depend on one primary 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;
- 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 a procurement agreement between Orbital and us. If Orbital fails to perform its obligations adequately under the procurement agreement, we would be forced to delay deployment of OrbView-3 and/or OrbView-4 until we located an alternative provider. Orbital's liability to us for claims under the procurement agreement is limited to $10 million. 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 a services agreement with Orbital, Orbital has agreed to provide us with various administrative and operational functions on a cost reimbursable or cost-plus fee basis. These functions include on-orbit mission operations and anomaly resolution for OrbView-2, OrbView-3 and OrbView-4. If Orbital fails to perform its obligations under the services agreement, we may not be able to operate these satellites properly. The services agreement terminates for each OrbView satellite three years after the launch of each satellite. We cannot assure you that we will be able to renew the services agreement on favorable terms, 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, including the right to sublicense with our prior consent, to market and sell RadarSat-2 imagery. MDA will perform all RadarSat-2 marketing operations, subject to our supervision and approval. MDA's failure to successfully market RadarSat-2 imagery would have a material adverse effect on our ability to distribute and sell radar imagery, which would materially adversely affect our business.
POTENTIAL CONFLICTS OF INTEREST WITH ORBITAL -- WE RELY ON ORBITAL FOR CERTAIN OPERATIONS AND SERVICES THAT ARE CRITICAL TO OUR BUSINESS. ORBITAL'S INTERESTS MAY CONFLICT WITH OURS.
Orbital owns 52.1% of our outstanding voting stock on a fully diluted basis, and has agreed to acquire up to an additional 1,250,000 shares of common stock. 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 procurement agreement relating to OrbView-1, OrbView-3, OrbView-4 and the related ground system, the OrbView-2 License, the RadarSat-2 License, a services agreement and a non-compete agreement, each of which is material to our business. We also have an agreement with Orbital's subsidiary, MDA, pursuant to 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. As a result of an acquisition, Orbital holds approximately a 4% equity interest in EarthWatch. 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 outside of the United States. 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. ORBIMAGE has appealed for a relaxation of the terms of the OrbView-4 hyperspectral license. We cannot assure you that we will prevail in our appeal.
The DoC has informed ORBIMAGE that Orbital must obtain a DoC license for the RadarSat-2 satellite by virtue of its controlling ownership of MDA. Additionally, the DoC has informed ORBIMAGE that it is not required to obtain a DoC license to function as a RadarSat-2 distributor. If Orbital cannot obtain the DoC license on acceptable terms, our financial condition and results of operations would be materially adversely affected.
The DoC licenses provide that the U.S. government can interrupt service during periods of national emergency. Actual or threatened interruptions could adversely affect our ability to market our products abroad. In addition, the DoC has the right to review and approve our agreements with international customers for high-resolution optical imagery. These reviews could delay or prohibit us from executing these agreements. Canada does not currently have licensing requirements similar to the DoC's requirements, but has proposed legislation, which would regulate the ownership and operation of remote sensing satellites. Currently, the Canadian government can interrupt RadarSat-2 service during certain periods of national emergency.
Our renewal application for an experimental FCC license for OrbView-2 was granted effective January 1999. This license expires in January 2003 and may be revoked for failure to comply with its terms.
Our application with the FCC for a license to launch and operate OrbView-3 and OrbView-4 was granted in February 1999 and our applications to operate the associated ground systems were granted in May 1999. These licenses will expire in 10 years, but may be revoked for failure to comply with their terms or failure to meet certain construction and launch milestones.
International. All satellite systems operating internationally must follow general international regulations and the specific laws of the countries in which satellite imagery is downlinked.
The CSA has agreed to coordinate with the International Telecommunication Union to secure the necessary authorizations to operate RadarSat-2 in Canada and the FCC is undertaking the ITU coordination process on behalf
of OrbView-3 and OrbView-4. The CSA's or the FCC's failure to obtain the necessary coordination in a timely manner could have a material adverse effect on our business, financial condition and results of operations.
Our customers or distributors are responsible for obtaining local regulatory approval from the governments in the countries in which they do business to receive imagery directly from OrbView-2, OrbView-3, OrbView-4 and RadarSat-2. If these regional distributors are not successful in obtaining the necessary approvals, we will not be able to distribute real time OrbView or RadarSat-2 imagery in those regions. Our inability to offer real time service in a significant number of foreign countries could negatively affect our business. In addition, regulatory provisions in countries where we wish to operate may impose unduly burdensome restrictions on our operations. Our business may also be adversely affected if the national authorities where we plan to operate adopt treaties, regulations or legislation unfavorable to foreign companies.
Launch license. Commercial U.S. space launches require licenses from the U.S. Department of Transportation ("DoT"). Under our procurement agreement with Orbital, Orbital must ensure that the appropriate DoT commercial launch licenses are in place for the OrbView-3 and OrbView-4 launches. We cannot assure you that Orbital will continue to be successful in its efforts to obtain the necessary licenses or regulatory approvals. Orbital's inability to secure necessary licenses or approvals could delay launches. Delays could harm our business, financial condition and results of operations and our ability to service our debt.
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 that we obtain an export license from the DoC or the U.S. Department of State. If the DoC or the State Department does not issue these export licenses, or if these licenses are significantly delayed, or if restrictions are imposed on these licenses, our financial condition and results of operations could be materially adversely affected.
RISKS ASSOCIATED WITH DISTRIBUTORS AND RESELLERS -- FOREIGN DISTRIBUTORS AND VALUE-ADDED RESELLERS MAY NOT EXPAND COMMERCIAL MARKETS.
We will rely on foreign regional distributors to market and sell internationally a significant portion of our imagery from OrbView-3, OrbView-4 and RadarSat-2. We expect our existing and future foreign regional distributors to act on behalf of, or contract directly with, foreign governments to sell imagery for national security and related purposes. These regional distributors may not have the skill or experience to develop regional commercial markets for our products and services. If we fail to enter into regional distribution agreements on a timely basis or if our foreign regional distributors fail to market and sell our imagery products and services successfully, these failures would negatively impact our business, financial condition and results of operations, and our ability to service our debt.
We intend to rely on value-added resellers to develop, market and sell our products and services to address certain target markets. If our value-added resellers fail to develop, market and sell OrbView products and services successfully, this failure would negatively affect our business, financial condition and results of operations, and our ability to service our debt.
RISK ASSOCIATED WITH INTERNATIONAL OPERATIONS -- OUR INTERNATIONAL BUSINESS EXPOSES US TO RISKS RELATING TO INCREASED REGULATION AND POLITICAL OR ECONOMIC INSTABILITY IN FOREIGN MARKETS.
We expect to derive substantial revenues from international sales of products and services. International operations are subject to certain risks, such as:
- changes in domestic and foreign governmental regulations and licensing requirements;
- deterioration of once-friendly relations between the United States and a particular foreign country;
- increases in tariffs and taxes and other trade barriers; and
- changes in political and economic stability, including fluctuations in the value of foreign currencies, which
may make payment in U.S. dollars more expensive for foreign customers.
These risks are beyond our control and could have a material adverse effect on our business.
GOVERNMENT CONTRACTS -- WE DEPEND ON CONTRACTS WITH GOVERNMENT AGENCIES FOR A SUBSTANTIAL PORTION OF OUR REVENUES. GOVERNMENT AGENCIES CAN TERMINATE THEIR CONTRACTS AT ANY TIME.
Revenues from government contracts accounted for approximately 95%, 94% and 66% of our revenues for the years ended December 31, 1997, 1998 and 1999, respectively. As of December 31, 1999, contracts with U.S. government agencies constituted approximately 25% 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 contract with Orbital and we wish to proceed with our hyperspectral program, we would incur the remaining cost of upgrading OrbView-4 with hyperspectral capability. Similarly, if the CSA terminates the CSA contract 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. In addition, our approximately $0.6 million per year contract with NASA for the provision of OrbView-1 imagery expires on April 17, 2000 and may not be renewed.
CHANGE OF CONTROL -- THE HOLDERS OF SERIES A PREFERRED STOCK COULD TAKE CONTROL OF OUR BOARD OF DIRECTORS UPON THE OCCURRENCE OF CERTAIN EVENTS.
We are a party to a stockholders' agreement with the holders of our Series A preferred stock. This stockholders' agreement and our charter contain provisions relating to the election of directors.
Our charter permits the Series A holders to designate additional members to the board of directors and thus gain control of the board of directors if we fail to pay timely dividends or to repurchase the Series A preferred stock in some circumstances.
If the Series A holders designated these additional directors, the Series A directors would control our management and policies and could make decisions affecting the control of ORBIMAGE. These additional directors would serve until the event giving rise to their appointment has been resolved. Even without the appointment of these additional directors, the Series A holders have de facto control over certain corporate actions enumerated in the stockholders' agreement, because these actions require the approval of at least one of the Series A directors. These actions include the merger, consolidation, liquidation or sale of all or substantially all of our assets, the issuance of equity securities in certain circumstances, and the incurrence of certain indebtedness of more than $500,000.
FINANCING CHANGE OF CONTROL OFFER -- WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE SENIOR NOTE INDENTURES.
Upon the occurrence of certain change of control events, we will be required to offer to repurchase all outstanding senior notes at a price equal to 101% of the principal amount and to offer to repurchase all of the outstanding Series A preferred stock, subject to the senior rights of the senior note holders. It is possible that we will not have sufficient funds at the time of the change of control to make the required repurchases. If we are not able to make the required repurchases, we would be in default under the senior note indentures.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1999, ORBIMAGE had senior notes outstanding of $214.6 million with a fair value of $155.3 million as estimated by quoted market prices. The senior notes mature on March 1, 2005. Interest on the senior notes accrues at a rate of 11 5/8% per annum and is payable semi-annually in arrears on March 1 and September 1. ORBIMAGE purchased U.S. Treasury securities in an amount sufficient to pay the interest on the senior notes through March 1, 2000. As of December 31, 1999, held-to-maturity securities restricted for the payment of interest on the senior notes totaled $12.9 million.
ORBIMAGE does not have any derivative financial instruments as of December 31, 1999, and believes that the interest rate risk associated with its senior notes and the market risk associated with its securities are not material to the results of operations of ORBIMAGE. The available-for-sale securities subject ORBIMAGE's financial position to interest rate risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements listed under heading "(a) (1) Financial Statements" of Item 14 hereof, which financial statements are incorporated herein by reference in response to this Item 8.
OTHER INFORMATION
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On April 22, 1999, KPMG LLP ("KPMG") resigned as the auditors for ORBIMAGE. KPMG's reports on ORBIMAGE's financial statements for the fiscal years ended December 31, 1997 and 1998 did not contain any adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal year ended December 31, 1997, there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the subject matter of the disagreements in connection with KPMG's reports.
During the fiscal year ended December 31, 1998 and the interim period ended April 22, 1999, ORBIMAGE and KPMG had certain disagreements regarding prospective accounting treatment for recognizing revenue on certain customer purchase contracts. Those disagreements related to (1) the correct application of the revenue accounting for certain related party contracts in future periods and (2) disclosure of the nature of the contracts in certain of ORBIMAGE's registration statements and an offering memorandum issued in connection with an exempt debt securities offering in April 1999. ORBIMAGE ultimately disclosed these transactions in the exempt offering in such a manner so that the offering memorandum did not suggest that these contracts would result in revenues in the future and clearly identified these contracts as between Orbital Science Corporation and the customer rather than ORBIMAGE and the customer. ORBIMAGE authorized KPMG to respond fully to the inquiries of its successor accountant concerning the subject matter of the disagreements.
There were no reportable events (as defined in SEC Regulation S-K, Item 304(a)(1)(v)) during the fiscal years ended December 31, 1997 and 1998 and the interim period ended April 22, 1999.
KPMG issued a letter to the SEC as an exhibit to the Form 8-K/A dated June 10, 1999 stating that they agreed with the above statements.
On July 21, 1999, ORBIMAGE engaged PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") as ORBIMAGE's independent accountant to audit its consolidated financial statements for the year ended December 31, 1999. During the two most recent fiscal years of ORBIMAGE, and during the subsequent interim period preceding the engagement of PricewaterhouseCoopers, neither ORBIMAGE nor anyone on its behalf consulted with PricewaterhouseCoopers regarding (a) the application of accounting principles to any transactions, either completed or proposed, or the type of audit opinion that might be rendered on ORBIMAGE's financial statements, or (b) any matters that were the subject of disagreements between ORBIMAGE and KPMG, its former certifying accountant, which disagreements were described in Amendment No. 2 to ORBIMAGE's Current Report on Form 8-K/A filed on June 10, 1999. Neither any written report nor any oral advice was provided to ORBIMAGE by PricewaterhouseCoopers regarding any of the above.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the directors and executive officers of ORBIMAGE as of the date of this Report.
DAVID W. THOMPSON has served as Chairman of the Board and a director since 1993. Mr. Thompson also served as the Chief Executive Officer from 1993 through February 2000. He is also the Chairman, Chief Executive Officer and a director of Orbital. Mr. Thompson co-founded Orbital in 1982. Prior to founding Orbital, Mr. Thompson was employed by Hughes Electronics Corporation as Special Assistant to the President of its Missile Systems Group and by NASA at the Marshall Space Flight Center as a project manager and engineer, and also worked at the Charles Stark Draper Laboratory on the Space Shuttle's autopilot design.
GILBERT D. RYE is our President and Chief Executive Officer, a position he has held since February 2000. From 1993 through February 2000, Mr. Rye served as President and Chief Operating Officer. From 1990 to 1993, he was Orbital's Senior Vice President for Marketing and Business Development. Between 1985 and 1989, Mr. Rye was President of Comsat Government Systems (a subsidiary of Comsat Corporation) and Vice President and General Manager of Space and Technology for BDM International. Mr. Rye is a retired Colonel from the U.S. Air Force with over 25 years of experience in various intelligence and space-related program management and policy-making positions.
EDWARD D. NICASTRI has been our Vice President of Engineering and Operations since 1997. From 1994 to early 1997, Mr. Nicastri served as Vice President for Advanced Projects with Orbital's Space Systems Division. Prior to joining Orbital in 1994, Mr. Nicastri was Director of Space Systems at the Defense Advanced Research Projects Agency from 1988 to 1993. Prior to 1988 Mr. Nicastri served as a Colonel in the U.S. Air Force, holding positions in the development and operation of several military, satellites and other national space systems.
ARMAND D. MANCINI was appointed Vice President, Chief Financial Officer of ORBIMAGE in March 1998. He had been the Vice President of Finance since October 1994. From September 1991 to September 1994, Mr. Mancini was the Vice President of Finance for Orbital's Communications and Information Systems Group and Space Systems Division. Prior to that, Mr. Mancini worked as a senior manager with various defense contractors who provide training and classified weapons systems to the U.S. government.
ALAN R. SCHWARTZ OCIO was appointed Vice President, General Counsel and Assistant Secretary of ORBIMAGE in April 1999. Prior to joining ORBIMAGE, he was an associate with Piper & Marbury LLP from 1997 to March 1999, and Cole, Corette & Abrutyn from 1988 to 1997.
GENERAL (RET.) JAMES A. ABRAHAMSON has been a member of the Board since April 1998. General Abrahamson currently serves as Chairman and Chief Executive Officer of StratCom, LLC and Air Safety Consultants. From 1992 to 1995, he served as Chairman of Oracle Corporation. He served as Executive Vice President for Corporate Development for Hughes Aircraft Company from October 1989 to April 1992 and President of the Transportation Sector for Hughes Aircraft Company from April 1992 to September 1992. General Abrahamson directed the Strategic Defense Initiative from April 1984 until he retired from the Air Force in January 1989 at the rank of Lieutenant General. General Abrahamson is also a director of Western Digital Corporation and Stratesec Corporation.
BRUCE W. FERGUSON has been a member of the Board since 1993. Mr. Ferguson is Chairman, President and Chief Executive Officer of Edenspace Systems Corporation, an environmental services company he co-founded in 1998. He is a co-founder of Orbital and a member of its Board of Directors. Mr. Ferguson was Senior Vice President, Special Projects of Orbital from 1997 to 1999 and was Executive Vice President and General Manager/Communications and Information Services Group of Orbital from 1993 until 1997. Mr. Ferguson was Executive Vice President and Chief Operating Officer of Orbital from 1989 to 1993 and Senior Vice President/Finance and Administration and General Counsel of Orbital from 1985 to 1989.
RICHARD REISS, JR. has been a member of the Board since 1997. Mr. Reiss founded Georgica Advisors LLC in 1997, a private investment firm, to make both public and private investments in the communications, media and entertainment industries. From 1982 to 1997, Mr. Reiss was the Managing Partner of Cumberland Associates, a private investment firm that he joined in 1978, and Cumberland Partners and LongView Partners, both investment partnerships. From 1969 to 1977, Mr. Reiss was Senior Vice President and Director of Research for Shearson Lehman Brothers. Mr. Reiss is a Trustee and Treasurer of Barnard College and a Trustee of the Manhattan Institute. He is also a Director of The Lazard Funds, Inc., a Director of nStor Technologies and Chairman of the Executive Committee and a Director of O'Charley's.
WILLIAM W. SPRAGUE has been a member of the Board since 1997. Mr. Sprague is the founder and President of Crest Communications Holdings LLC, a private investment firm that invests in media and communications companies. From 1989 to 1996, Mr. Sprague served in various positions at Smith Barney, Inc., including as a Managing Director and head of the Media and Telecommunications Group, as co-head of the Mergers and Acquisitions Group and as a senior member of Smith Barney Inc.'s high yield group. From 1985 to 1989, Mr. Sprague was a Vice President at Kidder Peabody & Co. Incorporated in the High Yield/Merchant Banking Group. Mr. Sprague is currently a director of Centennial Communication Inc., Ethan Allan Interiors Inc., Wave Transnational LLC, One-On-One Sports, Inc. and Communications Resources, Inc.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation earned for services rendered to ORBIMAGE in the fiscal years ended December 31, 1997, 1998 and 1999, by ORBIMAGE's Chief Executive Officer and the most highly compensated executive officers in all capacities in which they served (the "Named Officers").
SUMMARY COMPENSATION TABLE
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(1) Includes bonuses earned in 1999 and paid in 2000.
(2) Includes matching and profit-sharing contributions earned under a 401(k) Plan and the dollar value of premiums paid by ORBIMAGE with respect to life insurance for their benefit.
(3) Mr. Thompson's salary, bonus and long-term compensation (other than options) are paid by Orbital. During the three years ended December 31, 1999, Mr. Thompson served as Chief Executive Officer. Effective February 2000, Mr. Thompson no longer serves as Chief Executive Officer. Except as set forth in the above table, Mr. Thompson was not compensated for services rendered in his capacity as an officer of ORBIMAGE.
(4) During the three years ended December 31, 1999, Mr. Rye served as President and Chief Operating Officer. Effective February 2000, Mr. Rye serves as President and Chief Executive Officer.
(5) Mr. Schwartz Ocio joined ORBIMAGE in March 1999.
ORBIMAGE pays Gen. Abrahamson a $1,000 director's fee for each meeting of the Board that he attends. In addition, ORBIMAGE reimburses all directors for out of pocket expenses incurred for their services rendered as directors.
INDEMNIFICATION AGREEMENTS
We have entered into an indemnification agreement with each of our executive officers and directors. Each agreement provides that if an executive officer or director is or is threatened to be made a party to an actual or threatened civil, criminal, administrative or investigative action, suit or proceeding (other than an action brought by or in the right of ORBIMAGE), we will indemnify that executive officer or director against expenses (including attorneys' fees), judgments, fines and amounts actually and reasonably incurred by him or her in connection with that action, suit or proceeding, if he or she acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of ORBIMAGE. With respect to any criminal action or proceeding, our obligation to indemnify the executive officer or director applies so long as he or she had no reasonable cause to believe that his or her conduct was unlawful. If an executive officer or director is or is threatened to be made a party to an actual or threatened action or suit that is brought by or in the right of ORBIMAGE, we are still obligated to indemnify that officer or director unless he or she is determined to be liable to ORBIMAGE.
STOCK OPTION PLAN
In November 1996, the Board adopted the Stock Option Plan, which provides for grants of either incentive or non-qualified stock options to officers, directors and employees of ORBIMAGE and Orbital. Under the terms of the Stock Option Plan, incentive stock options may not be granted at less than 100% of the fair market value at the date of grant, and non-qualified options may not be granted at less than 85% of the fair market value at the date of grant. Each option under the Stock Option Plan vests at a rate set by the Board in each individual's option agreement, generally in one-third increments over a three-year period following the date of grant. Options expire no more than ten years following the grant date.
As of December 31, 1999, 4,800,000 shares of common stock were authorized for issuance under the Stock Option Plan, of which 3,293,572 options were outstanding at exercise prices ranging from $3.60 to $6.25 per share. Of the total number of options outstanding, 1,916,611 were currently exercisable.
On February 14, 2000, ORBIMAGE granted 412,347 options to purchase shares of common stock to employees, directors and consultants. The stock options were granted with an exercise price of $7.25 and generally vest in one-third increments over a three-year period. ORBIMAGE will expense the value of the 2,000 compensatory options that were issued to consultants over the three-year vesting period of the options.
OPTION GRANTS IN LAST FISCAL YEAR
Shown below is information on grants of stock options to the Named Officers pursuant to the Stock Option Plan during the fiscal year ended December 31, 1999, which options are reflected in the Summary Compensation Table.
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(1) Options generally vest in one-third increments over a three-year period.
(2) Options are granted at the fair market value on the date of grant, as determined by the Board. Certain factors considered by the Board in determining the fair market value of options include, without limitation: (i) valuations done in connection with recent financings; (ii) the conversion price of ORBIMAGE's Series A preferred stock; (iii) results of operations; (iv) whether ORBIMAGE has entered into any new contracts; and (v) the lack of a market for ORBIMAGE common stock.
The Board has implemented an incentive bonus plan. Members of senior management are eligible for bonuses equal to between 10% and 50% of their base salary, based upon their success in meeting certain team and individual incentives that are defined by the Board.
In April 1999, ORBIMAGE awarded options to purchase 7,500 shares of common stock to each of the four non-employee directors. These stock options were granted with an exercise price of $6.20 and vest over a one-year period.
AGGREGATED OPTIONS; YEAR END OPTION VALUES
The following table sets forth the number of options and the value of unexercised and exercised options held by the Named Officers as of December 31, 1999:
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(1) The value of unexercised in-the-money options at December 31, 1999 assumes a fair value of $6.25 for ORBIMAGE's common stock.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of the common stock and Series A preferred stock as of March 30, 2000: (i) by each person who beneficially owns more than five percent of the Series A preferred stock (which votes as a class on certain matters); (ii) by each person who beneficially owns more than five percent of the common stock (including the Series A preferred stock on an as-converted basis); (iii) by each director and Named Officer; and (iv) by all executive officers and directors as a group.
All persons listed below have an address in care of ORBIMAGE's principal executive offices unless otherwise noted.
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* Less than one percent.
(1) The persons named in this table have sole voting power with respect to all shares shown as beneficially owned by them, except as indicated in other footnotes to this table. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days after March 30, 2000, are deemed outstanding.
(2) Each of Crest Funding Partners, L.P., Merrill Lynch KECALP L.P., Morgan Guaranty Trust Co. and Georgica Advisors LLC or their respective affiliates currently owns shares of Series A preferred stock. Each share of Series A preferred stock is convertible into approximately 24 shares of common stock.
(3) Includes 169,411 shares owned by Merrill Lynch KECALP L.P. 1997, 55,826 shares owned by Merrill Lynch KECALP L.P. 1999, 32,348 shares owned by Merrill Lynch KECALP International L.P. 1997, and 18,610 shares owned by Merrill Lynch KECALP International L.P. 1999.
(4) William W. Sprague, an ORBIMAGE director, is the founder and President of Crest Management Company, LLC, the manager of Crest Funding Partners, L.P.
(5) Includes 159,738 shares owned by Crest Funding Partners, L.P., and 59,948 shares owned by Crest Management Company LLC.
(6) Includes 115,826 shares owned by Morgan Guaranty Trust Company of New York, as Trustee of the Commingled Pension Trust Fund (Multi-Market Special Investment Fund II) of Morgan Guaranty Trust Company of New York; 23,027 shares owned by Morgan Guaranty Trust Company of New York, as Trustee of the Multi-Market Special Investment Trust Fund of Morgan Guaranty Trust Company of New York; and 24,502 shares owned by Morgan Guaranty Trust Company of New York, as Investment Manager and Agent for the Alfred P. Sloan Foundation (Multi-Market Account).
(7) Richard Reiss, Jr., an ORBIMAGE director, is the founder and President of Georgica Advisors LLC.
(8) Includes 73,744 shares owned by Georgica Partners and 9,733 shares owned by Georgica International Fund.
(9) Consists of shares of common stock issuable upon the exercise of options.
(10) Includes 14,000 shares of common stock issued pursuant to option exercises.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK PURCHASE AGREEMENT
During 1997, we sold 372,705 shares of our Series A Cumulative Convertible Preferred Stock for $100 per share pursuant to a stock purchase agreement, generating net proceeds of approximately $33.5 million. We used these proceeds to fund a portion of the purchase of the OrbView satellite systems and the OrbView-2 License, and for initial operating expenses and other general corporate purposes. During 1998, the Series A holders exercised their rights under the stock purchase agreement to purchase an additional $22.7 million of Series A preferred stock. This Series A offering generated net proceeds of approximately $21.3 million.
Capital Contributions. As part of the initial sale of Series A preferred stock in 1997, Orbital contributed approximately $91.5 million to our capital and paid us $40.9 million to purchase OrbView-1 and OrbView-2 imagery, for total payments to us of $132.4 million. These payments were offset by approximately $95 million that we owed to Orbital under the procurement agreement and the services agreement, resulting in net payments to us of $37.4 million. See "-- Procurement Agreement," and "-- Services Agreement."
Change of Control. We have certain obligations to our Series A holders upon a "change of control" as defined in the stock purchase agreement If a change of control occurs before the latest of:
- the successful in-orbit checkout of OrbView-3,
- the closing of an initial public offering that meets certain criteria, or
- the end of a 180-day period in which the average price of the common stock exceeds a certain level relative to the conversion price of the Series A preferred stock,
then we must offer to purchase, subject to the rights of the holders of the senior notes, all outstanding shares of Series A preferred stock for a purchase price of 101% of the liquidation amount of the stock. If the change of control occurs before the fourth anniversary of the initial 1997 sale of the Series A preferred stock, then we must also pay each
Series A holder an amount equal to the dividends that would have accrued on such holder's shares of Series A preferred stock from the date of the change of control through the fourth anniversary of the initial 1997 sale of the Series A preferred stock.
STOCKHOLDERS' AGREEMENT
In connection with the 1997 sale of our Series A preferred stock, we entered into a stockholders' agreement with Orbital and the Series A holders. The stockholders' agreement governs certain voting rights of, and restrictions upon transfer on, the Series A preferred stock.
Board of Directors. The stockholders' agreement provides that the Board shall consist of up to five members. The majority of the Series A holders have the right to elect two directors, and may be entitled to elect two additional directors upon the occurrence of certain events described in "Description of Capital Stock -- Series A Preferred Stock -- Voting." The majority of the holders of the common stock also have the right to elect two directors. The fifth member of the Board must be an independent director, elected by a majority vote of all stockholders, where each Series A holder is entitled to vote the number of shares of common stock into which such holder's Series A preferred stock would be convertible. However, as long as Orbital holds 50% of the voting stock of ORBIMAGE, it has the right to appoint the independent member of the Board with the consent of one of the Series A directors, and as long as Orbital holds 20% of the voting stock of ORBIMAGE, it may appoint one of the two common directors. The stockholders' agreement provides for vacancies to be filled using the same nomination procedures that are used for elections.
A majority vote of the Board, including in some cases the affirmative vote of at least one Series A director, is required before we can, among other things:
- merge, consolidate, liquidate or sell all or substantially all of our assets;
- modify the stock purchase agreement or the stockholders' agreement, or the procurement agreement, the services agreement or the OrbView-2 License, if such modifications would affect satellite performance or increase our costs by more than $1 million;
- issue or commit to issue equity securities or securities convertible into or exchangeable or exercisable for equity securities;
- incur indebtedness for borrowed money or any capital lease in excess of $0.5 million;
- select, approve or remove any officer; or
- declare any dividends on the common stock.
Restrictions on Transfer. Subject to limited exceptions, the stockholders have agreed not to transfer, pledge, mortgage, hypothecate or otherwise encumber any shares of common stock or Series A preferred stock. The stockholders have also agreed as follows:
Right of First Purchase. Any stockholder desiring to transfer common stock or Series A preferred stock must first give Orbital the right to purchase such shares.
Right of First Refusal. Conversely, if Orbital desires to transfer common stock or Series C preferred stock, it must give stockholders the right to purchase a proportionate amount of such common stock or Series C preferred stock.
Tag-Along Rights. If Orbital proposes to transfer any shares of common stock or Series C preferred, the Series A holders will have the right to "tag along" in the transfer by requiring Orbital to sell a proportionate amount of their Series A preferred stock.
Drag-Along Rights. If 70% of the common holders (on a fully diluted basis) propose to transfer 70% or more of their common stock, the Series A holders may be required to convert their Series A preferred stock into common stock and transfer such common stock to the proposed transferee.
Subscription Rights. If we plan to offer to issue private equity securities (including warrants, options or other rights to acquire equity securities), we must notify our Series A holders of the terms of the offering and offer a proportionate amount of the securities being offered (based on each Series A holders current ownership) to each Series A holder. These subscription rights will expire upon a public offering of the common stock.
Registration Rights. Holders of more than 35% of our outstanding common stock may demand that we file up to three registration statements to permit the sale and distribution of their common stock. Also, if we register any of our common stock (excluding registrations on Form S-8 or Form S-4, or that are incident to the registration of convertible securities), the common holders may require us to include their common stock within such registration statement. These registration rights are subject to customary underwriters' cutbacks and other standard exceptions, and are not exercisable until (i) 180 days after an initial public offering of common stock or (ii) after June 30, 2002, if we have not consummated an initial public offering of our common stock by that time.
PROCUREMENT AGREEMENT
ORBIMAGE and Orbital are parties to a procurement agreement. The procurement agreement, as amended requires Orbital to:
- design, develop, construct and launch OrbView-1, OrbView-3 and OrbView-4;
- grant us a license to market OrbView-2 imagery, including the right to receive all payments to Orbital from NASA under Orbital's contract to provide OrbView-2 imagery to NASA;
- build the U.S. central imagery receiving, processing and command and control ground segment and any necessary infrastructure upgrades for all four OrbView satellites.
Orbital (or its subcontractors) will retain ownership of all intellectual property rights underlying the OrbView satellites and related ground systems, and has granted us a license to use the necessary intellectual property to operate the OrbView satellites.
Contract Costs. We estimate that the total cost of the OrbView-1, OrbView-3 and OrbView-4 satellites, the OrbView-2 License and the related U.S. ground systems will be approximately $311.3 million, net of $31 million which will be funded by the U.S. Air Force through an agreement with Orbital ($292 million of which we have agreed to pay under the procurement agreement). These estimated costs include all satellite design, construction and launch costs and hyperspectral capability, but exclude insurance costs. Of this amount, we had spent approximately $265 million as of December 31, 1999. We expect to spend approximately $22.5 million through the third quarter of 2001, the projected deployment date of OrbView-3 and an additional $24 million in post-launch, on-orbit incentives. We generally pay our costs under the procurement agreement on a monthly schedule based on the costs incurred by Orbital, and pay the remaining amounts upon completion of specified project milestones, such as critical design review and launch events. Our costs under the procurement agreement include a performance incentive to Orbital of: (a) up to $2.25 million for OrbView-4 and $2.55 million for OrbView-3 during each year of the five-year design lives of the satellites, based on the operational efficiency of the satellites, for a maximum payment of up to $24 million; and (b) an additional $1 million per year per satellite for each year that OrbView-3 or OrbView-4 remains in operation beyond its five year design life. See "Risk Factors -- Contract Revenue -- Contracts may be terminated for a variety of reasons which would result in a loss of contract revenues."
Termination. We may terminate the procurement agreement if Orbital fails to comply with the material terms of the agreement and does not cure such failure within 60 days of our notice. Orbital may terminate the procurement agreement if we fail to make the payments required by the agreement.
Limited Remedies. Orbital has made certain one-year warranties to us regarding the workmanship of the items delivered by it under the procurement agreement. It has also assigned to us certain third-party warranties that it
has or may have with respect to these items. However, for OrbView-3 and OrbView-4, following launch, our sole remedy for launch failure, defects, failure to conform with applicable specifications or any other requirements is limited to insurance proceeds. Orbital's liability to us for all claims under the procurement agreement, including breach of its warranties, is limited to $10 million. Orbital is not liable to us for any costs or other damages arising from schedule delays.
SERVICES AGREEMENT
ORBIMAGE and Orbital are parties to a services agreement, under which Orbital has agreed to provide to us, upon our request, for three years from the date of launch of each OrbView satellite:
- general and administrative, accounting, tax, legal, regulatory, and other similar services on a cost-reimbursable basis with no additional fee;
- office and other facilities-related services on a cost-reimbursable basis with no additional fee; and
- in-orbit satellite operations for the OrbView satellites on a cost plus 10% fee basis.
NON-COMPETITION AND TEAMING AGREEMENT
Under a non-compete agreement, Orbital has agreed that it will not, and will not allow any of its affiliates to, enter into contracts to provide integrated remote sensing satellite-based systems consisting of satellite bus, payload, launch services and ground systems. Orbital may respond to a request for a proposal for such an integrated system only if Orbital allows us to have primary responsibility for the provision of imagery services from the system. In addition, Orbital must offer us any satellite-based remote imaging project that emerges from its research and development.
The non-compete agreement permits Orbital to provide components for integrated systems or subsystems, but does not permit Orbital to design, develop or construct sensors capable of generating imagery similar, or technologically superior, to the imagery of OrbView-2, OrbView-3, OrbView-4 or any satellite that we purchase from Orbital or its affiliates. Subject to certain exceptions, Orbital has also agreed not to invest, and not to let its affiliates invest, more than $10 million in any entity that gathers and distributes satellite-based imagery similar, or technologically superior, to the imagery of OrbView-2, OrbView-3, OrbView-4, or any similar satellite that we purchase from Orbital or its affiliates. The non-compete agreement will terminate on the earlier of (i) June 30, 2003, (ii) the date on which the procurement agreement is terminated, (iii) the first anniversary of an initial public offering by ORBIMAGE, (iv) the end of a 180-day period in which ORBIMAGE's average common stock price exceeds certain thresholds, or (v) the date on which ORBIMAGE procures a follow-on high-resolution satellite from a provider other than Orbital or its affiliates.
ORBVIEW-2 LICENSE
Orbital has granted us an exclusive worldwide license to use and sell OrbView-2 imagery (and to sublicense third parties to distribute OrbView-2 imagery) for a license fee of approximately $62.7 million. The OrbView-2 License is subject to the limitations imposed by Orbital's contract with NASA for OrbView-2 imagery and the DoC license applicable to OrbView-2. Orbital has agreed to use reasonable commercial efforts to obtain and maintain the permits and licenses that are necessary for the continued operation of the OrbView-2 satellite. Orbital also has assigned to us all amounts that are due or will become due to Orbital under Orbital's contract with NASA. We have the sole responsibility for operating and controlling the OrbView-2 satellite.
RADARSAT-2 LICENSE
In 1998, we entered into a license agreement with Orbital and MDA, under which MDA granted us:
- a ten-year exclusive worldwide license to distribute and market RadarSat-2 imagery products and services, with an option to renew this license for two years at a renewal price of $10,000 per year;
- a ten-year non-exclusive, royalty-free worldwide sublicense to use the mark "RadarSat" to promote, market, sell and distribute RadarSat-2 imagery; and
- a perpetual, fully paid non-exclusive license for all RadarSat-2 image processing and archiving software.
Under the license agreement, MDA has further agreed to:
- construct and operate the RadarSat-2 satellite;
- provide us with RadarSat-2 imagery reception, processing and archiving services; and
- market RadarSat-2 imagery and serve as our exclusive worldwide distributor of RadarSat-2 imagery pursuant to a sublicense of our distribution rights.
Purchase Price. ORBIMAGE's acquisition of the RadarSat-2 License will cost $60 million. Approximately $140 million of RadarSat-2's $200 million estimated total cost will be funded by the CSA through a contract with MDA. ORBIMAGE will pay the $60 million purchase price in installments based on progress payments during the satellite construction phase. In October 1999, ORBIMAGE, Orbital and MDA amended the RadarSat-2 License, pursuant to which amendment ORBIMAGE agreed to pay in October 1999 a $15 million payment that would have otherwise been due in 2000. During the year ended December 31, 1999, ORBIMAGE paid a total of $30 million to MDA. The remaining payments will not exceed $15 million in 2001; $10 million in 2002; and $5 million upon the successful checkout of RadarSat-2.
Other Fees and Arrangements. We will pay MDA 12% of our annual net revenues from RadarSat-2 imagery sales for data reception, processing and archiving services. We will also pay MDA its costs plus 10% for marketing and distribution services, and no more than $10 million per year to operate the RadarSat-2 satellite.
Termination. Either ORBIMAGE or MDA may terminate the license agreement governing the RadarSat-2 License if the other party defaults on its obligations to pay amounts when due, breaches its representations or warranties, or fails to perform any other of its material obligations under the license agreement. In addition, either party may terminate the agreement if the contract between CSA and MDA is terminated for any reason, including by the Canadian government for convenience.
Effects of Termination. Upon termination of the license agreement, our exclusive license to market and distribute RadarSat-2 imagery will terminate, except with respect to imagery we have already received, for which we will continue to hold a non-exclusive license. In addition, MDA will have no further imagery purchase obligations under the agreement.
If we terminate the license agreement because the CSA contract terminates or because MDA fails to obtain the regulatory approvals needed for it to perform its obligations under the license agreement, MDA must reimburse us for the amount of our payments toward the purchase price of the RadarSat-2 License as of the date of termination. In addition, because CSA had not selected a launch vehicle by December 31, 1999, we are not required to make any more payments under the license agreement until CSA has selected a launch vehicle. As of March 30, 2000, CSA has not selected a launch vehicle for RadarSat-2. If CSA has not selected a launch vehicle by June 30, 2000, we are entitled to a refund of 50% of the license fee that we have paid as of that date.
If MDA terminates the license agreement because of our default before RadarSat-2 becomes operational, we must pay MDA the balance of the purchase price of the RadarSat-2 License. If our default occurs after RadarSat-2 is operational, we do not have to pay MDA any additional amounts for the RadarSat-2 License.
Indemnification. MDA has agreed to indemnify us for breaches of its representations and warranties and other covenants under the RadarSat-2 License. We have agreed to indemnify MDA for breaches of our representations and warranties and other covenants under the RadarSat-2 License. These indemnities survive expiration or termination of the RadarSat-2 License, but are limited to $10 million.
Guarantee. Orbital has unconditionally guaranteed MDA's full and timely performance of its obligations under the RadarSat-2 License. If MDA defaults, Orbital agrees to pay all amounts due to us.
Follow-on projects. Orbital and MDA have agreed to offer us (subject to negotiation) exclusive commercial distribution rights with respect to any follow-on RadarSat-2 or similar project before June 30, 2003, if MDA or Orbital obtains such rights.
OTHER AGREEMENTS
The distributorship contracts that we expect to offer to foreign high-resolution imagery distributors may require the distributor to purchase from us an imagery ground station or an OrbView upgrade to an existing ground station. We are contractually obligated to procure any such ground stations or upgrades from MDA, provided that the price is commercially competitive.
Orbital has guaranteed our performance under our distribution agreement with Samsung. This agreement grants Samsung an exclusive license to receive, process and sell high resolution OrbView-3 imagery of the Korean peninsula, and a non-exclusive license to receive, process and sell high-resolution OrbView-4 imagery of South Korea.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of Orbital Imaging Corporation, Report of Independent Accountants and the Independent Auditors' Report are included in Item 8 above:
(a)(2) FINANCIAL STATEMENT SCHEDULES
Not applicable.
(a)(3) 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.
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.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ORBITAL IMAGING CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders Orbital Imaging Corporation
In our opinion, the accompanying balance sheet as of December 31, 1999 and the related statements of operations, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of Orbital Imaging Corporation and its subsidiary at December 31, 1999, and the results of their operations and their cash flows for the year then ended conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP March 24, 2000 McLean, Virginia
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Orbital Imaging Corporation:
We have audited the accompanying consolidated balance sheet of Orbital Imaging Corporation ("ORBIMAGE") as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1998. These consolidated financial statements are the responsibility of ORBIMAGE's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orbital Imaging Corporation as of December 31, 1998, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 3, the accompanying consolidated balance sheet as of December 31, 1998 and the consolidated statements of operations, stockholders' equity and cash flows for the year then ended have been restated.
KPMG LLP
January 22, 1999, except for the second paragraph of Note 3 which is as of March 23, 2000 Washington, D.C.
ORBITAL IMAGING CORPORATION CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes to consolidated financial statements.
ORBITAL IMAGING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
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(1) All potentially dilutive securities, such as preferred stock subject to repurchase, warrants and stock options, are antidilutive for each year presented.
See accompanying notes to consolidated financial statements.
ORBITAL IMAGING CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes to consolidated financial statements.
ORBITAL IMAGING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
See accompanying notes to consolidated financial statements.
ORBITAL IMAGING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) RELATIONSHIP WITH ORBITAL
In 1991, the ORBIMAGE operating division of Orbital Sciences Corporation ("Orbital") was established to manage the development of remote imaging satellites which would collect, process and distribute digital imagery of land areas, oceans and the atmosphere. In 1992, Orbital Imaging Corporation ("ORBIMAGE") was incorporated in Delaware as a wholly owned subsidiary of Orbital. On May 8, 1997 and July 3, 1997, ORBIMAGE issued preferred stock to private investors to fund a significant portion of the remaining costs of existing projects (the "Private Placement"). Orbital also purchased additional common stock, bringing its total common equity investment to approximately $91.5 million. Also on May 8, 1997, ORBIMAGE executed certain contracts with Orbital whereby all assets and liabilities of Orbital's operating division, ORBIMAGE, were sold to ORBIMAGE at the historical cost. Accordingly, the accompanying financial statements incorporate the historical accounts and operations of the operating division prior to May 8, 1997, as predecessor financial statements of ORBIMAGE.
ORBIMAGE has four contracts with Orbital: (i) the ORBIMAGE System Procurement Agreement dated November 18, 1996, as amended (the "System Procurement Agreement"), (ii) the OrbView-2 License Agreement dated May 8, 1997 (the "OrbView-2 License"), (iii) the Amended and Restated Administrative Services Agreement dated May 8, 1997 (the "Administrative Services Agreement"), and (iv) the Stock Purchase Agreement dated October 26, 1999, as amended (the "Stock Purchase Agreement").
Under the System Procurement Agreement, ORBIMAGE purchased (i) the OrbView-1 satellite, (ii) an exclusive license entitling ORBIMAGE to all of the economic rights and benefits of the OrbView-2 satellite, (iii) the OrbView-3 satellite and launch service, (iv) the OrbView-4 satellite and launch service and (v) the ground system assets used to command and control the satellites as well as receive and process imagery. Pursuant to the System Procurement Agreement through December 31, 1999, ORBIMAGE has committed to purchase various satellites, rights and ground systems for approximately $279.9 million, net of $31.0 million which will be funded by the U.S. Air Force through a contract with Orbital. ORBIMAGE incurred costs of approximately $47.6 million, $94.3 million and $33.0 million for the years ended December 31, 1997, 1998 and 1999, respectively, under the System Procurement Agreement. As of December 31, 1999, ORBIMAGE has remaining commitments under the System Procurement Agreement of $22.4 million, net of $31.0 million, which will be funded by the U.S. Air Force through a contract with Orbital. In March 2000, the System Procurement Agreement was amended to increase the cost of the OrbView-3 and OrbView-4 satellites by $14 million. In exchange for permitting ORBIMAGE to pay this cost increase in the form of post-launch, on-orbit incentives, the Stock Purchase Agreement was amended to reduce Orbital's stock purchase commitment to $12.5 million from $25.0 million.
Under the OrbView-2 License Agreement, Orbital has granted an exclusive worldwide license to ORBIMAGE to use and sell OrbView-2 imagery. Pursuant to the terms of the OrbView-2 License Agreement, Orbital has assigned to ORBIMAGE all amounts that are due or become due to Orbital under a contract Orbital has with NASA to deliver OrbView-2 imagery, and ORBIMAGE has sole responsibility for operating and controlling the satellite.
Under the Administrative Services Agreement, ORBIMAGE is reimbursing Orbital for management, accounting, legal, financial services, office space and other administrative services, as well as certain direct and indirect operating services provided by Orbital. ORBIMAGE incurred costs of approximately $3.2 million, $2.7 million and $2.1 million for the years ended December 31, 1997, 1998 and 1999, respectively, under the Administrative Services Agreement. The term of the Administrative Services Agreement is expected to terminate on or before December 31, 2001.
Under the Stock Purchase Agreement, Orbital was originally required to purchase up to 2,500,000 shares of common stock for a price of $10 per share in minimum $5.0 million increments whenever ORBIMAGE's aggregate balance of cash, cash equivalents and available-for-sale securities falls below $10.0 million. In March 2000, in connection with the March 2000 amendment to the System Procurement Agreement, the Stock Purchase Agreement was amended to reduce the number of shares required to be purchased by Orbital to 1,250,000 from 2,500,000 shares, although that number may increase in the event of certain delays in the launch of OrbView-4.
ORBIMAGE has also entered into an agreement with Orbital and MacDonald, Dettwiler and Associates Ltd. ("MDA"), a Canadian subsidiary of Orbital, under which ORBIMAGE has acquired the exclusive worldwide
distribution rights for the RadarSat-2 satellite imagery (the "RadarSat-2 License"). Under the RadarSat-2 License, MDA will own and operate the RadarSat-2 satellite, and MDA will provide operations, data reception, processing, archiving and distribution services to ORBIMAGE. ORBIMAGE's acquisition of the RadarSat-2 License will cost $60.0 million, of which $30.0 million was paid in 1999. Approximately $140.0 million of RadarSat-2's $200 million estimated total cost will be funded by the Canadian Space Agency through a contract with Orbital and MDA. The remaining payments will not exceed $15.0 million in 2001; $10.0 million in 2002; and $5.0 million upon the successful on-orbit checkout of RadarSat-2.
Amounts due to Orbital of $9.2 million and $0.6 million as of December 31, 1998 and 1999, respectively, were included in accounts payable and accrued expenses.
For the year ended December 31, 1999, ORBIMAGE recorded revenue of $0.5 million on contracts with Orbital.
Two ORBIMAGE directors are also directors of Orbital, and one of ORBIMAGE's officers is also an employee of Orbital.
(2) NATURE OF OPERATIONS
The OrbView-1 satellite was launched in 1995 and provides severe weather and atmospheric images, including global lightning information and measurements used in analyzing atmospheric temperature information. The OrbView-2 satellite was launched on August 1, 1997, and completed its on-orbit checkout in October 1997. ORBIMAGE recognized revenues related to the OrbView-2 satellite of $1.3 million, $9.1 million and $10.5 million for the years ended December 31, 1997, 1998 and 1999, respectively. The OrbView-4 satellite is currently scheduled to be launched in the first quarter of 2001 and will provide one-meter panchromatic and four-meter multispectral imagery of the Earth. The OrbView-3 satellite will provide one-meter panchromatic, four-meter multispectral and eight-meter hyperspectral imagery of the Earth and is currently expected to be launched in the second quarter of 2001. The imagery provided by both OrbView-3 and OrbView-4 will have a broad range of applications for U.S. and foreign national security and many commercial and scientific markets. In 1998, ORBIMAGE acquired the RadarSat License. RadarSat-2 will provide high-resolution commercial radar imaging and is currently expected to be launched in the fourth quarter of 2002.
(3) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
In consultation with its new independent auditors retained in July 1999, the valuation of the warrants issued on February 25, 1998 in connection with the senior notes (Note 12) was restated from $9.0 million to $7.9 million based on an independent third party valuation, which resulted in reducing the debt discount and additional paid in capital. The Series A Preferred Stock sold on February 25, 1998 was deemed to have a beneficial conversion feature totaling $10.0 million as a result of the difference between the common stock fair value based on an independent third party valuation and the conversion price of the preferred stock. This difference is a deemed dividend to the holders of the preferred stock. The preferred stock dividends paid in shares during 1998 were also deemed to have a beneficial conversion feature as a result of the difference between the conversion price of the preferred stock and the underlying value of the common stock. Additionally, the stock options issued to employees during 1998 were deemed to be compensatory based on the difference between the exercise price and the common stock fair value based on an independent third party valuation. As a result of these changes, ORBIMAGE's loss before income taxes, benefit for income taxes, net loss, preferred stock dividends, loss available to common stockholders and loss per common share basic and diluted were restated as follows for the year ended December 31, 1998 (in thousands, except per share data):
(1) All potentially dilutive securities, such as preferred stock subject to repurchase, warrants and stock options, are antidilutive for each year presented.
Principles of Consolidation
The consolidated financial statements include the accounts of ORBIMAGE and, in 1999, its wholly owned subsidiary. All material intercompany transactions and accounts have been eliminated in consolidation.
Revenue Recognition
ORBIMAGE's principal source of revenue is the sale of satellite imagery to customers, value-added resellers and distributors. Such sales often require ORBIMAGE to provide imagery over the term of a multi-year sales contract. Accordingly, ORBIMAGE recognizes revenues on imagery contracts on a straight-line basis over the delivery term of the contract. Deferred revenue represents receipts in advance of the delivery of imagery.
ORBIMAGE recognizes revenue on the contracts to construct OrbView-3 and OrbView-4 distributor ground stations using the percentage-of-completion method of accounting. Revenue on these contracts is recognized based on costs incurred in relation to total estimated costs. To the extent that estimated costs of completion are adjusted, revenue and profit recognized from a particular contract will be affected in the period of the adjustment. Anticipated contract losses are recognized as they become known.
Services Provided by Orbital
A substantial part of ORBIMAGE's administrative services, including legal, accounting, human resources and purchasing is provided to ORBIMAGE at cost by Orbital. Such costs include both specifically identifiable services and certain pooled costs allocated by Orbital based on ORBIMAGE's proportional use. ORBIMAGE believes that the cost of these services, as provided for in the accompanying statements of operations, approximates the cost of similar services if obtained directly by ORBIMAGE.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123") requires companies to recognize as expense the fair value of all stock-based awards on the date of grant, or (ii) continue to apply the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and provide pro forma net income (loss) disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied.
ORBIMAGE has elected to continue to apply the provision of APB 25 and provide the pro forma disclosure provisions of SFAS 123 (see Note 16). Compensation expense is recognized over the vesting period for stock option grants to employees that have market values in excess of the strike price. To the extent that ORBIMAGE grants stock options to non-employee consultants or advisors, ORBIMAGE records costs equal to the fair value of the options granted as of the measurement date as determined using a Black-Scholes model.
Cash and Cash Equivalents
ORBIMAGE considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Securities
Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when ORBIMAGE has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. The held-to-maturity securities are restricted by provisions of the senior notes. (See Note 12.)
Securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. The amortized cost of available-for-sale securities is adjusted for amortization of premiums and accretion of discounts to maturity. Amortization, accretion, and realized gains and losses are included in interest income. The cost of securities sold is based on the specific identification method.
Securities with original maturities of more than three months, but not more than one year, are classified as current assets. Securities with original maturities of more than one year are classified as long-term assets.
Financial Instruments
The carrying amounts for ORBIMAGE's cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value. The fair values for securities (see Note 8) and senior notes (see Note 12) are based on quoted market prices.
Two foreign distributors have issued letters of credit to ORBIMAGE as credit enhancements for the construction of regional distributor ground stations. One letter of credit has a face value of $13.5 million and expires on January 31, 2001 and the other letter of credit has a face value of $4.0 million and expires on May 4, 2001. The face values for the letters of credit approximate fair value.
ORBIMAGE does not have any derivative financial instruments as of December 31, 1999, and believes that the interest rate risk associated with its senior notes and the market risk associated with its securities are not material to the results of operations of ORBIMAGE. The available-for-sale securities subject ORBIMAGE's financial position to interest rate risk.
Satellites and Related Rights and Property, Plant and Equipment
ORBIMAGE is purchasing the OrbView-1, OrbView-3 and OrbView-4 satellites, the OrbView-2 License and the ground system assets pursuant to the System Procurement Agreement. ORBIMAGE is purchasing the RadarSat-2 License pursuant to a separate agreement with Orbital and MDA. ORBIMAGE is constructing the ORBIMAGE digital catalogue, a digital imagery catalogue and processing system, to support OrbView-2, OrbView-3 and OrbView-4 imagery processing and distribution. ORBIMAGE capitalizes certain direct and indirect costs incurred in the construction of the ORBIMAGE digital catalogue. Amortization of the capitalized costs begins when the assets are placed in service.
ORBIMAGE capitalizes interest costs in connection with the construction of satellites, related ground system assets, and the ORBIMAGE digital catalogue. 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 years ended December 31, 1998 and 1999, capitalized interest totaled $10.9 million and $23.7 million, respectively. No interest was capitalized for the year ended December 31, 1997.
Depreciation and amortization are provided using the straight-line method as follows:
Income Taxes
ORBIMAGE recognizes income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(4) BUSINESS ACQUISITION
In 1998, ORBIMAGE acquired substantially all of the assets of TRIFID Corporation ("TRIFID") for $5.0 million. 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 financial results of TRIFID have been included in ORBIMAGE's results since April 30, 1998.
The following unaudited supplemental financial information presents ORBIMAGE's results of operations for the years ended December 31, 1997 and 1998, on a pro forma basis, as though the TRIFID acquisition were consummated on January 1, 1997 (in thousands, except share data):
- ---------- (1) All potentially dilutive securities, such as preferred stock subject to repurchase, warrants and stock options, are antidilutive for each year presented.
(5) EMPLOYEE BENEFIT PLAN
In February 1998, the FASB issued Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, that supersedes the disclosure requirements of Statement No. 87, Employers' Accounting for Pensions, and Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. ORBIMAGE adopted Statement No. 132 effective January 1, 1998. Adoption of the new benefits disclosure rules did not impact ORBIMAGE's financial position, results of operations or cash flows.
ORBIMAGE's employees participate in the Orbital Imaging Corporation Retirement Savings Plan, as amended, a defined contribution plan (the "Plan") in accordance with Section 401(k) of the Internal Revenue Code of 1986, as amended. ORBIMAGE's contributions to the Plan are made based on certain plan provisions and at the discretion of the Board of Directors. For the years ended December 31, 1997, 1998 and 1999, ORBIMAGE's contribution expense was $44,000, $0.3 million and $0.5 million, respectively. ORBIMAGE's contribution to the Plan for the years ended December 31, 1998 and 1999 includes contributions to accounts of employees who joined ORBIMAGE as part of the TRIFID acquisition. (See Note 4.)
(6) COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, ORBIMAGE 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 ORBIMAGE's net loss or stockholders' equity. For the years ended December 31, 1997, 1998 and 1999, 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 years ended December 31, 1997, 1998 and 1999 were as follows (in thousands, except share data):
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(1) All potentially dilutive securities, such as preferred stock subject to repurchase, warrants and stock options, are antidilutive for each year presented.
(8) SECURITIES
As of December 31, 1998 and 1999, ORBIMAGE had available-for-sale securities invested primarily in commercial paper with an amortized cost basis of $34.4 million and $32.4 million, respectively. There were no differences between the amortized cost basis of the available-for-sale securities and their fair values. As of December 31, 1999, the available-for-sale securities had maturities less than one year.
As of December 31, 1998 and 1999, ORBIMAGE had held-to-maturity securities invested in U.S. Treasury securities with fair values of $25.1 million and $12.9 million, respectively and amortized cost bases of $24.9 million and $12.9 million, respectively, resulting in unrealized gains of $0.2 million and $0, respectively. These securities are pledged as security for repayment of interest on the senior notes. As of December 31, 1999, the held-to-maturity
securities had maturities less than one year.
Included in cash and cash equivalents was $24.0 million and $2.4 million of commercial paper as of December 31, 1998 and 1999, respectively.
(9) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 1998 and 1999 consisted of the following (in thousands):
Depreciation and amortization totaled $1.7 million, $2.5 million and $3.2 million for the years ended December 31, 1997, 1998 and 1999, respectively.
(10) SATELLITES AND RELATED RIGHTS
Satellites and related rights as of December 31, 1998 and 1999 consisted of the following (in thousands):
Satellite depreciation and amortization totaled $3.9 million, $9.4 million and $8.6 million for the years ended December 31, 1997, 1998 and 1999, respectively.
(11) INCOME TAXES
ORBIMAGE's losses for income tax purposes for the period from January 1, 1997 through May 7, 1997 (during which ORBIMAGE was an operating division, and was included in the consolidated tax return, of Orbital) were significantly greater than pre-tax financial statement losses, primarily due to expense associated with satellites and related rights deducted currently for income tax purposes. Prior to May 8, 1997, ORBIMAGE had a tax-sharing arrangement with Orbital under which tax deductions for satellites and related rights, and the associated net operating loss carryforwards, remained with Orbital. As a result, ORBIMAGE recorded a tax-sharing charge of $1.8 million for the year ended December 31, 1997, as a direct charge to additional paid-in capital.
The benefit for income taxes for the years ended December 31, 1997, 1998 and 1999 consisted of the following (in thousands):
The income tax benefit for the years ended December 31, 1997, 1998 and 1999 were different from those computed using the statutory U.S. Federal income tax rate as follows:
The tax effects of significant temporary differences as of December 31, 1998 and 1999 were as follows (in thousands):
As of December 31, 1999, ORBIMAGE had net operating loss carryforwards totaling $27.3 million, which expire beginning the year ending December 31, 2012.
(12) SENIOR NOTES
General
On February 25, 1998, ORBIMAGE issued 150,000 units consisting of senior notes and 1,312,746 warrants for common stock, raising net proceeds of approximately $144.6 million. The gross proceeds of the units offering of $150.0 million were allocated: $142.1 million to the senior notes and $7.9 million to the value of the warrants recorded as a debt discount. On April 22, 1999, ORBIMAGE completed an add-on debt offering raising net proceeds of approximately $68.1 million. The debt discount and issuance costs are amortized using the interest method as an adjustment to interest expense over the term of the senior notes resulting in an effective yield of approximately 13.4%. As of December 31, 1999, the senior notes had a fair value of $155.3 million as estimated by quoted market prices.
Interest
Interest on the senior notes accrues at a rate of 11 5/8% per annum and is payable semi-annually in arrears on March 1 and September 1. ORBIMAGE purchased U.S. Treasury securities in an amount sufficient to pay the interest on the senior notes through March 1, 2000. As of December 31, 1999, held- to-maturity securities restricted for the payment of interest on the senior notes totaled $12.9 million. On March 1, 2000, restricted held-to-maturity securities and the related accrued interest were used to pay the semi-annual interest due on the senior notes of $13.0 million.
Mandatory Redemption
The senior notes mature on March 1, 2005. ORBIMAGE will not be required to make mandatory redemption or sinking fund payments with respect to the senior notes. However, ORBIMAGE may be obligated, under certain circumstances, to make an offer to purchase: (i) all outstanding senior notes at a redemption price of 101% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages (if any) to the date of purchase, upon a change of control, and (ii) outstanding senior notes with a portion of the net proceeds of certain asset sales at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages (if any) to the date of the purchase.
Covenants
The indenture for the senior notes restricts, among other things, ORBIMAGE's ability to pay dividends.
(13) LEASE COMMITMENTS
Aggregate minimum rental commitments under non-cancelable operating and capital leases (primarily for office space and equipment) as of December 31, 1999 were as follows (in thousands):
(14) PREFERRED STOCK SUBJECT TO REPURCHASE
ORBIMAGE has authorized 10,000,000 shares of $0.01 par value preferred stock, of which: (a) 2,000,000 shares of the Series A preferred stock have been authorized, of which 772,561 shares were issued and outstanding as of December 31, 1999; (b) 2,000,000 shares of the Series B preferred stock have been authorized, none of which have been issued and (c) 2,000,000 shares of the Series C preferred stock have been authorized, none of which have been issued.
Dividends
The Series A preferred stock is assigned a stated value of $100 per share and is entitled to a cumulative dividend of 12% per annum payable semi-annually on May 1 and November 1 of each year, in cash or, in lieu thereof, payable in-kind in shares of Series A preferred stock on the basis of 120 shares of Series A preferred stock for each 1,000 shares of Series A preferred stock outstanding. To date, all dividends have been paid in-kind. As of December 31, 1999, cumulative preferred stock dividends in arrears totaled 15,451 shares. Upon mandatory conversion prior to the fourth anniversary of the issuance of any Series A preferred stock, a Series A holder shall also receive the
dividends with respect to the Series A preferred stock that would have accrued from the date of the mandatory conversion to the fourth anniversary of the initial issuance of the Series A preferred stock.
Ranking
Series A holders have certain preferences upon dividend distributions, distributions upon liquidation or distributions upon merger, consolidation or sale of assets over the holders of Series B preferred stock (if and when issued), Series C preferred stock (if and when issued), the common holders and any other class of stock ranking junior to the Series A preferred stock.
Voting Rights
Each Series A holder is entitled to such number (rounded to the nearest whole number) of votes as such Series A holder would be entitled if such Series A holder had converted its Series A preferred stock into shares of common stock.
Conversion Rights
The Series A holders have the option, at any time, or from time to time, to convert their Series A preferred stock into fully paid and non-assessable shares of common stock. The number of shares of common stock issued upon such conversion will be determined by multiplying each Series A holder's number of Series A preferred stock by a fraction, the numerator of which is the Series A preferred stock Stated Value and the denominator of which is a conversion price, subject to anti-dilutive adjustments. The per share conversion price is currently $4.17. The Series A preferred stock shall be automatically converted into shares of common stock upon the earliest to occur of any one of the following events:
- the closing, under certain circumstances, of a public offering of the common stock;
- the culmination of a 180-day period in which the average price of the common stock exceeds a certain level relative to the conversion price or
- the proposed sale of no less than 70% of the common stock on a fully diluted basis.
Change of Control
Although not redeemable at the option of the holders, ORBIMAGE has certain obligations to our Series A holders upon a "change of control" as deemed in the stock purchase agreement. If a change of control occurs before the latest of:
- the successful on-orbit checkout of OrbView-3,
- the closing of an initial public offering that meets certain criteria, or
- the end of a 180-day period in which the average price of the common stock exceeds a certain level relative to the conversion price of the Series A preferred stock,
then ORBIMAGE must offer to purchase, subject to the rights of the holders of the senior notes, all outstanding shares of Series A preferred stock for a purchase price of 101% of the liquidation amount of the stock. If the change of control occurs before the fourth anniversary of the initial 1997 sale of the Series A preferred stock, then ORBIMAGE must also pay each Series A holder an amount equal to the dividends that would have accrued on such holder's shares of Series A preferred stock from the date of the change of control through the fourth anniversary of the initial 1997 sale of the Series A preferred stock.
The activity in the preferred stock subject to repurchase was as follows for the years ended December 31, 1997, 1998 and 1999 (dollars in thousands):
(15) COMMON STOCK WARRANTS
In connection with the units offering on February 25, 1998, ORBIMAGE issued 150,000 warrants, which entitle the holders to acquire 1,312,746 shares of ORBIMAGE's common stock. The exercise price is $0.01 per share and as of December 31, 1999, the warrants are exercisable. Each warrant entitles the holder to buy 8.75164 shares of common stock. The warrants expire on March 1, 2005.
(16) STOCK OPTION PLAN
Through ORBIMAGE's stock option plan, as amended (the "Plan"), ORBIMAGE may issue to its employees, Orbital's employees, consultants or advisors incentive or non-qualified options to purchase up to 4,800,000 shares of ORBIMAGE's common stock. Under the Plan, stock options may not be granted with an exercise price less than 85% of the stock's fair market value at the date of the grant as determined by the Board of Directors. ORBIMAGE's options generally vest in one-third increments over a three-year period. The following table summarizes the activity relating to the Plan for the years ended December 31, 1997, 1998 and 1999:
As of December 31, 1999, the weighted average remaining contractual life of the options outstanding was 7.8 years.
Had ORBIMAGE determined compensation expense based on the fair value at the grant date for its stock options in accordance with the fair value method prescribed by SFAS 123, ORBIMAGE's pro forma net loss and pro forma basic loss per common share would have been approximately $4.4 million and $0.44, respectively, for the year ended December 31, 1997; $6.3 million (restated) and $1.08 (restated), respectively, for the year ended December 31, 1998; and $7.7 million and $0.82, respectively, for the year ended December 31, 1999. Pro forma diluted loss per common share for the years ended December 31, 1997, 1998 and 1999 would be the same as the pro forma basic loss per share shown above since all potentially dilutive securities are antidilutive. Pro forma net loss as stated above is not necessarily representative of the effects of reported net income (loss) for future years due to, among other things, the vesting period of the stock options and the fair value of the additional stock options in future years.
ORBIMAGE used the Black-Scholes options pricing model for the year ended December 31, 1999 for options issued to employees and directors to determine the pro forma impact to its net loss. For the years ended December 31, 1997 and 1998, ORBIMAGE used the minimum value method, which does not consider volatility. Both models utilize certain information, such as the interest rate on a risk-free security maturing generally at the same time as the option being valued, and requires certain assumptions, such as the expected amount of time an option will be outstanding until it is exercised or it expires, to calculate the weighted-average fair value per share of stock options granted. The assumptions used to determine the pro forma impact for the years ended December 31, 1997, 1998 and 1999 were as follows:
The fair value of the options granted to employees and directors during the years ended December 31, 1997, 1998 and 1999 were estimated at $0.97 per share, $1.26 per share and $2.69 per share, respectively. Compensation expense recognized during each of the years ended December 31, 1998 and 1999 on stock options granted to employees and directors was $0.2 million. There was no compensation expense recognized during the year ended December 31, 1997 on stock options granted to employees and directors.
On February 14, 2000, ORBIMAGE granted 412,347 options to purchase shares of common stock to employees, directors and consultants. The stock options were granted with an exercise price of $7.25 and generally vest in one-third increments over a three-year period. ORBIMAGE will expense the value of the 2,000 compensatory options that were issued to consultants over the three-year vesting period of the options.
(17) SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes reporting standards for a company's operating segments and related disclosures about its products, services, geographic areas and major customers. ORBIMAGE adopted SFAS No. 131 effective January 1, 1998. SFAS No. 131 requires comparative segment information; however, ORBIMAGE operated as a single segment for the years ended December 31, 1997, 1998 and 1999.
ORBIMAGE recognized revenues related to contracts with the National Aeronautics and Space Administration of approximately $2.0 million, $9.6 million and $9.4 million for the years ended December 31, 1997, 1998 and 1999, respectively, representing approximately 95%, 82% and 51%, respectively, of total revenues recognized during those years.
EXHIBIT INDEX
The following exhibits are filed as part of this report.
+ Incorporated by reference to the identically numbered exhibit to ORBIMAGE's registration statement on Form S-4, as amended (Reg. No. 333-49583).
++ Incorporated by reference to Exhibit 4.9 to ORBIMAGE's registration statement on Form S-4, as amended (Reg. No. 333-49583).
+++ Incorporated by reference to the identically numbered exhibit to ORBIMAGE's quarterly report on Form 10-Q for the three months ended March 31, 1999 (Commission file No. 333-49583).
* Incorporated by reference to the identically numbered exhibit to ORBIMAGE's registration statement on Form S-1, as amended (Reg. No. 333-67697).
** Confidential treatment was granted pursuant to Rule 406 under the Securities Act of 1933, in connection with ORBIMAGE's registration statement on Form S-4, as amended (Reg. No. 333-49583). Certain portions of the exhibit have been omitted. The omitted portions of such exhibits have been separately filed with the Commission.
*** Confidential treatment was granted pursuant to Rule 406 under the Securities Act of 1933, in connection with ORBIMAGE's Quarterly Report on Form 10-Q for the three months ended September 30, 1999 (Commission File No. 333-49583). Certain portions of the exhibit have been omitted. The omitted portions of the exhibit have been separately filed with the Commission.
(a) Incorporated by reference to the identically numbered exhibit to ORBIMAGE's registration statement on Form S-4, as amended (Registration No. 333-80035).
(b) Incorporated by reference to the identically numbered exhibit to ORBIMAGE's quarterly report on Form 10-Q for the three months ended September 30, 1999 (Commission File No. 333-49583).
(c) Filed herewith.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable or not required or the required information is included in the financial statements or notes thereto.