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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended
DECEMBER 31, 1998
ORBITAL IMAGING CORPORATION
(Commission File No. 333-49583)
DELAWARE 54-1660268
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(State of Incorporation) (IRS Identification number)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166 (703) 406-5000
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(Address of principal executive offices) (Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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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 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
the assets and liabilities of the operating division. Prior to May 8, 1997,
ORBIMAGE was an operating division of Orbital. Orbital now owns approximately
60.4% of ORBIMAGE (55.2% on a fully diluted basis) and has the ability to
exercise significant influence, but not control, over ORBIMAGE's operational and
financial affairs.
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 and
wind conditions. In April 1998, we acquired a satellite image processing company
that will complement our core imagery business by providing sophisticated image
processing software, engineering analysis capability and in-house digital
imaging production capability.
In April 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 August 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 the
only satellite of its kind providing daily color images of the entire Earth's
surface. We expect to place two additional satellites, OrbView-3 and OrbView-4,
into operation during the first quarter of 2000 and the fourth quarter of 2000
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.
As of December 31, 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 operational in early 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's") medium-resolution radar imaging satellite
that was launched in 1995. RadarSat-2 is expected 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. This market 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
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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. The U.S.
government has estimated that the worldwide market for remote imagery products
and services addressable by commercial imagery providers (excluding satellite
and ground hardware sales) will be approximately $2 billion by the year 2000. We
believe that this market will grow as the availability of low-cost, high quality
satellite imagery stimulates the demand for these products and services and
encourages the development of new satellite-imaging technologies and
applications.
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
remainder 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 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, or 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 OrbView-3 will be able to map 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.
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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) that will fund capital expenditures. 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 an option for additional
post-launch imagery purchases up to $8 million; and
- RadarSat-2 will be partially paid for under a $140 million
contract between Orbital and the CSA, all of which will be
funded prior to launch.
Direct customer sales. In October 1998, we entered into 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
committed in 1998 to purchase $3 million of imagery, services and compatibility
upgrades to ORBIMAGE's ground systems.
International distributors. Internationally, we are developing
relationships with a network of commercial distributors while also dealing
directly with potential foreign national security government customers. ORBIMAGE
has entered into a $15 million contract with Samsung Aerospace Industries, Ltd.
for the distribution of OrbView-3 and OrbView-4 imagery in South Korea. In the
first quarter of 1999, we finalized exclusive commercial regional
distributorship for Japan and Central America, and we are negotiating several
similar arrangements for Europe, the Middle East and Asia, while pursuing other
opportunities with regional distributors in Australia and South Africa. We are
also in discussions with several foreign governments regarding access to our
real-time high-resolution imagery exclusively for national security
applications.
Value-added resellers. We are also focusing on the development of
various value-added applications for imagery products. Using OrbView-2 imagery,
we provide our proprietary fish-finding maps to approximately 110 commercial
fishing vessels. We are purchasing aerial imagery of major metropolitan areas in
the United States to supplement and develop a digital catalogue of up-to-date
mapping products that we expect to offer for sale to individual consumers and
local governments later this year. We have also entered into agreements with
several value-added resellers ("VARs") 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
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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' 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 U.S. 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 VARs 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 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
aerial sources. The digital catalogue currently includes 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
database of digital imagery with aerial imagery products that we expect to have
available later this year. We can deliver imagery from our digital catalogue to
customers over the Internet or on CD for a per-image fee.
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
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
provides the U.S. government with daily atmospheric and weather condition
images, including images showing both clouds and global
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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 is also marketing
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 two types of fishing maps, a coastal product targeted at
sport and smaller commercial fishing customers and a deep ocean product targeted
at larger, high seas fishing fleets.
High spatial resolution optical and radar imagery. High-resolution
optical imagery enables 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
the ORBIMAGE digital catalogue, we believe that military and intelligence
customers will 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 other land uses.
Hyperspectral imagery. Hyperspectral imagery provides enhanced color
and enhanced infrared imagery for additional applications, including more
precise crop health analysis and analysis of the presence of minerals that 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
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and ice flows, making such technology useful for offshore and onshore oil and
gas exploration, ship navigation and crop health monitoring. 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 by aerial photography or lower-resolution
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. We believe that potential
budget cutbacks in the U.S. Department of Defense ("DoD") and the U.S. National
Reconnaissance Office ("NRO") budgets, combined with changes in military
strategies (e.g., fewer military assets dispersed over a wider geographic area),
could further increase the government's need for commercially available
high-resolution imagery. 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 our radar imagery, 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 $31
million contract (with up to $10 million in data purchases and contract options)
to acquire real-time hyperspectral imagery from OrbView-4. In October 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 already committed
to purchase $3 million of imagery, services and compatibility upgrades to
ORBIMAGE's ground systems. The U.S. Navy has made an initial purchase of
OrbView-2 imagery and has also expressed an interest in procuring additional
OrbView-2 imagery for measuring water clarity and for similar applications. The
imagery would assist the U.S. Navy in determining optimal times, locations and
depths for performing laser and sonar operations relating to mine detection and
submarine communication. The Canadian Navy uses RadarSat-1 imagery to detect
the presence of other ships through wave analysis and to monitor the location
and movement of ice bergs 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. This 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
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require a substantial time commitment. Purchasing a turn-key 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 an agreement with Samsung for
imagery of the Korean peninsula. The interest expressed by potential regional
distributors during the course of these discussions 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 the ORBIMAGE 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 identifying this
boundary in a timely fashion. Based on customer feedback, our
fishing maps significantly reduce search time and related
hardware and operating cost, and are more accurate and cover a
broader area than existing alternatives.
Our customers for fishing maps include 25 fishing companies
comprising approximately 110 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
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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 recently entered
into a strategic relationship with a value-added reseller that
currently uses aerial imagery to monitor power lines for
utility companies. Under the agreement, we will be the
preferred supplier of high-resolution satellite imagery and we
are working with the VAR to develop a broad product base
targeted at the utility market. We are also finalizing the
terms of a strategic value-added reseller arrangement with one
of the leading providers of value-added aerial products to oil
and gas companies for pipeline monitoring and oil field
monitoring and mapping. Finally, 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, hyperspectral 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, hyperspectral 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 for 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 such activities 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's ability to measure the edge of and track
the movement of major ice flows will be valuable to oil and
gas companies for 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
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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-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 recently has announced its intention 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 filed in order to analyze the effects of glaciers and global climate changes
in Antarctica. We believe the imagery available from our high-resolution optical
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 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. We expect that our distribution
agreements will give foreign regional distributors priority in "tasking" the
satellite's camera while the satellite is over its geographic region. We
generally expect to retain the right to market and sell imagery of a
distributor's territories, although we will pay the distributor a royalty for
these sales. In certain cases, we may agree that a distributor's approval is
required for certain sales of imagery, including sales to specified customers or
of specific areas. We anticipate that a single geographic distribution region
normally will have a maximum radius of approximately 2,400 kilometers from the
ground station (this is the maximum range that the satellite can communicate
with the ground station on a given orbital pass), although the precise size of
each region will be negotiable.
In the first quarter of 1999, we finalized exclusive commercial
regional distribution agreements for Japan and Central America, and we are
negotiating similar arrangements for Europe, the Middle East and certain
countries
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in Asia, while pursuing opportunities with regional distributors in Australia
and South Africa. We are also in discussions with several foreign governments
regarding access to our real-time high-resolution imagery exclusively for
national security applications.
We anticipate that our regional distribution agreements will
generally provide for significant annual minimum guaranteed royalty payments,
additional royalties for taskings or image purchases above agreed minimums, and
the purchase or upgrade of a regional ground station. We will also provide
training and technical support services to regional distributors, the extent and
price of which will be negotiated on a case-by-case basis.
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 it into complex maps and other
types of enhanced products for specific markets or applications. Using OrbView-2
imagery, we provide our proprietary fish-finding maps to approximately 110
commercial fishing vessels. We have also entered into agreements with several
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 digital catalogue. We also market imagery through our
on-line electronic digital catalogue. The ORBIMAGE digital catalogue will be a
comprehensive, digital-imagery catalogue in which we collect, store and
distribute imagery derived from our satellites and other satellite and aerial
sources. We may then deliver the images to customers over the Internet, on CD or
on computer tape. Through strategic alliances with existing imaging satellite
operators, aerial photography firms and imagery 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. To date, we have completed distribution
agreements with three aerial imagery firms to assist us in developing an initial
high resolution imagery product line planned for release in April 1999. This
product line will initially include images of approximately 15 major U.S cities.
The ORBIMAGE digital catalogue commenced operation in the second half of 1998
offering OrbView-2 imagery products.
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 to provide up to $48
million (including options) of OrbView-3 and OrbView-4
imagery in certain regions of Asia and Central America. 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. To further facilitate market
penetration, we have developed our own value-added products
using OrbView-2 imagery and are working with a number of
VARs 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) that will fund
capital expenditures. 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.
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- 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, OrbView-4 and 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 imagery;
- 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 the
satellite 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 and will use
redundant components and subsystems that were used in 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 Orbital's
subsidiary, MacDonald, Dettwiler and Associates, Ltd. ("MDA"), and/or CSA under
a contract with CSA.
The following table summarizes the primary technical characteristics
of the satellites.
ORBVIEW-1 ORBVIEW-2 ORBVIEW-3
--------- --------- ---------
Principal Applications Weather, Scientific Weather, Fishing, Mapping, Agriculture, Oil
Research Agricultural, and Gas, National
Scientific Security
Research
Best Ground Resolution 10 km Panchromatic 1 km to 4 km 1 m Panchromatic
Multispectral 4 m Multispectral
Scene-Width 1,300 km 2,800 km 8 km Panchromatic
and Multispectral
ORBVIEW-4 RADARSAT-2
--------- ----------
Principal Applications Mapping, Agriculture, Mapping, Agriculture,
Oil and Gas, Oil and Gas,
Forestry, Mining, Forestry, Mining,
National Security
National Security
Best Ground Resolution 1 m Panchromatic 3 m to 100 m
4 m Multispectral Multipolarization
8 m Hyperspectral
Scene-Width 8 km Panchromatic 20 km to 500 km
and Multispectral
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Image Area N.A. N.A. 64 km(2) Panchromatic and
Multispectral
On-Board Storage 80 Megabytes 128 Megabytes 4 Gigabytes
Revisit Time 12 Days 1 Day 3 Days(1)
Orbital Altitude 740 km 705 km 470 km
Design Life 3 Years(2) 7 1/2 Years 5 Years
5 km Hyperspectral
Image Area 64 km(2) Panchromatic 400 km(2) to 250,000
and Multispectral 100
km(2) Hyperspectral
On-Board Storage 4 Gigabytes 32 Gigabytes
Revisit Time 3 Days(1) 3 days(2)
Orbital Altitude 470 km 800 km
Design Life 5 Years 7 Years
- ----------
(1) The combined revisit time of both 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) As it enters its fifth year of operation, OrbView-1 has significantly
exceeded its initial 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. The satellite had a design life of three years, but is
currently expected to be operable for approximately two additional years into
2000.
ORBVIEW-2 SATELLITE
The OrbView-2 satellite was launched in August 1997 and is believed
to be the only operational satellite 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 it under 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. 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 systems monitor the OrbView
satellites while they are in orbit and command 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.
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The image receiving and processing center for the OrbView satellites
is also located at our 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
processing and archiving 6,500 high-resolution OrbView satellite images per day.
In April 1998, we acquired an image processing company to complement our core
business by providing engineering analysis, sophisticated imaging processing
software and production of high quality digital imagery products.
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 Satellite Imagery Providers. OrbView-1 and OrbView-2 have
no existing direct competitors for their daily panchromatic and multispectral
imagery. SPOT 4 (operated by SPOTImage) 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:
- SPOTImage S.A., a French-owned company, currently produces
unprocessed imagery using three satellites with resolution
capability of 10 meters in panchromatic and 20 meters in
multispectral;
- Space Imaging's Landsat 4 and Landsat 5 satellites provide
coverage in seven spectral bands covering the visible to
infrared parts of the spectrum, but the best resolution of
these satellites is 30 meters in multispectral;
- RadarSat-1, operated by CSA, provides radar imagery with a
resolution that varies between 10 and 100 meters. RadarSat-1
will be phased out based on its seven year design life when
RadarSat-2 is placed into service in 2002;
- 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.
Future Satellite Competitors. The high-resolution OrbView satellites
and RadarSat-2 are expected to face significant future competition in the
satellite imagery market from two U.S. satellite competitors who are planning
imaging satellites that will have one-meter panchromatic and four-meter
multispectral capability and who have partnered with various industry
participants:
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- Space Imaging, which is owned by Lockheed Martin Corporation,
Raytheon Company and Mitsubishi Corporation, has announced
plans to launch its first high-resolution (one-meter)
satellite in mid-1999; and
- EarthWatch, whose major shareholders include Ball Aerospace
and Technology Corporation, Telespazio and Hitachi, Ltd has
announced plans to launch its high-resolution (one-meter)
satellite in late 1999.
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 is
sponsoring a satellite scheduled for launch next year that will provide imagery
similar to that of OrbView-2, and the European Space Agency has announced that
it plans to launch Envisat satellite in late 1999 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.
CONTRACT COMMITMENTS
As of March 31, 1999, approximately $214 million of advance
payments have been or are being provided from pre-launch contracts (directly
with ORBIMAGE's customers or between Orbital and third parties) that are
funding certain capital expenditures for ORBIMAGE's satellite systems. In
addition, as of March 31, 1999, ORGIMAGE has contracts (including options) from
U.S. government and international customers to purchase up to approximately
$156 million of OrbView-3 and OrbView-4 imagery and related services.
BACKLOG
ORBIMAGE's contract backlog of firm commitments at December 31, 1998
and 1997 was approximately $54 million and $56 million, respectively. As of
December 31, 1998 and 1997, 72% and 75%, 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, 1998 of approximately $106 million.
EMPLOYEES
As of March 15, 1999, ORBIMAGE had 108 full-time permanent
employees. None of our employees is represented by a collective bargaining
agreement.
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ITEM 2. PROPERTIES
ORBIMAGE currently leases approximately 13,000 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. LEGAL PROCEEDINGS
ORBIMAGE is not a party to any pending legal proceedings material to
its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
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, 1998, there were 25,214,000 shares of common stock
issued and outstanding, and 20,437,879 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, 1998, 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, the Company has sold and
issued the following securities on the dates and for the consideration stated
below:
- On February 25, 1998, the Company 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 the Company's common stock. On July
24, 1998, the Company 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
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and construct satellites, ground stations, market products and
services and for working capital.
- Concurrently with the units offering, the Company 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, the Company 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, the Company 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, the Company 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.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of ORBIMAGE as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from
the audited financial statements of ORBIMAGE. The selected historical financial
data set forth below should be read in conjunction with "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto, included elsewhere in this Report.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ -- $ 4,567 $ 1,055 $ 2,062 $ 11,663
Direct expenses................................... 800 7,998 4,320 6,312 15,215
---------- ---------- ---------- ---------- ------------
Gross loss........................................ (800) (3,431) (3,265) (4,250) (3,552)
Selling, general and administrative
expenses........................................ 3,156 2,371 1,630 2,845 7,124
---------- ---------- ---------- ---------- ------------
Loss from operations.............................. (3,956) (5,802) (4,895) (7,095) (10,676)
Interest income................................... -- -- -- 1,261 1,845
---------- ---------- ---------- ---------- ------------
Loss before benefit for income taxes.............. (3,956) (5,802) (4,895) (5,834) (8,831)
Benefit for income taxes.......................... -- -- -- (1,752) (3,312)
---------- ---------- ---------- ---------- ------------
Net loss.......................................... $ (3,956) $ (5,802) $ (4,895) $ (4,082) $ (5,519)
========== ========== ========== ========== ============
Loss per common share -- basic and diluted (1).... -- -- -- $ (0.42) $ (0.51)
OTHER DATA:
Capital expenditures.............................. $ 13,832 $ 18,989 $ 12,617 $ 49,029 $ 108,541
EBITDA (2)........................................ (3,157) 1,975 (914) (1,558) 2,448
DECEMBER 31,
-----------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ------------ ------------ ------------ -------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and
available-for-sale securities.... $ -- $ -- $ -- $ 22,220 $ 59,483
Total assets....................... 51,944 63,423 72,328 137,749 307,969
Long-term obligations (3).......... -- -- -- -- 141,728
Stockholders' equity............... 11,526 19,956 26,279 85,360 113,372
- ----------
(1) All potentially dilutive securities, such as convertible preferred stock,
warrants and stock options are antidilutive for each year presented. Prior
to May 8, 1997, ORBIMAGE was an operating division of Orbital, and the
loss per common share for the years ended December 31, 1994, 1995 and 1996
were not considered meaningful.
(2) EBITDA consists of earnings (losses) before interest, income taxes,
depreciation, amortization and other non-cash charges. EBITDA data is
presented because such data is used by certain investors to determine our
ability to incur debt and to meet its debt service requirements. We
consider EBITDA to be a useful measure of our operating performance,
because EBITDA can be used to measure our ability to service debt, fund
capital expenditures and expand our business. However, such information
should not be considered as an alternative to net income, operating
profit, cash flows from operations or any other operating or liquidity
performance measure prescribed by generally accepted accounting
principles. EBITDA does not represent funds available for management's
discretionary use. EBITDA is not a measure supported by generally accepted
accounting principles and may be calculated differently by other
companies. EBITDA as defined herein may not conform to the definition of
Consolidated Cash Flow as defined in the Indenture.
(3) Net of unamortized debt discount, estimated to be $8.4 million.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In 1991, ORBIMAGE was established as an operating division of
Orbital to manage the development of remote imaging satellites that would
collect, process and distribute digital imagery of land areas, oceans and the
atmosphere. In 1992, ORBIMAGE 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 the assets and liabilities
of the operating division. Prior to May 8, 1997, ORBIMAGE was an operating
division of Orbital. Orbital now owns approximately 60.4% of ORBIMAGE (55.2% on
a fully diluted basis) and has the ability to exercise significant influence,
but not control, over ORBIMAGE's operating and financial policies. Pursuant to
the terms of ORBIMAGE's charter and the stockholders' agreement, Orbital does
not have unilateral control over ORBIMAGE's assets.
ORBIMAGE operates and is further developing a fleet of satellites
that collect, process and distribute digital imagery of the Earth's surface, the
atmosphere and weather conditions. ORBIMAGE has entered into a procurement
agreement with Orbital to purchase the OrbView-1, OrbView-3 and OrbView-4
satellites (including launch services) and the U.S. ground system necessary to
operate the satellites and to collect, process and distribute imagery. Under the
procurement agreement, ORBIMAGE also acquired the OrbView-2 License. The terms
of the OrbView-2 License require ORBIMAGE to operate and control the OrbView-2
satellite. ORBIMAGE has also entered into an agreement with Orbital and MDA
under which ORBIMAGE has acquired 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. Orbital also provides certain administrative services to ORBIMAGE such
as accounting, tax, human resources and benefit-related services. See "Item 13 -
Certain Relationships and Related Transactions -- Services Agreement" and "--
RadarSat-2 License Agreement."
Currently, ORBIMAGE expects OrbView-3 to be operational in the first
quarter of 2000, OrbView-4 to be operational in the fourth quarter of 2000 and
RadarSat-2 to be operational in early 2002. ORBIMAGE cannot assure the
successful deployment of these satellites. A delay or launch failure could
negatively affect ORBIMAGE's business, financial condition and results of
operations, its ability to deliver its products and services and its ability to
service its debt.
Revenues. ORBIMAGE is performing under several long-term sales
contracts to provide imagery products and receives contractual payments in
advance of product delivery. In such circumstances, ORBIMAGE initially records
deferred revenue for the total amount of the payment and recognizes revenue over
the contractual delivery period. At December 31, 1998, ORBIMAGE had
approximately $32.1 million of deferred revenue related to advance payments for
OrbView-2 imagery. See "Item 13 - Certain Relationships and Related Transactions
- -- OrbView-2 License."
System Depreciation. ORBIMAGE depreciates its satellites over the
design life of each satellite. ORBIMAGE is amortizing the cost of the OrbView-2
License over the design life of the OrbView-2 satellite. ORBIMAGE intends to
amortize the cost of OrbView-3, OrbView-4 and the RadarSat-2 License over the
design life 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. A portion of the proceeds of the units offering
representing the estimated debt discount has been accounted for as a discount to
the par value of the Notes. Amortization of this discount, together with the
stated interest on the Notes, is capitalized as the historical costs of assets
under construction, when appropriate. ORBIMAGE expects to capitalize a
significant portion of its interest expense throughout 1999 and 2000 as it
completes construction of the high-resolution OrbView satellites.
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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997
AND 1998
Business Acquisition. In 1998, ORBIMAGE acquired substantially all
of the assets of St. Louis-based 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. The acquisition resulted
in excess of purchase price over net assets acquired of approximately $3
million, which is being amortized over ten years.
Revenues. Revenues for the years ended December 31, 1996, 1997 and
1998 were approximately $1.1 million, $2.1 million and $11.7 million,
respectively. The increase in 1998 revenues was primarily due to the
commencement of the OrbView-2 satellite's commercial operations in November
1997. Revenues during the year ended December 31, 1998 also included $1.6
million in sales generated from the image processing business acquired from
TRIFID in April 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. Revenues in 1996 were attributable solely to the sale of OrbView-1
imagery products to NASA and the University Corporation for Atmospheric
Research.
Direct Expenses. Direct expenses include the costs of operating and
depreciating (i) the OrbView-1 satellite, (ii) the OrbView-2 License, and (iii)
the related ground system. Satellite operating costs primarily consist of labor
expenses. Direct expenses for the years ended December 31, 1996, 1997 and 1998
were approximately $4.3 million, $6.3 million and $15.2 million, respectively.
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.
Direct expenses increased from the year ended December 31, 1996 to
the year ended December 31, 1997 as a result of the launch and placement in
operation of OrbView-2 in 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 $1.6 million, $2.8 million and $7.1 million for the years ended
December 31, 1996, 1997 and 1998, respectively. The increase in SG&A expenses in
1998 was primarily attributable to the increase in salaries and related benefits
as ORBIMAGE expanded its operations and workforce.
The increase in SG&A expenses from the year ended December 31, 1996
to the year ended December 31, 1997 was primarily attributable to an increase in
ORBIMAGE's staffing levels as ORBIMAGE expanded its operations. SG&A expenses in
1997 included costs of approximately $0.6 million incurred to support the launch
and initial checkout of the OrbView-2 satellite. ORBIMAGE expects that launch
and initial checkout costs for OrbView-3 and OrbView-4 will be incurred at
levels generally consistent with those incurred in 1997 for OrbView-2.
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 Notes,
net of applicable capitalized interest. Net interest income for the year ended
December 31, 1998 was approximately $1.8 million, which is net of interest
expense of approximately $4.9 million. For the year ended December 31, 1998,
capitalized interest in connection with the construction of the OrbView-3 and
OrbView-4 satellites and related ground system totaled $10.9 million. 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. Net interest income was approximately $1.3 million for the year
ended December 31, 1997 and none in
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1996.
Benefit for Income Taxes. ORBIMAGE recorded an income tax benefit of
approximately $3.3 million for the year ended December 31, 1998. 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, 1998, ORBIMAGE had approximately $59.5 million of
cash and cash equivalents and available-for-sale securities. On February 25,
1998, ORBIMAGE issued units consisting of the Notes and common stock warrants
raising gross proceeds of $150 million. Out of net proceeds of approximately
$144.6 million, ORBIMAGE purchased approximately $32.9 million of U.S. Treasury
securities to fund the interest on the Notes for the first four interest payment
dates, of which $24.5 million remained as of December 31, 1998. These securities
were placed in a restricted account and pledged as security for repayment of
interest on the Notes. The total effective interest rate on the Notes, including
the discount attributable to the value of the warrants and issuance expenses, is
approximately 14%. Concurrent with the Units 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
invested to approximately $91.5 million.
Investing activities used cash of approximately $12.6 million, $60.4
million and $161.2 million for the years ended December 31, 1996, 1997 and 1998,
respectively. The increase in the use of cash from 1996 to 1997 and continuing
into 1998 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 and 1998, ORBIMAGE invested the proceeds from the financings
in various short- and long-term investments, consisting primarily of commercial
paper and U.S. Treasury securities. ORBIMAGE intends to use the investments 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, 1996, 1997 and
1998 were approximately $12.6 million, $49 million and $97.6 million (excluding
capitalized interest) and consisted primarily of costs relating to the
acquisition of the OrbView-3 and OrbView-4 satellites and the related U.S.
ground system. Capital expenditures in 1996 consisted primarily of costs under
the procurement agreement relating to the acquisition of the U.S. ground system,
the OrbView-1 satellite and the OrbView-2 License. Beginning in 1997, capital
expenditures were also related to OrbView-3 and OrbView-4. The total cost of the
OrbView-1, OrbView-3 and OrbView-4 satellites, the OrbView-2 License and the
related U.S. ground system, is estimated to be approximately $285 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, 1998, ORBIMAGE had
spent approximately $225 million and expects to spend approximately $60 million
through the third quarter of 2000, the projected deployment date of OrbView-4.
ORBIMAGE's acquisition of the RadarSat-2 License will cost
approximately $60 million, net of approximately $140 million which will be
funded by the CSA through a contract with Orbital. ORBIMAGE expects to use cash
on hand, cash from operations and also may consider raising additional capital
to fund RadarSat-2 License payments.
Operating activities provided cash of approximately $6.3 million and
$9.8 million during the years ended December 31, 1997 and 1998, respectively.
Operating activities used cash during the year ended December 31, 1996 of
approximately $1 million. The increase in operating cash flow from 1997 to 1998
is
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primarily attributable to an increase in accounts payable and accrued expenses
of $12.4 million. The increase in operating cash flows from 1996 to 1997 was
primarily attributable to the receipt of advance customer payments for imagery
purchases.
ORBIMAGE expects to fund its other future capital expenditures and
negative cash flows from operating activities using cash and cash equivalents
and securities together with cash from advance customer payments. ORBIMAGE's
ability to generate positive cash flow is dependent on the sale of its products
and services, adequate customer acceptance of ORBIMAGE's products and services
and numerous other factors. ORBIMAGE does not expect to generate net positive
cash flow from operations sufficient to fund both operations and capital
expenditures before the fourth quarter of 2000, when both OrbView-3 and
OrbView-4 are operational. While ORBIMAGE believes it has sufficient resources
to meet its requirements through that time, additional funding may be necessary
in the event of an OrbView-3 or OrbView-4 launch delay, cost increases or
unanticipated expenses. We cannot assure you that additional capital will be
available 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 the continued
expansion of commercial services, adequate customer acceptance of ORBIMAGE's
products and services and numerous other factors.
"YEAR 2000" COMPLIANCE
The year 2000 presents potential concerns for computer hardware and
software applications. The consequences of this may include systems failures and
business process interruption. The problem may exist for many kinds of software
and hardware, including mainframes, mini computers, PCs and embedded systems.
ORBIMAGE has completed an assessment of the potential Year 2000
issues with respect to various financial, technical and operational
computer-related systems. This assessment consisted of reviewing software code
and hardware system components to determine whether a system failure or
miscalculations causing disruption of operations could occur as a result of the
system's inability to distinguish between the year 2000 and the year 1900.
ORBIMAGE intends to correct any Year 2000 issues, or develop alternative
"work-around" procedures that address the problem by June 1999. ORBIMAGE has
also inquired of its primary vendor, Orbital, as to whether products and
services provided by Orbital may be adversely affected by the Year 2000 issue.
Orbital has informed ORBIMAGE that with respect to its provision of
administrative services, no material Year 2000 issues have been identified.
Orbital is still conducting an internal review of Year 2000 issues with respect
to the satellite systems, ground systems and launch services provided or to be
provided to ORBIMAGE, and completed its initial assessment of any pertinent
issues in December 1998.
ORBIMAGE's largest customer is NIMA. If NIMA's systems are not Year
2000 compliant on a timely basis, payments owed to ORBIMAGE could be delayed.
There can be no assurance that a significant delay in payments would not have a
material impact on ORBIMAGE's financial results.
ORBIMAGE does not currently anticipate that addressing Year 2000
problems for its internal systems will have a material impact on its operations
or financial results. There can be, however, no assurance that costs associated
with addressing Year 2000 issues will not be greater than anticipated, or that
Year 2000 problems will be identified on a timely basis and that corrective
actions undertaken by ORBIMAGE or its primary vendor will be completed before
any Year 2000 problems occur. All costs, including the cost of internal
personnel, outside consultants, systems replacements and other equipment, will
be expensed as incurred, except for long-lived assets, which will be capitalized
in accordance with ORBIMAGE's capitalization policies. Contingency plans will be
developed if it appears ORBIMAGE or its key supplier will not be Year 2000
compliant and such noncompliance is expected to have a material adverse impact
on ORBIMAGE's operations.
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
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representatives may from time-to-time make written or verbal forward-looking
statements, including statements contained in ORBIMAGE's filings with the
Securities and Exchange Commission. All statements that address operating
performance, events, or developments that ORBIMAGE expects or anticipates will
occur in the future, including statements relating to ORBIMAGE's sales and
earnings growth or statements expressing general optimism about future operating
results, are forward-looking statements within the meaning of the Act. The
forward-looking statements are and will be based on management's then-current
views and assumptions regarding future events and operating performance. The
following are some of the factors that could cause actual results to differ
materially from information contained in ORBIMAGE's forward-looking statements.
LIMITED HISTORY OF OPERATIONS AND NET LOSSES -- GIVEN OUR LIMITED OPERATING
HISTORY AND NET LOSSES, OUR FUTURE PROSPECTS ARE UNCERTAIN.
Limited operating and financial data. We did not begin commercial
service until 1995, when we launched OrbView-1. We have a history of net losses
from operations and have generated only limited revenues from the operations of
OrbView-1 and OrbView-2 and our image processing business. 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 will result in a negative cash
flow until we establish an adequate revenue-generating customer base. We had an
accumulated deficit of approximately $39 million through December 31, 1998. We
expect losses to continue through 2000, and we do not expect to generate net
positive cash flow from operations sufficient to fund both operations and
capital expenditures until both OrbView-3 and OrbView-4 are operational,
currently expected to be in the fourth quarter of 2000. We cannot assure you
that the OrbView satellites will become operational on this timetable, or at
all, or that we will achieve or sustain any positive cash flow or profitability
thereafter.
POTENTIAL ADDITIONAL CAPITAL REQUIREMENTS -- OUR INABILITY TO FUND POTENTIAL
ADDITIONAL CAPITAL REQUIREMENTS COULD DELAY SATELLITE CONSTRUCTION AND
DEPLOYMENT.
We currently expect that we will need approximately $79 million (net
of $140 million and $31 million which will be funded by CSA and the U.S. Air
Force, respectively, through contracts with Orbital) for capital expenditures,
development and initial operating costs through the third quarter of 2000. As of
December 31, 1998, we had cash and cash equivalents and unrestricted securities
in the aggregate amount of $59.5 million. We believe that cash on hand, expected
cash flows from operations and advance payments from customers will be
sufficient to fund our operations through the fourth quarter of 2000. We cannot
assure you that we will generate sufficient cash from operations to pay for our
anticipated capital expenditures, or that these expenditures will fall within
our estimates. If we do not generate sufficient cash flow by the fourth quarter
of 2000, or if our capital expenditures exceed our estimates, we would need
additional capital.
A significant portion of our capital requirements are related to
developing, constructing and launching the OrbView satellites, constructing and
activating the related U.S. ground systems and acquiring the RadarSat-2 License.
While most of these costs are currently fixed under agreements with Orbital, we
cannot assure you that these costs will not increase over time. In addition to
these fixed cost agreements, we will be furnished with certain items and
services on a cost-plus or cost-reimbursable basis, such as launch and in-orbit
insurance and technological assistance for OrbView-3, OrbView-4 and RadarSat-2.
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 because
of technical difficulties, launch or satellite failure or other
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reasons, or we incur significant unanticipated expenses, such as costs for
resolving satellite operational difficulties. If these or other events occur, we
cannot assure you that we could raise additional capital on favorable terms, on
a timely basis or at all. A substantial shortfall in funding would delay or
prevent deployment of one or both of the high-resolution OrbView satellites and
the RadarSat-2 satellite.
SCHEDULE DELAYS -- DELAYS IN THE COMMERCIAL OPERATION OF OUR SATELLITES COULD
ADVERSELY AFFECT OUR BUSINESS.
We could experience delays in the commercial operation of OrbView-3,
OrbView-4 and RadarSat-2 from a variety of causes, including:
- delays in designing, constructing, integrating or testing the
satellites, satellite components and related ground systems;
- delayed or unsuccessful launches;
- subcontractor or manufacturer delays;
- delays in receiving the licenses necessary to operate the
satellite systems;
- delays under our procurement agreement with Orbital, or delays
under the CSA Contract, including delays by CSA in procuring a
launch vehicle on a timely basis for RadarSat-2; or
- other events beyond our control.
The perceived and actual timing of satellite launches may affect
competition in the remote imaging industry. We previously encountered
significant delays in the design, production and testing of the OrbView-2
satellite that was launched in August 1997. Significant delays in the deployment
of OrbView-3, OrbView-4 or RadarSat-2 could increase pre-launch operating costs,
delay revenues and negatively affect our marketing efforts. Even the perception
of potential delays could affect our marketing efforts. We cannot assure you
that any of these satellites will be launched or deployed on a timely basis.
LAUNCH FAILURES -- A LAUNCH VEHICLE FAILURE WOULD ADVERSELY AFFECT OUR ABILITY
TO DELIVER IMAGERY PRODUCTS AND SERVICES.
Satellite launches are subject to significant risks, including
partial or complete launch vehicle failure. Launch vehicle failure may cause
disabling damage to or loss of a satellite or may result in a failure to deliver
the satellite to its proper orbit. We have contracted with Orbital to launch
OrbView-3 on a Pegasus launch vehicle, which has flown 26 missions and has a
greater than 90% success rate. However, there are several additional Pegasus
launches planned before OrbView-3's scheduled launch, and the failure of any one
of those launch vehicles could result in delayed deployment of OrbView-3. The
Pegasus is launched from beneath Orbital's modified Lockheed L-1011 aircraft. If
Orbital's L-1011 aircraft is unavailable, we could experience significant
delays. Orbital would have to acquire and modify a new carrier aircraft or we
would have to arrange to deploy OrbView-3 using an alternative launch vehicle.
We cannot assure you that Orbital could obtain another aircraft and properly
modify the aircraft or that we could obtain alternate launch services on a
timely basis, if at all. We have contracted with Orbital to launch OrbView-4 on
its Taurus launch vehicle, which has flown three missions to date, all of which
were successful. Under the CSA Contract, CSA is responsible for financing a
launch vehicle for RadarSat-2, which has not yet been identified. We cannot
assure you that Orbital will successfully launch either OrbView-3, OrbView-4 or
RadarSat-2. A launch failure of OrbView-3, OrbView-4 or RadarSat-2 could
negatively affect our business, financial condition and results of operations,
our ability to deliver our products and services.
MARKET ACCEPTANCE -- WE CANNOT ASSURE YOU THAT THE MARKET WILL ACCEPT OUR
PRODUCTS AND SERVICES.
Our success depends on existing markets accepting our imagery
products and services and our ability to develop new markets. Our business plan
is based on the assumption that we will generate significant future revenues
from sales of high-resolution imagery produced by OrbView-3, OrbView-4 and
RadarSat-2 to existing markets and new markets. High-resolution satellite
imagery is not yet commercially available. Consequently, it is difficult to
predict accurately the ultimate size of the market and the market acceptance of
products and
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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. Our
description of potential markets for our products and services and estimates of
the addressable markets that we discuss in this Report represent our view as of
the date of this Report, and actual markets could vary materially from these
markets.
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 such acceptance, or failure of certain
markets to develop could 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, sometimes 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
not experience design-related delays during the construction process and 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.
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 expected
design lives of our satellites are affected by a number of factors, including
the quality of construction, the expected gradual environmental degradation of
solar panels, the durability of various satellite components and the orbits in
which the satellites are placed. Random failure of satellite components could
cause damage to or loss of a satellite before the end of its design life. In
rare cases, electrostatic storms or collisions with other objects could damage
our satellites. We cannot assure you that each satellite will remain in
operation for its expected design life. We expect the performance of each
satellite to decline gradually near the end of its design life, although this
has not yet happened with OrbView-1.
We have not procured a spare high-resolution OrbView satellite, nor
do we maintain an inventory of long lead-time parts for these satellites. If one
of our high-resolution OrbView satellites were to fail prematurely, we could
experience significant delays while procuring the necessary spares or
replacement parts to replace or repair the satellite. Procurement delays would
negatively affect our business, results of operations and financial condition.
In addition, we would be required to allocate, earlier than expected, additional
capital expenditures to replace a satellite. We cannot assure you that we would
have on hand, or be able to obtain in a timely manner, the necessary funds to
cover accelerated replacement and repair costs of the satellites if they fail
prematurely.
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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 under the CSA Contract 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.
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 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 COMPETE SUCCESSFULLY IN THE REMOTE IMAGING
INDUSTRY.
Our products and services will compete with satellite and
aircraft-based imagery and related products and services offered by a range of
private and government providers. Certain of these entities may have greater
financial, personnel and other resources than we have. Our major potential
competitors for high-resolution satellite imagery include:
- Space Imaging, which has announced plans to launch its first
high-resolution (one-meter) satellite in mid-1999; and
- EarthWatch, which has announced plans to launch its
high-resolution (one-meter) satellite in late 1999.
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 A SINGLE SUPPLIER COULD RESULT IN DELAYS
IF THE SUPPLIER FAILS TO PERFORM, AND OUR RECOURSE AGAINST THE SUPPLIER IS
LIMITED.
We depend on one supplier, Orbital:
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- to design, develop and launch OrbView-3 and OrbView-4 and to
construct the U.S. ground system for these satellites;
- to design, develop and, through its wholly owned subsidiary
MDA, operate RadarSat-2, and to 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 the RadarSat-2 License from Orbital's
wholly-owned subsidiary MDA to market the RadarSat-2 imagery. The terms and
conditions of the RadarSat-2 License and related contractual arrangements
between ORBIMAGE and MDA are subject to CSA review and approval. There can be no
assurances that CSA will approve these arrangements on terms that are favorable
to ORBIMAGE. ORBIMAGE, Orbital and MDA are currently negotiating an amendment to
the OrbView-2 License that, among other things, will require MDA and/or Orbital
to indemnify ORBIMAGE if CSA's actions materially impact the commercial
viability of the RadarSat-2 program. There can be no assurance that this
amendment will be finalized.
We expect to continue to rely on third parties (including Orbital
and MDA) to design, construct or launch satellites for us and to modify the
existing ground systems to accommodate these satellites. Orbital's obligations
to provide design, construction, and launch services for the OrbView satellites
are governed by a procurement agreement between us and Orbital. If Orbital fails
to perform its obligations adequately under the procurement agreement, we would
be forced to delay deployment of OrbView-3 and/or OrbView-4 until we located an
alternative provider. Orbital's liability to us for claims under the procurement
agreement, such as breach of contract or patent indemnification, is limited to
$10 million. Orbital is designing and constructing the RadarSat-2 satellite. If
Orbital fails to perform its obligations in the RadarSat-2 program, the
deployment of RadarSat-2 could be delayed. Orbital is not liable to us for any
costs or other damages arising from schedule delays in the operation of the
high-resolution OrbView satellites or RadarSat-2.
Under a services agreement we have 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
IMAGERY COULD RESULT IN MARKETING AND DISTRIBUTION DELAYS IF THE DISTRIBUTOR
FAILS TO PERFORM.
As of December 31, 1998, we acquired the RadarSat-2 License from
Orbital. Under an agreement with Orbital and MDA, ORBIMAGE appointed MDA as an
exclusive worldwide distribution of RadarSat-2 imagery. In connection with such
appointment we have granted to MDA an exclusive, unrestricted worldwide license
(including the right to sublicense) to promote, market and sell worldwide
RadarSat-2 data. The entire RadarSat-2 marketing operations will be performed by
MDA. All marketing and sales policies, strategies, targets and resources and
budgets shall be approved by us. If MDA fails to perform its obligations under
its agreement with us or fails to successfully implement marketing plan we may
not be able to successfully market the RadarSat-2 imagery. We cannot assure you
that MDA will perform its obligations under its agreements with us or develop a
successful marketing strategy. If MDA fails to perform these obligations,
ORBIMAGE's RadarSat-2 program and our ability to distribute radar imagery would
be negatively affected,