As filed with the Securities and Exchange Commission on March 29, 2001
Registration No. 333-65014
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
EARTHWATCH INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 3663 31-1420852
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
EarthWatch Incorporated
1900 Pike Road
Longmont, Colorado 80501
(303) 682-3800
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Herbert F. Satterlee III
President and Chief Executive Officer
EarthWatch Incorporated
1900 Pike Road
Longmont, Colorado 80501
(303) 682-3800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Albert G. McGrath, Esq.
Baker & McKenzie
2300 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
(214) 978-3000
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Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this registration statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
================================================================================
EXPLANATORY NOTE
The prospectus included in this Registration Statement also relates to the
registrant's Registration Statement No. 333-39202 pursuant to Rule 429 under the
Securities Act.
PROSPECTUS
EARTHWATCH INCORPORATED
13% SENIOR DISCOUNT NOTES DUE 2007
This prospectus relates to the offering for resale from time to time by
the selling holders described in this prospectus of 13% Senior Discount Notes
due 2007 of EarthWatch Incorporated doing business as DigitalGlobe
("DigitalGlobe"). There are $71.65 million in aggregate principal amount at
maturity of notes outstanding. The notes were issued on August 11, 2000, and
were registered under the Securities Act. They were issued in exchange for notes
with substantially similar terms to these notes that had not been registered.
The notes rank equally in right of payment with all of our existing and
future unsubordinated and unsecured indebtedness.
---------------------------------
Investing in the notes involves risks. See "Risk factors"
beginning on page 7.
---------------------------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------------------------------
Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc.
(collectively, "Morgan Stanley Dean Witter") will use this prospectus in
connection with offers and sales of the notes in market-making transactions at
negotiated prices related to prevailing market prices at the time of sale.
Morgan Stanley Dean Witter may act as principal or agent in the transactions.
DigitalGlobe will receive no portion of the proceeds of the sales of the notes
and will bear the expenses incident to the registration of the notes. If Morgan
Stanley Dean Witter conducts any market-making activities, it may be required to
deliver a "market-making prospectus" when effecting offers and sales of the
notes because of the equity ownership of DigitalGlobe by affiliates of Morgan
Stanley Dean Witter. For so long as a market-making prospectus is required to be
delivered, the ability of Morgan Stanley Dean Witter to make a market in the
notes may be dependent, in part, on the ability of DigitalGlobe to maintain a
current market-making prospectus.
In addition, other selling holders named in this prospectus, directly
or through agents, dealers, or underwriters to be designated from time to time,
will use this prospectus in connection with offers and sales of notes that they
hold. DigitalGlobe will receive no portion of the proceeds of the sales of the
notes and will bear the expenses incident to the registration of the notes.
The date of this prospectus is March __, 2002.
TABLE OF CONTENTS
Page
----
Summary............................................................................................... 1
Risk factors.......................................................................................... 7
Special note regarding forward-looking statements..................................................... 15
Use of proceeds....................................................................................... 16
Dividend policy....................................................................................... 16
Capitalization........................................................................................ 17
Selected historical financial data.................................................................... 18
Management's discussion and analysis of financial condition and results of operations................. 19
Business.............................................................................................. 26
Management............................................................................................ 36
Limitation of liability and indemnification matters................................................... 44
Certain relationships and related transactions........................................................ 45
Principal stockholders................................................................................ 47
Recapitalizations..................................................................................... 49
Description of material indebtedness.................................................................. 52
Form of notes......................................................................................... 53
Description of the notes.............................................................................. 54
Selling holders....................................................................................... 79
Description of capital stock.......................................................................... 80
United States federal income tax consequences......................................................... 84
Plan of distribution.................................................................................. 87
Legal matters......................................................................................... 88
Experts .............................................................................................. 88
Where you can find more information................................................................... 89
Index to financial statements......................................................................... F-1
------------------------------------
You should rely only on the information provided in this prospectus. We have
authorized no one to provide you with different information. We, Morgan Stanley
Dean Witter and the other selling holders are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus or any prospectus supplement is accurate
as of any date other than the date on the front of the document.
SUMMARY
You should read the following summary together with the detailed
information regarding DigitalGlobe, including "Risk factors" and the financial
statements, including the notes to the financial statements, appearing elsewhere
in this prospectus. DigitalGlobe(R) and Your Planet Online(R) are our registered
trademarks, and Seconds on Orbit(R) is our trademark. References herein to the
"DigitalGlobe system" refer collectively to our planned satellite, ground
stations, the DigitalGlobe, and our distribution system. We do business under
the name DigitalGlobe and therefore, in this document refer to our company under
the name DigitalGlobe as well.
EARTHWATCH INCORPORATED
We plan to create and market a variety of information products derived
from satellite imagery of the earth's surface. We successfully launched and
deployed our QuickBird satellite on October 18, 2001. We released our first
imagery from our QuickBird satellite on December 17, 200l. We completed our
initial on-orbit calibration and commission period and commenced commercial
operations on February 1, 2002.
Our QuickBird satellite collects high-resolution digital imagery of the
earth's surface. Our QuickBird satellite collects 0.6-meter resolution gray
scale and 2.44-meter resolution color imagery of the earth and revisits most
areas within three to five days.
We were originally incorporated as a wholly owned subsidiary of Ball
Corporation. On March 31, 1995, we merged with WorldView Imaging Corporation,
which had been founded by Dr. Walter S. Scott, our Chief Technical Officer and
Executive Vice President. In connection with the merger, Ball contributed
certain assets and technology, in addition to making a substantial cash
investment. WorldView received the first United States government license to
operate a high-resolution satellite for commercial use and was developing the
EarlyBird satellites (predecessor satellites to the QuickBird satellites) when
it merged with us.
Since the merger, we have invested in research and development to develop
our satellite system and have incurred substantial operating costs and selling,
general, and administrative expenses. We completed and launched EarlyBird 1,
our first satellite, in December 1997. However, four days after a successful
launch, we lost contact with EarlyBird 1. We were unable to reestablish
communications and determined that the satellite was a total loss. Although we
launched our first QuickBird satellite on November 20, 2000, it failed to
achieve orbit, which resulted in a total loss of the satellite. As a result, we
have not generated any significant revenue from our proposed primary satellite
imagery business and did not do so until we began selling imagery generated by
our second QuickBird satellite in February 2002. We have generated only limited
revenue from other related projects.
Geographic imagery is used in a broad and increasing range of
applications. Most governments and businesses need geographic information. The
United States and foreign governments use geographic imagery for national
security reconnaissance. Local and municipal governments use geographic imagery
for land use and infrastructure planning, resource management, and
environmental monitoring. Geographic imagery products are also important to a
variety of industries, including mapping, surveying, agriculture, forestry,
environmental protection, and mineral and oil exploration.
High-resolution satellites have significant advantages over aerial
photography and low-resolution satellites that are currently used to collect
geographic imagery. Aerial photography provides accurate, high-resolution
overhead imagery of discrete areas, but can be subject to a number of
limitations, including:
. limited coverage area;
. slow delivery time;
. restricted ability to fly over certain areas; and
. high marginal cost of images.
In addition, we believe that many aerial providers still have a limited
ability to produce imagery in a digital format, which constrains their ability
to process and enhance images and to maintain a low cost, readily accessible
image archive.
Existing low spatial resolution satellite imagery systems, such as Landsat
and the French satellite consortium SPOT, can provide imagery that is less
costly and covers wider areas than aerial photography, but the low spatial
resolution of these satellite systems significantly limits their usefulness for
many applications.
1
High spatial resolution satellite imagery has fewer of these limitations
and has several additional advantages. In addition to providing high spatial
resolution gray scale (panchromatic) imagery, high-resolution satellites can
take precise color and near infrared (multispectral) images, enabling a wide
range of monitoring, detection, and exploration applications. The digital format
of satellite imagery facilitates quick delivery, enables low-cost archiving,
allows for image enhancement and manipulation, and preserves much more of the
information value than analog imagery.
We are not aware of any additional competitors that plan to enter this
market other than our three announced competitors:
. Space Imaging, Inc., which successfully launched its first .8-meter
resolution satellite in September 1999 and has begun serving the
commercial market;
. Orbital Imaging Corp., or Orbimage, which has developed a 1-meter
high-resolution imaging system, and has announced plans for launch
during the third quarter of 2002; and
. ImageSat International, which successfully launched a 1.8-meter
resolution satellite in December 2000 and has announced plans to
launch an .8-meter high-resolution satellite for commercial use
during the fourth quarter of 2003. ImageSat also recently announced
that it plans to offer .6-meter resolution images from its 1.8 meter
high-resolution satellite through software upgrades and new
processing techniques by the second quarter of 2002.
We believe there are significant barriers for other potential entrants.
The design, creation, launch, and operation of an integrated high-resolution
commercial satellite system require significant expertise and knowledge. We and
each of our three announced competitors have been developing commercial
satellite imagery systems for more than five years. We believe it would take a
new potential competitor more than four years and significant capital to
develop and construct a high-resolution commercial imaging satellite. Most
aerospace companies capable of constructing such a satellite have already
aligned themselves with one of the announced entrants. As a result, we believe
that DigitalGlobe, together with the other announced entrants, will have a
significant advantage over new market entrants.
Initially, we expect to provide imagery primarily to the United States and
foreign governments and agencies. The United States government supports the
development of a commercial satellite imaging industry and is now taking steps
to include commercial providers in several major security, mapping, and earth
monitoring programs. For example, the United States government is currently
upgrading its EagleVision mobile reconnaissance ground stations to accommodate
high-resolution commercial satellite imagery. Between NASA and the Department
of Defense, the United States government has identified over $1 billion in
prospective purchases of imagery products and related value-added services that
it expects to obtain from commercial vendors in the next five years. As one of
three announced United States entrants, we believe we are well positioned to
secure a portion of this business. We have already provided commercial imagery
products to NASA and the National Imagery and Mapping Agency, or NIMA.
Governments of many foreign countries have a strong national security
interest in obtaining near real-time high-resolution imagery of their borders
and neighboring countries. This type of imagery has generally not been
available to governments other than those of the United States, France, Israel,
and the former Soviet Union. We have submitted proposals to foreign governments
and commercial entities, with several of these being prospective customers. We
have entered into contracts with agencies in three countries, have outstanding
proposals for contracts with agencies in fifteen countries, and are in
discussions with many other countries to provide them with a wide range of
images and other products.
We are also targeting as potential customers civilian agencies and local
and municipal governments that currently use aerial and low-resolution
satellite imagery for mapping, environmental monitoring, land use, and
infrastructure planning. In the longer term, we expect that our customers will
include commercial users in industries such as mapping and surveying, oil, gas,
and mineral exploration, agriculture, forestry, scientific and environmental
monitoring, and insurance risk analysis and damage assessment. We also expect
value-added resellers to develop products based on satellite imagery from our
DigitalGlobe archive for various commercial and consumer-oriented applications,
such as real estate assessment, travel planning, commodities forecasting,
economic intelligence, and entertainment.
2
We are committed to achieving leadership positions in specific markets for
digital imagery and derivative information products. Our strategy to achieve
our objectives includes the following elements:
. become a leading provider of imagery-driven solutions;
. pursue targeted market entry and expansion;
. maintain leadership through partnerships with leading technology
companies;
. leverage our technical advantages;
. build direct relationships with key customers and market influencers;
and
. develop a comprehensive DigitalGlobe archive.
DigitalGlobe is a Delaware corporation. Our principal executive offices
are located at 1900 Pike Road, Longmont, Colorado 80501-6700. Our telephone
number is (303) 682-3800.
3
SUMMARY OF THE TERMS OF THE NOTES
The notes................................. 13% Senior Discount Notes due 2007,
which have an aggregate principal
amount at maturity of $71,650,000.
Maturity.................................. July 15, 2007.
Interest payment dates.................... The notes will not begin to accrue
cash interest until July 15, 2002.
Beginning on January 15, 2003,
interest on the notes will be
payable semiannually in cash on
January 15 and July 15 of each year.
Change of control......................... Upon a change of control of
DigitalGlobe, we will be required
to make an offer to purchase the
notes at a purchase price equal to
101% of their accreted value on the
date of repurchase, plus any
accrued and unpaid interest. We
cannot assure you that we will
have sufficient funds available
at the time of any change of
control to make any required debt
repayment, including repurchases of
the notes.
Insurance collateral...................... We have obtained insurance
policies for our QuickBird
satellite to cover $155 million
of risks associated with the
launch and first year of operations
of our QuickBird satellite. The
notes are secured equally with up
to $9 million in principal amount
of vendor financing by any proceeds
of insurance policies covering
certain aspects of our QuickBird
satellite.
If the trustee for the notes
receives proceeds from the insurance
policy covering risks related to our
QuickBird satellite, we will make an
offer to repay the vendor financing
described above and purchase the
notes at a purchase price equal to
their accreted value, plus any
accrued and unpaid interest to the
date of purchase. To the extent that
the aggregate accreted value and
accrued interest of the notes
tendered in response to the offer to
purchase and the amount of vendor
financing requested to be repaid
exceeds the amount of insurance
proceeds available for such offer,
holders of the notes that subscribe
to the offer to purchase and the
lender in the vendor financing will
receive a ratable portion of the
insurance proceeds. To the extent
the accreted value and interest on
the notes tendered, together with
the vendor financing to be repaid,
are less than the available
proceeds, the excess will be placed
into a similar pledge account to
secure a put right on behalf of the
holders of our Series A and B
preferred stock, and any remaining
funds after exercise of this put
right will be returned to
DigitalGlobe.
Ranking................................... The notes rank equally in
right of payment with all of
our unsubordinated and unsecured
indebtedness. At December 31, 2001,
we had $9.7 million of indebtedness
outstanding that ranked equally in
right of payment with the notes.
Restrictive covenants..................... The indenture under which the notes
have been issued contains covenants
that, among other things, restrict
our ability and the ability of our
subsidiaries to:
. incur additional debt;
. incur liens;
. engage in sale-leaseback
transactions;
. pay dividends or make other
distributions in respect of our
capital stock;
. redeem capital stock; or
. make investments or restricted
payments.
4
However, these limitations are
subject to a number of important
qualifications and exceptions. We
are, among other things, permitted
to incur additional indebtedness,
including secured debt, under
specified circumstances.
Form of notes............................. The notes have been issued in fully
registered form, without coupons.
The notes have been deposited with
The Bank of New York, as custodian
for The Depository Trust Company,
and registered in the name of Cede
& Co. in the form of one or more
global notes. Holders of the notes
own book-entry interests in the
global note, and evidence of these
interests is kept in the records
maintained by The Depository Trust
Company. See "Form of notes."
Use of proceeds........................... We will not receive any proceeds
from this offering.
5
SUMMARY HISTORICAL FINANCIAL DATA
The following summary historical financial data are qualified by reference
to, and should be read in conjunction with, our consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The consolidated balance sheet data as of December 31, 2000 and
2001, and the consolidated statement of operations data for each of the three
years ended December 31, 2001, and for the period from January 1, 1995
(Inception) to December 31, 2001, have been derived from our audited
consolidated financial statements and the notes thereto included elsewhere in
this prospectus. The consolidated statement of operations data for the years
ended December 31, 1997, and 1998, and the consolidated balance sheet data as
of December 31, 1997, 1998, and 1999, are derived from our historical
consolidated financial statements not included in this prospectus. Historical
results may not be indicative of results for any future period.
Period From
January 1, 1995
(Inception) to
Year Ended December 31, December 31,
-------------------------------------------------------------------
1997 1998 1999 2000 2001 2001
----------- ------------- ------------- ------------- ------------- --------------
(in thousands)
Consolidated Statement of Operations Data:
Revenue $ 437 $ 1,809 $ 5,913 $ 3,336 $ 12,009 $ 28,397
----------- ------------- ------------- ------------- ------------- --------------
Cost of goods sold 382 1,905 5,120 2,099 9,392 22,533
Selling, general, and administrative 8,588 4,975 12,763 15,333 15,116 65,196
Research and development 19,121 9,113 6,956 13,442 11,910 83,846
Gain (loss) from impairment of fixed assets,
net of insurance recoveries (25,519) (599) - 107,608 - 81,490
Gain from arbitration settlement - 1,515 - - - 1,515
Gain (loss) from operations (53,173) (13,268) (18,926) 80,070 (24,409) (60,173)
Interest expense (86) (1,340) (5,482) (4,492) (4,726) (16,215)
Interest income 2,528 1,688 4,089 4,104 2,883 18,233
Income tax provision - - - (3,000) - (3,000)
Extraordinary loss on early extinguishment of
debt, net of deferred tax benefit - - - - (23,038) (23,038)
----------- ------------- ------------- ------------- ------------- --------------
Net income (loss) $ (50,731) $ (12,920) $ (20,319) $ 76,682 $ (49,290) $ (84,193)
=========== ============= ============= ============= ============= ==============
Other Consolidated Financial Data:
Capital expenditures $ 54,271 $ 26,037 $ 75,238 $ 82,640 $ 72,999 $ 354,415
Cash provided (used) by operating activities (14,192) (10,864) (6,420) (18,891) (79,268) (152,156)
Cash provided (used) by investing activities (68,290) 11,471 (97,070) (57,534) 198,296 (56,356)
Cash provided (used) by financing activities 53,668 (1,972) 180,639 (43) (116,445) 216,820
Ratio of earnings to fixed charges - - - 2.89x - -
Deficiency of earnings to fixed charges (56,401) (18,976) (31,659) - (61,698) (147,141)
Consolidated Balance Sheet Data (end of period):
Cash and cash equivalents $ 6,410 $ 5,045 $ 82,193 $ 5,726 $ 8,309
Total assets 104,299 85,328 271,469 379,378 210,632
Total debt 51,511 49,804 167,148 195,485 66,844
Mandatorily redeemable preferred stock - - 129,978 141,246 158,267
Stockholders' equity (deficit) 39,737 26,831 (40,114) 26,387 (30,198)
6
RISK FACTORS
The notes entail a high degree of risk, including the following risks.
If any of the events described in the following risks actually occur, our
business, operating results, financial condition, or ability to pay principal
or interest on the notes could be materially adversely affected. In that event,
you may lose all or part of your investment. You should carefully consider the
following factors and other information in this prospectus before deciding to
purchase the notes.
RISKS RELATED TO OUR FINANCIAL HISTORY, CONDITION, AND REQUIREMENTS.
We need additional financing.
We do not expect to generate positive cash flow from operations until at
least the third quarter of 2002. Accordingly, our existing capital resources
will not be sufficient to meet our anticipated cash needs in fiscal 2002,
including the payment of an insurance premium due in April 2002, which has
resulted in our independent accountants questioning our ability to continue as a
going concern in their report included in this registration statement as set
forth in the contractual obligation table. We believe that we currently have an
agreement in principle with our existing investors to loan to us $12 million
dollars on an unsecured basis and, if the agreement is consummated, we believe
that we should have capital resources sufficient to meet our anticipated cash
needs in fiscal 2002. The agreement in principle requires repayment of the loan
in three annual installments of $4 million plus interest, which will range
between 11% to 12 1/2%. However, we cannot assure you that we will be able to
consummate the agreement in principle on the terms described or at all. Failure
to consummate the agreement in principle or obtain additional financing capital
when needed would significantly diminish or eliminate our ability to continue as
a going concern.
As a result, we cannot assure you that we will have sufficient funds to
service the notes or our other indebtedness or to fund our other liquidity
needs, including our anticipated capital expenditures, or that these
expenditures will fall within our estimates.
Our limited operating history makes an evaluation of our prospects
difficult and the notes a highly speculative investment.
We have a limited operating history from which you can evaluate our
business and prospects. As a young company, we face risks and uncertainties
relating to our ability to successfully implement our business plan. You should
consider the significant risks, expenses, and difficulties encountered by
companies like us in their early stages of development in a highly regulated,
high technology industry. Specifically, we must successfully operate our
satellite and introduce new services and products on a commercial basis in an
industry that is still evolving. If we do not successfully address these risks
and uncertainties, our business, operating results, and financial condition
will be materially adversely affected.
Since commencing development operations on March 31, 1995, we have
invested in research and development and incurred substantial operating costs,
as well as selling and general and administrative expenses. Four days after
launching our first satellite, EarlyBird 1, in December 1997, we lost contact
with it, resulting in a total loss of that satellite. Our second satellite,
QuickBird 1, was lost on launch on November 20, 2000, due to a failure to
achieve orbit. While we successfully launched our second QuickBird satellite on
October 18, 2001, we have not yet generated significant revenue from the sale
of licenses for the use of imagery products. Given our limited operating
history, you have only limited operating and financial data on which to
evaluate our performance. Also, our historical financial results are not
representative of what we expect to achieve from operation of our QuickBird
satellite. Our business plan depends upon:
. our ability to develop a customer base and distribution channels for
our imagery products and services; and
. demand for commercially available satellite imagery we plan to offer.
. We have a history of losses, we expect to incur additional losses in
the near future, and we may not achieve or sustain profitability.
We have not achieved profitability and, since inception, we have generated
no significant revenues from our proposed satellite imaging business. We had
accumulated net losses of approximately $84.2 million at December 31, 2001.
Our business strategy requires substantial capital and operating
expenditures before we can begin to realize any significant revenues. We expect
to incur significant operating losses as we continue to develop our satellite
and imaging network and as we begin to market our products. We expect to
continue to incur negative cash flow and substantial operating losses at least
through the third quarter of 2002. Our ability to become profitable and to
generate positive cash flow will depend on our ability to sell imagery to
existing markets for geographic imagery and develop new markets for geographic
imagery. In addition, our revenues and operating results could vary
significantly from period to period.
7
Our substantial indebtedness could adversely affect our financial
condition and prevent us from fulfilling our payment obligations under the
notes.
We currently have a significant amount of indebtedness. As of December 31,
2001, we had approximately $76.7 million of debt. This amount includes $67.2
million in accreted value of notes, which will have a fully accreted value of
$71.7 million on July 15, 2002. The notes will begin to accrue cash interest on
July 15, 2002, which interest will be payable semiannually in cash on January
15 and July 15 of each year, beginning on January 15, 2003. In addition, we
have obtained $9.0 million of vendor financing, approximately $9.5 million of
principal and accrued interest at December 31, 2001, which we used to fund the
completion of our QuickBird satellite. This vendor financing facility accrues
interest at an annual rate of 11%, which becomes payable in May 2002. Beginning
in June 2002 and ending in April 2003, principal in equal monthly amounts, and
interest are payable in cash each month. We may also raise additional financing
in the future.
The amount of our indebtedness could have important consequences to you.
For example, it could:
. make it more difficult for us to satisfy our obligations with respect
to payments on the notes;
. require us to dedicate a substantial portion of our cash flow from
operations, if any, to repaying indebtedness, thereby reducing the
availability of cash flow to fund operating expenses, working
capital, capital expenditures, and other general corporate purposes;
. limit our flexibility in planning for or reacting to changes in our
business and the satellite imaging industry, placing us at a
competitive disadvantage;
. limit our ability to borrow additional funds for working capital,
capital expenditures, debt service requirements, or other purposes;
and
. limit our ability to react to changing market conditions, changes in
our industry, or economic downturns.
We will require a significant amount of cash to service our indebtedness.
Our ability to make scheduled payments of principal and interest on our
indebtedness and to fund planned capital expenditures, development expenses,
and operating costs will depend on our ability to generate cash through sales
of imagery products and services. Our ability to generate cash depends on the
success of our marketing and distribution strategy, customer demand for our
imagery products and services, and, to a certain extent, general economic,
financial, competitive, regulatory, and other factors beyond our control. If we
are unable to generate sufficient cash from our operations, we will be required
to identify and secure additional financing. However, we cannot assure you that
additional financing will be available to us on acceptable terms or at all.
Consequently, we could be required to significantly reduce or suspend our
operations, seek a merger partner, sell the business, or seek additional
financing.
We must make significant additional capital expenditures.
We have begun to develop plans for the next-generation satellites that
will augment our QuickBird satellite system. We expect to incur in excess of
$400 million of research and development costs and capital expenditures to
develop our next-generation satellites. However, we cannot assure you that such
funds will be available to us on acceptable terms or at all. Consequently, we
could be required to significantly reduce or suspend our operations, seek a
merger partner, sell the business, or seek additional financing.
Our cost to insure future launches may increase.
Due to the launch failure of our first QuickBird satellite and the failure
of EarlyBird 1 on orbit, we have made claims on the insurance policies covering
both of these satellites. Although we did obtain insurance for our second
QuickBird satellite, these claims may hinder or prevent us from obtaining
insurance for future launches on commercially reasonable terms or at all.
The cost of launch insurance for a particular satellite is based on many
factors, including failure rates of similar launch vehicles or satellite
components. An adverse change in insurance market conditions, for example, the
events of September 11, 2001, or the failure of a satellite using similar
components or a similar launch vehicle, could significantly increase the cost
of insurance on future launches. Recently, there have been several commercial
satellite launch failures. Additionally, there have been numerous government
launch failures which were not insured. Consequently, the launch insurance
industry is assessing the impact of failed launches and examining the resulting
claims. These factors could cause the market terms of future insurance policies
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. We cannot assure you that launch insurance for our
next generation satellites will be available on acceptable terms, or at all.
8
Our current revenues depend on a limited number of customers.
NASA accounted for approximately 23%, and NIMA accounted for approximately
67%, of our revenue during the fiscal year ended December 31, 2001. Any
termination of our relationships with NASA and NIMA would have a material
adverse effect on our current operating results and financial condition. NASA
and NIMA retain our services on a case-by-case basis and may choose at any time
to use another firm to provide the services that we perform. Therefore, any
shift in either NASA's or NIMA's decisions to continue to use our services
could also result in substantially reduced revenues for us.
Our use of net operating losses to offset taxes may be limited.
Under the Internal Revenue Code as currently in effect, utilization of our
net operating loss carry forwards against future taxable income could be
limited if we are treated as having experienced an ownership change, as defined
in the Code. We believe that we may have experienced an ownership change as a
result of certain prior transactions. Future events also may result in an
ownership change that could result in limitations on our ability to utilize our
net operating loss carry forwards. In addition, the Internal Revenue Code
restricts our ability to use net operating losses to a limited period of time
after they are incurred.
RISKS RELATING TO OUR SATELLITE OPERATIONS.
We cannot assure you that our satellite will continue to operate as
designed.
We have limited experience in producing our products, contracting for such
production, and providing services. To date, we are still in the process of
developing our products and services and have yet to fully establish our
processes and facilities. Problems may occur in the future with respect to
product or service quality, performance, and reliability. If such problems
occur, we could experience increased costs, delays in, or cancellations of
orders, loss of customers, and product returns, any one of which would
materially adversely affect our business, operating results, financial
condition, and our ability to pay interest and principal on the notes. See
"Business--Products and services."
We cannot assure you that our QuickBird satellite will continue to operate
throughout its expected design life. Even if this satellite is operated
properly, minor technical flaws in its sensors, power supply, data recorder,
communications systems, or other components could significantly degrade its
performance, which could materially affect our ability to collect and market
imagery products. For example, our EarlyBird 1 satellite was successfully
launched, but we lost contact with it four days later. After we were unable to
reestablish communications, we determined that the satellite was a total loss.
Our QuickBird satellite uses advanced technology that will be subject to
severe environmental stresses in space that could adversely affect its
performance. Hardware component problems in space could require premature
satellite replacement, with attendant costs and revenue losses. In addition,
human operators may make mistakes in issuing commands, negatively impacting our
satellite's performance.
Satellites have limited design lives and are expensive to replace.
Satellites have limited useful lives. We determine a satellite's useful
life, or 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 useful life of our
QuickBird satellite is seven years. We expect the performance of our QuickBird
satellite to decline near the end of its design life. However, we cannot assure
you that the satellite will function properly for its expected design life. We
anticipate using funds primarily generated from operations to develop next
generation high-resolution satellites. We expect the cost of the next
generation satellites to be significant. If we do not generate sufficient funds
from operations or are unable to obtain financing from outside sources, we will
not be able to develop next generation satellites to replace our QuickBird
satellite at the end of its design life. This would materially and adversely
affect our business, operating results, financial condition, and ability to pay
principal and interest on the notes and our other indebtedness.
Our business depends on component and software suppliers.
We are highly dependent on other companies for the development and
manufacture of various components critical to our operation. These components
include software and products for our satellite systems, ground stations,
DigitalGlobe archive, data distribution network, and the launch of our
satellite. Many of the sources for these components are our primary source of
supply, including Ball Aerospace, Eastman Kodak Company, Fokker Space B.V.,
Datron/Transco Inc., InfoFusion, LLC, ITT Industries, Inc., Kongsberg Spacetec
A.S., L3 Communications Storm Control Systems, Inc., and MacDonald Dettwiler &
Associates, Ltd.
9
The continued development and deployment of the DigitalGlobe system will
be delayed if these or other companies and subcontractors fail to complete
development or produce these components on a timely basis. Additionally, the
failure of any such components to function as required will adversely affect
our business.
Our business depends on the continued functioning of our data centers.
We must protect our data centers against damage from fire, earthquake,
power loss, telecommunications failure, and similar events. We plan to take
precautions to protect ourselves from events that could interrupt our
operations, including the implementation of redundant systems, offsite storage
of back-up data, and sprinkler systems in the data centers. Our master
international distributors will maintain separate archives of portions of our
imagery data and we plan to enter into arrangements with other high volume
customers for alternative data back-up storage. We cannot assure you that such
precautions will be adequate, and our operations may still be interrupted,
possibly for extended periods. Although we have insurance to cover damage to
our data centers, and we also carry business interruption insurance to cover
the loss of revenue that would result if one of our data centers was damaged or
destroyed, the insurance proceeds might not sufficiently compensate us for
interruptions of our operations.
RISKS RELATED TO GOVERNMENT REGULATION OF OUR INDUSTRY.
We are subject to extensive government regulation.
Our business is subject to extensive regulation in the United States and
in foreign jurisdictions in which we may operate or in which our products may
be sold. Regulatory changes could significantly impact our operations by:
. restricting our development efforts and those of our customers;
. restricting the amount and type of data that we can collect;
. making current products obsolete;
. restricting sales or distribution of our products; or
. increasing competition.
We might need to modify our products or operations to comply with such
regulations. Such modifications could be expensive and time-consuming.
Foreign governments may attempt to limit or prohibit sales of images into
their country or other countries. The United States government imposes
restrictions on our ability to collect and sell imagery covering Israel and
could elect to limit or proscribe sales of imagery covering other countries or
regions. Additionally, the United States government may limit our ability to
collect and distribute images in order to protect the safety and security of
the United States or allied military forces, or for other reasons involving
national security or military strategy. Any such limitation would materially
affect our ability to generate revenues.
We could in the future be subjected to new laws, policies, or regulations,
or changes in the interpretation or application of existing laws, policies, and
regulations that modify the present regulatory environment in the United States
or abroad. U.S. regulators could decide to impose limitations on U.S. companies
that are currently applicable only to other countries or other regulatory
limitations that affect satellite remote imaging operations. Any limitations of
this kind could materially adversely affect our business.
National Oceanic and Atmospheric Administration Licenses.
We are required to hold, and have obtained, licenses from the National
Oceanic and Atmospheric Administration of the United States Department of
Commerce for the operation of our commercial remote sensing satellite system.
These licenses regulate our activities in several areas. For example, the
collection and distribution of data and the percentage of foreign ownership of
our company may be controlled for purposes of national security or foreign
policy in certain circumstances.
Federal Communications Commission Licenses.
We are required to hold, and have obtained, licenses from the Federal
Communications Commission for the operation of radio frequency devices on board
our satellite and at United States ground stations. Any future regulatory
changes could materially adversely affect our business, operating results,
financial condition, and our ability to pay interest and principal on the notes
and our other indebtedness.
10
RISKS RELATED TO THE MARKET FOR OUR PRODUCTS AND SERVICES.
Our business will suffer if we do not compete successfully in the
collection and distribution of digital geographic and image data.
We expect to encounter substantial competition in the market for digital
geographic and image data. We expect to face competition from traditional
sources of image-based information, including aerial photography, and from
high-resolution satellite systems developed and operated by other commercial
enterprises or foreign governments. Industry analysts generally expect that
aerial photography will remain the dominant source of imagery because it offers
superior spatial resolution as compared to imagery produced by commercial
satellites.
Aerial photography offers high-resolution imagery, is efficient and
competitively priced, and currently enjoys a majority share of the overhead
imagery market. We expect that aerial photography firms will continue to offer
products that are competitive with ours in many applications.
We also face competition from high-resolution commercial satellite
ventures, including Space Imaging, Orbimage, and ImageSat. Space Imaging, a
joint venture including Lockheed Martin, E-Systems, and Mitsubishi, has
developed a high-resolution imaging system. Space Imaging successfully launched
a high-resolution satellite in September 1999 and has begun serving the
commercial market. Space Imaging also has the right to distribute imagery for
Landsat 4 and 5 and for the Indian Remote Sensing System. It also has access to
significant technological and capital resources. Orbimage, a wholly owned
subsidiary of Orbital Sciences Corporation, is developing a high-resolution
imaging system, which is scheduled for launch during the third quarter of 2002,
as publicly announced. In addition, ImageSat successfully launched a 1.8-meter
resolution satellite in December 2000 and has announced plans to launch an
.8-meter high-resolution satellite for commercial use during the fourth quarter
of 2003.
We also will face competition from new and emerging technologies, possibly
including satellites with higher resolution and radar. We cannot assure you
that we will be able to compete successfully against current and future
competitors, or that competitive pressures faced by us will not materially
adversely affect our business, operating results, financial condition, or our
ability to pay principal and interest on the notes and our other indebtedness.
Our business may become subject to intense price competition.
As more of our competitors successfully launch earth-observing imaging
satellites, our business will become increasingly competitive. The cost to
enter our business is very high, while operating costs, on a day-to-day basis,
are lower. Therefore, one of our competitors may substantially reduce prices in
an effort to gain market share and eliminate other market participants, and
still be able to carry on business and finance operations. A reduction in
prices by one of our competitors would force us to reduce our prices in order
to maintain market share. Any significant price reduction in the market could
have a material adverse effect on our revenues, operating results, financial
condition, and our ability to pay principal and interest on the notes and our
other indebtedness.
Our dependence on third party distributors, sales agents, and value-added
resellers could result in marketing and distribution delays.
We plan to market and license our products using a network of distributors
covering major world regions and, on a regional basis, through local
distributors retained by the major distributors. We currently have agreements
with certain of our strategic partners to serve as master international
distributors, with exclusive distribution rights for at least four years to
certain of our products in Europe and Asia. We are currently engaged in
discussions with other potential distributors, sales agents, and value-added
resellers.
Our ability to terminate a distributor who is not performing
satisfactorily may be limited. Inadequate performance by a master international
distributor would adversely affect our ability to develop markets in the
regions for which the master international distributor is responsible and could
result in substantially greater expenditures by us in order to develop such
markets. Our operating results will be highly dependent upon:
. our ability to maintain our existing master international distributor
arrangements;
. our ability to establish and maintain coverage of major geographic
areas and establish access to customers and markets; and
. the ability of our distributors, sales agents, and value-added
resellers to successfully market our products.
11
Market acceptance of our products and services is uncertain.
We intend to address the needs of existing imagery markets and to develop
new markets. Our success will depend on demand for satellite imagery with a
resolution of one meter or less, which to date has not been widely available
commercially. Consequently, it is difficult to predict the ultimate size of the
market and the demand for products and services based on this type of imagery.
Our strategy to target certain markets for our satellite imagery is based
on a number of assumptions, some or all of which may prove to be incorrect. Our
description of potential markets for our products and services, and estimates
of the addressable markets that we discuss in this prospectus, represent our
view as of the date of this prospectus. Actual markets could vary materially
from these estimates.
As is typical in many emerging markets, demand and market acceptance for a
new product or service is subject to many uncertainties. We cannot assure you
that our products will achieve market acceptance in existing imagery markets or
that new markets will develop. Even if markets for our imagery develop, we may
capture a smaller share of these markets than we currently anticipate. We have
entered into contracts to supply imagery, which provide for agreed upon minimum
and maximum purchases by our customers of imagery and value-added products and
services. We cannot assure you that our customers will purchase any such data
in excess of minimum contractual obligations. Lack of significant market
acceptance of our products and services, delays in acceptance, or failure of
certain markets to develop would have a material adverse effect on our
business, operating results, and financial condition, and would negatively
affect our ability to pay interest and principal on the notes and our other
indebtedness.
Our business will suffer if we are not able to expand into international
markets or compete effectively in those markets.
We expect to derive a significant portion of our revenues from
international markets. We have limited experience internationally and may not
be able to compete effectively in international markets. International
operations are subject to certain risks, such as:
. increases in tariffs, taxes, and other trade barriers;
. difficulties in collecting accounts receivable and longer collection
periods ;
. fluctuations in currency exchange rates;
. changes in political and economic stability;
. potentially adverse tax consequences;
. government regulations; and
. reduced protection for intellectual property rights in certain
countries.
Any of these factors could materially adversely affect our international
revenues and, consequently, our business, operating results, and financial
condition.
We face technological risks.
The DigitalGlobe system is exposed to the risks inherent in a complex
satellite system employing advanced technologies. The technology used in the
DigitalGlobe system has never been used in an integrated commercial system and
has been or must be adapted to meet our specific needs. The operation of the
DigitalGlobe system will require the design and integration of advanced digital
technologies throughout our satellite, ground station, and data gathering and
distribution networks. The failure to develop, produce, and implement the
DigitalGlobe system or any of its elements could delay the operation of the
DigitalGlobe system or render it unable to perform to the quality standards
required for success. We believe that, based upon presently available
information, our QuickBird satellite is technologically competitive with other
high-resolution satellites. However, because of substantial and continual
technological change, we may be unable to maintain our competitive position,
and our business, results of operations, and financial condition may be
adversely affected. Therefore, we may be unable to pay interest and principal
on the notes and our other indebtedness.
12
RISKS RELATING TO OUR PERSONNEL AND INTELLECTUAL PROPERTY.
Our business will suffer if we do not attract and retain additional
highly-skilled personnel or manage our growth effectively.
Our future success depends on our ability to identify, attract, hire, and
train highly-skilled technical, managerial, sales, and marketing personnel. In
particular, we have significantly increased our hiring efforts since the
successful launch of our QuickBird satellite. Competition for skilled technical
personnel is intense. Some of our competitors have significantly greater
financial resources than us and may be able to more easily attract such skilled
personnel. Moreover, competition for technical talent in the Denver
metropolitan area is particularly intense. Failure to attract and retain the
necessary technical, managerial, sales, and marketing personnel could
materially adversely affect our business, operating results, and financial
condition.
We may experience periods of rapid growth. If we fail to manage our
growth, this could materially adversely affect our business, operating results,
and financial condition. We must effectively manage our operational, financial,
and accounting systems, procedures, and controls to manage this future growth.
We may not be able to successfully operate our business if we lose key
personnel.
We believe that our success will depend on the continued services of our
senior management team and other key personnel, including Herbert F. Satterlee
III, our Chief Executive Officer and President, Dr. Walter S. Scott, our Chief
Technical Officer and Executive Vice President, and Henry Dubois, our Chief
Operating Officer, Chief Financial Officer, and Executive Vice President. The
loss of the services of any of our senior management team or other key
employees could materially adversely affect our business, operating results,
and financial condition. We generally have not entered into written employment
contracts with any members of management. Furthermore, we do not maintain key
person life insurance on our management personnel.
Our limited ability to protect our intellectual property and proprietary
information may adversely affect our competitive position.
Patent laws, trade secrets, copyright laws, nondisclosure agreements, and
other proprietary rights are important to our success and competitive position.
Our efforts to protect our proprietary rights may be inadequate and may not
prevent others from using our proprietary rights. Existing trade secret and
copyright laws offer only limited protection. Further, effective patent, trade
secret and copyright protection may not be available in every country in which
our services or products are made available, and policing unauthorized use of
our proprietary information is difficult.
The unauthorized misappropriation of our proprietary rights could have a
material adverse effect on our business, operating results, and financial
condition. Our expected use of the Internet as a means of distribution for our
images may exacerbate the risks, as it places our imagery data in the hands of
our customers in a form readily duplicated and transferable to other persons
without our consent. If we resort to legal proceedings to enforce our
proprietary rights, the proceedings could be burdensome and expensive, and the
outcome could be uncertain.
Claims of intellectual property infringement expose us to costs and
potential losses.
Because we have contracted for a significant portion of our
infrastructure, suppliers often grant us licenses to use their intellectual
property embodied in the hardware and software supplied, and indemnification
for any infringement of intellectual property rights in connection with such
use. Despite this indemnification, we may be subject to claims alleging
infringement by us of third party proprietary rights. If any of our products or
services infringes third party rights, we may not be able to obtain permission
to use such intellectual property on commercially reasonable terms. This could
require us to expend significant resources to make our products and services
noninfringing or to discontinue the use of such products and services. Any
claim of infringement also could cause us to incur substantial costs defending
against the claim, even if the claim is without merit. Finally, a party making
such a claim could secure a judgment that requires us to pay substantial
damages or that prevents us from using or selling our products and services.
Any of these events could have a material adverse effect on our business,
operating results, financial condition, and our ability to pay principal and
interest on the notes and our other indebtedness.
Claims of invasion of privacy or misappropriation of trade secrets could
be expensive and cause substantial losses.
Because our QuickBird satellite is capable of obtaining imagery in finer
detail than has been possible to date by other commercial systems, we may be
subject to claims of invasion of privacy, misappropriation of trade secrets, or
other novel claims by persons or companies that may object to our collection of
satellite imagery of their property. Such claims could cause us to incur
substantial costs defending against such claims, even if the claim is without
merit. Finally, a party making such a claim
13
could secure a judgment that requires us to pay substantial damages or that
prevents us from collecting or using imagery. Any of these events could have a
material adverse effect on our business, operating results, financial
condition, and our ability to pay principal and interest on the notes and our
other indebtedness.
RISKS RELATING TO THE NOTES.
Any launch insurance coverage may not provide adequate protection against
satellite loss or impairment.
Holders of the notes have an indirect security interest in proceeds from
one or more insurance policies covering the launch and first year of operations
of our QuickBird satellite. Holders' interests in these policies are shared on
an equal basis with Ball, as the lender in our vendor financing, through a
collateral pledge and security agreement. We believe the security interest
granted in favor of holders of the notes will be perfected to the extent
feasible under the governing laws of Colorado, Delaware and New York. However,
there is ambiguity in the governing law of these jurisdictions with respect to
perfecting a security interest in proceeds of an insurance policy. As a result,
we cannot assure you that the rights of holders of the notes to receive
payments on the notes from such insurance proceeds will not be superseded by
another creditor or class of creditors. Moreover, a default by any of our
insurers in their obligations to pay upon a loss would reduce the proceeds
available to holders of the notes.
The launch insurance policies contain customary exclusions, such as war,
insurrection, or willful act, the occurrence of any of which would result in a
lack of insurance coverage, which could have a material adverse effect on our
business, operating results, and financial condition. In addition, we do not
currently have insurance covering the operations of our QuickBird satellite
after October 17, 2002, and we cannot assure you that we will be able to obtain
this insurance on terms acceptable to us or at all.
We cannot assure you that an active trading market will develop for the
notes.
Morgan Stanley Dean Witter has advised us that it may make a market in the
notes. Morgan Stanley Dean Witter is not obligated to do so and such
market-making activities, if any, may be discontinued at any time without
notice, in its sole discretion. We have not and do not intend to apply for
listing of the notes on any securities exchange or through the Nasdaq National
Market. The notes may trade at a discount, depending upon prevailing interest
rates, the market for similar securities, our performance, and other factors.
We cannot be certain, therefore, that an active market for the notes will
develop, or if such a market does develop, that it will continue. See "Plan of
distribution."
As of the date hereof, we have notes outstanding with an aggregate
principal amount at maturity of $71.7 million.
We may not have the ability to raise the funds necessary to finance the
change of control offer required by the notes.
Upon the occurrence of certain change of control events, we will be
required to offer to repurchase the notes at a price equal to 101% of their
accreted value, plus accrued interest. It is possible that we will not have
sufficient funds at the time of the change of control to make the required
repurchases. If we were unable to make the required repurchases, we would be in
default under the notes.
Purchasers of the notes will be required to include amounts in gross
income for federal income tax purposes in advance of receipt of cash payments.
The notes have been issued with original issue discount for United States
federal income tax purposes. As a result, U.S. holders (as defined in "United
States federal income tax consequences") will be required to include amounts in
income in respect of the notes on a constant yield to maturity basis in advance
of the receipt of the cash to which such income is attributable. See "United
States federal income tax consequences--Original issue discount."
We may not be able to deduct a portion of the original issue discount that
accrues on the notes.
The notes are applicable high-yield discount obligations, as defined in
the Internal Revenue Code, and the following rules will apply if the yield to
maturity of the notes exceeds the "applicable federal rate" in effect at the
time of their issuance, plus five percentage points. Under these rules, if the
yield to maturity of the notes exceeds the applicable federal rate plus five
percentage points, we will not be able to deduct a portion of the original
issue discount that accrues on the notes, and the remaining original issue
discount on the notes will not be deductible by us until we pay the original
issue discount in cash. See "United States federal income tax
consequences--Applicable high-yield discount obligations."
14
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Risk factors," "Management's
discussion and analysis of financial condition and results of operations,"
"Business," and elsewhere in this prospectus constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties,
and other factors that may cause our or our industry's results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by the forward-looking statements. These factors include, among others,
those listed under "Risk factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology,
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of these
terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels
of activity, performance, or achievements. Our actual results and the timing of
certain events could differ materially from those anticipated in these
forward-looking statements.
15
USE OF PROCEEDS
This prospectus is to be used by Morgan Stanley Dean Witter in
connection with offers and sales of the notes in market-making transactions at
negotiated prices related to prevailing market prices at the time of sale.
Morgan Stanley Dean Witter may act as principal or agent in such transactions.
In addition, the other selling holders named in this prospectus may use this
prospectus from time to time in connection with offers and sales of the notes
that they hold, directly or through agents, dealers, or underwriters to be
designated from time to time, in the over-the-counter market, on a securities
exchange on which the notes are then listed, in negotiated transactions, or
otherwise, at prices and on terms to be determined at the time of sale. We will
not receive any proceeds from the sale of the notes by Morgan Stanley Dean
Witter or the other selling holders.
DIVIDEND POLICY
The following is a summary of our dividend policy with respect to shares
of our common and preferred stock.
COMMON STOCK
The holders of our common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of funds legally
available to be paid. We have not paid any dividends to the holders of our
common stock and do not intend to pay dividends to such holders in the
foreseeable future.
SERIES A AND SERIES B PREFERRED STOCK
The holders of our Series A preferred stock and Series B preferred stock
are entitled to receive cumulative dividends, whether or not declared by our
board of directors, at an annual rate of 7% of the liquidation preference
amount until no later than June 15, 2003. Such dividends are payable quarterly
on March 31, June 30, September 30, and December 31, and commenced on June 30,
1999. Such dividends may be paid, subject to certain limitations, at our
option, either in cash or in additional shares of Series A preferred stock or
Series B preferred stock, as applicable. After June 15, 2003, dividends will
accrue at an annual rate of 7% of the liquidation preference amount and will be
payable when, as, and if declared by the board of directors, in cash only. If
any dividend is not paid in full in cash on a quarterly payment date after June
15, 2003, the liquidation preference of the Series A preferred stock and Series
B preferred stock will be increased by an amount equal to the product of (a)
the amount per share not paid divided by the total amount payable per share and
(b) one quarter of the dividend rate multiplied by the effective liquidation
preference. Under our amended and restated certificate of incorporation, we are
prohibited from paying dividends on any shares of stock having rights junior to
the Series A and Series B preferred stock until all accumulated dividends have
been paid on the Series A and Series B preferred stock.
SERIES C PREFERRED STOCK
Until June 15, 2003, the holders of our Series C preferred stock are
entitled to cumulative dividends, whether or not declared by the board of
directors, at an annual rate of 8.5%. Such dividends are payable quarterly on
March 31, June 30, September 30, and December 31, and commenced on June 30,
1999. Such dividends may be paid, subject to certain limitations, at our
option, either in cash or in additional shares of Series C preferred stock.
After June 15, 2003, dividends will accrue at an annual rate of 8.5% of the
liquidation preference amount and will be payable when, as, and if declared by
the board of directors, in cash only. If any dividend is not paid in full in
cash on a quarterly payment date after June 15, 2003, the liquidation
preference of the Series C preferred stock will be increased by an amount equal
to the product of (a) the amount per share not paid divided by the total amount
payable per share and (b) one quarter of the dividend rate multiplied by the
effective liquidation preference. Under our amended and restated certificate of
incorporation, we are prohibited from paying dividends on any shares of stock
having rights junior to the Series C preferred stock until all accumulated
dividends have been paid on the Series C preferred stock.
However, the terms of the indenture governing the notes restricts our
ability to pay dividends on, or make distributions in respect to, our capital
stock. See "Description of the notes."
16
CAPITALIZATION
The following table sets forth our total cash and cash equivalents and
capitalization as of December 31, 2001. This table should be read in conjunction
with the consolidated financial statements and related notes thereto included
elsewhere in this prospectus.
December 31, 2001
-----------------
(in thousands)
Cash and cash equivalents $ 8,309
=======
Long-term debt (including current maturities):
13% Senior Discount Notes $ 57,757
Vendor financing facility 9,087
---------
Total long-term debt 66,844
---------
Mandatorily redeemable preferred stock/(1)/:
Series A convertible preferred stock 29,584
Series B convertible preferred stock 29,584
Series C convertible preferred stock 99,099
---------
Total mandatorily redeemable preferred stock 158,267
---------
Stockholders' equity (deficit):
Common stock -
Additional paid-in-capital 54,328
Deferred stock compensation (333)
Deficit accumulated during the development stage (84,193)
---------
Total stockholders' equity (deficit) (30,198)
---------
Total long-term debt, mandatorily redeemable preferred stock, and
stockholders' equity (deficit) $ 194,913
=========
(1) The mandatorily redeemable Series A, Series B, and Series C preferred
stock are required to be redeemed on March 31, 2009 at a redemption
price equal to 100% of the then applicable liquidation preference, plus
accrued and unpaid dividends to the date of redemption. The mandatorily
redeemable Series A, Series B, and Series C preferred stock are
entitled to cumulative dividends, payable quarterly in cash, additional
shares, or an increase in liquidation preference, as applicable. The
annual dividend rates are 7.0% for the Series A and B preferred stock
and 8.5% for the Series C preferred stock. The indenture governing the
notes restricts our ability to pay cash dividends.
17
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data are qualified by
reference to, and should be read in conjunction with, our consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The consolidated balance sheet data as of December 31, 2000 and
2001, and the consolidated statement of operations data for each of the three
years ended December 31, 2001, and for the period from January 1, 1995
(Inception) to December 31, 2001, have been derived from our audited
consolidated financial statements and the notes thereto included elsewhere in
this prospectus. The consolidated statement of operations data for the years
ended December 31, 1997, and 1998, and the consolidated balance sheet data as of
December 31, 1997, 1998, and 1999, are derived from our historical consolidated
financial statements not included in this prospectus. Historical results may not
be indicative of results for any future period.
Period From
January 1, 1995
Year Ended December 31, (Inception) to
------------------------------------------------------- December 31,
1997 1998 1999 2000 2001 2001
---------- ---------- ---------- ---------- ----------- --------------
(in thousands)
Consolidated Statement of Operations Data:
Revenue $ 437 $ 1,809 $ 5,913 $ 3,336 $ 12,009 $ 28,397
---------- ---------- ---------- ---------- ----------- --------------
Cost of goods sold 382 1,905 5,120 2,099 9,392 22,533
Selling, general, and administrative 8,588 4,975 12,763 15,333 15,116 65,196
Research and development 19,121 9,113 6,956 13,442 11,910 83,846
Gain (loss) from impairment of fixed assets,
net of insurance recoveries (25,519) (599) - 107,608 - 81,490
Gain from arbitration settlement - 1,515 - - - 1,515
Gain (loss) from operations (53,173) (13,268) (18,926) 80,070 (24,409) (60,173)
Interest expense (86) (1,340) (5,482) (4,492) (4,726) (16,215)
Interest income 2,528 1,688 4,089 4,104 2,883 18,233
Income tax provision - - - (3,000) - (3,000)
Extraordinary loss on early extinguishment of
debt, net of deferred tax benefit - - - - (23,038) (23,038)
---------- ---------- ---------- ---------- ----------- --------------
Net income (loss) $(50,731) $(12,920) $(20,319) $ 76,682 $ (49,290) $ (84,193)
========== ========== ========== ========== =========== ==============
Other Consolidated Financial Data:
Capital expenditures $ 54,271 $ 26,037 $ 75,238 $ 82,640 $ 72,999 $ 354,415
Cash provided (used) by operating activities (14,192) (10,864) (6,420) (18,891) (79,268) (152,156)
Cash provided (used) by investing activities (68,290) 11,471 (97,070) (57,534) 198,296 (56,356)
Cash provided (used) by financing activities 53,668 (1,972) 180,639 (43) (116,445) 216,820
Ratio of earnings to fixed charges - - - 2.89x - -
Deficiency of earnings to fixed charges (56,401) (18,976) (31,659) - (61,698) (147,141)
Consolidated Balance Sheet Data (end of period):
Cash and cash equivalents $ 6,410 $ 5,045 $ 82,193 $ 5,726 $ 8,309
Total assets 104,299 85,328 271,469 379,378 210,632
Total debt 51,511 49,804 167,148 195,485 66,844
Mandatorily redeemable preferred stock - - 129,978 141,246 158,267
Stockholders' equity (deficit) 39,737 26,831 (40,114) 26,387 (30,198)
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and notes
thereto included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Actual results
may differ materially from those indicated in such forward-looking statements.
Factors that may cause such a difference include, but are not limited to, those
discussed in "Risk factors" and "Business."
OVERVIEW
We commenced development operations on March 31, 1995 with the
contribution of the net assets of WorldView Imaging Corporation and certain
assets of Ball Corporation. We plan to create and market a variety of
information products derived from satellite imagery of the earth's surface. We
successfully launched and deployed our QuickBird satellite on October 18, 2001.
We completed our initial on-orbit calibration and commission period and
commenced commercial operations on February 1, 2002.
On April 8, 1999, we completed a recapitalization. As a result, all of our
existing common and preferred stock were converted into shares of Series C
preferred stock at varying conversion ratios. In connection with the
recapitalization, ITT Industries, Inc., Morgan Stanley & Co. Incorporated, and
entities affiliated with Capital Research and Management Company purchased
shares of our common stock, Series A preferred stock, and Series B preferred
stock for an aggregate purchase price of approximately $50 million. This
investment by the new equity partners caused the existing stockholders,
including Ball, to become minority owners. As a result, we may have experienced
a change in control. See "Recapitalizations." Also, we obtained the consent of
holders of the notes to amend the indenture governing the notes and change the
terms of such securities, including extending their maturity to March 1, 2005.
On July 12, 1999, we completed a private offering of 199,000 units,
consisting of the 13% notes and shares of preferred stock. Each unit consisted
of a 13% note which had an accreted value of $684.61 and a principal value at
maturity in 2007 of $1,000, and 49.095 shares of our 8.5% Series C convertible
preferred stock. The offering resulted in aggregate gross proceeds of
approximately $136 million. In August 2000, we exchanged all of the original 13%
notes for registered 13% notes. We did not receive any proceeds from this
exchange offer.
On February 28, 2001, as required by the indentures governing the notes
and our 12 1/2% notes, we offered to purchase all of our outstanding notes and
12 1/2% notes at their accreted values per their respective indentures on the
date of purchase, using the insurance proceeds relating to the loss of our first
QuickBird satellite in November 2000. The offer expired on April 2, 2001 and we
repurchased $127.4 million in principal amount at maturity of the notes and all
outstanding 12 1/2% notes on April 3, 2001, resulting in an extraordinary loss
on early extinguishment of debt of approximately $23.0 million. The combined
repurchase price totaled $172.9 million.
In connection with the offer, we entered into the Recapitalization
Agreement with certain holders of the notes. Pursuant to the Recapitalization
Agreement, these noteholders agreed to refrain from tendering their notes in the
offer, thus allowing us to have the use of the funds that would otherwise be
used to repurchase their notes. Pursuant to the Recapitalization Agreement, we
also:
. granted registration rights to certain holders of notes and Series C
preferred stock;
. obtained the consent of the holders of notes and amended the
indenture governing the notes in certain respects;
. obtained $9 million of vendor financing from Ball Aerospace;
. amended our certificate of incorporation in certain respects;
. issued 10,843,297 additional shares of our Series C preferred stock
to the holders of the notes that signed the Recapitalization
Agreement and their assignees;
. purchased launch and in-orbit insurance for our second QuickBird
satellite; and
. pledged the QuickBird satellite insurance in favor of The Bank of New
York, as collateral agent for (a) the holders of notes and for Ball
Aerospace, and (b) the holders of our Series A preferred stock and
Series B preferred stock.
See "Recapitalizations - 2001 Recapitalization" for a further
discussion of the recent recapitalization transactions.
We have realized significant operating losses and negative earnings before
interest, taxes, depreciation, and amortization, or
19
EBITDA. We expect our operating expenses to increase as we develop our
QuickBird satellite and imaging network, product and service lines, and
customer base. We expect our revenue and operating results will vary
significantly from period to period.
Given our growth strategy, we expect to realize significant operating
losses at least through the third quarter of 2002 due to anticipated substantial
operating expenses, including costs of operating and maintaining our QuickBird
satellite and related ground stations, costs of processing and delivering
imagery products, additional research and development expenses, and expenditures
for sales and marketing, as well as increased general and administrative
expenses. Our ability to generate operating income and cash flow is primarily
dependent upon the development of related ground systems, our ability to develop
a customer base and distribution channels for our imagery products and services,
and demand for our products and services. Demand and market acceptance for new
products and services is subject to a high level of uncertainty. We cannot
assure you that our products will achieve significant market acceptance in
existing imagery markets or that new markets anticipated by DigitalGlobe will
develop in the expected time periods, if at all.
Initially, we expect to provide imagery primarily to foreign governments,
U.S. government agencies, and large commercial users. We will also target local
and municipal governments that currently use aerial and low-resolution satellite
imagery for mapping, environmental monitoring, and land use and infrastructure
planning. We expect that revenue from government customers will account for a
majority of our revenues for the first few years after we begin selling products
based on our QuickBird satellite imagery. However, we believe that over the next
several years, commercial sales will account for an increasing portion of our
revenue as our industry demonstrates the utility of satellite imagery-based
products.
We began generating revenue from our satellite imagery in February 2002.
In the first year of operations, we expect most of our revenues to come from
government customers who enter into long-term contracts with us. Many customers
have waited until our QuickBird satellite was operational to enter into
contracts with us.
We expect that a number of our customers will eventually want to have
their own ground stations to receive imagery. However, we expect that many of
these customers will wait until full satellite operations are assured before
investing in new and upgraded ground stations. Although construction time
varies, it usually ranges from six months for an upgrade to two years for a new
facility. Until these customers upgrade or construct their own ground stations,
they will need to receive delivery of our imagery through our ground stations
and distribution systems.
CRITICAL ACCOUNTING POLICIES
REVENUE
Revenue is recognized when the product has been delivered to our
customers. We have generated our revenues primarily from the processing and sale
of geographic imagery purchased from third party suppliers. Now that our
satellite and production facilities are operational, we expect that our
principal source of revenue will be from the licensing of our own satellite
imagery and imagery enhancement for end users, value-added resellers, and
distributors.
Seconds on Orbit contracts are designed to establish a fixed dollar amount
for priority tasking time on the satellite, which is billed on a quarterly
basis, whether or not the rental time or resulting images are used. We believe
that our first-come, first-served approach to contracting Seconds on Orbit on
our QuickBird satellite will appeal to customers who want high priority tasking.
We have designed our Seconds on Orbit contracts to establish long-term
relationships with customers and to encourage them to make significant
investments in their ground systems and make significant upfront cash payments.
Our Seconds on Orbit sales represent a majority of our customer commitments for
the sale of QuickBird imagery to date. We expect that Seconds on Orbit will
represent our largest source of revenue over the next several years.
We believe that our planned value-added imagery products represent the
greatest potential for long-term growth. Such products include licensing of
archived DigitalGlobe and third party imagery, and image processing and
enhancement services, and market specific information products. Since
familiarity with high-resolution satellite imagery is limited, we expect the
markets for these products to develop more slowly than for our Seconds on Orbit
and customer requested image products. However, in the longer term, we believe
these products have the potential for significant revenue and margins.
20
COST OF GOODS SOLD
We do not believe that our historical costs are indicative of our
anticipated costs. Cost of goods sold for 2001 and prior periods includes third
party geographic imagery sold under contract. Now that our satellite and
production facilities are operational, cost of goods sold also will include
expenses incurred to operate the data and value-added production facilities,
ground stations, and satellite operations, as well as depreciation for these
facilities. In addition, cost of goods sold will include depreciation of the
satellite and ground systems. Since the expected useful life of the satellite is
seven years, we expect to depreciate it on a straight-line basis over a similar
period.
We do not expect our operating cost of goods sold, including labor in
production, satellite operations, and ground operations, to vary significantly
with revenues. We expect the costs associated with the purchase and resale of
third party data to increase as sales of these products increase.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses include the salaries,
benefits, and sales commissions of our distribution, marketing, and customer
service personnel, as well as expenses associated with marketing, advertising,
and sales programs to support distributor and end user sales. We expect these
expenses to increase significantly in the future due to sales staff additions
and increased marketing efforts.
We intend to focus our direct selling efforts on the United States
government, foreign national security markets, local governments, and large
commercial users. We will market to other users through market specific
distributors, value-added resellers, and e-commerce channels. We expect to
perform certain value-added services internally, and intend to distribute our
imagery to end users through value-added resellers. These resellers can process
such data into complex maps and other products for specific applications. As a
result, we can limit our initial sales and support infrastructure and leverage
the value-added resellers' existing market access and customer relationships,
particularly in markets requiring extensive product development, customer
education, and long sales cycles.
Selling, general, and administrative expenses also include the salaries
and benefits of the executive staff, accounting, and other corporate expenses.
We expect these expenses to increase in the future as we begin our planned
commercial operations. As these expenses are primarily fixed, we believe they
will decrease as a percentage of revenue over time.
RESEARCH AND DEVELOPMENT
Research and development costs are principally expensed as incurred and
reflect the cost of the design of the satellites, data processing, value-added
production facilities, and ground station systems. We record as research and
development expense all engineering costs associated with the preliminary design
of our satellites where we maintain the risk associated with design failure.
Once the design of the satellite is stable and not subject to significant
additional modifications, we capitalize additional costs as investments in
satellite equipment. Also included are the costs of research and development for
ongoing operational improvements and new product and application development. It
is our intention to continue to fund the development of new products, processes,
and image applications in addition to developing next generation satellite
systems.
SATELLITE FAILURE
Due to the loss of our first QuickBird satellite on November 20, 2000, we
wrote off approximately $157 million of satellite costs in fiscal 2000. The
impact was a decrease in balance sheet values, specifically, construction in
progress (satellite) assets in the year end consolidated financial statements
for 2000. We also recognized in fiscal 2000 a receivable in the amount of $265
million for insurance proceeds due to the loss of our first QuickBird satellite,
resulting in a net gain on the loss of our satellite of approximately $108
million.
INCOME TAXES
In connection with our start up expenditures and costs related to the
development of the EarlyBird and QuickBird satellites, we have generated
significant net operating losses. Our ability to use these net operating losses
to offset net income that we may earn in the future may be limited, as we may
have experienced an ownership change as defined in the Internal Revenue Code as
a
21
result of subsequent stock issuances.
CAPITAL EXPENDITURES
Property and equipment are recorded at cost. Pursuant to SFAS No. 34,
Capitalization of Interest Cost, the cost of significant assets includes
capitalized interest incurred during the construction and development period.
The costs of satellites under construction are capitalized during the
construction phase, assuming the eventual successful launch and in-orbit
operation of the satellite. If a satellite were to fail during launch or while
in-orbit, the resultant loss would be charged to expense in the period such loss
was incurred. The amount of any such loss would be reduced to the extent of
insurance proceeds received as a result of the launch or in-orbit failure.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets (three to seven years). Leasehold
improvements and assets acquired pursuant to capital-lease obligations are
amortized on a straight-line basis over the shorter of their useful lives or
lease terms; such amortization is included in depreciation expense. Repairs and
maintenance are expensed as incurred.
We have incurred significant capital expenditures to construct and launch
the second QuickBird satellite, and upgrade both our ground stations and other
operating systems. Our QuickBird satellite has now begun initial operations and
has an expected useful life of seven years.
We have begun to develop plans for the satellites that will augment our
QuickBird satellite capabilities. The first replacement satellite is planned for
launch by 2005. We expect to incur significant research and development costs
and capital expenditures to develop these next generation satellites. We believe
these satellites will provide significant additional capacity and significantly
increase our revenue opportunities compared to the QuickBird system.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Revenue. Our revenue has been generated primarily from the
processing and sale of geographic imagery purchased from third-party suppliers.
These sources of revenue increased from $3.3 million for the year ended December
31, 2000 to $12.0 million for the year ended December 31, 2001, due to increased
quantities of images sold. Revenue from the resale of third-party data was $2.7
million for 2000 and $11.8 million for 2001. Revenue from service contracts was
approximately $600,000 for 2000 and $250,000 for 2001.
Cost of Goods Sold. Our cost of goods sold includes third party
geographic imagery sold under contract. As a result of our increased revenue,
our cost of goods sold consequently increased from $2.1 million for the year
ended December 31, 2000 to $9.4 million for the year ended December 31, 2001.
Costs for both periods were primarily the direct costs associated with obtaining
third-party geographic imagery for resale.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses were $15.3 million for the year ended December 31, 2000
and $15.1 million for the year ended December 31, 2001. We expect these costs to
increase in the future as we increase staff levels and implement new procedures
as we begin full-scale operations and market entry of our products and services.
Research and Development. Our research and development costs were $13.4
million for the year ended December 31, 2000 and $11.9 million for the year
ended December 31, 2001. These expenses decreased due to staff reductions and
reduced operating activities following the loss of our first QuickBird
satellite.
Loss (Gain) from Impairment of Fixed Assets, net of insurance
recoveries. No gains or losses from impairment of fixed assets were recognized
in 2001, but due to the loss of our first QuickBird satellite on November 20,
2000, we wrote off approximately $157 million of QuickBird costs in 2000. The
impact was a decrease in balance sheet values, specifically, construction in
progress (satellite) assets in the year-end consolidated financial statements
for 2000. We also recognized in the year 2000, a receivable in the amount of
$265 million for insurance proceeds due to the loss of the first QuickBird
satellite, resulting in a net gain on the loss of our satellite of approximately
$108 million.
22
Interest Expense. Interest expense was $4.5 million for the year ended
December 31, 2000 and $4.7 million for the year ended December 31, 2001. These
amounts are net of interest capitalized as part of the cost of building the
QuickBird satellites. Interest expense is expected to increase in 2002 due to
the cessation of interest capitalization.
Interest Income. Interest income decreased from $4.1 million for the
year ended December 31, 2000 to $2.9 million for the year ended December 31,
2001. Higher average investment balances outstanding during 2001 were offset by
lower rates of return.
Provision for Income Taxes. Due to losses incurred each year since
inception, there was no provision for income taxes recorded until 2000. We
recorded a provision for income taxes in 2000 for alternative minimum taxes. We
had net operating loss carryforwards for federal income tax purposes of $134.5
million and $171.5 million as of December 31, 2000 and 2001, respectively;
however, such deferred tax benefits and the fiscal 2000 alternative minimum tax
credit were not recorded as assets because we have no history of profitability.
In addition, utilization of net operating loss carryforwards may be subject to
limitation, depending on changes in our ownership.
Net Income ( Loss). We had net income of $76.7 million for the year
ended December 31, 2000 and a net loss of $49.3 million for the year ended
December 31, 2001. The results for fiscal 2000 were favorably impacted by the
gain recognized on the satellite insurance recovery. The results for fiscal 2001
were unfavorably impacted by the extraordinary loss on early extinguishment of
debt incurred in April 2001, as discussed in Note 1 to our consolidated
financial statements.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Revenue. Revenue decreased from $5.9 million in 1999 to $3.3 million in
2000. The decrease is attributable to a lack of contract revenue during the last
three quarters of 2000. New and existing contracts contained few scheduled
product deliveries during that time, so little revenue was realized. Revenue
from the resale of third-party data was $5.5 million for 1999 and $2.7 million
for 2000. Revenue from service contracts and sales from archives was $400,000
for 1999 and $600,000 for 2000.
Cost of Goods Sold. Our cost of goods sold decreased from $5.1 million
in 1999 to $2.1 million in 2000. Costs for both periods primarily consisted of
the direct costs associated with obtaining third-party geographic imagery for
resale. We do not believe that these costs reflect our anticipated costs of
generating satellite imagery once our initial satellite and production
facilities are operational, or when acquiring imaging and other data from other
sources.
Selling, General, and AdministrativeEexpenses. Selling, general, and
administrative expenses were $12.8 million in 1999 and $15.3 million in 2000.
General and administrative expenses remained relatively consistent at $9.9
million for 1999 and $9.6 million for 2000. Selling and marketing expenses
increased from $2.9 million in 1999 to $5.7 million in 2000 as a result of
increases in sales staff and increased marketing efforts in preparation for
market entry of the Company's products and services, originally anticipated for
year end 2000.
Research and Development. Research and development costs increased from
$7.0 million for the year ended December 31, 1999 to $13.4 million for the year
ended December 31, 2000. The increase was attributable to additional staff and
systems development for launch and satellite systems.
Loss (Gain) from impairment of Fixed Assets, Net of Insurance
Recoveries. No gains or losses from impairment of fixed assets were recognized
in 1999, but due to the loss of our QuickBird 1 satellite on November 20, 2000,
we wrote off approximately $157 million of QuickBird 1 costs in 2000. The impact
was a decrease in balance sheet values, specifically, construction in progress
(satellite) assets in the year end consolidated financial statements for 2000.
We also recognized in the year 2000, a receivable in the amount of $265 million
for insurance proceeds due to the loss of QuickBird 1, resulting in a net gain
on the loss of our satellite of approximately $108 million.
Interest Expense. Interest expense decreased from approximately $5.5
million in 1999 to $4.5 million in 2000, as a result of increased capitalization
of interest on the higher average balance of construction in progress during
2000.
Interest Income. Interest income of approximately $4.1 million was
substantially consistent in 1999 and 2000. Cash available for investment has
steadily declined since the unit offering in July 1999 as we have drawn upon
these amounts to fund our operations. Although a greater amount of cash was
available for investment in the latter half of 1999, interest income for 2000
was approximately the same due to having more funds available during a longer
portion of 2000 than in 1999 and overall higher interest rates in 2000.
Provision for Income Taxes. Due to losses incurred each year since
inception, there was no provision for income taxes
23
recorded until 2000. We recorded a provision for income taxes in 2000 for
alternative minimum taxes. We had net operating loss carryforwards of $89.0
million as of December 31, 1999 and $134.5 million as of December 31, 2000;
however, such deferred tax benefits and the fiscal 2000 alternative minimum tax
credit were not recorded as assets because we have no history of profitability.
In addition, utilization of net operating loss carryforwards may be subject to
limitation, depending on changes in our ownership.
Net Income (Loss). We had a net loss of $20.3 million in 1999 versus
net income of $76.7 million in 2000. Our net income in 2000 was the result of
the recognition of the insurance proceeds from the loss of our QuickBird 1
satellite.
Year ended December 31, 1998 compared with year ended December 31, 1999
Revenue. Our revenue increased from $1.8 million in 1998 to $5.9
million in 1999. Our revenue generated from service contracts and sales from
archives for 1998 and 1999 was $400,000 for each year.
Cost of Goods Sold. Our cost of goods sold increased from $1.9 million
in 1998 to $5.1 million in 1999. Our costs for third-party geographic imagery
increased from $1.2 million in 1998 to $5.1 million in 1999. Our costs for
providing services under other service contracts decreased from $700,000 in 1998
to zero in 1999. We do not believe that these costs reflect our anticipated
costs of generating satellite imagery once our initial satellite and production
facilities are operational, or when acquiring imaging and other data from other
sources.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased from $5.0 million in 1998 to $12.8 million in
1999. General and administrative expenses increased from $3.2 million in 1998 to
$9.9 million in 1999. These increased during 1999 as we implemented new systems
and procedures in preparation for full-scale operations. Selling and marketing
expenses increased from $1.8 million in 1998 to $2.9 million in 1999. These
increased in 1999 as a result of increases in sales staff and increased
marketing efforts in preparation for anticipated market entry of our products
and services in 2000.
Research and Development. Research and development costs decreased from
$9.1 million in 1998 to $7.0 million in 1999. Costs associated with the design
of the satellites decreased from $3.3 million in 1998 to $2.5 million in 1999.
The remaining research and development costs were associated with the design of
the archival and value-added production facilities for image data, ground
stations, and satellite control operations.
Interest Expense. Interest expense increased from approximately $1.3
million in 1998 to $5.5 million in 1999, as a result of increased capitalization
of interest on the higher average balance of construction in progress during
1999 and the additional debt outstanding.
Interest Income. Interest income increased from approximately $1.7
million in 1998 to $4.1 million in 1999. As a result of the unit offering in
July of 1999, there was a significantly greater amount of cash available for
investment during the latter half of 1999.
Provision for Income Taxes. Due to losses incurred during 1999, there
was no provision for income taxes recorded. As of December 31, 1999, we had
approximately $89.0 million in net operating loss carryforwards; however, such
deferred tax benefits were not recorded as an asset because we have no history
of profitability. In addition, utilization of net operating loss carryforwards
may be subject to limitation, depending on changes in our ownership.
Net Income (Loss). We had net losses of $12.9 million in 1998 and
$20.3 million in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities increased from $18.9 million for
the year ended December 31, 2000 to $79.3 million for the year ended December
31, 2001. This increase was primarily the result of the payment of accrued
interest and the extraordinary loss incurred in conjunction with the redemption
of notes in 2001. The accrued liabilities at December 31, 2001 include the
remaining premiums of $5.7 million due in April 2002 for the launch and on-orbit
insurance related to our second QuickBird satellite.
Net cash used by investing activities of $57.5 million for the year
ended December 31, 2000 increased to net cash provided by investing activities
of $198.3 million for the year ended December 31, 2001. This increase was
primarily the result of the receipt of insurance proceeds from the loss of our
first QuickBird satellite.
24
Net cash used by financing activities increased from $42,815 for the
year ended December 31, 2000 to $116.4 million for the year ended December 31,
2001. This increase was primarily the result of the redemption of notes in 2001.
In February 2001, we secured a commitment for a $20.75 million
borrowing facility with Boeing Capital Services Corporation. If drawn, the
facility would accrue interest at LIBOR plus 4% to 6%, depending upon the
duration of the borrowing. The commitment is subject to the negotiation and
execution of a credit agreement and DigitalGlobe having $125 million of
contractually committed orders or some form of facility guarantee in place. As
we have not yet met these requirements, these funds are not currently available.
The facility is available through September 30, 2002, will have a two and a half
year term and has an annual commitment fee of 50 basis points payable quarterly
in arrears. At December 31, 2001, we had incurred deferred financing costs of
approximately $500,000 related to this facility.
The Company's contractual obligations at December 31, 2001, including
future interest payment requirements on debt obligations, were as follows:
2006 and
2002 2003 2004 2005 Thereafter
---------- ---------- ---------- ---------- ----------
Long-term debt $ 7,067 $ 12,648 $ 9,315 $ 9,315 $ 85,622
Accounts payable and
accrued liablities* 15,719 - - - -
Operating leases 1,008 970 913 350 -
Unconditional purchase
obligations 4,545 45 - - -
Other 2,000 - - - -
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 30,339 $ 13,663 $ 10,228 $ 9,665 $ 85,622
========== ========== ========== ========== ==========
* This amount includes our final insurance premium of $5.7 million due in
April 2002. If we do not make the premium payment, we will be in default of the
indenture governing our outstanding notes.
On January 25, 2002, the Company acquired exclusive rights for the
distribution of satellite products and services to the United States agriculture
and defense markets from SPOT Image Corporation, a subsidiary of SPOT Image
S.A., in exchange for approximately $50.0 million of cash and certain data
purchase commitments. The data purchase commitments vary by period during the
six and one-half year term of the agreement. If we do not meet 80% of our data
purchase obligations after any contract year of the agreement, we may terminate
the agreement. However, upon termination we remain obligated for 45% of the next
year's minimum data purchase commitment. Minimum payments under the agreement
are currently approximately $7.0 million and $3.8 million in 2002 and 2003,
respectively.
We do not expect to generate positive cash flow from operations until
at least the third quarter of 2002. Accordingly, our existing capital resources
will not be sufficient to meet our anticipated cash needs in fiscal 2002,
including the payment of an insurance premium due in April 2002 as set forth in
the above contractual obligation table. We believe that we currently have an
agreement in principle with our existing investors to loan to us funds
sufficient to meet our anticipated cash needs to fiscal 2002 and beyond. Failure
to consummate the agreement in principle or obtain additional financing capital
when needed would significantly diminish or eliminate our ability to continue as
a going concern.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We invest our cash and cash equivalents and restricted investments in
short-term, U.S. dollar interest-bearing, investment grade securities with
maturities less than 90 days. As of December 31, 2001, the interest rates on
these investments have not fluctuated more than one percentage point since they
were purchased. We do not currently hold any derivative instruments and do not
engage in hedging activities. Also, we are not obligated for any variable
interest rate debt or lines of credit, and currently do not generally enter into
any transactions denominated in a foreign currency. Therefore, our exposure to
interest rate and foreign exchange fluctuations is minimal.
25
BUSINESS
EarthWatch Incorporated was incorporated on September 30, 1994 under
the laws of the State of Colorado and, on August 21, 1995, was reincorporated in
the State of Delaware. We commenced development operations on March 31, 1995
with the contribution of the net assets of WorldView Imaging Corporation and
certain assets of Ball Corporation. We do business under the name DigitalGlobe
and therefore, in this document refer to our company under the name DigitalGlobe
as well.
We plan to create and market a variety of information products derived
from satellite imagery of the earth's surface. We successfully launched and
deployed our QuickBird satellite on October 18, 2001. We released our first
imagery from our QuickBird satellite on December 17, 2001. We completed our
initial on-orbit calibration and commission period and commenced commercial
operations on February 1, 2002.
Our QuickBird satellite collects high-resolution digital imagery of the
earth's surface. Our QuickBird satellite collects 0.6-meter resolution gray
scale and 2.44-meter resolution color imagery of the earth and revisits most
areas within three to five days.
EarthWatch Incorporated is a Delaware corporation. Our principal
executive offices are located at 1900 Pike Road, Longmont, Colorado 80501-6700.
Our telephone number is (303) 682-3800.
INDUSTRY OVERVIEW
We believe that access to accurate, affordable, and timely data has
been, and still is, the single largest problem facing the Geographic Information
Systems, or GIS, market. Users have few alternative sources from which to obtain
data and we believe that high-resolution satellite imagery provided by the
QuickBird system will provide an important alternative source to aerial
photography and low-resolution satellite imagery, such as Landsat and SPOT.
Imagery with a resolution of one-meter or better can detect and locate many
objects that previously could not be identified using low-resolution satellite
imagery. High-resolution satellite imagery offers Geographic Information
Systems' customers a number of advantages, including computer compatibility,
large area coverage, and up-to-date information.
In addition to providing high spatial resolution gray scale
(panchromatic) imagery, high-resolution satellites can take precise color and
near infrared (multispectral) imagery, enabling a wide range of monitoring,
detection, and exploration applications. The digital format of satellite imagery
facilitates quick delivery, enables low-cost archiving, allows for image
enhancement and manipulation, and preserves much more information value than
analog imagery.
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We are not aware of any additional competitors that plan to enter this
market other than our three announced competitors:
. Space Imaging, Inc., which successfully launched its first .8-meter
resolution satellite in September 1999 and has begun serving the
commercial market;
. Orbital Imaging Corp., or Orbimage, which is developing a 1-meter
high -resolution imaging system, which is scheduled for launch during
the third quarter of 2002, as publicly announced; and
. ImageSat International, which successfully launched a 1.8-meter
resolution satellite in December 2000 and has announced plans to
launch an .8-meter high-resolution satellite for commercial use
during the fourth quarter of 2003. ImageSat also recently announced
that it plans to offer .6-meter resolution images from its 1.8-meter
high-resolution satellite through software upgrades and new
processing techniques by the second quarter of 2002.
We believe there are significant barriers for other potential entrants.
The design, creation, launch, and operation of an integrated high-resolution
commercial satellite system require significant expertise and knowledge. We, and
each of our three announced competitors, have been developing commercial
satellite imagery systems for more than five years. We believe it would take a
new potential competitor more than four years and significant capital to develop
and construct a high-resolution commercial imaging satellite. Most aerospace
companies capable of constructing such a satellite have already aligned
themselves with one of the announced entrants. As a result, we believe that
DigitalGlobe, together with the other announced entrants, will have a
significant advantage over future competitors seeking to enter this market.
We also believe that the emergence of high-resolution commercial remote
sensing satellites will stimulate new spending to create and update Geographic
Information Systems databases, especially in emerging markets in Asia,
Australia, the Middle East, and South America. Furthermore, we believe that a
larger, more profitable market will evolve for value-added information products
derived from raw imagery data processed and packaged to meet the demands of
specific users. Traditionally, overhead imagery products have been marketed in
the form of raw data. We seek to be a leading provider of value-added
imagery-based applications and services, rather than just a provider of
satellite imagery. We believe our advanced image processing technology and
user-friendly distribution network will enable us to make imagery easy to use,
affordable, and accessible. We believe that our focus on developing
industry-specific products will stimulate demand and expand the market for
satellite imagery and related products.
STRATEGY
We are committed to achieving leadership positions in specific markets
for digital imagery and derivative information products. Our strategy to achieve
our objectives includes the following elements:
BECOME A LEADING PROVIDER OF IMAGERY-DRIVEN SOLUTIONS
Overhead imagery products have traditionally been marketed in the form
of raw data. However, we believe that a larger, more profitable market will
evolve for value-added information products derived from raw imagery data,
processed and packaged to meet the demands of specific users. We seek to be a
leading provider of value-added imagery-based applications and services, rather
than just a provider of satellite imagery. We believe our advanced image
processing technology and user-friendly distribution network will enable us to
make imagery easy to use, affordable, and accessible. We intend to continuously
develop industry-specific value-added products, such as tailored damage
assessment products for the insurance industry and crop monitoring products for
the agriculture industry. We believe that our focus on industry-specific
products will stimulate demand and expand the market for satellite imagery and
related products.
PURSUE TARGETED MARKET ENTRY AND EXPANSION
Recognizing that we cannot address every possible sales opportunity
ourselves, we will focus on specific customer segments and new commercial
markets. We are focusing initially on providing imagery products to the largest
potential users and early adopters, such as United States government agencies
and foreign governments, in order to rapidly build a core group of customers. We
then intend to incrementally expand our target markets by pursuing commercial
markets and applications for higher margin, value-added products that offer
prospects for long-term growth. This targeted marketing strategy will limit the
number of products that we offer initially and simplify the logistics of
supporting our customers. In addition, this focus should allow us to avoid
building the large and costly marketing and sales organization that would be
required to pursue a wide range of market opportunities simultaneously.
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In addition to our direct sales efforts, we market our products through
market specific distributors, agents, value-added resellers, and e-commerce
channels. We work with value-added resellers to enhance existing applications
and develop new products based upon our imagery. This allows us to limit our
initial sales and support infrastructure and to leverage the value-added
resellers' existing market access and customer relationships, particularly for
markets that require extensive product development, customer education, and long
sales cycles.
MAINTAIN LEADERSHIP THROUGH PARTNERSHIPS WITH LEADING TECHNOLOGY COMPANIES
We will seek to establish our technological leadership in the remote
sensing industry as an innovative provider of imagery through partnerships with
leading aerospace and information technology companies. Our strategic
partners, including Ball Aerospace, Datron/Transco Inc., Hitachi, Ltd., ITT
Industries, Inc., MacDonald Dettwiler & Associates, Ltd., and Telespazio S.p.A.
have supplied us with much of the technology, components, and services for our
satellite imaging system.
LEVERAGE OUR TECHNICAL ADVANTAGES
We believe our QuickBird satellite system offers significant technical
advantages over the three other competitive commercial satellite-based systems
that have been announced. These advantages include:
. the highest available resolution;
. the widest imaging area; and
. the largest image storage capacity.
Assuming that our QuickBird satellite system continues to operate as we
expect, we believe that by the end of 2003 we will be able to archive most key
urban areas and other areas of interest worldwide.
With the loss of our first QuickBird satellite, and the corresponding
decreased capacity, imagery, and revisit times inherent in a one-satellite
system, populating our archive will require more time than previously planned.
Even with this decrease, we believe the above technical advantages will allow us
to collect more usable imagery per day than our competitors, enabling us to
provide more imagery to our customers, to update such imagery more frequently,
and to build an imagery archive more rapidly.
We believe that these advantages, taken together, will provide one of the
best commercially available systems for producing low cost, high-resolution, map
quality imagery over large areas of the earth's surface. We have positioned our
satellite in an orbit that provides revisit capability from three to five days,
so that we will be able to collect imagery on virtually every location on the
earth's surface every three to five days. Applications that require near
real-time high-resolution imagery, such as monitoring natural disasters, civil
emergencies, and regional security, will benefit from this frequent revisit
capability.
BUILD DIRECT RELATIONSHIPS WITH KEY CUSTOMERS AND MARKET INFLUENCERS
To build market presence and demonstrate new product applications
quickly, we will seek to identify key early adopters and influencers in each
target market and develop close customer relationships. We will seek to expand
our reach to potential customers through partnerships with leading information
technology companies, distributors, agents, value-added resellers, and
customers. For example, in addition to contributing to our systems development
program, Hitachi will serve as the master international distributor of our
products and services in Asia, and Telespazio, will do the same in Europe. We
also plan to license our products through value-added resellers in North America
and in those regions of the world not covered by exclusive reseller distribution
agreements.
In contrast to our competitors, we intend to create an open system to
support purchasers of raw imagery data who desire to process such data using
their own facilities. We plan to provide to purchasers the detailed support
data, including our satellite camera model and downlink formats, necessary to
enable them to perform their own image processing. By supporting open systems
interoperability, we believe we can stimulate third party software developers
and value-added resellers to develop innovative products and applications that
use our imagery data. We also intend to establish relationships with one or more
leading retail websites to sell our mapping and other imagery products directly
to consumers.
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DEVELOP COMPREHENSIVE DIGITALGLOBE ARCHIVE
We plan to create an Internet-based proprietary database of imagery
collected from our QuickBird satellite and other third party satellite and
aerial imaging companies. We plan to use a portion of our imaging capacity not
being used to address specific customer requests to prospectively collect and
archive imagery of key geographies and markets.
We believe that once our proprietary DigitalGlobe archive of imagery is
established and combined with value-added image enhancement tools and processing
software, it will facilitate an array of new geographic information, mapping,
and multimedia applications and markets that do not currently use geographic
imagery. For example, a user could log on to our Internet site, view the entire
earth, and then focus in on a country, state, city, or town, or even a specific
neighborhood or street corner. In addition, in the future, a user could view
interactive fly-throughs of selected areas of interest, such as popular tourism
sites or golf courses for vacation planning, or residential neighborhoods for
relocation or home purchasing.
TARGET MARKETS AND APPLICATIONS
Within the overhead imagery market, we will initially target worldwide
commercial and government applications for surveillance, Geographic Information
Systems, and mapping. Within the market for federal, state, and local government
users, we are serving domestic and foreign intelligence and security agencies,
as well as civilian agencies that use overhead imagery for environmental
monitoring, land use, disaster management, and infrastructure planning. We are
also targeting civilian agencies and local and municipal governments that
currently use aerial and low-resolution satellite imagery for mapping,
environmental monitoring, land use, and infrastructure planning. In the longer
term, we expect that our customers will include commercial users in industries
such as mapping and surveying, oil, gas, and mineral exploration, agriculture,
forestry, scientific and environmental monitoring, and insurance risk analysis
and damage assessment.
PRODUCTS AND SERVICES
We offer high-resolution panchromatic and multispectral imagery
collected from our QuickBird satellite, as well as other third-party data. In
addition, we are the exclusive distributors of SPOT Image S.A. satellite imagery
products (which are lower-resolution images), and value added products derived
from those products, to the defense and agricultural markets in the United
States and its territories.
We also plan to develop and market specific value-added products for
commercial applications. We will incorporate imagery collected by our satellite
and other airborne and satellite systems into the DigitalGlobe, providing
imagery to customers primarily in digital form that can be easily stored and
processed on a computer. Our customers may also receive products in other forms,
such as on CD-ROM or printed copy.
We offer sophisticated government, scientific, and commercial users raw
imagery data on a near real-time basis from customer designated satellite
tasking assignments. Our Seconds on Orbit product, also known as SOO, is
specifically designed for customers who want high priority tasking. Customers
can also purchase imagery of a desired location. In addition, we can process and
enhance acquired imagery to make it more useful to a customer.
We price our products according to market conditions and perceived
consumer value. In addition, we retain ownership of all imagery collected by our
satellite and license our imagery to customers in a manner similar to software
licenses. See "--Proprietary rights."
SALES, MARKETING, AND DISTRIBUTION
We deliver our products through direct sales, e-commerce channels, and
through our master international distributors. We are currently expanding these
channels to include value-added resellers. Our direct sales organization is
structured to provide relationship-based sales to early adopters and key market
influencers, such as large governments and commercial customers. While our
direct sales organization is not a large organization, we supplement our
in-house sales force with third-party sales agents. These sales agents market a
variety of similar products and have extensive contacts and customer
relationships in the industries or regions they serve. Each sales agent is
dedicated to one or two customers, or to a single vertical market, such as
mapping. In addition to the direct sales force, we have a distributor sales
force that is responsible for selection, recruitment, and management of the
distributor network. They are teamed with customer service representatives to
ensure that distributors have the necessary training and support to maximize
sales.
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MASTER INTERNATIONAL DISTRIBUTORS
We have formed strategic relationships with Hitachi Software in Asia
and Telespazio in Europe to be our master international distributors. Hitachi
Software is developing innovative information products to expand distribution of
our imagery to both businesses and individuals. Telespazio has designated its
majority owned subsidiary, Eurimage, as its reseller. Eurimage is the largest
distributor of satellite imagery in Europe and has an extensive distribution
system in place. We believe both master international distributors have
developed, and will continue to develop, value-added resellers in their
respective regions. The master international distributors will serve as
resellers and value-added resellers in their respective regions. Such activities
include providing online distribution channels and direct links to our
headquarters in Longmont, Colorado. Eurimage has implemented a Web-based
ordering and delivery system for its existing customers and is in the process of
modifying this system to include QuickBird products.
VALUE-ADDED RESELLERS
We are currently selecting value-added resellers based on demonstrated
distribution capability within target market segments. We are seeking
value-added resellers that are strong product advocates, especially in markets
where the application value of high-resolution imagery remains unproven. We are
basing our selections on capability and willingness to work cooperatively with
DigitalGlobe in designing and selling market-specific information products.
DIRECT ONLINE DISTRIBUTION
Because our products are in digital form, customers will be able to
access products in the DigitalGlobe database through the Internet or another
online service. For our master international distributors, who are expected to
regularly download large volumes of data and may require imagery immediately
upon receipt by ground stations, we plan to offer a direct network connection to
our master data facility. Our customers may access the DigitalGlobe by means of
our Web-based user interface. Similar to widely available search tools and
browsers, the DigitalGlobe archive will be available for browsing by customers
to order imagery and products, and to track the status of orders online.
ORDER PROCESSING
We have developed an automated order processing system that verifies
and accepts direct orders. This system is linked to our tasking, production, and
accounting systems. Orders that we cannot fill with previously archived
DigitalGlobe products are prioritized according to parameters such as project
timing and size, prevailing weather conditions, and other imaging requests, and
then translated into tasking commands passed on to the satellite. After each
orbit, orders are matched with successful results obtained from the satellite
downlink. Specific orders for large areas require tasking over several orbits
and days.
QUICKBIRD SATELLITE AND GROUND SYSTEM OPERATIONS
QUICKBIRD SATELLITE
We operate one satellite. Our QuickBird spacecraft recently completed
an initial on-orbit calibration and commission period and is currently producing
imagery.
GROUND STATIONS AND SATELLITE CONTROL
Our QuickBird satellite is supported by two ground stations located in
Fairbanks, Alaska and Tromso, Norway. We control our satellite from the mission
control center at our headquarters in Longmont, Colorado.
DIGITALGLOBE ARCHIVE AND GEOSPATIAL OPERATIONS
The DigitalGlobe value-added product archive is designed to provide
customers access to a range of products, including precision corrected image
maps, digital elevation models, and terrain-corrected image maps, as well as
maps and additional geographic data. We believe that by the end of 2003, we will
be able to archive most key urban areas and other areas of interest worldwide,
and will be able to continually update this imagery. We also maintain a
geospatial operations facility to produce
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orthoimages and digital elevation models from a variety of data sources.
RISK MITIGATION
PROVEN TECHNOLOGY
We have followed a low-cost design philosophy that capitalizes on the
expertise of our strategic partners while incorporating proven technology used
by other satellite systems.
INSURANCE
We have insurance policies that covered the launch of our QuickBird
satellite and that cover its operation through October 17, 2002. The launch
insurance covers total failure, as well as partial failure by the satellite to
achieve proper orbit or to perform in accordance with specifications through
October 17, 2002. We are evaluating our alternatives for insurance covering the
operation of our satellite after October 17, 2002, but we cannot assure you that
we will be able to obtain this insurance on terms acceptable to us or at all.
RESEARCH AND DEVELOPMENT
We plan to continue to invest in research and development to develop
improved satellite technology, develop the DigitalGlobe archive, and maintain
technological leadership in geographic imagery products and related systems. We
will also acquire licenses for existing technology where we determine that
adapting existing technology would be less expensive than developing it
internally.
Our research and development costs were $11.9 million in 2001, $13.4
million in 2000 and $7.0 million in 1999.
COMPETITION
Traditional sources of image-based information have included aerial
photography and existing low-to-medium resolution earth orbiting satellites. Our
principal competitors in high-resolution space imaging collection are Space
Imaging (United States), Orbimage (United States), and ImageSat (Israel). Space
Imaging successfully launched a satellite in September 1999 and has been
distributing imagery to its customers since that time. ImageSat successfully
launched a satellite in December 2000 and began receiving images shortly
thereafter.
To a lesser extent, we also compete on a regional basis with
independent aerial photography companies, as well as radar and low-resolution
commercial satellite systems such as Landsat, SPOT, and the 6-meter resolution
satellite launched by the Indian Government. However, we expect our competition
in the future to come primarily from high-resolution satellite systems developed
and operated by other commercial enterprises or foreign governments.
AERIAL PHOTOGRAPHY
Commercial aerial photogrammetry firms serve highly fragmented and
localized markets. Customers requiring imagery from different geographic areas
must coordinate with several providers, which increases the cost and time
necessary to obtain imagery data. For large projects, aerial photogrammetry
firms usually require substantial lead-time, resulting in a product that may be
out of date by the time it is delivered. Also, these firms typically produce
aerial imagery in analog form on photographic film rather than in digital form,
making post-image processing more difficult and hindering development of
value-added applications such as complex mosaics.
Satellite imagery addresses many of the limitations of aerial
photography, allowing cost effective collection of data over large areas in a
short time, access to remote regions of the world and restricted airspace, and
timely delivery of data in digital form. Nonetheless, for certain applications,
aerial photography is highly efficient and competitively priced. Since these
applications tend to require a limited geographic scope and spatial resolution
of less than one meter, we do not view aerial providers as direct competitors.
Conversely, we intend to work with these companies and expect that many will
purchase, enhance, and resell our imagery to their customers. We also expect to
continue to purchase and resell aerial imagery to enrich our DigitalGlobe
archive and our product mix.
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NEW COMMERCIAL HIGH-RESOLUTION SATELLITE SYSTEMS
Space Imaging launched the first successful commercial high-resolution
satellite in September 1999. Other competitors include ImageSat, which
successfully launched its high-resolution satellite in December 2000, and
Orbimage which has announced plans to launch a high-resolution satellite in
2002.
Space Imaging. Space Imaging, a joint venture owned collectively by
Lockheed Martin, Ratheon, and Mitsubishi, has successfully launched and deployed
a .8-meter resolution satellite named IKONOS and a global archive for storage of
imagery. Space Imaging has access to significant technological and capital
resources through its partners and has distribution rights to both Landsat 4 and
5 within the United States, and to Indian Remote Sensing satellite data.
Orbimage. Orbimage is a provider of global space-based imagery.
Currently, it has two low-resolution satellites in operation: OrbView 1 and
OrbView 2. It has also acquired limited rights to market and sell, in the United
States of America, imagery from RadarSat 2, a high-resolution commercial radar
imaging satellite being constructed by the Canadian government. Orbimage also
developed two 1-meter resolution satellites. OrbView 4, which was launched in
September 2001, failed to achieve orbit. Orbimage has recently announced that it
plans to launch OrbView 3 during the third quarter of 2002.
ImageSat. ImageSat International is a joint venture composed of
government-owned Israel Aircraft Industries, Electro-Optics Industries, and Core
Software Technology Inc. ImageSat has announced plans to launch and operate a
constellation of 1.8-meter and .8-meter resolution commercial imaging satellites
named EROS, one of which is for the Israeli government and was launched in
December 2000, and the other of which will be for commercial use and is
scheduled for launch in 2003. Based on the announced specification for EROS
satellites, we believe that they will offer lower performance than our QuickBird
satellite. However, ImageSat is associated with the Israeli government and, if
subsidized, could be able to compete aggressively on price. ImageSat's first
customer, the Israeli government, has announced that it has reserved the full
capacity of ImageSat's first and third satellites in specific geographic areas.
Although the satellites of each of the companies mentioned above have
similar spatial and spectral resolutions as the QuickBird system, based on their
public announcements, we believe that our QuickBird system will offer
significant technical advantages over the competition.
We believe that the Orbimage and ImageSat satellites appear to be
better suited for reconnaissance than for mapping. QuickBird and IKONOS qualify
as both mapping and reconnaissance satellites.
Space Imaging's IKONOS is designed to offer mapping capability.
However, we do not believe that the IKONOS satellite will compete equally with
QuickBird in terms of collection capacity. The IKONOS satellite offers only an
11-kilometer swath, 64 gigabytes of storage, and a maximum positional accuracy
of four meters. In contrast, our QuickBird satellite offers a 16-kilometer swath
width and 128 gigabytes of on-board storage. We believe that we will be able to
collect more imagery per day than Orbimage or Space Imaging. Accordingly, we
should have more images to sell and should be able to populate our digital
archive faster than these competitors.
STRATEGIC RELATIONSHIPS
We have teamed with the six strategic partners listed below. These
partners are leaders in their respective industries, and we believe that their
expertise and resources will contribute significantly to establishing
DigitalGlobe as a leader in satellite imaging technology. Our partners are
providing us with technology, components, and services that we believe will
contribute materially to our business. Each of our partners has an equity stake
in DigitalGlobe, some of which equity stakes were obtained in exchange for
providing DigitalGlobe with goods or services.
ITT INDUSTRIES
ITT Industries, Inc. is a leading global supplier of sophisticated
military defense systems and industrial components for the transportation,
construction, and aerospace industries. ITT Industries has provided innovative
satellite sensor systems to NASA and the National Oceanic and Atmospheric
Administration for more than 25 years. In addition to making an equity
investment in DigitalGlobe in April 1999, ITT Industries entered into a 10-year
strategic supplier agreement as integrator of sensors for future DigitalGlobe
systems. ITT Industries will provide such sensors and associated services on a
best value basis. We have entered into a contract with ITT Industries under
which it provided the QuickBird satellite scheduling and tasking
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system, and a QuickBird spacecraft simulator. In addition, we have contracted
with ITT Industries to assist us in developing technical specifications and the
sensors for our next generation satellites.
BALL AEROSPACE
Ball Aerospace is a leading supplier of remote sensing, military, and
space technology. Ball Aerospace has developed and successfully executed 37
satellite-related projects. Additionally, Ball Aerospace has developed and
implemented the in-orbit solution for problems faced by the Hubble Space
Telescope's optical system. As the prime contractor for the QuickBird system,
Ball Aerospace provided design, construction, and integration for the imaging
payload and spacecraft bus of our QuickBird satellite.
HITACHI SOFTWARE
Hitachi Software Engineering Company, Ltd. is a leading manufacturer of
high technology products and is a major Japanese supplier of Geographic
Information Systems software and hardware. Hitachi Software has established
relationships in both the military and commercial Geographic Information Systems
markets in Asia, which, we believe, are currently the fastest growing Geographic
Information Systems markets in the world. Hitachi Software is our master
international distributor in Asia.
TELESPAZIO/EURIMAGE
Telespazio, S.p.A. is a leading owner and operator of satellite data
downlink and control facilities in Europe. Telespazio maintains a large earth
observation division with extensive international Geographic Information Systems
and mapping capabilities. It is also a part owner of Eurimage, a company that
manages the largest European satellite imagery sales and distribution network.
Eurimage is Telespazio's licensed reseller in Europe.
MACDONALD DETTWILER & ASSOCIATES
MacDonald Dettwiler & Associates, Ltd. is a leading supplier of ground
processing systems for civilian satellite data and has provided our image data
archiving and distribution capabilities.
DATRON
Datron/Transco Inc. provides products and services for emerging radio
and satellite communication markets, primarily for ground uplink facilities.
Datron supplied us with ground station equipment for our QuickBird satellite.
All three antenna systems to be provided by Datron have been completed and the
first two ground station antenna systems have been installed in Fairbanks,
Alaska and Tromso, Norway.
CUSTOMERS
U.S. Government
During 2001, 2000 and 1999, approximately 89.8%, 92.9% and 99.2%,
respectively of our total annual revenues were derived from contracts with the
U.S. government. Most of our U.S. government contracts are funded incrementally
on a year-to-year basis. Changes in government policies, priorities or funding
levels through agency or program budget reductions by the U.S. Congress or
executive agencies or the imposition of budgetary constraints could materially
adversely affect our financial condition or results of operations.
DigitalGlobe's major contracts with the U.S. government are firm
fixed-price contracts under commercial terms. Under firm fixed-price contracts,
work performed and products shipped are paid for at a discount from the current
published prices without adjustment for actual costs incurred in connection with
the contract.
All our U.S. government contracts provide that such contracts may be
terminated for convenience by the U.S. government. Furthermore, any of these
contracts may become subject to a government-issued stop work order under which
we would be required to suspend production or delivery. In the event of a
termination for convenience, contractors should be entitled
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to receive the purchase price for delivered items, reimbursement for allowable
costs for work in process and an allowance for reasonable profit thereon or
adjustment for loss if completion of performance would have resulted in a loss.
The National Aeronautics and Space Administration, or NASA, accounted
for approximately $2.7 million or 23% of our revenue and the National Imagery
and Mapping Agency, or NIMA, accounted for approximately $7.8 million or 66.8%
of our revenue during the fiscal year ended December 31, 2001. Any termination
of our relationships with NASA and NIMA would have a material adverse effect on
our current operating results and financial condition. NASA and NIMA retain our
services on a case-by-case basis and may choose at any time to use another firm
to provide the services that we perform. Therefore, any shift in either NASA's
or NIMA's decisions to continue to use our services could also result in
substantially reduced revenues for us. At February 28, 2002, we had contractual
commitments from NASA and NIMA totaling $11.25 million to purchase imagery over
the next three years.
SOO Customers
At February 28, 2002, we had contracts totaling $29.9 million from our foreign
governmental customers to purchase our premium tasked SOO products over the next
five years. The ability of our customers to meet their annual commitments under
these contracts is subject to the availability of annual governmental
appropriations.
PROPRIETARY RIGHTS
We have developed proprietary technology relating to our data
processing systems, and imagery product processing and distribution systems. We
also have acquired the right to use technology from our strategic partners. We
plan to combine components and systems incorporating our technology and our
strategic partners' technology to produce one or more satellites, an image
archive, and a distribution network. We have applications pending for U.S.
patents relating to our next generation remote sensing system for the
agricultural market and related products. We rely primarily upon copyright and
trade secret laws for protection of our proprietary technology. The source code
for our own proprietary software is protected as an unpublished copyrighted work
and as a trade secret.
We also generally enter into confidentiality agreements with our
employees, consultants, vendors, customers, and licensees, and limit access to
our proprietary designs, software, and other confidential information. We own
United States trademark registrations for "DigitalGlobe," a graphic
representation of the DigitalGlobe, "Your Planet Online," and "SOO." We have
submitted, and will continue to submit, trademark applications for our
operations.
GOVERNMENT REGULATION
Our business is subject to regulation in the United States and abroad.
COMMERCIAL REMOTE SENSING LICENSE
We have received our licenses from the National Oceanic and Atmospheric
Administration, or NOAA, for QuickBird satellite operations. The licenses
contain restrictions to protect the foreign and national security policies of
the United States and to implement United States obligations under various
international agreements. Under such licenses, we must also provide the United
States government with access to, and the use of, our data at commercial market
prices. The United States government may limit the commercial distribution of
such data in certain circumstances.
COMMUNICATIONS FREQUENCY LICENSE
We have licenses issued by the Federal Communications Commission, or
FCC, to operate radio frequency devices aboard our satellites and at ground
stations located in the United States. The FCC has allocated to us frequency
spectrum for telemetry, tracking and control operations, and data downlinks, and
we have obtained a license for our QuickBird satellite. Also, the FCC has
granted us 10-year licenses to operate the ground stations in Fairbanks, Alaska
and Longmont, Colorado. We have received from the FCC a license to launch and
operate two remote-sensing satellites. The license authorizes us to transmit
imagery to earth and to perform telemetry, tracking, and command of the
satellites.
In order to operate internationally and comply with international
regulations, the FCC has recorded the DigitalGlobe network with the
International Telecommunications Union (ITU) on our behalf. The ITU frequency
coordination is necessary to
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maintain interference protection with other international satellite systems.
DigitalGlobe's use of these frequencies is now protected.
IMPORT AUTHORIZATIONS AND FOREIGN GOVERNMENT LICENSES
We may be required to obtain import authorizations or licenses from
foreign governments in order to market and distribute DigitalGlobe data and
products, and to operate ground station facilities outside the United States.
NOAA must also be notified of any significant agreements with foreign
governments or companies who provide for the tasking of satellites or sensors,
for real-time direct access to unenhanced data, or for high volume data purchase
agreements.
EMPLOYEES
As of December 31, 2001, we employed 208 full-time employees. Of these
employees, 45 were in data systems, 79 were in ground, product, and space
operations, 42 were in marketing, sales, and customer service, and 42 were in
executive, finance, and administration. None of our employees are represented by
a labor union or are covered by a collective bargaining agreement. We consider
our employee relations to be good.
PROPERTIES
Our principal executive offices consist of approximately 77,988 square
feet of leased space located in Longmont, Colorado. The term of this lease runs
through April 2005. Our monthly payments under this lease are approximately
$92,720. We lease a 5000 square foot warehouse for $3,373 per month. The term of
the lease expires on May 31, 2003. We also lease approximately ten acres for our
ground station located in Fairbanks, Alaska and 400 square feet of space for our
ground station located in Tromso, Norway. The term of the Alaska lease expires
on July 10, 2005 and the term of the Norway lease expires six months following
the cessation of QuickBird operations. Our payments under these leases are
approximately $4,000 semi-annually for the Alaska lease, and approximately
$15,000 (based on current exchange rates) annually for the Norway lease.
LEGAL PROCEEDINGS
We are not currently a party to any material pending legal proceedings.
35
MANAGEMENT
Directors, executive officers, and key employees
The following table provides information concerning our directors,
executive officers, and certain key employees as of December 31, 2001:
Name Age Position
- ---- --- --------
Herbert F. Satterlee III............... 46 Chief Executive Officer, President, and Director
Henry E. Dubois........................ 40 Chief Operating Officer, Chief Financial Officer, and Executive Vice President
Walter S. Scott........................ 43 Chief Technical Officer, Executive Vice President, and Director
Neal T. Anderson....................... 57 Vice President Space and Ground Systems
Mark A. Hargrove....................... 45 Chief Information Officer and Vice President of Operations
Jeffrey S. Kerridge.................... 40 Vice President Sales
Kari L. Blanchard...................... 42 Vice President Data Systems
Gregory E. Knoblauch................... 43 Vice President Agriculture Business
Jolyon Thurgood........................ 45 Vice President Marketing
Shawn R. Thompson, Esq................. 47 Secretary of the Board
Paul M. Albert, Jr..................... 59 Director
Henry J. Driesse....................... 58 Director
Donald E. Foley........................ 50 Director
Anne Karalekas......................... 55 Director
Takatoshi Kodaira...................... 54 Director
Michael J. Petrick..................... 40 Director
Donald W. Vanlandingham................ 62 Director
Herbert F. Satterlee III has served as Chief Executive Officer,
President, and a director since he joined DigitalGlobe in June 1998. From
August 1995 to April 1998, Mr. Satterlee served as President of RESOURCE 21
LLC, a Denver-based remote sensing information products company, where Mr.
Satterlee led the development of aircraft-derived imagery information products
for the agriculture industry in preparation for the 2001 launch of that
company's Earth-observing satellite. Additionally, from October 1978 to June
1998, Mr. Satterlee spent 19 years with The Boeing Company, holding senior
management positions on programs such as Teledesic, UK/ROF AWACS (international
defense), and the B-1 Bomber Simulator (United States defense).
Henry E. Dubois has served as Chief Operating Officer, Chief Financial
Officer, and Executive Vice President since September 1999. From June 1995 to
December 1998, Mr. Dubois served as Advisor to the Board of Directors, Chief
Executive Officer, and Chief Financial Officer of P.T. Centralindo Panca Sakti,
a telecommunication and multimedia company in Indonesia. From March 1993 to
February 1995, Mr. Dubois served as Senior Vice President of P.T. Ongko Multi
Corpora, a diversified conglomerate based in Indonesia. From October 1987 to
February 1993, he served as a consultant and in financial functions for Booz
Allen and Hamilton in Asia. From August 1985 to September 1987, he served in
financial functions for Exxon Corporation.
Walter S. Scott has served as Chief Technical Officer and Executive
Vice President since we merged with WorldView in March 1995. Dr. Scott has
served as a director of DigitalGlobe since June 1999 and from March 1995 until
April 1999. From May 1998 to June 1998, Dr. Scott served as our interim Chief
Executive Officer. Dr. Scott founded WorldView, our predecessor, in January 1992
and served as its Chief Technical Officer, Chairman of the Board, and Chief
Financial Officer from January 1992 to March 1995. From January 1986 to February
1993, he served in a variety of positions at the Lawrence Livermore National
Laboratory, including program leader of the Brilliant Pebbles Strategic Defense
Initiative program. In addition, he developed low-cost lightweight satellite
technology, managed the successful launch of several space flight experiments,
and developed computer automated design tools for the manufacture of hybrid
wafer scale integrated circuits. From June 1982 to December 1985, he was founder
and president of Scott Consulting, a software and consulting firm.
Neal T. Anderson has served as Vice President Space Segment since
September 1999. Mr. Anderson is responsible for overall management of the
development, production, test, and launch of the QuickBird spacecrafts. From
March 1995 to September 1999, Mr. Anderson served as Senior Director, Space
Segment. Mr. Anderson's experience includes marketing, engineering, and
management of over 25 spacecraft programs. From January 1994 to March 1995,
Mr. Anderson served as a Director of Advanced Programs with Spectrum Astro
Inc., an aerospace company. From November 1978 to December 1993, he served in
a variety of positions with Ball Aerospace. From May 1967 to November 1978, he
served in the U.S. Air Force.
36
Mark A. Hargrove has served as Vice President of Operations and Chief
Information Officer since May 2000. Mr. Hargrove is responsible for managing all
aspects of corporate information systems at DigitalGlobe. From December 1997 to
May 2000, Mr. Hargrove served as Vice President and Chief Information Officer of
Computer Curriculum Corporation, a publisher of educational software. From
September 1996 to December 1997, he served as Director of Software Engineering
at BayStone Software, a start-up developer of customer relationship management
software. From June 1995 to September 1996, Mr. Hargrove consulted with various
companies on large-scale MIS integration. Prior to that time, he served as
Director of Technical Services at 3Com Corporation.
Jeffrey S. Kerridge has served as our Vice President Sales since August
1998 and as our Vice President Marketing from August 1998 to February 1999. Mr.
Kerridge joined DigitalGlobe in September 1996 as our Director,
Defense/Intelligence Programs. His responsibilities in that position included
managing DigitalGlobe's direct sales and marketing efforts with the United
States Department of Defense and Intelligence Community and with Middle East and
European foreign government accounts. From February 1984 until August 1996, Mr.
Kerridge served in a variety of capacities for the Central Intelligence Agency's
National Photographic Interpretation Center, including strategic planning,
division level officer, program management, branch chief, and analyst.
Kari L. Blanchard has served as Vice President of Data Systems since
August 2001. Ms. Blanchard is responsible for overall management of our major
software development efforts and for systems analysis activities including
sensor calibration and product verification. From June 1999 to august 2001, she
served as Software Development Manager and then as Senior Director of Data
Systems. From August 1996 to June 1999, she served as Senior Systems Engineer
and Software Development Manager for Logicon space and Information Operations
(now a subsidiary of Northrop Grumman Corp., a major aerospace and engineering
firm).
Gregory E. Knoblauch has served as Vice President of Agriculture
Business since May 2000. Mr. Knoblauch is responsible for our AgroWatch product
and market development in the agricultural market. From July 1991 to April 2000
he served as Vice President of Marketing for RESOURCE 21, a remote sensing
satellite company where he initiated and conducted marketing and sales
activities in the agricultural market. Prior to 1991, Mr. Knoblauch served as
President of ACC of Wisconsin, an agribusiness service company.
Jolyon Thurgood has served as Vice President of Marketing since August
2001. He also serves as Senior Director, New Products Research and Development,
a position he has held from July 2000 to the current time. Mr. Thurgood is
responsible for developing marketing strategy and executing all marketing
programs in support of DigitalGlobe's business goals, including: product
development priorities, product rollout, marketing communications, and industry
marketing focused on specific government and commercial customer sets. Prior to
joining DigitalGlobe, Mr. Thurgood served as Director of Product Marketing
(January 1995 to July 1996), and Director of International Business Development
and Director of International Marketing (September 1996 to June 2000), for Space
Imaging. From July 1982 until December 1994, Mr. Thurgood worked for Wild
Heerbrugg (now known as Leica Geosystems) in a variety of positions with
responsibilities for photogrammetry and Geographic Information Systems (GIS)
software development and marketing.
Shawn R. Thompson, Esq. has served as Secretary of the Board since
August 1999, as Director of Contracts since October 1996, and is responsible
for contract administration, negotiations, and compliance. Mr. Thompson is an
attorney licensed to practice in the state of Colorado. Previously, Mr.
Thompson served as Contract Manager for Tenera Rocky Flats from September 1995
to October 1996 and as Manager of Contract Administration for NFT Inc. from
September 1990 to September 1995.
Paul M. Albert, Jr. has served as a director of DigitalGlobe since
June 1999. Mr. Albert is a finance and capital markets consultant primarily
engaged in educating bankers at global financial institutions, and a private
investor. From December 1998 to August 1999 he served as a director of CAI
Wireless and from December 1999 to April 2001 he served as director of Teletrac
Inc. From 1970 to 1996 he was an investment banker, holding senior officer
positions at Morgan Stanley & Co. and Prudential Securities.
Henry J. Driesse has served as a director of DigitalGlobe since April
2001. Mr. Driesse has served as President of ITT Industries' Defense Division
since August 2000. Prior to his current position, Mr. Driesse served in a
variety of capacities for ITT Industries since 1981, most recently as President
of the Avionics Division.
Donald E. Foley has served as a director of DigitalGlobe since June
1999. Since June 2001, Mr. Foley has served as the Treasurer and Director of Tax
for ITT Industries. From May 1996 to June 2001, Mr. Foley has served as the Vice
President and Treasurer of ITT Industries. From July 1989 to May 1996, Mr. Foley
served as the Assistant Treasurer of International Paper Company, where he
helped manage that company's global expansion. Additionally, Mr. Foley has held
executive positions with the Mobil Corporation and the General Electric Company.
He also is the Director/Chairman of the New York Corporate Treasury Association.
37
Anne Karalekas has served as a director of DigitalGlobe since November
1999. From September 1996 until October 1999, Ms. Karalekas served as General
Manager for Microsoft's online guide, MSN Sidewalk Washington. From 1985 until
1996, Ms. Karalekas held several positions at the Washington Post newspaper,
including Director of Marketing, Publisher of the Washington Post Magazine, and
Director of the Specialty Products Group. Between 1978 and 1985, Ms. Karalekas
was a member of McKinsey & Co., a management consulting firm. From 1975 until
1978, she served as Senior Staff member of the Senate Select Committee on
Intelligence.
Takatoshi Kodaira served as a director of DigitalGlobe from June 1995
to April 1999, and since June 1999. Since April 1999, Mr. Kodaira has served as
the General Manager, Geospatial Information Division of Hitachi Software. From
August 1994 to April 1999, Mr. Kodaira served as the Department Manager of the
New Business Development Department of Hitachi, where he was responsible for
identifying and developing new business opportunities. From August 1992 to
August 1994, Mr. Kodaira was a Department Manager of the Defense Systems
Department of Hitachi, where he established a military tactical trainer business
and commercial satellite-based image exploitation systems for the Japanese
government.
Michael J. Petrick has served as a director of DigitalGlobe since June
1999. Mr. Petrick is a Managing Director of Morgan Stanley and has been with
Morgan Stanley since 1989. Mr. Petrick also serves as a director of Marvel
Enterprises, Inc., CHI Energy, Inc., TVN Entertainment Corporation, and Premium
Standard Farms, Inc.
Donald W. Vanlandingham has served as a director of DigitalGlobe since
October 1996. Mr. Vanlandingham has served as President and Chief Executive
Officer of Ball Aerospace since January 1997. Mr. Vanlandingham has been an
employee of Ball Aerospace since July 1967.
BOARD COMPOSITION
The composition of our board of directors is governed by a
stockholders' agreement entered into in connection with our recapitalization in
April 1999. The stockholders' agreement provides for a board of directors
consisting of 11 members. The holder of the Series A preferred stock is entitled
to designate two directors, the holders of the Series B preferred stock are
entitled to designate four directors, our Chief Executive Officer is entitled to
designate two directors, Ball Technologies Holding Corp is entitled to designate
one director and a majority of the holders of the Series C preferred stock are
entitled to designate the remaining two directors. The numbers of directors to
be designated by the holders of Series A preferred stock and Series B preferred
stock may be adjusted if the holders' percentage ownership changes. Currently,
the board consists of nine members, as the Series B stockholders have only
designated three members and the Series C stockholders have only designated one
member.
The holder of the Series A preferred stock has designated Mr. Foley
and Mr. Driesse as its representatives. The holders of the Series B preferred
stock have designated Messrs. Albert and Petrick, and Ms. Karalekas as their
representatives, and are entitled to designate one additional director. The
holders of the Series C preferred stock have designated Mr. Kodaira as one of
their representatives, and have the right to designate one further
representative. Our Chief Executive Officer has designated Mr. Satterlee and
Dr. Scott to serve on the board of directors. Ball Technologies Holding Corp
has designated Donald Vanlandingham to serve on the board of directors.
During fiscal year 2001, our board of directors held 11 meetings, and
its committees held a total of 6 meetings. Each of the directors attended at
least 75% of the aggregate of all meetings of the board of directors and the
total number of meetings held by all committees of the board of directors of
which each respective director was a member during the time he or she was
serving as such during fiscal year 2001.
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation Committee consists of Messrs. Petrick, Foley, Kodaira
and Vanlandingham and Ms. Karalekas. The Compensation Committee is chaired by
Mr. Petrick and is responsible for the review of our company's equity and bonus
plans, as well as compensation plans for executive officers with base salaries
in excess of $125,000.
The Audit Committee consists of Messrs. Albert, Petrick, Vanlandingham,
and Driesse, and is chaired by Mr. Albert. The Audit Committee makes
recommendations to the board of directors regarding the selection of independent
accountants, reviews the results and scope of the audit, and reviews the annual
financial statements before their submission to the board for approval.
The Governance Committee consists of Messrs. Albert, Driesse, Kodaira,
Ms. Karalekas, and Dr. Scott. The Governance
38
Committee is chaired by Mr. Albert and is responsible for advising the board of
directors on our company's compliance with relevant laws and regulations,
including without limitation, export controls, the Foreign Corrupt Practices
Act, matters relating to the environment, worker's health and safety, and
employment law.
The Finance Committee is chaired by Mr. Foley, and consists of Messrs.
Albert, Foley, Petrick, Kodaira and Satterlee. The Finance Committee is
responsible for oversight of our company's financial policies.
DIRECTOR COMPENSATION
The majority of the directors on the board is compensated by their
respective employers and is not directly compensated by our company for
attendance at board or committee meetings. In 1999, two independent directors,
Mr. Paul Albert and Ms. Anne Karalekas, were elected to the board. We have
committed to an annual stipend of $24,000, board attendance fees of $3,750 per
meeting, for quarterly meetings, and annual committee attendance fees of $7,500
per committee, to be paid to such outside directors for their service on the
board. Mr. Albert and Ms. Karalekas, as outside and unaffiliated directors, have
each received non-qualified stock options to purchase 33,750 and 31,875 shares
of common stock, respectively, at a price of $0.25 per share. Additionally, Mr.
Albert and Ms. Karalekas will each receive grants of options to purchase 7,500
shares of common stock at the end of each calendar year in which they serve as
directors, prorated for their period of service as a director during the first
year in which they served as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of our board of directors for
the 2001 fiscal year were those named above. No member of the Compensation
Committee was at any time during the 2001 fiscal year or at any other time an
officer or employee of DigitalGlobe.
No executive officer of DigitalGlobe has served on the board of
directors or compensation committee of any other entity that has or has had one
or more executive officers serving as a member of the board of directors of
DigitalGlobe. Except for Ms. Karelekas, each member of the Compensation
Committee is employed by an entity that is either a stockholder of or maintains
a business relationship with DigitalGlobe. See "Certain Relationships and
Related Transactions."
39
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth information concerning the compensation
received for services rendered to us during fiscal 1999, 2000 and 2001 by our
Chief Executive Officer and our four next most highly compensated executive
officers whose total compensation in fiscal 2001 equaled or exceeded $100,000:
SUMMARY COMPENSATION TABLE
Long-term
Compensation
Annual Compensation ------------
------------------- Securities
Name and Principal Position Year Salary ($) Bonus ($) Underlying Options/(1)
- --------------------------- ---- ---------- --------- ----------------------
Herbert F. Satterlee III,
Chief Executive Officer, President, and
Director................................... 2001 269,897 9,600 --
2000 256,250 -- 370,919
1999 203,333 40,000 --
Walter S. Scott,
Chief Technical Officer and Director......... 2001 192,038 6,100 --
2000 181,500 -- 538,595
1999 165,000 45,000 --
Henry E. Dubois,
Chief Operating Officer, Chief Financial
Officer, and Executive Vice President /3/.. 2001 243,192 13,500 20,000
2000 231,000 37,500 230,000
1999 75,000 30,000 --
Jeffrey S. Kerridge,
Vice President Sales ........................ 2001 266,983/2/ 7,800 --
2000 220,048/2/ -- 126,266
1999 198,690/2/ 30,000 --
Mark A. Hargrove,
Vice President of Operations and Chief
Information Officer ....................... 2001 175,385 5,000 --
2000 94,808 25,000 130,000
1999 -- -- --
(1) The options granted to each of the named executive officers in 2000 and
2001 are stock options to purchase shares of common stock at the
initial exercise price of $0.25 that were issued under our 1999 Stock
Option/Stock Issuance Plan. The options granted prior to 2000 are
stock options to purchase shares of Series C preferred stock at an
initial exercise price of $3.81 that were issued under our 1995 Stock
Option/Stock Issuance Plan.
(2) The compensation paid to Mr. Kerridge for his services includes sales
commissions of $57,205 in 1999, $41,048 in 2000 and $81,559 in 2001.
(3) We have agreed to grant Mr. Dubois a severance payment equal to six
months of his current salary in the event the Company ceases business
activities before September 1, 2002.
OPTION GRANTS IN 2001
The following table sets forth certain information regarding options
that we granted during the year ended December 31, 2001 to the named executive
officers:
OPTION GRANTS IN LAST FISCAL YEAR
Percent of Total Potential Realizable Value At
Number of Options Granted Exercise Assumed Annual Rates of Stock Price
Options to Employees in Price Appreciation for Option Term
----------------------------
Name Granted Fiscal Year(1) Per Share(2) Expiration Date 5% 10%
---- ------- ------------- ------------- --------------- -- ---
Henry E. Dubois 20,000 2.6 0.25 December 21, 2011 $3,144 $7,969
(1) Based on 775,740 options granted during 2001.
(2) The exercise price per share of options granted was equal to the fair
market value of the Common Stock on the date of grant as determined
by the Board of Directors.
40
2001 OPTION EXERCISES AND YEAR END OPTION VALUES
The following table sets forth information concerning the value realized upon
exercise of options during 2001 and the number and value of unexercised options
held by each of the named executive officers at December 31, 2001.
Number of Value of Unexercised In
Unexercised Options at the Money Options at
Shares December 31, 2001 December 31, 2001
Acquired on Value ----------------- -----------------
Exercise Realized Exercisable/(1)/ Unexercisable Exercisable Unexercisable
-------- -------- --------------- ------------- ----------- -------------
Herbert F. Satterlee III 22,000 -- 433,000 -- -- --
Walter S. Scott -- -- 543,850 -- -- --
Henry E. Dubois -- -- 250,000 -- -- --
Jeffrey S. Kerridge -- -- 138,300 -- -- --
Mark A. Hargrove -- -- 130,000 -- -- --
(1) All options are immediately exercisable, subject to repurchase by
DigitalGlobe of any unvested shares at the exercise price upon cessation of
the optionee's service to DigitalGlobe.
EMPLOYEE BENEFIT PLANS
1995 STOCK OPTION/STOCK ISSUANCE PLAN
Our 1995 Stock Option/Stock Issuance Plan was adopted and approved by
our board of directors in May 1995 and by our stockholders in June 1995. We
terminated the 1995 Plan effective upon the closing of the recapitalization in
April 1999.
Options granted under the 1995 Plan were originally options to purchase
our common stock. In connection with the 1999 recapitalization, all outstanding
options were automatically converted into options to purchase shares of our
Series C preferred stock. The exercise price of such options was adjusted based
on the conversion ratio applicable to the common stock in connection with the
recapitalization. Options currently outstanding under the 1995 Plan will
continue in full force and effect under the terms of the plan until such
outstanding options are exercised or terminated.
As of December 31, 2001 and on an as-converted basis, we had granted
options under the 1995 Plan to purchase 589,550 shares of Series C preferred
stock, of which options to purchase 57,307 shares had been exercised, options to
purchase 310,998 shares had been cancelled (due to expiration or otherwise), and
options to purchase 221,245 shares at a weighted average exercise price of
$3.806 per share remained outstanding.
The 1995 Plan provided for the grant of incentive stock options to
employees and nonstatutory stock options to employees, directors, and
consultants. The 1995 Plan also provided for the grant of restricted stock to
employees, directors, and consultants. The 1995 Plan is administered by the
board or a committee appointed by the board which determines recipients and
types of awards to be granted, including the exercise price, number of shares
subject to the award, and the vesting and exercisability thereof.
The maximum term of options granted under the 1995 Plan is ten years.
The board determines the exercise price of options granted under the 1995 Plan,
provided that the exercise price of an incentive stock option may not be less
than 100% of the fair market value of the Series C preferred stock on the date
of the option grant (110% in the case of participants holding more than 10% of
the combined voting rights of our outstanding capital stock) and the exercise
price of a nonstatutory stock option cannot be less than 85% of the fair market
value of the Series C preferred stock on the date of the option grant.
Options granted under the 1995 Plan vest at the rate specified in the
applicable option agreement and are not transferable. An optionee whose
relationship with us ceases for any reason, other than by death or disability,
may exercise vested options in the three-month period following such cessation,
unless such options terminate or expire sooner by their terms. Vested options
may be exercised for up to 12 months after an optionee's relationship with us
ceases due to death or disability.
Upon certain changes in control of our ownership, each outstanding
option will terminate unless assumed by the successor corporation.
PREDECESSOR STOCK OPTION PLAN
In connection with the merger with WorldView in March 1995, we assumed
options issued under WorldView's 1994 Stock Option/Stock Issuance Plan. In
connection with the 1999 recapitalization, all outstanding options under the
WorldView Plan were automatically converted into options to purchase shares of
our Series C preferred stock.
41
As of December 31, 2001 and on an as-converted basis, options to
purchase an aggregate of approximately 7,853 shares of Series C preferred stock,
at a weighted average exercise price of $0.105 per share, remained outstanding
under the WorldView Plan.
The maximum term of options granted under the WorldView Plan is ten
years. Options granted under the WorldView Plan are nontransferable. An optionee
whose relationship with us ceases for any reason, other than by death or
disability, may exercise vested options in the three-month period following such
cessation, unless such options terminate or expire sooner by their terms.
Holders may exercise vested options for up to 12 months after an optionee's
relationship with us ceases due to death or disability.
1999 EQUITY INCENTIVE PLAN
In February 2000, our board of directors approved a 1999 Equity
Incentive Plan, under which 10,000,000 shares of common stock have been reserved
for issuance. Our stockholders approved this plan in December 2000. The plan
provides for the grant of incentive stock options to employees and nonstatutory
stock options, stock bonuses, and restricted stock awards to employees,
directors, and consultants to purchase common stock. The purpose of the plan is
to secure and retain qualified personnel and to provide incentives to such
personnel to achieve success for the company. The plan is administered by the
board or a committee appointed by the board, which determines recipients and
types of awards to be granted, including the exercise price, number of shares
subject to the award, and the exercisability thereof.
As of December 31, 2001, we had granted options to certain employees
under the plan to purchase an aggregate of 4,494,815 shares of common stock, of
which options to purchase 562,089 shares had been exercised, options to purchase
617,631 shares had been cancelled (due to expiration or otherwise), and options
to purchase 3,315,095 shares at a weighted-average exercise price of $0.25 per
share remained outstanding.
The term of an option granted under the plan is stated in the option
agreement. The terms of options granted under the plan may not exceed ten years
generally and the term of an incentive stock option granted to a participant
holding more than 10% of the combined voting rights of our outstanding capital
stock may not exceed five years. Options granted under the plan generally vest
and become exercisable as set forth in the option agreement; provided that
options granted prior to the initial listing of any of our securities on a
national securities exchange to an employee who is not an officer, director, or
consultant vest at a rate of 20% over five years from the date of grant. The
option agreement may provide for an early exercise by the optionee, a right of
repurchase of vested options by us, a right of first refusal, or a re-load
option in which an optionee who exercises an option by surrendering
already-owned shares of our common stock may be granted a further option.
In general, no option, stock bonus, or restricted stock award may be
transferred by the optionee other than by will or the laws of descent or
distribution, and each option may be exercised, during the lifetime of the
optionee, only by such optionee. An optionee whose relationship with us or any
related corporation ceases for any reason (other than by death or permanent and
total disability) may exercise options in the 30-day period following such
cessation, unless such options terminate or expire sooner, by their terms, but
only to the extent the option had vested on such date of cessation. In addition,
in the event of the cessation of an optionee's employment, we may repurchase any
unvested shares granted under a stock bonus or restricted stock award. In the
event of death or total and permanent disability, the option may be exercised in
the twelve-month period following the date of death or total and permanent
disability unless such options terminate or expire sooner, but only to the
extent the option had vested on the date of death or disability.
In the event we merge with or into another corporation, all outstanding
options may either be assumed or an equivalent option may be substituted by the
surviving entity or, if such options are not assumed or substituted, vesting of
such options shall be accelerated in full. In the event that options become
exercisable in lieu of assumption or substitution, the board of directors shall
notify optionees that all options shall be fully exercisable for a period of 15
days, after which time the options shall terminate.
The board of directors determines the exercise price of options granted
under the plan at the time of grant, provided that the exercise price of all
incentive stock options generally must be at least equal to the fair market
value of the shares on the date of grant. The exercise price of a nonstatutory
stock option cannot be less than 85% of the fair market value of the shares on
the date of grant. With respect to any participant who is a 10% holder of the
combined voting rights of our outstanding capital stock, the exercise price of
any incentive stock option or any nonstatutory stock option granted must equal
at least 110% of the fair market value on the grant date and the exercise price
of any stock bonus or restricted stock award must be at least equal to the fair
market value of the shares on the date of grant. The consideration for
exercising any incentive stock option or any nonstatutory stock option may
consist of cash, promissory note, delivery of already-owned shares of our common
stock, or such other
42
consideration or method of payment as determined by the board of directors to
the extent permitted under applicable law. No incentive stock options may be
granted to a participant, which, when aggregated with all other incentive stock
options granted to such participant, would have an aggregate fair market value
in excess of $100,000 becoming exercisable in any calendar year. Stock bonuses
and restricted stock awards may be issued either alone, in addition to, or in
tandem with stock options granted under the plan. The plan will terminate on
February 14, 2010, unless sooner terminated by the board of directors.
401(K) PLAN
We have a 401(k) plan, pursuant to which eligible employees may elect
to reduce their current salary by up to 60%, subject to other IRS limitations,
and have the amount of such reduction contributed to the 401(k) plan. Any
contributions by us to the 401(k) plan are discretionary. The 401(k) plan is
intended to qualify under section 401 of the Internal Revenue Code so that
contributions by participants to the 401(k) plan, and income earned on those
contributions, are not taxed to participants until withdrawn from the 401(k)
plan.
43
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation contains a provision to eliminate the
personal liability of our directors for monetary damages for breach or alleged
breach of their fiduciary duties as directors except to the extent the exemption
from or limitation of liability is not permitted under Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except for
liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper
personal benefit.
In addition, our certificate of incorporation and bylaws provide that
we will indemnify our officers, directors, and employees against any and all
liability and reasonable expenses incurred in connection with any claim, action,
suit, or proceeding in which that person may become involved by reason of their
relationship to the company, provided that the person acted in good faith and in
a manner reasonably believed to be in our best interests. Our bylaws prevent us
from indemnifying an officer, director, or employee to the extent not permitted
under Delaware law as well as in the following circumstances:
. as to amounts paid or payable to us for or based upon the director,
officer, or employee having gained any personal profit or advantage
to which he was not legally entitled; or
. as to amounts paid or payable to us for accounting profits made
from the purchase or sale of our securities within the meaning of
Section 16(b) of the Securities Exchange Act of 1934, as amended.
Our bylaws also provide that we will grant indemnification only if our
board of directors, outside legal counsel, or a court of competent jurisdiction
determines that the officer, director, or employee has met the applicable
standard of conduct as described above, or if the officer, director, or employee
has been wholly successful with respect to the claim, action, suit, or
proceeding.
We have obtained directors' and officers' liability insurance but have
not entered into indemnity agreements with any of our officers, directors, or
employees.
44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH BALL CORPORATION
In March 1996, we entered into a contract with Ball Aerospace, an
affiliate of Ball Technologies Holdings Corp., which holds in excess of 5% of
our outstanding capital stock, for engineering services in connection with our
first QuickBird satellite. This agreement currently remains in effect. We made
payments to Ball Aerospace for engineering services of approximately $770,034 in
2001.
In October 1997, we entered into an agreement with Ball Aerospace that
granted us an option to purchase either one or two QuickBird spacecraft at
varying prices, depending on the timing of our exercise of that option. Under
the agreement, Ball Aerospace is permitted to sell spacecraft based on the
QuickBird design to third parties under specified circumstances. Ball Aerospace
did not perform any work under the agreement from October 1997 through May 1998,
and we did not make any payments to Ball Aerospace during that period. Under the
agreement, we issued to Ball Aerospace a promissory note in the principal amount
of $1.6 million. We repaid this note in May 1998.
In June 1998, we entered into a new agreement with Ball Aerospace. This
agreement restarted work on our first QuickBird satellite, with a total fixed
cost of $34.1 million. In April 1999, we exercised our option to purchase a
second QuickBird satellite. The total cost of our second QuickBird satellite was
$36.5 million. We made payments to Ball Aerospace under the Ball Aerospace
agreements of approximately $ 3.3 million in 2001.
In April 1999, Ball Technologies exercised its option in connection
with the recapitalization to purchase 714,286 shares of our Series C preferred
stock for an aggregate purchase price of $2.5 million. The purchase was
consummated in July 1999.
In April 2001, we entered into a new $9.0 million financing agreement
with Ball Aerospace, which we used to fund the completion of our second
QuickBird satellite. This financing facility accrues interest at an annual rate
of 11%, which becomes payable seven months following the launch of our QuickBird
satellite. Beginning in June 2002 and ending in April 2003, principal, in equal
monthly amounts, and interest are payable in cash each month. Our obligations
under the financing facility, together with the notes, are secured by the
insurance policy for our QuickBird satellite launch and operations. In
conjunction with this arrangement, we issued 903,608 shares of Series C
preferred stock in June 2001 to Ball Technologies.
Mr. Vanlandingham, a director of DigitalGlobe, is the President and
Chief Executive Officer of Ball Aerospace.
TRANSACTION WITH HITACHI SOFTWARE
Hitachi, Ltd., which holds approximately 4.8% of our outstanding
capital stock, currently is a master international distributor of our products,
and the exclusive distributor in most of Asia. Additionally, we have entered
into an agreement with Hitachi Software Engineering Company, Ltd. an affiliate
of Hitachi, Ltd., for the development and delivery of a product processor and to
cross-license certain intellectual property rights related to our ground system
and the proprietary software of Hitachi Software. The license grants Hitachi
Software the right to offer customers ground systems that permit them to receive
data directly from our QuickBird satellite.
Hitachi Software was a party to our recapitalization transactions in
April 2001, as the holder of $13 million in principal amount at maturity of
notes. In connection with these transactions, we issued 1,967,381 shares of
Series C preferred stock in June 2001 to Hitachi Software.
Mr. Kodaira, a director of DigitalGlobe, is the General Manager of the
Geospatial Information Division of Hitachi Software.
TRANSACTIONS WITH ITT INDUSTRIES
In December 1998 and January 1999, we entered into agreements with ITT
Industries, Inc., which holds in excess of 10% of our outstanding capital stock,
for system engineering and development of a scheduling and tasking model of our
QuickBird satellites and the development of a satellite simulator. We made
payments to ITT Industries, under these agreements, of approximately $171,175 in
2001.
In February 1999, we entered into a strategic supplier agreement with
ITT Industries. In exchange for our commitment to use ITT Industries as the
provider and integrator of sensors for ten years, ITT Industries will provide
such sensors and associated services on a best value basis. Additionally, we
have qualified ITT Systems as a preferred DigitalGlobe supplier for certain
goods and services during the term of the strategic supplier agreement.
45
In June 1999, we entered into an agreement with the
Aerospace/Communications division of ITT Industries to assist us in evaluating
our options for our next generation satellite system. At December 31, 2001, we
owed ITT Industries $712,560 for their services.
ITT Industries was an assignee of certain rights of Morgan Stanley in
our recapitalization transactions in April 2001. In connection with these
transactions, we issued 2,421,392 shares of Series C preferred stock in June
2001 to ITT Industries.
Mr. Driesse, a director of DigitalGlobe, is a Vice President of ITT
Industries and the President of ITT Industries' Defense Division. Mr. Foley, a
director of DigitalGlobe, is the Treasurer of ITT Industries.
TRANSACTIONS WITH MORGAN STANLEY
Morgan Stanley & Co. Incorporated, which holds in excess of 10% of our
outstanding capital stock, acted as placement agent in connection with our
offering in April 1996 of 7,000,000 shares of our former Series C preferred
stock and our offering in March 1997 of 50,000 units, each consisting of one
note and one warrant to purchase 31.12 shares of our common stock. Morgan
Stanley also acted as placement agent in connection with our offering in July
1999 of 199,000 units, each consisting of one note and 49.095 shares of our
existing Series C preferred stock. In connection with its role in these
offerings, Morgan Stanley received customary commissions and discounts in its
capacity as placement agent.
On February 28, 2002, Morgan Stanley held 5,177,898 shares of Series B
preferred stock, had beneficial ownership of 5,343,619 shares of Series C
preferred stock, and one share of common stock. In addition, Morgan Stanley acts
as exclusive financial advisor to DigitalGlobe under a five-year agreement. In
connection with its advisory role in the 1999 recapitalization, Morgan Stanley
received $750,000 in April 1999, and in connection with its advisory role in the
2001 recapitalization it received $1.0 million in April 2001.
Morgan Stanley was also a party to our recapitalization transactions in
April 2001, as the holder of approximately $44.7 million in principal amount at
maturity of notes. In connection with these transactions, we issued to Morgan
Stanley 3,806,126 shares of Series C preferred stock. We issued an additional
2,951,072 shares of Series C preferred stock to certain assignees of Morgan
Stanley, including ITT Industries. We also granted certain additional
registration rights to Morgan Stanley's transferees for the notes that Morgan
Stanley held at the time of the recapitalization, and agreed to maintain current
a market-making prospectus for Morgan Stanley with respect to the notes.
Mr. Petrick, a director of DigitalGlobe, is a Managing Director of
Morgan Stanley.
TRANSACTIONS WITH UNITED START CORPORATION
In 1998, we entered into an agreement with United Start Corporation
under which United Start provided launch and associated services for our first
QuickBird satellite launch and granted us an option to obtain launch services
for another satellite. We never exercised our option for additional launch
services. We made our final payments to United Start under this agreement of
approximately $2,283,375 in 2001. Mr. Lushtak, a former director of
DigitalGlobe, was Co-Chairman and Chief Executive Officer of United Start.
We believe that all of the transactions set forth above were made on
terms no less favorable than would be obtained for similar services provided to
unrelated third parties. Any future transactions between us and our executive
officers, directors, and their affiliates will be on terms no less favorable to
us than can be obtained from unaffiliated third parties, and any material
transactions with such persons will be approved by a majority of the
disinterested members of our board of directors.
46
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our voting capital stock as of February 28, 2002 for:
. each person (or group of affiliated persons) known to us to own
beneficially more than 5% of the outstanding shares of common stock
or of any series of preferred stock;
. each of our directors;
. each of our named executive officers; and
. all of our directors and executive officers as a group.
Unless otherwise indicated, the address of all persons and entities named
below is c/o DigitalGlobe 1900 Pike Road, Longmont, Colorado 80501.
Number of Shares Beneficially Owned
-----------------------------------
as of February 28, 2002 and Percent of Class/1/
-----------------------------------------------
Series A Series B Series C
Directors, Named Executive Convertible Percent Convertible Percent Convertible Percent % of
Officers and Preferred of Preferred of Preferred of Common Common % of total
5% Stockholders Stock Series (%) Stock Series (%) Stock Series (%) Stock Stock voting power
--------------- ----- ---------- ----- ---------- ----- ---------- ----- ----- ------------
ITT Industries, Inc./2/... 8,629,893 100.0 -- -- 2,534,339 6.4 -- -- 20.7
Morgan Stanley & Co.
Incorporated /3/.......... -- -- 5,177,898 60.0 5,343,619 13.4 1 * 28.0
Affiliated Entities of
Capital
Research and Management
Company /4/............ -- -- 3,451,932 40.0 -- * -- -- 15.0
Ball Technologies &
Holdings Corp./5/........ -- -- -- -- 5,771,928 14.5 -- -- 5.8
Hitachi, Ltd./6/.......... -- -- -- -- 4,695,210 11.8 -- -- 4.8
Walter S. Scott /7/....... -- -- -- -- 678,451 1.7 538,595 13.4 1.2
Herbert F. Satterlee
III/8/................. -- -- -- -- 84,081 * 370,919 9.3 *
Henry E. Dubois/9/........ -- -- -- -- -- -- 230,000 6.2 *
Jeffrey S. Kerridge/10/... -- -- -- -- 12,034 * 126,266 3.2 *
Mark Hargrove /11/........ -- -- -- -- -- -- 130,000 3.2 *
Paul M. Albert, Jr./12/... -- -- -- -- -- -- 33,750 * *
Henry J. Driesse /13/..... -- -- -- -- -- -- -- -- --
Donald E. Foley /14/...... -- -- -- -- -- -- -- -- --
Anne Karalekas /15/....... -- -- -- -- -- -- 31,875 * *
Takatoshi Kodaira /16/.... -- -- -- -- 4,695,210 11.8 -- -- 4.8
Michael J. Petrick /17/... -- -- 5,177,898 60.0 5,343,619 13.4 1 * 28.0
Donald W.
Vanlandingham/18/...... -- -- -- -- 5,771,928 14.5 -- -- 5.8
All non-named executive
officers.................. -- -- -- -- 13,035 * 408,500 11.5 *
All executive officers
and directors as a group
(17 persons).............. -- -- -- -- 16,598,358 41.8 1,940,325 48.4 18.8
* Less than 1%.
- --------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock and
preferred stock subject to warrants and options currently exercisable or
exercisable within 60 days of February 28, 2002, are deemed outstanding for
computing the percentage of the person or entity holding such securities,
but are not outstanding for computing the percentage of any other person or
entity. Except as indicated by footnote, and subject to community property
laws where applicable, the persons named in the table above have sole
voting and investment power with respect to all shares of common stock and
preferred stock shown as beneficially owned by them.
(2) The address of ITT Industries, Inc. is 4 West Red Oak Lane, White Plains,
New York 10604.
(3) The address of Morgan Stanley & Co. Incorporated is 1585 Broadway,
New York, New York 10036. Morgan Stanley also holds one share of common
stock.
(4) The shares of Series B preferred stock reflected as being held by Capital
Research Management Company, a registered investment advisor, are held by
the following entities to whom Capital Research Management Company provides
investment services: Bridgecabin & Co., 86,299 shares; Cudd & Co.,
1,984,860 shares; Movepass & Co., 345,193 shares; and Waterfish & Co.,
1,035,580 shares. The address of Capital Research and Management Company
and its affiliated entities is 11100 Santa Monica Boulevard, Los Angeles,
California 90025.
(5) The address of Ball Technologies Holdings Corp. is 10 Longs Peak Drive,
Broomfield, Colorado 80021.
(6) The address of Hitachi, Ltd., is 6 Kanda-Surugadai, 4-Chome, Chiyoda-Ku
Tokyo, 101 Japan.
(7) Includes 5,255 shares of Series C convertible preferred stock and 538,595
shares of common stock issuable on exercise of outstanding options.
Includes as beneficial ownership the shares held by The Leona A. Rose
Trust, Kenneth E. Scott & Shelly A. Scott, and Jean Scott Crowell & Luther
Crowell. Mr. Scott disclaims beneficial ownership of shares held by the
trust.
(8) Consists of 84,081 shares of Series C convertible preferred stock and
348,919 shares of common stock issuable upon exercise of outstanding
options.
(9) Consists of 250,000 shares of common stock issuable on exercise of
outstanding options.
47
(10) Includes 12,034 shares of Series C convertible
preferred stock and 126,266 shares of common stock issuable upon exercise
of outstanding options.
(11) Includes 130,000 shares of common stock issuable on exercise of outstanding
options.
(12) The address of Mr. Albert is 135 Main Street, South Salem, New York 10590.
(13) The address of Mr. Driesse is c/o ITT Industries, Inc., 4 West Red Oak
Lane, White Plains, New York 10604. Mr. Driesse is a Vice President of ITT
Industries and President and General Manager of ITT Industries' Defense
Division and may be viewed as the beneficial owner of the shares of stock
held by ITT Industries. Mr. Driesse disclaims beneficial ownership of
shares held by ITT Industries.
(14) The address of Mr. Foley is c/o ITT
Industries, Inc., 4 West Red Oak Lane, White Plains, New York 10604. Mr.
Foley is Treasurer and Director of Tax of ITT Industries and may be viewed
as the beneficial owner of the shares of stock held by ITT Industries.
Mr. Foley disclaims beneficial ownership of shares held by ITT
Industries.
(15) Consists of 31,875 shares of common stock issuable upon exercise of
outstanding options. The address of Ms. Karalekas is 2126 Connecticut
Avenue, N.W., Suite 25, Washington, DC 20008.
(16) The address of Mr. Kodaira is Hitachi Software Engineering Co., Ltd. 6-81
Onoe-cho, Naka-ku, Yokohama, Japan 231-8475. Mr. Kodaira has served as the
General Manager, Geospatial Information Division of Hitachi Software
Engineering Co., Ltd., and may be viewed as the beneficial owner of the
shares of stock held by Hitachi Software Engineering Co., Ltd. Mr. Kodaira
disclaims beneficial ownership of shares held by Hitachi Software
Engineering Co., Ltd.
(17) Consists of shares held by Morgan Stanley & Co. The address of Mr. Petrick
is c/o Morgan Stanley & Co. Incorporated, 1585 Broadway, New York, New York
10036.
(18) The address of Mr. Vanlandingham is c/o Ball Technologies Holdings Corp.,
10 Longs Peak Drive, Broomfield, Colorado 80021. Mr. Vanlandingham is the
President and Chief Executive Officer of Ball Aerospace, an affiliate of
Ball Technologies, and may be viewed as the beneficial owner of the shares
stock held by Ball Technologies Holdings Corp. Mr. Vanlandingham disclaims
beneficial ownership of shares held by Ball Technologies.
48
RECAPITALIZATIONS
1999 RECAPITALIZATION
In April 1999, we completed a recapitalization. The recapitalization was
undertaken in order to enable us to raise the additional capital necessary to
pursue the QuickBird program. As a result of the recapitalization:
. all of our outstanding shares of common stock and preferred stock were
exchanged (at a 1 to .44116 ratio for all outstanding preferred stock
and a 1 to .210202 ratio for all outstanding common stock) for an
aggregate of 11,042,075 shares of newly created Series C preferred
stock;
. all warrants issued in connection with our 1997 units offering were
exercised for an aggregate of 327,074 shares of new Series C preferred
stock for aggregate proceeds to us of $15,600;
. all warrants issued to Odetics, Incorporated to purchase Series A
preferred stock automatically converted by their terms into warrants
to purchase an aggregate of 12,463 shares of new Series C preferred
stock;
. all outstanding options to purchase common stock or preferred stock
were automatically converted by their terms into options to purchase
an aggregate of 306,700 shares of new Series C preferred stock;
. Ball Technologies surrendered 2,761,983 shares of Series A preferred
stock to us (which we cancelled and retired);
. we have included 30,500 shares of common stock issued to the
Waterstone Group in the number of shares that were exchanged for new
Series C preferred stock in the recapitalization;
. ITT Industries invested $25 million in exchange for 7,142,857 shares
of new Series A preferred stock;
. Morgan Stanley invested $15 million in exchange for 4,285,714 shares
of new Series B preferred stock and one share of new common stock;
. Capital Research invested $10 million in exchange for 2,857,143 shares
of new Series B preferred stock;
. our 12 1/2% Senior Notes due March 1, 2001 were exchanged for new 12
1/2% Senior Notes having a maturity of March 1, 2005. As a result of
this exchange, the remaining unamortized discount relating to the
value attributed to the 1997 warrants (issued in connection with the
12 1/2% Notes) of $592,000 at March 31, 1999 was charged to
operations, resulting in an initial accreted value of $50.0 million
for the notes. The notes provide for payment of interest in kind
through March 2002, and are collateralized by the launch insurance
policy; and
. we entered into a new stockholders' agreement with Ball Corporation,
ITT Industries, Capital Research, Morgan Stanley, and other major
stockholders providing for an expanded board of directors, setting
forth approval requirements regarding certain transactions and
corporate matters, and granting registration rights to the holders of
our preferred stock.
49
The following table shows the impact of the 1999 recapitalization on
our capital stock:
NUMBER OF SHARES ISSUED AND OUTSTANDING BEFORE AND AFTER RECAPITALIZATION
Before % After %
------ -- ----- --
Old Series A Preferred /1/............................. 16,606,343 58.9% -- --
Old Series A Preferred Options......................... 17,800 0.1 -- --
Old Series A Preferred Warrants........................ 28,250 0.1 -- --
Old Series B Preferred................................. 311,300 1.1 -- --
Old Series C Preferred................................. 7,000,000 24.8 -- --
Old Series D Preferred................................. 1,000,000 3.5 -- --
Old Common............................................. 235,048 0.8 -- --
Old Common Stock Options............................... 1,421,712 5.0 -- --
Old Common Stock Warrants.............................. 1,556,000 5.5 -- --
New Series A Preferred................................. -- -- 7,142,857 26.8%
New Series B Preferred................................. -- -- 7,142,857 26.8
New Series C Preferred /2/............................. -- -- 12,083,435 45.3
New Series C Preferred Options /3/..................... -- -- 306,699 1.1
New Preferred Series C Warrants........................ -- -- 12,463 --
Common................................................. -- -- 1 --
----------- ------- ---------- -----
28,176,453 100.0% 26,688,312 100.0%
- -----------------
(1) Reflects Ball Technologies' surrender of 2,761,983 shares.
(2) Reflects the purchase in July 1999 by Ball Technologies of 714,286
shares of new Series C preferred stock for $2.5 million.
(3) The exercise price of the options to purchase Series C preferred
stock is $3.81.
A change in control of DigitalGlobe may have occurred on April 8, 1999
in connection with this recapitalization. ITT Industries, Morgan Stanley, and
Capital Research may be deemed to have acquired control of DigitalGlobe through
the acquisitions by ITT Industries of 7,142,857 shares of Series A preferred
stock in exchange for $25 million, by Morgan Stanley 4,285,714 shares of Series
B preferred stock and one share of common stock in exchange for $15 million, and
by Capital Research of 2,857,143 shares of Series B preferred stock in exchange
for $10 million. As of February 28, 2002, ITT Industries held 20.7%, Morgan
Stanley held 28.0%, and Capital Research held 15.0% of our total voting power.
2001 RECAPITALIZATION
On February 28, 2001, as required by the indentures governing the notes
and our then-outstanding 12 1/2% Senior Notes due 2005, we offered to purchase
all of our outstanding notes and 12 1/2% notes at their accreted value on the
date of purchase, using the insurance proceeds relating to the loss of our first
QuickBird satellite. The offer expired on April 2, 2001, and we repurchased
$127.4 million in principal amount at maturity of the outstanding notes and all
outstanding 12 1/2% notes on April 3, 2001. The combined repurchase price
totaled $172.9 million.
In connection with the offer, we entered into the Recapitalization
Agreement on April 2, 2001 with certain holders of the notes. Pursuant to the
Recapitalization Agreement, these holders agreed to refrain from tendering their
notes in the offer, thus allowing us to have the use of the funds that would
otherwise be used to repurchase their notes.
On April 3, 2001, pursuant to the Recapitalization Agreement, we
entered into:
. a Pledge Agreement, pursuant to which we agreed to pledge to the
trustee for the notes, for the benefit of the holders of the notes,
United States government securities in an amount equal to the
aggregate accreted value of all outstanding notes on August 1, 2001;
. a Notes Registration Rights Agreement, which provides certain
registration rights to Morgan Stanley's transferees for the notes
that Morgan Stanley held at the time of the recapitalization, and
requires us to maintain current a market-making prospectus for
Morgan Stanley with respect to the notes; and
. a Series C Preferred Registration Rights Agreement, which provides
certain registration rights with respect to shares of our common
stock issuable upon conversion of the shares of Series C preferred
stock to be issued pursuant to the Recapitalization Agreement.
50
Pursuant to the Recapitalization Agreement, we obtained the consent of
the holders of notes and amended the indenture governing the notes on April 16,
2001 to require us to:
. obtain launch and in-orbit operations insurance for our QuickBird
satellite; and
. offer to repurchase the notes at their accreted value on the date of
repurchase (1) if all of the contemplated transactions under the
Recapitalization Agreement are not completed by June 15, 2001,
consummating this offer no later than August 1, 2001, and (2) if an
insurable event occurs under the QuickBird insurance policy,
consummate this offer no later than 60 days after it begins.
As required by the Recapitalization Agreement, we also:
. obtained $9 million of vendor financing from Ball Aerospace;
. amended our certificate of incorporation to, among other things, (1)
require that we purchase, at each holder's option, that holder's
shares of our Series A and B preferred stock, if an insurable event
occurs under the QuickBird insurance policy, (2) increase the number
of authorized shares of our common stock and each series of our
preferred stock, and (3) extend the time period by one year during
which holders of our preferred stock may convert their shares into
shares of our common stock;
. issued an aggregate of 10,843,297 additional shares of our Series C
preferred stock to the holders of the notes that signed the
Recapitalization Agreement and their assignees;
. purchased launch and in-orbit insurance for our QuickBird satellite;
and
. pledged the QuickBird insurance in favor of The Bank of New York, as
collateral agent for (a) the holders of notes and for Ball
Aerospace, and (b) the holders of our Series A preferred stock and
Series B preferred stock.
The foregoing description is qualified in its entirety by the terms and
conditions of the Recapitalization Agreement, the Notes Registration Rights
Agreement, the Series C Preferred Registration Rights Agreement, the Pledge
Agreement, the Certificate of Amendment to our certificate of incorporation, the
Senior Collateral Pledge and Security Agreement and the Junior Collateral Pledge
and Security Agreement, in each case including the exhibits and schedules
thereto, each of which agreements is filed as an exhibit to the registration
statement of which this prospectus forms a part.
See "Description of capital stock" for a description of the terms of
the new Series A, Series B, and Series C preferred stock issued in the 1999
recapitalization, as amended in the 2001 recapitalization, and for a description
of the stockholders' agreement. See "Form of notes" and "Description of the
notes" for a description of the terms of the notes.
51
DESCRIPTION OF MATERIAL INDEBTEDNESS
BALL AEROSPACE CREDIT AGREEMENT
In April 2001, we entered into a $9.0 million credit agreement with
Ball Aerospace which we used to fund the completion of our second QuickBird
satellite. This agreement accrues interest at an annual rate of 11%, which
becomes payable seven months following the launch of our QuickBird satellite.
Beginning in June 2002 and ending in April 2003, principal, in equal monthly
amounts, and interest are payable in cash each month.
We were permitted to borrow funds under the agreement from time to time
until the date that Ball Aerospace tendered to us the QuickBird satellite, but
only to the extent that such funds were due and payable under the contract for
construction of the satellite. We may prepay all or part of any loan under the
agreement at any time without penalty. In addition, we must generally prepay a
portion of our outstanding borrowings under the agreement if we dispose of any
assets that constitute collateral under the agreement or if we receive insurance
proceeds under the launch or, under certain circumstances, pre-launch insurance
policies. Furthermore, we must prepay all outstanding borrowings under the
agreement if we undergo a change of control.
Our obligations under the agreement, together with the notes, are
secured by the insurance policies for our QuickBird satellite launch and
operations, as well as transit and pre-launch insurance that we have obtained
for that satellite. See "Recapitalizations - 2001 Recapitalization." In
addition, we have granted a first priority security interest to Ball Aerospace
in our QuickBird satellite and associated property delivered by Ball and their
proceeds.
The agreement limits the existence of liens on the collateral
thereunder, and also limits our ability to enter into merger and consolidation
transactions, enter into certain intercompany encumbrances and restrictions,
change our places of business or our legal name, enter into transactions with
our affiliates, dispose of collateral, pay dividends and make distributions.
In conjunction with this agreement, we issued to Ball Aerospace 903,608
shares of Series C preferred stock in June 2001. See "Recapitalizations - 2001
Recapitalization." As of December 31, 2001, we had borrowed the full amount
available under this facility.
13% SENIOR DISCOUNT NOTES
Notes with a principal amount at maturity of approximately $71.7
million are outstanding. For a description of the terms of the notes, see "Form
of the notes" and "Description of notes."
COMMITMENT FROM BOEING CAPITAL SERVICES CORPORATION
In February 2001, we secured a commitment for a $20.75 million
borrowing facility with Boeing Capital Services Corporation. If drawn, the
facility would accrue interest at LIBOR plus 4% to 6%, depending upon the
duration of the borrowing. The commitment is subject to the negotiation and
execution of a credit agreement and DigitalGlobe having $125 million of
contractually committed orders or some form of facility guarantee in place. As
we have not yet met these requirements, these funds are not currently available.
The facility is available through September 30, 2002, will have a two and a half
year term and has an annual commitment fee of 50 basis points payable quarterly
in arrears. At December 31, 2001, we had incurred deferred financing costs of
approximately $500,000 related to this facility.
52
FORM OF NOTES
The certificates representing the notes were issued in fully registered
form, without coupons. Except as described in the next paragraph, the notes have
been deposited with The Bank of New York, as custodian for DTC, and registered
in the name of Cede & Co., as DTC's nominee, in the form of one or more global
notes. Holders of the notes own book-entry interests in the global note
evidenced by records maintained by DTC.
Book-entry interests may be exchanged for certificated notes of like
tenor and equal aggregate principal amount if:
(1) DTC notifies us that it is unwilling or unable to continue
as depositary or we determine that DTC is unable to
continue as depositary and we fail to appoint a successor
depositary within 90 days;
(2) we provide for the exchange pursuant to the terms of the
indenture; or
(3) we determine that the book-entry interests will no longer
be represented by global notes and we execute and deliver
to the trustee under the indenture instructions to that
effect.
As of the date of this prospectus, no certificated notes are issued and
outstanding.
53
DESCRIPTION OF THE NOTES
We issued the notes under an indenture between our company, as issuer,
and The Bank of New York, as trustee (the "Trustee"). The following is a summary
of the material provisions of the indenture. For a complete statement of the
terms, we refer you to the indenture, which is filed as an exhibit to the
registration statement of which this prospectus is a part. Certain provisions of
the indenture are made a part thereof by the Trust Indenture Act of 1939, as
amended. Definitions or particular terms in the indenture supplement this
summary. For definitions of certain capitalized terms used in the following
summary, see "--Certain definitions" below.
GENERAL
The notes are unsecured (except to the extent described under
"--Security" below), unsubordinated obligations of our company, which have an
aggregate principal amount at maturity of $1,000 per note, and will mature on
July 15, 2007. Interest on the notes accrues at the rate of 13% per annum and is
payable semiannually in arrears (to holders of record at the close of business
on January 1 or July 1 immediately preceding the Interest Payment Date) on
January 15 and July 15 of each year. Accrual of cash interest does not begin
until July 15, 2002 and payment of interest does not begin until January 15,
2003. Interest is computed on the basis of a 360-day year of twelve 30-day
months. The notes were issued at a discount of $684.61 per $1,000 of principal
amount at maturity.
The principal, interest, and premium, if any, on the notes is payable,
and the notes may be exchanged or transferred, at the office or agency of our
company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at 101 Barclay Street, Floor 21
West, New York, New York 10286; Attention: Corporate Trust Trustee
Administration); provided that, at our option, payment of interest may be made
by check mailed to the holders at their addresses as they appear in the security
register maintained by the Trustee.
The notes were issued only in fully registered form, without coupons,
in denominations of $1,000 of principal amount at maturity or any integral
multiple thereof. No service charge was made for any registration of transfer of
notes, but we may require payment of a sum sufficient to cover any transfer tax
or other similar governmental charge payable in connection therewith.
The notes were originally issued as a part of a unit, consisting of one
note with a principal amount at maturity of $1,000 and 49.095 shares of Series C
cumulative convertible redeemable preferred stock. Each share of Series C
preferred stock entitles its holder to purchase one share of common stock, par
value $.001, of DigitalGlobe. The note and shares of Series C preferred stock
included in each unit automatically became separately transferable on January
12, 2000.
OPTIONAL REDEMPTION
We can redeem the notes at our option, in whole or in part, at any time
or from time to time, on or after July 15, 2004 and prior to maturity. The notes
may be redeemed at the redemption prices, expressed in percentages of principal
amount at maturity, set forth below, plus accrued and unpaid interest to the
redemption date, if redeemed during the 12-month period commencing July 15 of
the years set forth below. Our right of redemption is subject to the rights of
holders of record on the relevant regular record date that is on or prior to the
redemption date to receive interest due on an interest payment date.
Year Redemption Price
- ---- ----------------
2004......................................................... 106.500%
2005......................................................... 104.333%
2006......................................................... 102.167%
2007......................................................... 100.000%
SELECTION AND NOTICE OF REDEMPTION
To redeem the notes, we must give the holder not less than 30 nor more
than 60 days' prior notice, which we must mail to the holder by first class mail
to the holder's last address as it appears in the security register.
In the case of any partial redemption, the Trustee will select the
notes for redemption:
. in compliance with the requirements of the principal national
securities exchange, if any, on which the notes are listed, or
54
. if the notes are not listed on a national securities exchange, on a
pro rata basis, by lot or by such other method as the Trustee in its
sole discretion will deem to be fair and appropriate.
No note of $1,000 in principal amount at maturity or less will be
redeemed in part. If any note is to be redeemed in part only, the notice of
redemption relating to such note will state the portion of the principal amount
of such note to be redeemed. A note in principal amount equal to the unredeemed
portion will be issued in the name of the holder thereof upon cancellation of
the original note.
SINKING FUND
There are no sinking fund payments for the notes.
REGISTRATION RIGHTS
On August 11, 2000, we exchanged all originally-issued notes for new
notes, the terms of which are identical to the originally-issued notes (except
that the new notes do not bear legends restricting the transfer thereof or
provide for registration rights or additional interest). When the exchange offer
was completed, our original obligation to register or exchange notes terminated.
On April 3, 2001, in connection with our recapitalization transactions,
we agreed to effect a registration with respect to certain outstanding notes
then held by Morgan Stanley. We subsequently effected this registration.
RANKING
The Indebtedness evidenced by the notes ranks equally in priority of
payment with all present and future unsubordinated indebtedness of our company,
and senior in right of payment to all existing and future subordinated
indebtedness of our company. In addition, all existing and future liabilities,
including trade payables and indebtedness, including any subordinated
indebtedness, of our subsidiaries and all of our secured indebtedness will be
effectively senior to the notes. We and our subsidiaries may incur substantial
additional Indebtedness, including secured Indebtedness, under the indenture.
SECURITY
Pledge Agreement
In April 2001, we executed a Pledge Agreement that provided the Trustee
with an interest in U.S. government securities securing a portion of the
premiums for the QuickBird Launch Insurance. The collateral under this agreement
was used for the designated purpose of paying the QuickBird Launch Insurance
premiums that were due before launch of our QuickBird satellite. Accordingly,
the notes are no longer secured by any collateral under this agreement.
55
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in
the covenants and other provisions of the indenture.
56
"Accreted Value" means, for any Specified Date, the amount provided
below for each $1,000 principal amount at maturity of notes:
(1) if the Specified Date occurs on one of the following
semiannual dates, the Accreted Value will equal the amount set
forth below for such semiannual accrual date:
Semiannual Accrual Date Accreted Value
- ----------------------- --------------
January 15, 2000.............................................. $ 729.88
July 15, 2000................................................. $ 777.32
January 15, 2001.............................................. $ 827.24
July 15, 2001................................................. $ 881.65
January 15, 2002.............................................. $ 938.96
July 15, 2002................................................. $1,000.00
(2) if the Specified Date occurs before the first semiannual
accrual date, the Accreted Value will equal the sum of
(a) $684.61, and
(b) an amount equal to the product of:
(1) the Accreted Value for the first semiannual accrual
date less $684.61 multiplied by
(2) a fraction, the numerator of which is the number of
days from the Closing Date to the Specified Date,
using a 360-day year of twelve 30-day months, and the
denominator of which is the number of days from the
Closing Date to the first semiannual accrual date,
using a 360-day year of twelve 30-day months;
(3) if the Specified Date occurs between two semiannual accrual
dates, the Accreted Value will equal the sum of:
(a) the Accreted Value for the semiannual accrual date
immediately preceding such Specified Date, and
(b) an amount equal to the product of:
(1) the Accreted Value for the immediately following
semiannual accrual date less the Accreted Value for
the immediately preceding semiannual accrual date
multiplied by
(2) a fraction, the numerator of which is the number of
days from the immediately preceding semiannual
accrual date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of
which is 180; or
(4) if the Specified Date occurs after the last semiannual accrual
date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the
time such Person becomes a Subsidiary of DigitalGlobe or assumed in connection
with an Asset Acquisition by a Subsidiary of DigitalGlobe and not incurred in
connection with, or in anticipation of, such Person becoming a Subsidiary of
DigitalGlobe or such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate
net income or loss of DigitalGlobe and its Subsidiaries for such period
determined in conformity with GAAP. However, the following items are excluded in
computing Adjusted Consolidated Net Income:
(1) the net income of any Person, other than net income attributable
to a Subsidiary, in which any Person other than DigitalGlobe or
any of its Subsidiaries has a joint interest, except to the extent
of the amount of dividends or other distributions actually paid to
DigitalGlobe or any of its Subsidiaries by such other Person
during such period;
(2) except to the extent includable under clause (1) above, the net
income or loss of any Person accrued prior to the date it becomes
a Subsidiary or is merged into or consolidated with DigitalGlobe
or any of its Subsidiaries or all or substantially all of the
property and assets of such person are acquired by DigitalGlobe or
any of its Subsidiaries;
(3) the net income of any Subsidiary (determined by excluding income
resulting from transfer of assets by DigitalGlobe or a Subsidiary
to another Subsidiary) to the extent that the declaration or
payment of dividends or similar distributions by such Subsidiary
of such net income is not at the time permitted by the operation
of the terms of its
57
charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such
Subsidiary;
(4) any gains or losses, on an after-tax basis, attributable to Asset
Sales; and
(5) all extraordinary gains and extraordinary losses.
Calculations for the purpose of determining Adjusted Consolidated Net Income
shall be made without giving effect to (a) the amortization of any expenses
incurred in connection with the offering of the notes and (b) except as
otherwise provided, the amortization of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17.
"Affiliate" means, as applied to any Person, any other Person directly
or indirectly controlling, controlled by, or under direct or indirect common
control with such Person. For purposes of this definition, "control" and the
correlative meanings of the terms "controlling," "controlled by," and "under
common control with," as applied to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting securities,
by contract, or otherwise.
"ASSET ACQUISITION" MEANS:
(1) an investment by DigitalGlobe or any of its Subsidiaries in any
other Person pursuant to which such Person becomes a Subsidiary of
DigitalGlobe or is merged into or consolidated with DigitalGlobe
or any of its Subsidiaries; provided that such Person's primary
business is related, ancillary, or complementary to the businesses
of DigitalGlobe and its Subsidiaries on the date of such
investment; or
(2) an acquisition by DigitalGlobe or any of its Subsidiaries of the
property and assets of any Person other than DigitalGlobe or any
of its Subsidiaries that constitute substantially all of a
division or line of business of such Person; provided that the
property and assets acquired are related, ancillary, or
complementary to the businesses of DigitalGlobe and its
Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by DigitalGlobe
or any of its Subsidiaries (other than to DigitalGlobe or to one of its
Subsidiaries) of:
(1) all or substantially all of the Capital Stock of any of
DigitalGlobe's Subsidiaries; or
(2) all or substantially all of the assets that constitute a division
or line of business of DigitalGlobe or any of its Subsidiaries.
"Asset Sale" means any sale, transfer, or other disposition, including
by way of merger, consolidation, or sale-leaseback transaction, in one
transaction or a series of related transactions by DigitalGlobe or any of its
Subsidiaries to any Person other than DigitalGlobe or any of its Subsidiaries
of:
(1) all or any of the Capital Stock of any Subsidiary;
(2) all or substantially all of the property and assets of an
operating unit or business of DigitalGlobe or any of its
Subsidiaries; or
(3) any other property and assets of DigitalGlobe or any of its
Subsidiaries outside the ordinary course of business of
DigitalGlobe or such Subsidiary, and,
in each case, that is not governed by the provisions of the indenture applicable
to mergers, consolidations, and sales of assets of DigitalGlobe. For purposes of
this definition, "Asset Sale" does not include:
(1) sales or other dispositions of inventory, receivables, and other
current assets; or
(2) sales or other dispositions of assets for consideration at least
equal to the fair market value of the assets sold or disposed of.
"Average Life" means, at any date of determination with respect to any
debt security, the quotient obtained by dividing:
(1) the sum of the products of:
58
(a) the number of years from such date of determination to the
dates of each successive scheduled principal payment of such
debt security; and
(b) the amount of such principal payment by
(2) the sum of all such principal payments.
"Capitalized Lease Obligations" means the discounted present value of
the rental obligations under a Capitalized Lease.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, or other equivalents, however designated, whether
voting or non-voting, in equity of such Person, whether outstanding on or issued
after the Closing Date, including all common stock and preferred stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property, whether real, personal, or mixed, of which the discounted present
value of the rental obligations of such person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Change of Control" means such time as:
(1) a "person" or "group" within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act, other than the Permitted Holders, in
each case together with their respective Affiliates, becomes the
ultimate "beneficial owner" as defined in Rule 13d-3 under the
Exchange Act, of more than 35% of the total voting power of the
Voting Stock of DigitalGlobe on a fully diluted basis and such
ownership is greater than the amount of voting power of the Voting
Stock of DigitalGlobe, on a fully diluted basis, held by the
Permitted Holders and their respective Affiliates on such date; or
(2) individuals who on the Closing Date constitute the board of
directors of DigitalGlobe, together with any new directors whose
election by the board of directors or whose nomination by the
board of directors for election by DigitalGlobe's stockholders was
either (a) approved by a vote of at least two-thirds of the
members of the board of directors then in office who either were
members of the board of directors on the Closing Date or whose
election or nomination for election was previously so approved or
(b) implemented under the "Composition of the Board" provision of
the Stockholders' Agreement, cease for any reason to constitute a
majority of the members of the board of directors of DigitalGlobe
then in office.
"Charter Amendments" means the amendment of the Company's Certificate
of Incorporation, substantially in the form attached to the Recapitalization
Agreement as Exhibit G.
"Closing Date" means July 12, 1999, the actual date on which the
original notes were issued under the indenture.
"Collateral" means:
(1) with respect to the Pledge Agreement, the Government Securities
and the other collateral described in the Pledge Agreement; and
(2) with respect to the Pledge and Security Agreement, the QuickBird
Launch Insurance and the other collateral described in the Pledge
and Security Agreement.
"Collateral Trustee" means:
(1) with respect to the Pledge Agreement, the Trustee or any successor
or substitute collateral trustee for the Collateral under the
Pledge Agreement acting as such for itself and the holders of the
notes; and
(2) with respect to the Pledge and Security Agreement, the Trustee or
any successor or substitute collateral trustee for the Collateral
under the Pledge and Security Agreement acting as such for itself,
the holders of the notes and the holder(s) of the Vendor
Financing.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income:
59
(1) Consolidated Interest Expense;
(2) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or
losses or sales of assets);
(3) depreciation expense;
(4) amortization expense; and
(5) all other non-cash items reducing Adjusted Consolidated Net Income
(other than items that will require cash payments and for which an
accrual or reserve is, or is required by GAAP to be, made), less
all non-cash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for DigitalGlobe and its
Subsidiaries in conformity with GAAP; provided that, if any
Subsidiary of DigitalGlobe is not a Wholly Owned Subsidiary,
Consolidated EBITDA will be reduced (to the extent not otherwise
reduced in accordance with GAAP) by an amount equal to (A) the
amount of the Adjusted Consolidated Net Income attributable to
such Subsidiary multiplied by (B) the percentage ownership
interest in the income of such Subsidiary not owned on the last
day of such period by DigitalGlobe or any of its Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate
amount of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts, and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by DigitalGlobe or any of its
Subsidiaries) and all but the principal component of rentals in respect of
Capitalized Lease Obligations paid, accrued, or scheduled to be paid or to be
accrued by DigitalGlobe and its Subsidiaries during such period; excluding,
however:
(1) any amount of such interest of any Subsidiary of DigitalGlobe if
the net income of such Subsidiary of DigitalGlobe is excluded in
the calculation of Adjusted Consolidated Net Income pursuant to
clause (3) of the definition thereof (but only in the same
proportion as the net income of such Subsidiary is excluded from
the calculation of Adjusted Consolidated Net Income pursuant to
clause (3) of the definition thereof); and
(2) any premiums, fees, and expenses (and any amortization thereof)
payable in connection with the offering of the notes and Series C
preferred stock, all as determined on a consolidated basis
(without taking into account the Subsidiaries of DigitalGlobe) in
conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio
of:
(1) the aggregate amount of Indebtedness of DigitalGlobe and its
Subsidiaries on a consolidated basis outstanding on such
Transaction Date to:
(2) the aggregate amount of Consolidated EBITDA for the then most
recent four fiscal quarters for which financial statements of
DigitalGlobe have been filed with the SEC or provided to the
Trustee pursuant to the "SEC reports and reports to holders"
covenant described below (such four fiscal quarter period being
the "Four Quarter Period"); provided that, in making the foregoing
calculation:
(A) pro forma effect will be given to any Indebtedness to be
Incurred or repaid on the Transaction Date;
(B) pro forma effect will be given to Asset Dispositions and
Asset Acquisitions (including giving pro forma effect to the
application of proceeds of any Asset Disposition) that occur
from the beginning of the Four Quarter Period through the
Transaction Date (the "Reference Period"), as if they had
occurred and such proceeds had been applied on the first day
of such Reference Period; and
(C) pro forma effect will be given to asset dispositions and
asset acquisitions (including giving pro forma effect to
the application of proceeds of any asset disposition) that
have been made by any Person that has become a Subsidiary
of DigitalGlobe or has been merged with or into
DigitalGlobe or any of its Subsidiaries during such
Reference Period and that would have constituted Asset
Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions
or Asset Acquisitions that occurred on the first day of
such Reference Period; provided that to the extent that
clause (B) or (C) of this sentence requires that pro forma
effect be given to an Asset Acquisition or Asset
Disposition, such pro forma calculation shall be based upon
the four full fiscal
60
quarters immediately preceding the Transaction Date of the
Person, division, or line of business of the Person, that
is acquired or disposed of for which financial information
is available.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect
DigitalGlobe or any of its Subsidiaries against fluctuations in currency values.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"fair market value" means the price that would be paid in an
arm's-length transaction between an informed and willing seller under no
compulsion to sell and an informed and willing buyer under no compulsion to buy,
as determined in good faith by the board of directors, whose determination shall
be conclusive if evidenced by a board resolution; provided that for purposes of
clause (viii) of the second paragraph of the "Limitation on Indebtedness"
covenant, (x) the fair market value of any security registered under the
Exchange Act will be the average of the closing prices, regular way, of such
security for the 20 consecutive trading days immediately preceding the sale of
Capital Stock and (y) in the event the aggregate fair market value of any other
property (other than cash or cash equivalents) received by DigitalGlobe exceeds
$10 million, the fair market value of such property will be determined by a
nationally recognized investment banking firm and set forth in their written
opinion which shall be delivered to the Trustee.
"First QuickBird Satellite" means the QuickBird spacecraft manufactured
under the contract dated June 9, 1998, between Ball Aerospace and DigitalGlobe,
for the QuickBird spacecraft number SE.IM.PRJ.0004.A, including amendments and
exhibits attached thereto, and related attached components and equipment.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Closing Date, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations contained or referred
to in the indenture will be computed in conformity with GAAP applied on a
consistent basis.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any other Person
and, without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person:
(1) to purchase or pay, or to advance or supply funds for the purchase
or payment of, such Indebtedness or other obligation of such other
Person, whether arising by virtue of partnership arrangements, or
by agreements to keep-well, to purchase assets, goods, securities,
or services, to take-or-pay, or to maintain financial statement
conditions or otherwise; or
(2) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness or other obligation of the payment
thereof or to protect such obligee against loss in respect
thereof, in whole or in part, or other obligation in whole or in
part.
However, the term "Guarantee" does not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee, or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an "Incurrence" by means of the acquisition of more than
50% of the Capital Stock of any Person; provided that neither the accrual of
interest nor the accretion of original issue discount will be considered an
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination without duplication:
(1) all indebtedness of such Person for borrowed money;
(2) all obligations of such Person evidenced by bonds, debentures,
notes, or other similar instruments;
(3) all obligations of such Person in respect of letters of credit or
other similar instruments, including reimbursement obligations
with respect thereto, but excluding obligations with respect to
letters of credit, including trade letters of credit, securing
obligations, other than obligations described in (1) or (2) above
or (5), (6), or (7) below, entered into in the ordinary course of
business of such Person to the extent such letters of credit are
not drawn upon or, if drawn
61
upon, to the extent such drawing is reimbursed no later than the
third business day following receipt by such Person of a demand
for reimbursement;
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is
due more than six months after the date of placing such property
in service or taking delivery and title thereto or the completion
of such services, except Trade Payables;
(5) all obligations of such Person under a Capitalized Lease;
(6) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by
such Person, but the amount of such Indebtedness will be the
lesser of the fair market value of such asset at such date of
determination and the amount of such Indebtedness;
(7) all Indebtedness of other Persons Guaranteed by such Person to the
extent such Indebtedness is Guaranteed by such Person; and
(8) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate
Agreements.
The amount of Indebtedness of any Person at any date will be the
outstanding balance at such date or, in the case of a revolving credit or other
similar facility, the total amount of funds outstanding and/or available on the
date of determination, of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation. However:
(1) the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness
less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in
conformity with GAAP, and
(2) Indebtedness will not include any liability for federal, state,
local, or other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, or other similar agreement or arrangement
designed to protect DigitalGlobe or any of its Subsidiaries against fluctuations
in interest rates in respect of Indebtedness to or under which DigitalGlobe or
any of its Subsidiaries is a party or a beneficiary on the Closing Date or
becomes a party or a beneficiary thereafter, so long as the notional principal
amount of any Interest Rate Agreement does not exceed the principal amount of
the Indebtedness of DigitalGlobe and its Subsidiaries that bears interest at
floating rates.
"Investment" in any Person means:
(1) any direct or indirect advance, loan, or other extension of
credit, including by way of Guarantee or similar arrangement, but
excluding advances to customers in the ordinary course of business
that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of DigitalGlobe or its Subsidiaries; or
(2) any capital contribution by means of any transfer of cash or other
property to others or any payment for property or services for the
account or use of others to, or any purchase or acquisition of
Capital Stock, bonds, notes, debentures, or other similar
instruments issued by such Person.
The term "Investment" also includes the fair market value of the Capital Stock
or any other Investment held by DigitalGlobe or any of its Subsidiaries of or in
any Person that has ceased to be a Subsidiary.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien, or charge of any kind, including any conditional sale or other title
retention agreement or lease in the nature of a security interest or any
agreement to give any security interest.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means:
(1) with respect to any Asset Sale, the proceeds of such Asset Sale in
the form of cash or cash equivalents, including
62
payments in respect of deferred payment obligations, to the extent
corresponding to the principal, but not interest, component of
such obligations, when received in the form of cash or cash
equivalents, except to the extent such obligations are financed or
sold with recourse to DigitalGlobe or any Subsidiary, and proceeds
from the conversion of other property received when converted to
cash or cash equivalents, net of:
(a) brokerage commissions and other fees and expenses related to
such Asset Sale, including fees and expenses of counsel and
investment bankers;
(b) provisions for all taxes, whether or not such taxes will
actually be paid or are payable, as a result of such Asset
Sale without regard to the consolidated results of operations
of DigitalGlobe and its Subsidiaries, taken as a whole;
(c) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either is
secured by a Lien on the property or assets sold, or is
required to be paid as a result of such sale; and
(d) appropriate amounts to be provided by DigitalGlobe or any
Subsidiary as a reserve against any liabilities associated
with such Asset Sale, including pension and other
post-employment benefit liabilities, liabilities related to
environmental matters, and liabilities under any
indemnification obligations associated with such Asset Sale,
all as determined in conformity with GAAP; and
(2) with respect to any issuance or sale of Capital Stock, the
proceeds of such issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment
obligations, to the extent corresponding to the principal, but not
interest, component of such obligations, when received in the form
of cash or cash equivalents, except to the extent such obligations
are financed or sold with recourse to DigitalGlobe or any of its
Subsidiaries, and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of
attorneys' fees, accountants' fees, underwriters' or placement
agents' fees, discounts or commissions and brokerage, consultant
and other fees incurred in connection with such issuance or sale,
and net of taxes paid or payable as a result of such conversion.
"Offer to Purchase" means an offer to purchase notes by DigitalGlobe from
the holders of the notes commenced by mailing a notice to the Trustee and each
such holder, stating that:
(1) all notes validly tendered will be accepted for payment;
(2) the purchase price and the applicable payment date;
(3) any note not tendered will continue to accrue interest, or
original issue discount, pursuant to its terms;
(4) unless DigitalGlobe defaults in the payment of the purchase price,
any note accepted for payment pursuant to the Offer to Purchase
will cease to accrue interest, or original issue discount, on and
after the applicable payment date;
(5) holders of notes electing to have a note purchased pursuant to the
Offer to Purchase will be required to surrender the note, together
with the form entitled "Option of the Holder to Elect Purchase" on
the reverse side of such note completed, to the paying agent at
the address specified in the notice, prior to the close of
business on the business day immediately preceding the applicable
payment date;
(6) holders of notes will be entitled to withdraw their election if
the paying agent receives, not later than the close of business on
the third business day immediately preceding such payment date, a
facsimile transmission or letter setting forth the name of such
holder, the principal amount of notes delivered for purchase and a
statement that such holder is withdrawing his election to have
such notes purchased; and
(7) holders of notes whose notes are being purchased only in part will
be issued notes equal in principal amount to the unpurchased
portion of the notes surrendered. For this purpose, each note
purchased and each note issued will have a principal amount at
maturity of $1,000 or an integral multiple of $1,000.
On the applicable payment date, DigitalGlobe will:
(1) accept for payment on an equal basis notes or portions of notes
tendered in response to an Offer to Purchase;
(2) deposit with the paying agent money sufficient to pay the purchase
price of all notes or portions of notes accepted;
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and
(3) deliver, or cause to be delivered, to the Trustee all notes or
portions of notes accepted, together with an officers' certificate
specifying the notes or portions thereof accepted for payment by
DigitalGlobe.
The paying agent will promptly mail to the holders of notes so accepted
payment in an amount equal to the purchase price, and the Trustee will promptly
authenticate and mail to such holders a note equal in principal amount to any
unpurchased portion of the note surrendered. However, each note purchased and
each note issued will have a principal amount at maturity of $1,000 or integral
multiples of $1,000. DigitalGlobe will publicly announce the results of an Offer
to Purchase as soon as practicable after the payment date. The Trustee will act
as the paying agent for an Offer to Purchase. DigitalGlobe will comply with Rule
14e-1 under the Exchange Act and any other securities laws and regulations under
the Exchange Act to the extent such laws and regulations are applicable, in the
event that DigitalGlobe is required to repurchase notes pursuant to an Offer to
Purchase.
"Permitted Holders" means Morgan Stanley & Co. Incorporated, American
High Income Trust, American Variable Insurance Series Asset Allocation Fund,
American Variable Insurance Series Bond Fund, American Variable Insurance
Series High- Yield Bond Fund, The Bond Fund of America, Inc., ITT Industries,
Inc., and Ball Technology Holdings Corp.
"Permitted Investment" means:
(1) an Investment in DigitalGlobe or a Subsidiary or a Person who
will, upon the making of such Investment, become a Subsidiary or
be merged or consolidated with or into or transfer or convey all
or substantially all its assets to DigitalGlobe or a Subsidiary;
provided that such Person's primary business is related,
ancillary, or complementary to the businesses of DigitalGlobe and
its Subsidiaries on the date of such Investment;
(2) Temporary Cash Investments;
(3) payroll, travel, and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as
expenses in accordance with GAAP;
(4) stock, obligations, or securities received in satisfaction of
judgments; and
(5) Investments in Currency Agreements and Interest Rate Agreements
permitted under the "Limitation on Indebtedness" covenant to the
extent that such Investments relate to actual obligations owed by
or owed to DigitalGlobe or any Subsidiary, and the face or
notional amount of such Investment does not exceed the amount of
the underlying obligation to which such Investment relates.
"Permitted Liens" means:
(1) Liens for taxes, assessments, governmental charges, or claims
that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted, and for
which a reserve or other appropriate provision, if any, as will
be required to be made to conform with GAAP will have been made;
(2) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or
other similar Liens arising in the ordinary course of business
and with respect to amounts not yet delinquent or being contested
in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or
other appropriate provision, if any, as will be required to be
made to conform with GAAP will have been made;
(3) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment
insurance, and other types of social security;
(4) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations,
bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds, and other
obligations of a similar nature incurred in the ordinary course
of business, exclusive of obligations for the payment of borrowed
money;
(5) easements, rights-of-way, municipal and zoning ordinances, and
similar charges, encumbrances, title defects, or other
irregularities that do not materially interfere with the ordinary
course of business of DigitalGlobe or any of its Subsidiaries;
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(6) Liens, including extensions and renewals, upon real or personal
property acquired after the Closing Date, so long as:
(a) any such Lien is created solely for the purpose of securing
Indebtedness incurred, in accordance with the "Limitation on
Indebtedness" covenant (1) to finance the cost, including
the cost of improvement or construction, of the item of
property or assets subject to such Lien and such Lien is
created prior to, at the time of, or within six months after
the latest of the acquisition, the completion of
construction, and the commencement of full operation of such
property, or (2) to refinance any indebtedness previously so
secured,
(b) the principal amount of the Indebtedness secured by such
Lien does not exceed 100% of such cost, and
(c) any such Lien will not extend to or cover any property or
assets other than such item of property or assets and any
improvements on such item;
(7) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of DigitalGlobe
and its Subsidiaries, taken as a whole;
(8) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of DigitalGlobe
or its Subsidiaries and that relate to such property or assets;
(9) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
(10) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(11) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person
becomes, or becomes a part of DigitalGlobe or any of its
Subsidiaries, so long as such Liens do not extend to or cover any
property or assets of DigitalGlobe or any such Subsidiary other
than the property or assets acquired;
(12) Liens in favor of DigitalGlobe or any of its Subsidiaries;
(13) Liens arising from the rendering of a final judgment or order
against DigitalGlobe or any of its Subsidiaries that does not
give rise to an Event of Default;
(14) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property and that
relate to such letters of credit and the products and proceeds of
such letters of credit;
(15) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection
with the importation of goods;
(16) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary
in the industry and incurred in the ordinary course of business,
in each case securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future
contracts, futures options, or similar agreements or arrangements
designed solely to protect DigitalGlobe or any of its
Subsidiaries from fluctuations in interest rates, currencies, or
the price of commodities;
(17) Liens arising out of conditional sale, title retention,
consignment, or similar arrangements for the sale of goods
entered into by DigitalGlobe or any of its Subsidiaries in the
ordinary course of business in accordance with the past practices
of DigitalGlobe and its Subsidiaries prior to the Closing Date;
(18) Liens on or sales of receivables;
(19) Liens, including any extensions or renewals of such Liens, so
long as any such extensions or renewals do not increase the
amount of the obligations secured by such Liens, existing on the
Closing Date;
(20) Liens granted after the Closing Date on any assets or capital
stock of DigitalGlobe or its Subsidiaries that are created in
favor of the holders of notes or a representative of such
holders;
(21) Liens with respect to the assets of a Subsidiary of DigitalGlobe
granted by such Subsidiary to DigitalGlobe or one of its Wholly
Owned Subsidiaries to secure Indebtedness owing to DigitalGlobe
or such other Subsidiary;
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(22) Liens securing Indebtedness which is incurred to refinance
secured Indebtedness, so long as such Liens do not extend to or
cover any property or assets of DigitalGlobe or any of its
Subsidiaries, other than the property or assets securing the
Indebtedness being refinanced; and
(23) any and all Liens granted under and in connection with the
Security Documents.
However, Permitted Liens shall not include any Liens on the QuickBird
satellite or the QuickBird Launch Insurance, except:
. in the case of Liens on the QuickBird Launch Insurance, Liens
thereon in favor of the Collateral Trustee under the Pledge and
Security Agreement or otherwise securing the notes or the Vendor
Financing, and Liens in favor of the collateral trustee under the
Junior Collateral Pledge and Security Agreement for the benefit of
the holders of the Series A Preferred Stock and Series B Preferred
Stock, provided such Liens shall be junior to the Liens in favor of
the Collateral Trustee under the Pledge and Security Agreement; and
. with respect to the QuickBird satellite,
(A) Liens described in clause (2) of the above definition,
(B) until the attachment of risk under the QuickBird Launch
Insurance, the retention or reservation of title to the
QuickBird satellite by Ball Aerospace under the terms of the
Vendor Financing,
(C) following the attachment of risk under the QuickBird Launch
Insurance, Liens to secure up to $9,000,000 principal amount
(plus accrued interest thereon) of Vendor Financing, and
(D) Liens in the proceeds (as defined in Section 9-306(1) of the
New York Uniform Commercial Code) from the disposition of the
QuickBird satellite, other than proceeds under the QuickBird
Launch Insurance, to secure up to $9,000,000 million principal
amount (plus accrued interest) of Vendor Financing.
"Person" means an individual, a corporation, a partnership, a limited
liability company, a joint venture, an association, a trust, an unincorporated
organization, or any other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
"Public Equity Offering" means an underwritten primary public offering
of common stock of DigitalGlobe pursuant to an effective registration statement
under the Securities Act.
"QuickBird 2 Launch Insurance" means launch and in-orbit operations
insurance in respect of the QuickBird 2 satellite, having the terms and
provisions described in Section 4.10(b) and being in form and substance
satisfactory to the Collateral Trustee under the Pledge and Security Agreement.
"Redeemable Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is:
(1) required to be redeemed on or prior to the Stated Maturity of the
notes;
(2) redeemable at the option of the holder of such class or series of
Capital Stock at any time prior to the Stated Maturity of the
notes; or
(3) convertible into or exchangeable for Capital Stock referred to in
(1) or (2) above or Indebtedness having a scheduled maturity
prior to the Stated Maturity of the notes.
However, any Capital Stock that constitutes Redeemable Stock only
because it gives the holders of such Capital Stock the right to require such
Person to repurchase or redeem such Capital Stock upon the occurrence of a
"change of control" occurring prior to the Stated Maturity of the notes will not
constitute Redeemable Stock if:
(1) the "change of control" provision applicable to such capital
stock is no more favorable to holders of such Capital Stock than
the provisions contained in the "Repurchase of notes upon a
Change of Control" covenant described below; and
(2) such Capital Stock, or the agreements or instruments governing
the redemption rights of such Capital Stock,
66
specifically provides that such Person will not repurchase or
redeem any such stock under such provision prior to
DigitalGlobe's repurchase of such notes as are required to be
repurchased under the "Repurchase of notes upon a Change of
Control" covenant described below.
"Restricted Payment," means any payment or other action taken, directly
or indirectly, by DigitalGlobe or any of its Subsidiaries whereby DigitalGlobe
or any of its Subsidiaries:
(1) declares or pays any dividend or makes any distribution on or
with respect to its Capital Stock, other than:
(a) dividends or distributions payable solely in shares of its
Capital Stock, other than Redeemable Stock, or in options,
warrants or other rights to acquire shares of such Capital
Stock, and
(b) pro rata dividends or distributions on common stock of
Subsidiaries of DigitalGlobe held by minority stockholders,
so long as such dividends do not in the aggregate exceed
the minority stockholders' proportional share of such
Subsidiaries' cumulative net income from the first day of
the fiscal quarter beginning immediately after the Closing
Date;
(2) purchases, redeems, retires, or otherwise acquires for value
(a) any shares of Capital Stock of DigitalGlobe, including
options, warrants, or other rights to acquire such shares
of Capital Stock held by any Person, or
(b) any shares of Capital Stock of a Subsidiary of
DigitalGlobe, including options, warrants, or other rights
to acquire such shares of Capital Stock, held by any
Affiliate of DigitalGlobe, other than an Affiliate that is
a Wholly Owned Subsidiary of DigitalGlobe, or held by any
holder, or any Affiliate of such holder, of 5% or more of
the Capital Stock of DigitalGlobe;
(3) makes any voluntary or optional principal payment, or voluntary
or optional redemption, repurchase, defeasance, or other
acquisition or retirement for value, of Indebtedness of
DigitalGlobe that is subordinated in right of payment to the
notes, other than the purchase, repurchase, or the acquisition of
Indebtedness in anticipation of satisfying a sinking fund
obligation, principal installment, or final maturity, in each
case due within one year of the date of acquisition; or
(4) makes any Investment in any Person, other than a Permitted
Investment.
The board of directors of DigitalGlobe will determine in good faith the amount
of any Restricted Payment, if such Restricted Payment is made in a form other
than in cash, and such determination will be conclusive.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Security Documents" means the Pledge Agreement and the Pledge and
Security Agreement.
"Significant Subsidiary" means, at any date of determination, any
Subsidiary of DigitalGlobe that, together with its Subsidiaries,
(1) for the most recent fiscal year of DigitalGlobe, accounted for
more than 10% of the consolidated revenues of DigitalGlobe and
its Subsidiaries, or
(2) as of the end of such fiscal year, was the owner of more than 10%
of the consolidated assets of DigitalGlobe and its Subsidiaries,
all as set forth on the most recently available consolidated
financial statements of DigitalGlobe for such fiscal year.
"Specified Date" means (1) any payment date with respect to an Offer to
Purchase the notes upon a Change of Control, (2) any payment date with respect
to an Offer to Purchase upon an insurance proceeds payment, (3) any redemption
date with respect to an optional redemption of the notes, or (4) any date on
which the notes are due and payable after an Event of Default.
"Stated Maturity" means:
(1) with respect to any debt security, the date specified in such
debt security as the fixed date on which the final installment of
principal of such debt security is due and payable, and
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(2) with respect to any scheduled installment of principal of or
interest on any debt security, the date specified in such debt
security as the fixed date on which such installment is due and
payable.
"Strategic Subordinated Indebtedness" means Indebtedness of
DigitalGlobe Incurred to finance the acquisition of a Person engaged in a
business that is related, ancillary, or complementary to the business conducted
by DigitalGlobe or any of its Subsidiaries, which Indebtedness by its terms, or
by the terms of any agreement or instrument pursuant to which such Indebtedness
is Incurred:
(1) is expressly made subordinate in right of payment to the notes;
and
(2) provides that no payment of principal, premium, or interest on,
or any other payment with respect to, such Indebtedness may be
made prior to the payment in full of all of DigitalGlobe's
obligations under the notes;
provided that such Indebtedness may provide for and be repaid at
any time from the proceeds of a capital contribution or the sale
of Capital Stock (other than Redeemable Stock) of DigitalGlobe
after the Incurrence of such Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
associati on, or other business entity of which more than 50% of the voting
power of the outstanding Voting Stock is owned, directly or indirectly, by such
Person and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following:
(1) direct obligations of the United States of America or any of its
agencies, or obligations fully and unconditionally guaranteed by
the United States of America or any of its agencies;
(2) time deposit accounts, certificates of deposit, and money market
deposits maturing within one year of the date of their
acquisition and issued by a bank or trust company which is
organized under the laws of the United States of America, any
state, or any foreign country recognized by the United States of
America, which bank or trust company has capital, surplus, and
undivided profits aggregating in excess of $50 million, or the
foreign currency equivalent of $50 million, and has outstanding
debt which is rated "A", or such similar equivalent rating or
higher by at least one nationally recognized statistical rating
organization, as defined in Rule 436 under the Securities Act, or
any money-market fund sponsored by a registered broker dealer or
mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in (1) above, which
obligations are entered into with a bank meeting the
qualifications described in (2) above;
(4) commercial paper, maturing not more than 90 days after the date
of acquisition, issued by a corporation, other than an Affiliate
of DigitalGlobe, organized and in existence under the laws of the
United States of America, any state, or any foreign country
recognized by the United States of America with a rating, at the
time as of which any investment is made, of "P-1" or higher
according to Moody's, or "A-1" or higher according to S&P; and
(5) securities with maturities of six months or less from the date of
acquisition that are issued or fully and unconditionally
guaranteed by any state, commonwealth, or territory of the United
States of America, or by any of their political subdivisions or
taxing authorities, and rated at least "A" by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts
payable or any other indebtedness or monetary obligation to trade creditors
created, assumed, or Guaranteed by such Person or any of its Subsidiaries
arising in the ordinary course of business in connection with the acquisition of
goods or services.
"Transaction Date" means the date on which any Restricted Payment is to
be made.
"Vendor Financing" means the financing to be provided by Ball
Technologies & Aerospace Corp. to DigitalGlobe in a principal amount not less
than $9 million for the construction and launch of the QuickBird 2 satellite on
substantially the terms set forth on Exhibit A to the Recapitalization
Agreement.
"Voting Stock" means, with respect to any person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers, or other voting members of the governing body of such Person.
68
"Wholly Owned" means, with respect to any Subsidiary of any Person,
the ownership of all of the outstanding Capital Stock of such Subsidiary,
other than any director's qualifying shares or Investments by foreign
nationals mandated by applicable law, by such Person or one or more Wholly
Owned Subsidiaries of such Person.
COVENANTS
SUMMARY
In the indenture, DigitalGlobe has agreed to certain restrictions
that limit its and its Subsidiaries' ability, among other things, to:
. incur additional debt;
. pay dividends;
. repurchase capital stock or subordinated indebtedness;
. make investments;
. incur liens; and
. engage in sale-leaseback transactions.
If a Change of Control occurs, DigitalGlobe must commence, within 30
days, and consummate an Offer to Repurchase all notes at a price equal to 101%
of their Accreted Value on the date of purchase, plus accrued interest, if
any, to that date.
If and to the extent that the Trustee receives insurance proceeds on
the QuickBird 2 Launch Insurance, DigitalGlobe must commence, within 30 days,
and consummate an Offer to Repurchase all notes, up to each holder's (and the
holders' of the Vendor Financing) ratable portion of the insurance proceeds,
at a price equal to 100% of the Accreted Value of the notes on the date of
purchase, plus any accrued interest to that date. See "Covenants - Repurchase
of notes upon an insurance proceeds payment."
LIMITATION ON INDEBTEDNESS
(a) DigitalGlobe will not, and will not permit any of its
Subsidiaries to, Incur any Indebtedness (other than the notes and Indebtedness
existing on the Closing Date); provided that DigitalGlobe may Incur
Indebtedness if, after giving effect to the Incurrence of such Indebtedness
and the receipt and application of the proceeds from such Indebtedness, the
Consolidated Leverage Ratio would be greater than zero and less than 5:1.
Notwithstanding this limitation, DigitalGlobe and any of its
Subsidiaries (except as specified below) may incur each and all of the
following types of Indebtedness:
(1) Indebtedness outstanding at any time in an aggregate principal
amount not to exceed $100 million;
(2) Indebtedness owed (A) to DigitalGlobe evidenced by a promissory
note or (B) to any Subsidiary of DigitalGlobe; provided that any
event which results in any such Subsidiary of DigitalGlobe
ceasing to be a Subsidiary or any subsequent transfer of such
Indebtedness (other than DigitalGlobe or another Subsidiary of
DigitalGlobe) will be deemed, in each case, to constitute an
Incurrence of Indebtedness not permitted by this clause (2);
(3) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness
(other than Indebtedness Incurred under clause (1), (2), (4),
(8), or (9) of this paragraph) and any refinancings of such
Indebtedness in an amount not to exceed the amount so refinanced
or refunded (plus premiums, accrued interest, fees, and
expenses); provided that Indebtedness, the proceeds of which are
used to refinance or refund the notes, or Indebtedness that ranks
equally with, or is subordinated in right of payment to, the
notes shall only be permitted under this clause (3) if:
(A) in case the notes are refinanced in part or the
Indebtedness to be refinanced ranks equally with the notes,
such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new
Indebtedness is outstanding, is expressly made to rank
equally with, or subordinate in right of payment to, the
remaining notes,
(B) in case the Indebtedness to be refinanced is subordinated in
right of payment to the notes, such new
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Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is
issued or remains outstanding, is expressly made
subordinate in right of payment to the notes at least to
the same extent that the Indebtedness to be refinanced is
subordinated to the notes and
(C) such new Indebtedness, determined as of the date of
Incurrence of such new Indebtedness, does not mature prior
to the Stated Maturity of the Indebtedness to be refinanced
or refunded, and the Average Life of such new Indebtedness
is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded; and provided
further that in no event may Indebtedness of DigitalGlobe
be refinanced by means of any Indebtedness of any
Subsidiary of DigitalGlobe pursuant to this clause (3);
(4) Indebtedness,
(A) in respect of performance, surety or appeal bonds provided
in the ordinary course of business,
(B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements (a) are designed solely to
protect DigitalGlobe or its Subsidiaries against
fluctuations in foreign currency exchange rates or interest
rates and (b) do not increase the Indebtedness of the
obligor outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest
rates or by reason of fees, indemnities, and compensation
payable thereunder and
(C) arising from agreements providing for indemnification,
adjustment of purchase price, or similar obligations, or
from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of DigitalGlobe
or any of its Subsidiaries pursuant to such agreements,
in any case Incurred in connection with the disposition of
any business, assets, or a Subsidiary of DigitalGlobe
(other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business,
assets, or a Subsidiary of DigitalGlobe for the purpose of
financing such acquisition), in a principal amount not to
exceed the gross proceeds actually received by DigitalGlobe
or of its Subsidiaries in connection with such disposition;
(5) Indebtedness of DigitalGlobe, to the extent the net proceeds of
such Indebtedness are promptly (A) used to purchase notes
tendered in an Offer to Purchase made as a result of a Change in
Control or (B) deposited to defease the notes as described below
under "Defeasance";
(6) Guarantees of the notes and Guarantees of Indebtedness of
DigitalGlobe by any of its Subsidiaries; provided any such
Subsidiary Guarantees the notes;
(7) Indebtedness, including Guarantees, Incurred to finance the
cost, including the cost of design, development, acquisition,
construction, insurance, installation, improvement,
transportation, launch, or integration, to acquire satellites,
ground systems, image processing software and systems, or other
tangible assets used or useful in the satellite imaging and
related businesses of DigitalGlobe and its Subsidiaries
(including acquisitions by way of Capitalized Leases and
acquisitions of the Capital Stock of a Person that becomes a
Subsidiary of DigitalGlobe to the extent of the fair market value
of the satellites, ground systems, image processing software and
systems, or other tangible assets so acquired) by DigitalGlobe or
a Subsidiary of DigitalGlobe after the Closing Date;
(8) Indebtedness of DigitalGlobe not to exceed, at any one time
outstanding, two times:
(A) the Net Cash Proceeds received by DigitalGlobe after the
Closing Date as a capital contribution or from the issuance
and sale of its Capital Stock (other than Redeemable Stock)
to a Person that is not a Subsidiary of DigitalGlobe, to the
extent (I) such capital contribution or Net Cash Proceeds
have not been used pursuant to clause (2)(b) of the first
paragraph or clause (2), (3), or (4) of the second paragraph
of the "Limitation on Restricted Payments" covenant
described below to make a Restricted Payment and (II) if
such capital contribution or Net Cash Proceeds are used to
consummate a transaction under which DigitalGlobe Incurs
Acquired Indebtedness, the amount of such Net Cash Proceeds
exceeds one-half of the amount of Acquired Indebtedness so
Incurred and
(B) 80% of the fair market value of property, other than cash
and cash equivalents, received by DigitalGlobe after the
Closing Date from the sale of its Capital Stock (other than
Redeemable Stock) to a Person that is not a Subsidiary of
DigitalGlobe, to the extent (I) such capital contribution or
sale of Capital Stock has not been used pursuant to clause
(2), (3), or (4) of the second paragraph of the "Limitation
on Restricted Payments" covenant described below to make a
Restricted Payment and (II) if such capital contribution or
Capital Stock is used to consummate a transaction pursuant
to which DigitalGlobe Incurs Acquired Indebtedness, 80% of
the
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fair market value of the property received exceeds one-half
of the amount of Acquired Indebtedness so Incurred, provided
that such Indebtedness does not mature prior to the Stated
Maturity of the notes and has an Average Life longer than
the notes;
(9) Acquired Indebtedness;
(10) Strategic Subordinated Indebtedness; and
(11) subordinated Indebtedness of DigitalGlobe, in addition to
Indebtedness permitted under clauses (1) through (10) above, in
aggregate principal amount outstanding at any time not to exceed
$100 million.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that DigitalGlobe
or a Subsidiary of DigitalGlobe may Incur pursuant to this "Limitation on
Indebtedness" covenant will not be deemed to be exceeded, with respect to any
outstanding Indebtedness, due solely to the result of fluctuations in the
exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness
under this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens, or
obligations with respect to letters of credit supporting Indebtedness
otherwise included in the determination of such particular amount will not be
included and (2) any Liens granted pursuant to the equal and ratable
provisions referred to in the "Limitation on Liens" covenant described below
will not be treated as Indebtedness. For purposes of determining compliance
with this "Limitation on Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses, DigitalGlobe, in its sole discretion, will
classify, and from time to time may reclassify, such item of Indebtedness and
only be required to include the amount and type of such Indebtedness in one of
such clauses.
LIMITATION ON RESTRICTED PAYMENTS
DigitalGlobe will not, and will not permit any of its Subsidiaries to,
directly or indirectly make any Restricted Payment if at the time of, and
after giving effect to, the proposed Restricted Payment:
(1) a Default or Event of Default will have occurred and be
continuing; or
(2) the aggregate amount of all Restricted Payments made after the
Closing Date will exceed the sum of:
(a) 50% of the aggregate amount of the Adjusted Consolidated Net
Income or, if the Adjusted Consolidated Net Income is a
loss, minus 100% of the amount of such loss, accrued on a
cumulative basis during the period, taken as one accounting
period, beginning on the first day of the fiscal quarter
immediately following the Closing Date and ending on the
last day of the last fiscal quarter preceding the
Transaction Date for which reports have been made available
to holders of the notes, plus
(b) the aggregate Net Cash Proceeds received by DigitalGlobe
after the Closing Date from the issuance and sale of its
Capital Stock (other than Redeemable Stock) to a person who
is not a Subsidiary of DigitalGlobe or from the issuance to
a person who is not a Subsidiary of DigitalGlobe of any
options, warrants, or other rights to acquire Capital Stock
of DigitalGlobe, in each case excluding any Redeemable Stock
or any options, warrants, or other rights that are
redeemable at the option of the holder, or are required to
be redeemed, prior to the Stated Maturity of the notes, and
the Net Cash Proceeds from any capital contributions to the
Company after the Closing Date from Person other than
Subsidiaries of the Company, in each case excluding such Net
Cash Proceeds to the extent used to Incur Indebtedness
pursuant to clause (a)(8) under the "Limitation on
Indebtedness" covenant and excluding Net Cash Proceeds from
the issuance of Capital Stock to the extent used to make
Permitted Investment in accordance with clause (6) of such
defined term, plus
(c) an amount equal to the net reduction after the Closing Date
in Investments, other than reductions in Permitted
Investments, in any person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to
DigitalGlobe or any of its Subsidiaries or from the Net Cash
Proceeds from the sale of any such Investment, except to the
extent any such proceeds are included in the calculation of
Adjusted Consolidated Net Income, not to exceed, in each
case, the amount of Investments previously made by
DigitalGlobe or any of its Subsidiaries in such Person.
The following Restricted Payments may be made so long as, other than
in the case of clauses (1) and (2), no Default or Event of Default has
occurred and is continuing or occurs as a consequence of the Restricted
Payments:
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(1) the payment of any dividend within 60 days after the date of
declaration of such dividend if, at such date of declaration, such payment
would comply with the prior paragraph;
(2) the repurchase, redemption, or other acquisition of Capital Stock
of DigitalGlobe, or options, warrants, or other rights to acquire such Capital
Stock, (a) in exchange for, or out of the proceeds of a capital contribution
or a substantially concurrent offering of, shares of Capital Stock, other than
Redeemable Stock, of DigitalGlobe or (b) for cash in an aggregate amount not
to exceed $2.0 million in any calendar year;
(3) the making of any principal payment or the repurchase,
redemption, retirement, defeasance, or other acquisition for value of
Indebtedness of DigitalGlobe which is subordinated in right of payment to the
notes in exchange for, or out of the proceeds of a capital contribution or a
substantially concurrent offering of, shares of the Capital Stock, other than
Redeemable Stock, of DigitalGlobe;
(4) the declaration or payment of dividends on the common stock of
DigitalGlobe following a Public Equity Offering of such common stock, of up to
5% per year of the Net Cash Proceeds received by DigitalGlobe in such Public
Equity Offering;
(5) payments or distributions to dissenting stockholders under
applicable law under or in connection with a consolidation, merger, or
transfer of assets;
(6) any purchase, redemption, retirement, or other acquisition of
Capital Stock deemed to occur upon exercise of stock options or warrants if
such Capital Stock represents a portion of the exercise price of such options
or warrants; or
(7) repurchases of fractional shares of Capital Stock in connection
with the exercise of stock options or warrants to acquire Capital Stock (other
than redeemable stock) of DigitalGlobe.
Each Restricted Payment permitted under the preceding paragraph,
other than an exchange of Capital Stock for Capital Stock or Indebtedness
referred to in (2) or (3) above, and the Net Cash Proceeds from any issuance
of Capital Stock referred to in (2) or (3) above, will be included in
calculating whether the conditions of clause (2) of the first paragraph of
this "Limitation on Restricted Payments" covenant have been met with respect
to any subsequent Restricted Payments.
LIMITATION ON LIENS
DigitalGlobe will not, and will not permit any of its Subsidiaries
to, create, incur, assume, or suffer to exist any Lien, other than Permitted
Liens, on any of its assets or properties of any character or any shares of
Capital Stock or Indebtedness of any of its Subsidiaries, without making
effective provision for all of the notes and all other amounts due under the
indenture to be directly secured equally and ratably with, or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the notes, prior to, the obligation or liability secured by such
Lien. In addition, DigitalGlobe will not, and will not permit any Subsidiary
to, create, incur, assume, or suffer to exist any Lien on the QuickBird
satellite or the QuickBird Launch Insurance, except:
(1) In the case of the QuickBird Launch Insurance, Liens thereon in
favor of the Collateral Trustee under the Pledge and Security Agreement or
otherwise securing the notes or the Vendor Financing and Liens thereon in
favor of the collateral trustee under the Junior Collateral Pledge and
Security Agreement for the benefit of the holders of the Series A and Series B
preferred stock, provided such Liens are junior to the Liens in favor of the
Collateral Trustee under the Pledge and Security Agreement; and
(2) With respect to the QuickBird satellite,
. liens described in clause (2) of the definition of Permitted
Liens,
. until the attachment of risk under the QuickBird Launch
Insurance, the retention or reservation of title to the
QuickBird satellite by Ball Aerospace under the terms of the
Vendor Financing,
. following the attachment of risk under the QuickBird 2 Launch
Insurance, Liens to secure up to $9 million principal amount
(plus accrued interest thereon) of Vendor Financing, and
. Liens in the proceeds (as defined in Section 9-306(1) of the
New York Uniform Commercial Code) from the disposition of the
QuickBird 2 satellite, other than proceeds under the QuickBird
Launch Insurance, to secure up to $9 million principal amount
(plus accrued interest) of Vendor Financing.
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LIMITATION ON SALE-LEASEBACK TRANSACTIONS
DigitalGlobe will not, and will not permit any of its Subsidiaries to,
enter into any sale-leaseback transaction involving any of its assets or
properties, whether now owned or acquired later, through which DigitalGlobe or
one of its Subsidiaries sells or transfers such assets or properties and then
or later leases such assets or properties or any part of them or any other
assets or properties which DigitalGlobe or such Subsidiary, as the case may
be, intends to use for substantially the same purpose or purposes as the
assets or properties sold or transferred.
This restriction does not apply to any sale-leaseback transaction if:
(1) the lease is for a period, including renewal rights, of three years
or less;
(2) the lease secures or relates to industrial revenue or pollution
control bonds;
(3) the transaction is solely between DigitalGlobe and any of its
Wholly Owned Subsidiaries or solely between its Wholly Owned
Subsidiaries; or
(4) the lease relates to any present or future ground station of
DigitalGlobe or any of its Subsidiaries.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
DigitalGlobe must commence, within 30 days of the occurrence of a Change
of Control, and must then consummate in accordance with the indenture an Offer
to Purchase for all notes then outstanding, at a purchase price equal to 101%
of the Accreted Value of such notes on the relevant payment date, plus any
accrued interest to the payment date.
There can be no assurance that DigitalGlobe will have sufficient funds
available at the time of any Change of Control to make any debt payment,
including repurchases of notes, required by this covenant as well as may be
contained in other securities of DigitalGlobe which might be outstanding at
the time. This covenant will, unless consents are obtained, require
DigitalGlobe to repay all indebtedness then outstanding which by its terms
would prohibit such note repurchase, either prior to or concurrently with such
note repurchase.
MAINTENANCE OF PROPERTIES AND INSURANCE
DigitalGlobe will use its best efforts to obtain and maintain in full
force and effect with respect to each and every satellite, other than the
QuickBird 2 satellite, and each permitted replacement satellite therefor,
launch insurance with respect to each such satellite, in each case for a
period which DigitalGlobe deems reasonable by comparison with other companies
in a similar industry, but in no event for a period less than 30 days
commencing on the date of intentional ignition of the launch vehicle. Such
insurance must be sufficient to cover an amount equal to or greater than the
sum of:
(1) the cost to replace such satellite and launch vehicle;
(2) the cost to launch a replacement satellite; and
(3) the cost of launch insurance for such satellite or, in the event
that DigitalGlobe has reason to believe that the cost of obtaining
comparable insurance for a replacement satellite would be
materially higher, DigitalGlobe's best estimate of the cost of such
comparable insurance.
The insurance policy required to be obtained under this "Maintenance of
properties and insurance" covenant must provide that (1) if 95% or more of a
satellite's capacity is lost, the full amount of insurance will become due and
payable, and (2) if a satellite is able to maintain more than 15% but less
than 95% of its capacity, a portion of such insurance based on the lost
capacity will become due and payable.
If DigitalGlobe receives proceeds from insurance relating to any
satellite under this "Maintenance of properties and insurance" covenant,
DigitalGlobe may use a portion of such proceeds to repay any vendor or
third-party purchase money financing pertaining to such satellite that is
required to be repaid by reason of the loss giving rise to such insurance
proceeds. Until such time as DigitalGlobe has at least two satellites
operating in orbit:
(1) if DigitalGlobe does not have any satellites in orbit, DigitalGlobe
will use the remainder of such proceeds to develop, construct,
launch, and insure a replacement high-resolution satellite of
comparable or superior utility as compared with the satellite being
replaced and to develop the necessary supporting infrastructure for
the replacement satellite and will use its best efforts to launch
such replacement satellite within nine months of the scheduled
launch or of the launch failure giving rise to the loss proceeds;
and
(2) if DigitalGlobe then has only one satellite in orbit, as soon as
practicable after loss of a satellite and, in any event, no
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more than 28 months after such scheduled launch or launch failure,
DigitalGlobe will use the remainder of such proceeds to develop,
construct, launch, and insure a second high-resolution satellite of
comparable or superior utility as the satellite being replaced.
If a constellation of two satellites has been successfully launched and
continues to remain operating in orbit, DigitalGlobe may use such insurance
proceeds for the development or construction of additional satellites or
further development as the board of directors determines is in the best
interests of DigitalGlobe.
With respect to the intentional ignition of the launch vehicle for, and
any operation following such ignition of, the QuickBird 2 satellite,
DigitalGlobe has agreed to use its best efforts to maintain in full force and
effect the QuickBird 2 Launch Insurance, for a period which DigitalGlobe deems
reasonable by comparison with other companies in a similar industry but in no
event for a period of less than one year commencing on the date of intentional
ignition of the launch vehicle. The insurance must name the Collateral Trustee
as sole loss payee thereof and must be in an amount of at least $155 million.
It must have substantially the same terms as the launch and in-orbit insurance
with respect to the QuickBird 1 satellite, except:
. for such differences in terms as may be required due to the
differences in construction, launch or in-orbit operations between the
QuickBird 1 and QuickBird 2 satellites;
. that the QuickBird 2 Launch Insurance shall only be required to cover
one year of operations after launch for the QuickBird 2 satellite;
. as is acceptable to the holders of a majority of the notes in their
absolute discretion; and
. for such differences that do not adversely affect the holders of
notes.
If premiums are not at any time fully paid in respect of the QuickBird 2
Launch Insurance solely by reason of the fact that premiums previously paid
have been returned by the relevant insurance companies, DigitalGlobe will not
thereby be in default of its insurance obligations so long as all such
returned premiums have been distributed to the Collateral Trustee as provided
in the Pledge and Security Agreement and any amounts subsequently made
available to DigitalGlobe by the Collateral Trustee in accordance with the
Pledge and Security Agreement are immediately used for the purchase of
complying launch insurance. Except as is acceptable to the holders of a
majority of the notes in their absolute discretion, the QuickBird 2 Launch
Insurance must provide that if 66% or more of a satellite's capacity is lost,
the full amount of insurance shall become due and payable, and that if a
satellite is able to maintain more than 34% but less than 85% of its capacity,
a portion of such insurance based on the lost capacity shall become due and
payable.
The Collateral Trustee will be the sole loss payee on the QuickBird 2
Launch Insurance and all proceeds, if any, from any QuickBird 2 Launch
Insurance will be paid directly to the Collateral Trustee for application (1)
first to the Notes and up to $9 million principal amount of Vendor Financing,
on a pro rata basis, in accordance with the provisions of the Pledge and
Security Agreement and (2) second to the collateral trustee under the Junior
Pledge and Security Agreement for the benefit of the Series A and Series B
preferred stock in accordance with the provisions of the Junior Pledge and
Security Agreement. If, notwithstanding the fact that the Collateral Trustee
will be the sole loss payee with respect to the QuickBird 2 Launch Insurance,
DigitalGlobe or any of its Subsidiaries at any time receives any proceeds
relating to the QuickBird 2 Launch Insurance from the relevant insurance
company or from any source, other than the Collateral Trustee in accordance
with the Pledge and Security Agreement, DigitalGlobe will cause such proceeds
to be held in trust for the benefit of the Collateral Trustee and immediately
turned over to the Collateral Trustee in the same form received with
appropriate endorsements.
REPURCHASE OF NOTES UPON INSURANCE PROCEEDS PAYMENT
DigitalGlobe must commence within 30 days of receipt by the Collateral
Trustee of any proceeds under the QuickBird 2 Launch Insurance, and consummate
within 60 days thereafter, an Offer to Purchase the notes and offer to repay
up to $9 million in principal amount of the Vendor Financing, including any
interest accrued and payable thereon, on a pro rata basis in an aggregate
amount equal to the insurance proceeds not previously subject to an Offer to
Purchase or repayment of the Vendor Financing under this covenant. The
purchase price for the notes in connection with the Offer to Purchase will
equal 100% of their Accreted Value on the payment date plus accrued and unpaid
interest, if any, to such date, and the purchase price for the Vendor
Financing to be so repaid shall be equal to the principal amount thereof plus
accrued interest thereon. If the sum of the aggregate purchase price of the
notes tendered in connection with the Offer to Purchase and the amount of
Vendor Financing repaid under this covenant is less than the insurance
proceeds, then the remaining insurance proceeds will be paid over to the
collateral trustee under the Junior Pledge and Security Agreement, to the
extent required under the Junior Pledge and Security Agreement, and otherwise
to DigitalGlobe, or as DigitalGlobe may direct.
REPURCHASE OF NOTES UPON A FAILURE TO MEET CERTAIN CONDITIONS
The indenture required DigitalGlobe to conduct an Offer to Purchase the
notes if it did not meet certain conditions by the
74
close of business on June 15, 2001. These conditions were met on or before
June 15, 2001.
RATING OF NOTES
DigitalGlobe will use its best efforts to obtain a rating for the notes
from either Moody's or S&P or, if neither firm is then in the business of
providing such ratings, from another nationally recognized statistical rating
organization, as defined in Rule 436 under the Securities Act at any time
after the later to occur of (1) the date that is one year after the Closing
Date and (2) the date that is six months after the date of the launch of
QuickBird 2, and to keep a rating with respect to the notes continuously in
effect through the maturity or redemption of the notes.
SEC REPORTS AND REPORTS TO HOLDERS
At all times from and after the earlier of (1) the commencement of an
exchange offer or effectiveness of a shelf registration statement
("registration") and (2) the date that is one year after the Closing Date,
whether or not DigitalGlobe is then required to file reports with the SEC,
DigitalGlobe will file with the SEC all such reports and other information as
it would be required to file with the SEC by Sections 13(a) or 15(d) of that
Act as if it were subject to such requirements. DigitalGlobe will supply the
Trustee and each holder of Notes or will supply to the Trustee for forwarding
to each such holder, without cost to such holder, copies of such reports and
other information. At all times prior to registration, upon the request of any
holder of notes or any prospective purchaser, DigitalGlobe also will supply
such holder or prospective purchasers with the information required under Rule
144A under the Securities Act.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the indenture:
(1) default in the payment of principal of, or any premium on, any note
when the same becomes due and payable at maturity, upon
acceleration, redemption, or otherwise;
(2) default in the payment of interest on any note when the same
becomes due and payable, and such default continues for a period
of 30 days;
(3) the failure to make or consummate an Offer to Purchase in
accordance with the "Repurchase of notes upon a Change of Control,
" "Repurchase of notes upon an insurance proceeds payment" or
"Repurchase of notes upon failure to meet certain conditions"
covenants;
(4) DigitalGlobe defaults in the performance of or breaches any other
covenant or agreement of DigitalGlobe in the indenture or under the
notes, other than a default specified in clause (1), (2), or (3)
above or under the Security Documents, and such default or breach
continues for a period of 30 consecutive days after written notice
by the Trustee or the holders of 25% or more in aggregate principal
amount of the notes;
(5) there occurs with respect to any issue or issues of Indebtedness of
DigitalGlobe or any Significant Subsidiary having an outstanding
principal amount of $1 million or more in the aggregate for all
such issues of all such persons, whether such Indebtedness now
exists or is created after the Closing Date,
(a) an event of default that has caused the holder of such
Indebtedness to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness
has not been discharged in full or such acceleration has not
been rescinded or annulled within 30 days of such
acceleration; and/or
(b) the failure to make a principal payment at the final, but not
any interim, fixed maturity and such defaulted payment is not
made, waived, or extended within 30 days of such payment
default; or
(c) there occurs with respect to the Vendor Financing any default
in the performance or observance of any term, condition,
covenant, or agreement contained in such Indebtedness or in
any agreement related to such Indebtedness, or any other event
specified in any such Indebtedness or agreement, if the effect
of such event is to cause, or permit the holder or holders of
such Indebtedness (or any trustee or other representative of
any such holder(s)) to cause, such Indebtedness to become due
prior to its Stated Maturity;
(6) any final judgment or order not covered by insurance for the
payment of money in excess of $1 million in the aggregate for all
such final judgments or orders against all such persons, treating
any deductibles, self-insurance, or retention as not so covered, is
rendered against DigitalGlobe or any Significant Subsidiary and is
not paid or discharged, and there is any period of 30 consecutive
days following entry of the final judgment or order that causes the
aggregate amount for all such final judgments or orders outstanding
and not paid or discharged against all such persons to exceed $1
million during which a stay of enforcement of such final judgment
or order, by reason of a pending appeal or otherwise, is not in
effect;
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(7) a court having jurisdiction in the premises enters a decree or
order for
(a) relief in respect of DigitalGlobe or any Significant
Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency, or other similar law in effect now or
after the Closing Date;
(b) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator, or similar official of DigitalGlobe or
any Significant Subsidiary or for all or substantially all of
the property and assets of DigitalGlobe or any Significant
Subsidiary;
(c) the winding up or liquidation of the affairs of DigitalGlobe
or any Significant Subsidiary and, in each case, such decree
or order will remain in effect for a period of 60 consecutive
days without being stayed or put on hold by a court;
(8) DigitalGlobe or any Significant Subsidiary
(a) commences a voluntary case under any applicable bankruptcy,
insolvency, or other similar law now or hereafter in effect,
or consents to the entry of an order for relief in an
involuntary case under any such law;
(b) consents to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee,
sequestrator, or similar official of DigitalGlobe or any
Significant Subsidiary or for all or substantially all of the
property and assets of DigitalGlobe or any Significant
Subsidiary; or
(c) effects any general assignment for the benefit of creditors;
(9) there occurs with respect to the QuickBird 2 Satellite (a) the loss
of 5% or more of such satellite's capacity or (b) any other event
that permits or requires the payment of any proceeds of the
QuickBird 2 Launch Insurance by an insurance company under such
policy and, in either such case, such proceeds are not paid over to
the Collateral Trustee within 90 days of the demand being made
under the applicable QuickBird 2 Launch Insurance policy; or
(10) the Collateral Trustee under the Pledge Agreement does not have at
all times a first priority perfected security interest in the
Collateral under the Pledge Agreement, or the Collateral Trustee
under the Pledge and Security Agreement does not have at all times
a first priority perfected security interest in the Collateral
under the Pledge and Security Agreement.
If an Event of Default, other than one specified in clause (7) or (8)
above that occurs with respect to DigitalGlobe, occurs and is continuing under
the indenture, the Trustee or the holders of at least 25% in aggregate
principal amount at maturity of the notes then outstanding, by written notice
to DigitalGlobe and to the Trustee if such notice is given by the holders,
may, and the Trustee at the request of such holders will, declare the Accreted
Value of, premium (if any), and accrued interest on the notes to be
immediately due and payable. Upon a declaration of acceleration, such Accreted
Value of, premium (if any), and accrued interest will be immediately due and
payable.
In the event of a declaration of acceleration because an Event of
Default set forth in clause (5) above has occurred and is continuing, such
declaration of acceleration is automatically rescinded and annulled if the
event of default triggering such Event of Default under clause (5) will be
remedied or cured by DigitalGlobe or the relevant Significant Subsidiary or
waived by the holders of the relevant Indebtedness within 60 days after the
declaration of acceleration with respect thereto.
If an Event of Default specified in clause (7) or (8) above occurs with
respect to DigitalGlobe, the Accreted Value of, premium (if any), and accrued
interest on the Notes then outstanding will automatically become and be
immediately due and payable without any declaration or other act on the part
of the Trustee or any holder. Holders of at least a majority in principal
amount of the outstanding notes, by written notice to DigitalGlobe and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and the consequences of such acceleration if:
(1) all existing Events of Default, other than the nonpayment of the
Accreted Value of, premium (if any), and interest on the Notes that
have become due solely by such declaration of acceleration, have
been cured or waived; and
(2) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction.
This waiver provision does not apply to a default caused by the
nonpayment of the Accreted Value of, premium (if any), and interest on, any
note as specified in clause (1) or (2) above or under a provision of the
indenture that cannot be modified or amended without the consent of the holder
of each outstanding note affected. For information as to the waiver of
defaults, see "-Modification and waiver."
The holders of at least a majority in aggregate principal amount of the
outstanding notes may direct the time, method, and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the indenture, that may involve the
76
Trustee in personal liability, or that the Trustee determines in good faith
may be unduly prejudicial to the rights of holders of notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction, received from holders of notes.
A holder may not pursue any remedy with respect to the indenture or the
notes unless:
(1) the holder gives the Trustee written notice of a continuing Event
of Default;
(2) the holders of at least 25% in aggregate principal amount of
outstanding notes make a written request to the Trustee to pursue
the remedy;
(3) such holder or holders offer(s) the Trustee indemnity satisfactory
to the Trustee against any costs, liability, or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period, the holders of a majority in aggregate
principal amount at maturity of the outstanding notes do not give
the Trustee a direction that is inconsistent with the request.
However, such limitations do not apply to the right of any holder of a
note to receive payment of the Accreted Value of, premium (if any), or
interest on, such note or to bring suit for the enforcement of any such
payment, on or after the due date expressed in the notes, which right will not
be impaired or affected without the consent of the holder.
The indenture requires the two principal accounting officers of
DigitalGlobe to certify, on or before a date not more than 90 days after the
end of each fiscal year, that a review has been conducted of the activities of
DigitalGlobe and its Subsidiaries and DigitalGlobe's and its Subsidiaries'
performance under the indenture and that DigitalGlobe has fulfilled all
obligations thereunder, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status of
such default. DigitalGlobe will also be obligated to notify the Trustee of
any default or defaults in the performance of any covenants or agreements
under the indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
DigitalGlobe will not consolidate with, merge with or into, or sell,
convey, transfer, lease, or otherwise dispose of all or substantially all of
its property and assets to any person or permit any person to merge with or
into DigitalGlobe unless:
(1) DigitalGlobe will be the continuing person, or the person, if other
than DigitalGlobe, formed by such consolidation or into which
DigitalGlobe is merged or that acquired or leased such property and
assets of DigitalGlobe will be a corporation organized and validly
existing under the laws of the United States of America or any of
its jurisdictions and expressly assumes, by a supplemental
indenture, executed and delivered to the Trustee and the Collateral
Trustee, all of the obligations of DigitalGlobe on all of the notes
and under the indenture;
(2) immediately after giving effect to such transaction, no Default or
Event of Default will have occurred and be continuing; and
(3) DigitalGlobe delivers to the Trustee an officers' certificate and
opinion of counsel, in each case stating that such consolidation,
merger, or transfer and such supplemental indenture complies with
this provision and that all conditions precedent provided for in
the indenture relating to such transaction have been complied with.
DEFEASANCE
SUMMARY
DigitalGlobe may, at its option, terminate its obligations under the
notes and the indenture, in the manner described in the paragraph below titled
"Legal defeasance." This defeasance, commonly known as "legal defeasance,"
means that DigitalGlobe will be deemed to have paid and discharged any and all
obligations in respect of the Notes other than, among other matters, its
obligation to:
. register the transfer or exchange of the notes;
. replace stolen, lost, or mutilated notes;
. maintain paying agencies; and
. hold monies in trust for payment of the obligations under the notes.
In addition, DigitalGlobe may, at its option, terminate its obligations
with respect to certain covenants under the indenture
77
in the manner described in the paragraph below titled "Covenant defeasance."
This defeasance is commonly known as "covenant defeasance."
LEGAL DEFEASANCE
DigitalGlobe may exercise its legal defeasance option with respect to
notes that mature or are to be called for redemption within one year if, among
other things:
(1) DigitalGlobe deposits with the Trustee, in trust, money, and/or U.S.
Government Obligations, that through the payment of interest and
principal in accordance with their terms, will provide money in an
amount sufficient to pay the principal of, premium (if any), and
accrued interest on the notes on the Stated Maturity of such
payments in accordance with the terms of the indenture and the
Notes;
(2) no Default or Event of Default will have occurred and be continuing
on the date of such deposit and such deposit will not result in a
breach or violation of, or constitute a default under, the indenture
or any other agreement or instrument to which DigitalGlobe is a
party or by which DigitalGlobe is bound; and
(3) if at such time the notes are listed on a national securities
exchange, DigitalGlobe has delivered to the Trustee an opinion of
counsel to the effect that the notes will not be delisted as a
result of such deposit, defeasance, and discharge.
COVENANT DEFEASANCE
DigitalGlobe may exercise its covenant defeasance option if, among
other things, it:
(1) deposits with the Trustee, in trust, money, and/or U.S. Government
Obligations, that through the payment of interest and principal in
accordance with their terms, will provide money in an amount
sufficient to pay the principal of, premium (if any), and accrued
interest on the notes on the Stated Maturity of such payments in
accordance with the terms of the indenture and the notes;
(2) satisfies the provisions described in clauses (2) and (3) under the
discussion "Legal defeasance" above; and
(3) delivers to the Trustee an opinion of counsel to the effect that (a)
the creation of the defeasance trust does not violate the Investment
Company Act of 1940, (b) holders will not recognize income, gain, or
loss for federal income tax purposes as a result of DigitalGlobe's
exercise of its option under this defeasance provision and will be
subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such
deposit, defeasance, and discharge had not occurred and (c) after
the passage of 123 days following the deposit, the trust fund will
not be subject to the effect of Section 547 of the U.S. Bankruptcy
Code or Section 15 of the New York Debtor and Creditor Law.
Once DigitalGlobe has satisfied these conditions, the provisions of the
indenture will no longer be in effect with respect to all of the covenants
described under "Covenants;" clauses (4) and (9) under "Events of Default"
with respect to certain covenants; and clauses (5) and (6) under "Events of
Default."
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT
If DigitalGlobe exercises its option to omit compliance with certain
covenants and provisions of the indenture with respect to the notes as
described in the immediately preceding paragraph and the notes are declared
due and payable because of the occurrence of an Event of Default that remains
applicable, the amount of money and/or U.S. Government Obligations on deposit
with the Trustee will be sufficient to pay amounts due on the notes at the
time of their Stated Maturity but may not be sufficient to pay amounts due on
the notes at the time of the acceleration resulting from such Event of
Default. However, DigitalGlobe will remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the indenture may be made by
DigitalGlobe and the Trustee with the consent of the holders of not less than
a majority in aggregate principal amount at maturity of the outstanding notes.
However, no such modification or amendment may, without the consent of each
holder affected thereby:
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any note;
(2) reduce the Accreted Value of, or premium, if any, or interest on,
any note;
(3) change the place or currency of payment of principal of, or
premium, if any, or interest on, any note;
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(4) impair the right to institute suit for the enforcement of any
payment of any note on or after the Stated Maturity, or, in the case
of a redemption, on or after the Redemption Date, of any note;
(5) reduce the above-stated percentage of outstanding notes the
consent of whose holders is necessary to modify or amend the
indenture;
(6) waive a default in the payment of principal of, or premium, if
any, or interest on, the notes;
(7) alter the obligation of DigitalGlobe to offer to purchase the notes
in accordance with the indenture following the occurrence of a
Change of Control or waive any default in the performance of such
obligation;
(8) reduce the percentage or aggregate principal amount at maturity of
outstanding notes, the consent of whose holders is necessary for
waiver of compliance with certain provisions of the indenture or for
waiver of certain defaults; or
(9) alter DigitalGlobe's obligation to purchase the notes under the
"Repurchase of notes upon an insurance proceeds payment" and
"Repurchase of notes upon a failure to meet certain conditions"
covenants.
In addition, without the consent of 66 2/3% of the holders affected
thereby, the Trustee may not direct the Collateral Trustee or otherwise permit
the release of any Collateral except as expressly provided in the Security
Documents.
No personal liability of incorporators, stockholders, officers, directors, or
employees
No incorporator, stockholder, officer, director, employee, or
controlling person of DigitalGlobe or any of its successors will have any
liability for any of DigitalGlobe's obligations under the notes or the
indenture, or for any claim based on, or in respect of, such obligations or
their creation. Each holder, by accepting the notes, waives and releases all
such liability.
CONCERNING THE TRUSTEE
Except during the continuance of a Default, the Trustee will not be
liable, except for the performance of such duties as are specifically set
forth in such indenture. If an Event of Default has occurred and is
continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the indenture as a
prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The indenture and provisions of the Trust Indenture Act of 1939, as
amended, that are incorporated by reference into the indenture contain
limitations on the rights of the Trustee, should it become a creditor of
DigitalGlobe, to obtain payment of claims in certain cases or to realize on
certain property received by it in respect of any such claims, as security or
otherwise. The Trustee is permitted to engage in other transactions but if it
acquires any conflicting interest, it must eliminate such conflict or resign.
The Trustee is also the Collateral Trustee under the Pledge Agreement
and Pledge and Security Agreement and the collateral trustee under the Junior
Pledge and Security Agreement.
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SELLING HOLDERS
We originally issued the notes on August 11, 2000, and they were
registered under the Securities Act. They were issued in exchange for notes
with substantially similar terms to these notes that had not been registered.
In April and May 2001, Morgan Stanley sold an aggregate of $19.5 million in
principal amount at maturity of notes in private placement transactions to the
other selling holders listed below. Because Morgan Stanley may be deemed to be
an affiliate of ours, the notes that it sold in private placement transactions
may not be freely transferable under federal securities laws. Accordingly, we
agreed to register these notes. The selling holders listed below, or their
transferees, pledgees, donees, or successors, may from time to time offer and
sell any or all of the notes listed below pursuant to this prospectus. The
selling holders listed below provided us the information contained in the
following table with respect to themselves and the respective principal amount
of notes beneficially owned by them and which may be sold by each of them
under this prospectus. We have not independently verified this information.
See "Plan of Distribution."
The following table sets forth as of December 31, 2001:
. the name of each selling holder;
. the principal amount at maturity of notes which they may sell from
time to time pursuant to the registration statement; and
. the percentage of outstanding notes beneficially owned by each
selling holder prior to any sales under this prospectus.
Principal amount at maturity
Name of selling holder of notes that may be sold Percentage of outstanding notes
---------------------- ------------------------- ------------------------------
ITT Industries, Inc. $16,000,000 22.3%
Morgan Stanley Dean Witter $71,650,000* 100.0%
Telespazio S.p.A. $3,500,000 4.9%
- ---------------
* Includes notes which may be offered and sold in market-making
transactions from time to time, including the notes listed above for
the other selling holders. See "Plan of Distribution."
Morgan Stanley holds in excess of 10% of our outstanding capital stock
and acted as placement agent in connection with:
. our offering in April 1996 of 7,000,000 shares of our former Series
C preferred stock;
. our offering in March 1997 of 50,000 units, consisting of 12 1/2%
. Senior Notes due 2005 and warrants to purchase shares of our common
stock; and
. our offering in July 1999 of 199,000 units, consisting of 13%
Senior Discount Notes due 2007 and shares of our existing Series
C preferred stock.
In addition, Morgan Stanley acts as exclusive financial advisor to us
under a five-year agreement and received $750,000 in connection with its
advisory role in our 1999 recapitalization and $1 million in connection with
its advisory role in our 2001 recapitalization. See "Material Relationships
and Related Party Transactions."
Because the selling holders may, pursuant to this prospectus, offer all
or some portion of the notes they presently hold, no estimate can be given as
to the number or percentage of notes that will be held by the selling holders
upon termination of any such sales. In addition, the selling holders may have
sold, transferred or otherwise disposed of all or a portion of their notes in
transactions exempt from the registration requirements of the Securities Act
since the date on which they provided the information regarding their notes.
This information may change from time to time, and, if required, such changes
will be set forth in a supplement or supplements to this prospectus.
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DESCRIPTION OF CAPITAL STOCK
The following description summarizes material terms of our capital
stock and is qualified in its entirety by reference to the actual terms of the
capital stock contained in our amended and restated certificate of
incorporation and bylaws, which are filed as exhibits to the registration
statement of which this prospectus forms a part.
Our certificate of incorporation authorizes us to issue 150,000,000
shares of common stock, par value $.001 per share, and 74,000,000 shares of
preferred stock, par value $.001 per share. We are authorized to issue
12,000,000 shares of Series A preferred stock, 12,000,000 shares of Series B
preferred stock, and 50,000,000 shares of Series C preferred stock.
As of December 31, 2001, we had outstanding 562,088 shares of common
stock, 8,629,830 shares of Series A preferred stock, 8,629,830 shares of
Series B preferred stock, and 39,522,036 shares of Series C preferred stock.
COMMON STOCK
The holders of common stock are entitled to one vote for each share
held of record at all meetings of the stockholders, and are not entitled to
cumulative voting rights with respect to the election of directors. Subject to
preferences that are applicable to outstanding shares of preferred stock, the
holders of common stock are entitled to receive ratably such dividends as may
be declared by the board of directors out of funds legally available to be
paid.
In the event of a liquidation, dissolution, or winding up, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of the outstanding
preferred stock. The holders of common stock have no preemptive rights and no
right to convert their common stock into any other securities. There are no
redemption provisions applicable to the common stock. The outstanding shares
of common stock are fully paid and nonassessable.
SERIES A AND SERIES B PREFERRED STOCK
Except with respect to the voting rights and representation on the
board of directors as set forth below, our Series A preferred stock and Series
B preferred stock are identical in all material respects.
Rank. Our Series A preferred stock and Series B preferred stock rank
equally with each other and senior to our Series C preferred stock and common
stock with respect to dividends, liquidation preference, and redemption.
Dividends. The holders of our Series A preferred stock and Series B
preferred stock are entitled to receive cumulative dividends, whether or not
declared by our board of directors, at an annual rate of 7% of the liquidation
preference amount until no later than June 15, 2003. Such dividends are
payable quarterly on March 31, June 30, September 30, and December 31, and
commenced on June 30, 1999. Such dividends may be paid, subject to certain
limitations, at our option, either in cash or in additional shares of Series A
preferred stock or Series B preferred stock, as applicable, until June 15,
2003. After June 15, 2003, dividends will accrue at an annual rate of 7% of
the liquidation preference amount and will be payable, when, as, and if
declared by the board of directors, in cash only. If any dividend is not paid
in full in cash on a quarterly payment date after June 15, 2003, the
liquidation preference of the Series A preferred stock and Series B preferred
stock will be increased by an amount equal to the product of (a) the amount
per share not paid divided by the total amount payable per share and (b) one
quarter of the dividend rate multiplied by the effective liquidation
preference. We are prohibited from paying dividends on any shares of stock
having rights junior to the Series A and Series B preferred stock until all
accumulated dividends have been paid on the Series A and Series B preferred
stock.
Liquidation preference. Upon our liquidation, dissolution, or winding
up, the holders of Series A preferred stock and Series B preferred stock will
be entitled to receive out of the assets available for distribution prior to
and in preference of the Series C preferred stock, an amount equal to $3.50
per share, plus all accrued and unpaid dividends, subject to adjustment.
Conversion. From June 15, 1999 and until June 15, 2003, each share of
Series A preferred stock and Series B preferred stock is convertible at the
option of the holder into that number of shares of common stock obtained by
dividing the applicable liquidation preference, plus any accumulated but
unpaid dividends by $3.50, subject to antidilution adjustments. Prior to June
15, 2003, each share of Series A preferred stock and Series B preferred stock
will automatically convert into common stock at the applicable conversion
ratio upon the earlier of (a) our initial public offering of shares of common
stock with an aggregate public offering price of at least $35 million and (b)
the listing of shares of our common stock under certain circumstances. After
June 15, 2003, each share of Series A preferred stock and Series B preferred
stock shall not be convertible into common stock.
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Antidilution. The conversion price of the Series A preferred stock and
Series B preferred stock is subject to adjustment under certain circumstances,
including upon any subsequent issuance of capital stock. The issuance of the
Series C preferred stock resulted in an adjustment in the conversion prices of
the Series A preferred stock and Series B preferred stock. See "Principal
stockholders".
Redemption. We are required to redeem all of the Series A preferred
stock and Series B preferred stock outstanding on March 31, 2009, at a
redemption price equal to 100% of the then existing applicable liquidation
preference, plus accrued and unpaid dividends to the date of redemption,
subject to the legal availability of funds.
Voting rights. Each holder of Series A preferred stock is entitled to
65 (subject to adjustment) votes per share held (on an as-converted basis)
and each holder of Series B preferred stock is entitled to 1.35 (subject to
adjustment) votes per share held (on an as-converted basis).
Board representation. The holder of Series A preferred stock has the
right to designate two persons to our board of directors and the holders of
the Series B preferred stock have the right to designate four persons to our
board of directors.
Put right. In connection with our 2001 recapitalization, we amended our
certificate of incorporation to grant a put right to the holders of Series A
and Series B preferred stock. This right permits holders to sell to us, and
require us to purchase, from any source of funds legally available therefor,
up to all of their shares of Series A and Series B preferred stock. The right
becomes exercisable upon notice from us that we (or the collateral trustee
under the Junior Pledge and Security Agreement) have received insurance
proceeds under the QuickBird 2 satellite launch and in-orbit operations
insurance policy. The right expires 60 days after it becomes exercisable. The
purchase price for the shares equals their liquidation preference, plus
accrued and unpaid dividends to the date of purchase. If the aggregate
purchase price would otherwise exceed the available insurance proceeds, the
number of shares of Series A and Series B preferred stock to be purchased is
reduced on a pro rata basis.
SERIES C PREFERRED STOCK
Rank. The Series C preferred stock is junior to the Series A preferred
stock and Series B preferred stock, but senior to the common stock, with
respect to dividends, liquidation preference, and redemption.
Dividends. The holders of Series C preferred stock are entitled to
cumulative dividends, whether or not declared by the board of directors, at an
annual rate of 8.5% until no later than June 15, 2003. Such dividends are
payable quarterly on March 31, June 30, September 30, and December 31, and
commenced on June 30, 1999. Until June 15, 2003, such dividends may be paid,
subject to certain limitations, at our option, either in cash or in additional
shares of Series C preferred stock. After June 15, 2003, dividends will accrue
at an annual rate of 8.5% of the liquidation preference amount and will be
payable, when, as, and if declared by the board of directors, in cash only. If
any dividend is not paid in full in cash on a quarterly payment date after June
15, 2003, the liquidation preference of the Series C preferred stock will be
increased by an amount equal to the product of (a) the amount per share not paid
divided by the total amount payable per share and (b) one quarter of the
dividend rate multiplied by the effective liquidation preference. We are
prohibited from paying dividends on any shares of stock having rights junior to
the Series C preferred stock until all accumulated dividends have been paid on
the Series C preferred stock.
Liquidation preference. Upon our liquidation, dissolution, or winding
up, the holders of the Series C preferred stock will be entitled to receive
out of the assets available for distribution following payment of the Series A
and Series B liquidation preference an amount equal to $3.50 per share, plus
all accrued and unpaid dividends, subject to adjustment.
Conversion. Until June 15, 2003, each share of Series C preferred stock
will be convertible at the option of the holder into that number of shares of
common stock obtained by dividing the Series C liquidation preference, plus
any accumulated but unpaid dividends by $3.50, subject to antidilution
adjustments. Prior to June 15, 2003, each share of Series C preferred stock
will automatically convert into common stock at the applicable conversion
ratio upon the earlier of (a) our initial public offering of shares of common
stock with an aggregate public offering price of at least $35 million and (b)
the listing of shares of our common stock under certain circumstances. After
June 15, 2003, each share of Series C preferred stock shall not be convertible
into common stock.
Antidilution. The conversion price of the Series C preferred stock is
subject to adjustment under certain circumstances.
Redemption. We are required to redeem all of the Series C preferred
stock outstanding on March 31, 2009, at a redemption price equal to 100% of
the then liquidation preference, plus accrued and unpaid dividends to the date
of redemption, subject to the legal availability of funds.
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Voting rights. Each holder of Series C preferred stock is entitled to
one (subject to adjustment) vote per share held on an "as-converted" basis.
Board representation. The holders of the Series C preferred stock are
entitled to designate three members of the board of directors.
Tag along rights. If one of our stockholders or a group of our
stockholders proposes to sell any shares of capital stock in one transaction
such that, following such sale, shares of capital stock representing more than
35% of the then outstanding shares (on a fully diluted basis) will have been
sold to one holder or a group of related holders, then each holder of Series C
preferred stock shall have the right to receive notice of such a transaction
and shall also have the right to participate in the transaction and sell a
proportionate number of such holders' Series C preferred stock in such
transaction.
STOCKHOLDERS' AGREEMENT
In connection with our recapitalization, we entered into a
stockholders' agreement which provides for voting agreements with respect to
election of directors, agreements requiring board approval for major
transactions, and registration rights for holders of our Series C preferred
stock.
ELECTION OF ADDITIONAL DIRECTORS
The stockholders' agreement provides for a board of 11 members. The
holder of the Series A preferred stock is entitled to designate two directors,
the holders of the Series B preferred stock are entitled to designate four
directors, our Chief Executive Officer is entitled to designate two directors,
and the holders of the Series C preferred stock are entitled to designate the
remaining three directors. If the percentage ownership of the holders of
Series A and Series B preferred stock changes, the numbers of directors that
those holders are entitled to designate may be adjusted.
APPROVAL REQUIREMENTS
The stockholders' agreement provides that a majority of the Board, a
majority of the directors designated by the holder of the Series A preferred
stock, and a majority of the directors designated by the holders of the Series
B preferred stock must approve certain corporate actions, including:
. amendments to our certificate of incorporation, bylaws, and other
organizational documents;
. the amendment, termination, or waiver of any provision under the
1999 recapitalization agreement;
. the issuance of equity securities;
. the grant or exercise of certain shares or equity interests,
options, warrants, or conversion, or other rights;
. any new agreements granting any preemptive, antidilution, or
registration rights with respect to any class of securities;
. the incurrence of any indebtedness over $10 million; and
. the replacement of independent auditors or making material changes
to accounting methodology.
REGISTRATION RIGHTS
The holders of the Series A, Series B, and Series C preferred stock
each have three rights to demand a registration of their securities having an
aggregate fair market value of at least $5 million beginning on the 90th day
following the successful launch and commercially viable operation, for a
period of 60 consecutive days, of our first QuickBird satellite, or any
successor satellite, and unlimited piggyback registration rights.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock and preferred
stock is The Bank of New York.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Our certificate of incorporation does not provide for cumulative voting
for the election of directors. As a result, the holders of shares representing
a majority of the voting power of the shares present or represented at a
meeting in which directors are to be elected have the power to elect all the
directors to be elected at such meeting, and no person may be elected without
the
83
support of holders of shares representing a majority of the voting power of
the shares present or represented at such meeting.
Under Delaware law, a special meeting of stockholders may be called
by the board of directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. Our bylaws authorize the Chairman
of the Board, the Chief Executive Officer, the President, the board of
directors, or stockholders holding in the aggregate not less than 10% of the
voting power of the company to call a special meeting of stockholders.
Under Delaware law and our bylaws, stockholders may execute an action
by written consent in lieu of a stockholder meeting. Delaware law permits a
corporation to eliminate such actions by written consent. Elimination of
written consents of stockholders may lengthen the amount of time required to
take stockholder actions since certain actions by written consent are not
subject to the minimum notice requirement of a stockholders' meeting. The
elimination of stockholders' written consents, however, deters hostile
takeover attempts. Without the availability of stockholders' actions by
written consent, a holder or group of holders controlling a majority in
interest of our capital stock would not be able to amend our bylaws or remove
directors pursuant to a stockholder's written consent. Any such holder or
group of holders would have to call a stockholders' meeting and wait until the
notice periods determined by the board of directors pursuant to our bylaws
prior to taking any such action.
PROVISIONS OF DELAWARE LAW
We do not currently have publicly-traded equity securities. In the
future, if we have publicly-traded equity securities, we would become subject
to Section 203 of the Delaware General Corporation Law, a provision that, in
general, prohibits a publicly-held Delaware corporation from engaging in
various "business combination" transactions with any "interested stockholder"
for a period of three years after the date of the transaction in which the
person became an "interested stockholder," unless:
. prior to that date, the board of directors of the corporation
approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder,
. upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding, those shares owned by:
(1) persons who are directors and also officers and
(2) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or
exchange offer, or
. on or subsequent to such time the business combination is approved
by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66
2/3% of the outstanding voting stock not owned by the interested
stockholder
SECTION 203 DEFINES "BUSINESS COMBINATION" TO INCLUDE:
. any merger or consolidation involving the corporation and the
interested stockholder;
. any sale, transfer, pledge, or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
. the receipt of the interested stockholder of the benefit of any
loans, advances, guarantees, pledges, or other financial benefits
provided by or through the corporation.
In general, Section 203 defines an interested stockholder as an
entity or person who, together with affiliates and associates, beneficially
owns (or within three years did beneficially own) 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or
other takeover or change in control attempts with respect to us and,
accordingly, may discourage attempts to acquire us, if we have publicly-traded
equity securities. No assurance can be given that we will have publicly-traded
equity securities in the future.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material U.S. federal income tax
consequences to U.S. holders (as defined below) resulting from the ownership
of the notes. This summary is based upon the current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), its legislative
history, Treasury regulations, administrative pronouncements and judicial
decisions, all of which are subject to change, possibly with retroactive
effect. This summary does not purport to be a complete discussion of all U.S.
federal income tax consequences. This summary also does not address the tax
consequences of the ownership of the notes under state, local, or non-U.S. tax
laws. In addition, this summary does not address the tax consequences
applicable to holders subject to special rules, such as:
. broker-dealers;
. banks;
. insurance companies;
. tax-exempt entities;
. investors holding the notes as a part of a straddle, hedge, or
conversion transaction; or
. investors whose functional currency is not the U.S. dollar.
This summary applies only to a holder of a note if such holder is a "U.S.
Holder". You are a U.S. Holder if you are:
. an individual who is a citizen or resident of the United States;
. a corporation or partnership created or organized in the United
States or under the laws of the United States or any state thereof
(including the District of Columbia);
. an estate, the income of which is includible in gross income for
U.S. federal income tax purposes regardless of its source; or
. a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one of
more United States persons have the authority to control all
substantial decisions of the trust (or, under certain circumstances,
a trust the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source).
This discussion assumes that the notes are considered debt for U.S.
federal income tax purposes. This discussion also assumes that the notes are
or will be held as capital assets. Finally, a ruling from the IRS with respect
to the tax consequences of the ownership of the notes has not been received.
As such, there can be no assurance that the IRS will not take a different
position.
PROSPECTIVE HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD
TO THE APPLICATION OF THE TAX CONSEQUENCES DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN, OR OTHER
TAX LAWS.
ORIGINAL ISSUE DISCOUNT
The notes were issued with original issue discount ("OID"). Except as
described under "Applicable high-yield discount obligations" below, you will
be required to include OID in income as interest periodically over the term of
the note before receipt of cash or other payments attributable to such income.
Since the cash payments of stated interest on the notes will not constitute
"qualified stated interest," you will not separately include such payments in
income upon receipt.
The amount of OID with respect to each note will be equal to the excess
of its "stated redemption price at maturity" over its issue price. Under the
OID Regulations, the "stated redemption price at maturity" of each note will
include all payments to be made in respect thereof, including any stated
interest payments, other than "qualified stated interest." Payments of
qualified stated interest are payments of interest which are unconditionally
payable in cash or property (other than debt instruments of the issuer) at
least annually at a qualifying rate, including a single fixed rate. Since no
actual cash payments will be made in respect of the notes until January 15,
2003, no interest payments on the notes will constitute "qualified stated
interest" and, accordingly, the stated redemption price at maturity of each
note will equal the sum of all interest and principal payments that are
intended to be made with respect to the note.
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A U.S. holder of a debt instrument issued with OID is required to
include in gross income for U.S. federal income tax purposes an amount equal
to the sum of the "daily portions" of OID for all days during the taxable year
on which the holder holds the debt instrument. The daily portions of OID
required to be included in a holder's gross income in a taxable year will be
determined upon a constant-yield to maturity basis by allocating to each day
during the taxable year on which the holder holds the debt instrument a
pro-rata portion of the OID on such debt instrument which is attributable to
the "accrual period" in which such day is included. Accrual periods with
respect to a note may be of any length and may vary in length over the term of
the note as long as (i) no accrual period is longer than one year, and (ii)
each scheduled payment of interest or principal on the note occurs on either
the final or first day of an accrual period. The amount of the OID
attributable to each "accrual period" will be the product of the "adjusted
issue price" at the beginning of such accrual period and the "yield to
maturity" of the debt instrument (stated in a manner appropriately taking into
account the length of the accrual period). The "adjusted issue price" of a
debt instrument at the beginning of an accrual period is defined generally as
the issue price of the debt instrument plus the aggregate amount of OID that
accrued in all prior accrual periods, less any cash payments on the debt
instrument. The "yield to maturity" is the discount rate that, when used in
computing the present value of all payments to be made under the notes,
produces an amount equal to the issue price of the notes. Accordingly, you
will be required to include OID in respect of a note in gross income for U.S.
federal income tax purposes in advance of the receipt of cash in respect of
such income. The amount of OID allocable to an initial short accrual period
may be computed using any reasonable method if all other accrual periods,
other than a final short accrual period, are of equal length. The amount of
OID allocable to the final accrual period at maturity of the note is the
difference between (x) the amount payable at the maturity of the note, and (y)
the note's adjusted issue price as of the beginning of the final accrual
period.
Under the OID Regulations, an issuer of a debt instrument may be deemed
to redeem such instrument prior to maturity if the exercise of that redemption
right would reduce the instrument's yield to maturity. If we were deemed to
redeem the notes, as a result of these rules, the timing and amount of OID
accrued would be different.
ACQUISITION PREMIUM
A U.S. holder who purchases a note for an amount that is greater than
the adjusted issue price of such note, but that is less than or equal to the
sum of the amounts payable on the note after the purchase date (other than
qualified stated interest) will be considered to have purchased such note at
an "acquisition premium." To the extent a holder has acquisition premium with
respect to a note, the holder will reduce the OID otherwise includable for
each accrual period by an amount equal to the product of (i) the amount of
such OID otherwise includable for such period, and (ii) a fraction, the
numerator of which is the acquisition premium and the denominator of which is
the excess of the amounts payable on the note after the purchase date over the
adjusted issue price.
MARKET DISCOUNT
Any gain or loss on a disposition of a note would generally be capital
gain or loss. However, a subsequent purchaser of a note who did not acquire
the note at its original issue, and who acquires such note at a price that is
less than the adjusted issue price may be required to treat the note as a
"market discount bond". Any recognized gain on a disposition of the note would
then be treated as ordinary income to the extent that it does not exceed the
"accrued market discount" on the note which has not previously been included
in income.
In general, any market discount will be considered to accrue ratably
during the period from the date of acquisition to the maturity date of the
note. However, an election may be made to accrue market discount on the basis
of a constant interest rate in lieu of ratable accrual. In addition, there are
rules deferring the deduction of all or part of the interest expense on
indebtedness incurred or continued to purchase or carry such bond, and
permitting a holder to elect to include accrued market discount in income on a
current basis.
APPLICABLE HIGH-YIELD DISCOUNT OBLIGATIONS
If the yield on the notes is at least five percentage points above the
applicable federal rate and the notes were issued with "significant original
issue discount," otherwise deductible interest and original issue discount
will not be deductible with respect thereto until such interest is actually
paid. In addition, if the yield of the notes is more than six percentage
points above the applicable federal rate, (i) a portion of such interest
corresponding to the yield in excess of six percentage points above the
applicable federal rate will not be deductible by us at any time, and (ii) a
corporate holder may be entitled to treat the portion of the interest that is
not deductible by us as a dividend for purposes of qualifying for the
dividends received deductions provided for by the tax code, subject to
applicable limitations.
86
SALE, REDEMPTION, OR RETIREMENT
If a note is redeemed, sold, or otherwise disposed of, a U.S. holder
generally will recognize gain or loss equal to the difference between the
amount realized on the sale or other disposition of such note (to the extent
such amount does not represent accrued but unpaid interest) and such holder's
tax basis in the note. A U.S. holder's tax basis in a note equals the initial
purchase price of a note by such holder, increased by the amount of any OID
previously included in income by such holder, and reduced by any payments of
amounts on the notes not constituting "qualified stated interest." Such gain
or loss generally will be capital gain or loss, provided that such holder has
held the note as a capital asset. A capital gain or loss will be a long-term
capital gain or loss if the holder's holding period is more than 12 months.
For individual holders, long-term capital gains are subject to a maximum
federal income tax rate of 20 percent. The deduction of capital losses may be
subject to limitation. In addition, a holder will recognize interest income to
the extent of any accrued but unpaid interest on the notes not previously
recognized by the holder at the time of the redemption or sale.
BACKUP WITHHOLDING
A holder may be subject, under certain circumstances, to backup
withholding at a 31% rate with respect to "reportable payments" on the notes.
This withholding generally applies only if the holder (i) fails to furnish his
or her social security or other taxpayer identification number ("TIN"), (ii)
furnishes an incorrect TIN, (iii) is notified by the IRS that he or she has
failed to report proper payments of interest and dividends and the IRS has
notified us the holder is subject to backup withholding, or (iv) fails, under
certain circumstances, to provide a certified statement, signed under penalty
of perjury, that the TIN provided is his or her correct number and that he or
she is not subject to backup withholding. Any amount withheld from payment to
a holder under the backup withholding rules is allowable as a credit against
such holder's federal income tax liability, provided that the required
information is furnished to the IRS. Certain holders (including, among others,
corporations) are not subject to backup withholding. Holders should consult
their tax advisors as to their qualifications for exemption from backup
withholding and the procedure for obtaining such an exemption.
INFORMATION REPORTING
We are required to furnish certain information to the IRS and will
furnish annually to record holders of the notes information with respect to
interest paid (and OID accrued) on the notes during the calendar year. The OID
information will be based upon the adjusted issue price of the notes as if the
U.S. Holder were the original holder of the notes. No assurance can be given
that the IRS will not challenge the accuracy of the reported information.
Holders who purchase the notes for an amount other than the adjusted issue
price and/or on a date other than the last day of an accrual period will be
required to determine for themselves the amount of OID, if any, they are
required to include in gross income for U.S. federal income tax purposes.
87
PLAN OF DISTRIBUTION
MORGAN STANLEY DEAN WITTER
This prospectus is to be used by Morgan Stanley Dean Witter in
connection with offers and sales of the notes in market-making transactions at
negotiated prices relating to prevailing market prices at the time of sale.
Morgan Stanley Dean Witter may act as principal or agent in such transactions.
Morgan Stanley Dean Witter has no obligation to make a market in the notes,
and may discontinue its market-making activities at any time without notice,
at its sole discretion.
There is currently no established public market for the notes. We do
not currently intend to apply for listing of the notes on any securities
exchange. Therefore, any trading that does develop will occur on the
over-the-counter market. We have been advised by Morgan Stanley Dean Witter
that it intends to make a market in the notes but it has no obligation to do
so and any market-making activity, if it occurs, may be discontinued at any
time. No assurance can be given that an active public market for the notes
will develop.
Morgan Stanley Dean Witter acted as placement agent in connection with
the original private placement of the notes and received a placement fee in
connection therewith. As of December 31, 2001, we believe that Morgan Stanley
Dean Witter and its affiliated entities collectively own approximately 60% of
our Series B preferred stock, 13.4% of our Series C preferred stock, and one
share of our common stock, which ownership represents approximately 28.0% of
our outstanding common stock on an as-converted basis.
Although there are no agreements to do so, Morgan Stanley Dean Witter,
as well as others, may act as broker or dealer in connection with the sale of
the notes contemplated by this prospectus and may receive fees or commissions
in connection therewith.
We have agreed to indemnify Morgan Stanley Dean Witter, and its
affiliates, against certain liabilities under the Securities Act or to
contribute to payments that Morgan Stanley Dean Witter or its affiliates may
be required to make in respect of such liabilities.
OTHER SELLING HOLDERS
We are registering the notes held by the selling holders other than
Morgan Stanley to permit public secondary trading of such notes by the holders
from time to time after the date of this prospectus. We will bear all expenses
(other than underwriting discounts and selling commissions) in connection with
the registration and sale of the notes covered by this prospectus. We will not
receive any of the proceeds from the offering of the notes by the selling
holders. The notes may be sold from time to time:
. directly by any selling holder to one or more purchasers;
. to or through underwriters, brokers, or dealers;
. through agents on a best-efforts basis or otherwise; or
. through a combination of such methods of sale.
If notes are sold through underwriters, brokers, or dealers, the
selling holder will be responsible for underwriting discounts or commissions
or agents' commissions. The notes may be sold:
. in one or more transactions at a fixed price or prices, which may be
changed;
. at prevailing market prices at the time of sale or at prices related
to such prevailing prices;
. at varying prices determined at the time of sale; or
. at negotiated prices.
Such sales may be effected in transactions (which may involve crosses
or block transactions):
. on any national securities exchange or quotation service on which
the notes may be listed or quoted at the time of sale;
. in the over-the-counter market;
. in transactions otherwise than on such exchanges or services or in
the over-the-counter market; or
88
. through the writing of options.
In connection with sales of the notes or otherwise, any selling holder
may:
. enter into hedging transactions with brokers, dealers, or others,
which may in turn engage in short sales of the notes in the course
of hedging the positions they assume;
. sell short and deliver notes to close out such short positions; or
. loan or pledge notes to brokers, dealers, or others who in turn may
sell such securities.
A selling holder may pledge or grant a security interest in some or all
of the notes owned by it, and if it defaults in the performance of its secured
obligations, the pledgees or secured parties may offer and sell the notes from
time to time pursuant to this prospectus. The selling holders may also
transfer and donate shares in other circumstances, in which case the
transferees, donees, pledgees, or other successors in interest will be the
selling holders for purposes of this prospectus.
The selling holders and any brokers, dealers, agents, or underwriters
that participate with the selling holders in the distribution of the notes may
be deemed to be "underwriters" within the meaning of the Securities Act, in
which event any commissions received by such brokers, dealers, agents, or
underwriters and any profits realized by the selling holders on the resales of
the notes may be deemed to be underwriting commissions or discounts under the
Securities Act. In addition, any notes covered by this prospectus which
qualify for sale pursuant to Rule 144, Rule 144A, or any other available
exemption from registration under the Securities Act may be sold under Rule
144, Rule 144A, or such other available exemption rather than pursuant to this
prospectus. There is no assurance that any selling holder will sell any or all
of the notes described herein, and any selling holder may transfer, devise or
gift such securities by other means not described herein.
LEGAL MATTERS
The validity of the notes offered hereby have been passed upon by Baker
& McKenzie.
EXPERTS
The consolidated financial statements of EarthWatch Incorporated and
subsidiaries as of December 31, 2000 and 2001 and for each of the three years
in the period ended December 31, 2001 included in this prospectus have been so
included in reliance on the report (which contains an explanatory paragraph
relating to the company's ability to continue as a going concern as described
in Note 1 to the consolidated financial statements) of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
89
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1, relating to the
notes offered by this prospectus, with the Securities and Exchange Commission,
or SEC. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules thereto. For further
information with respect to us and the notes offered by this prospectus,
reference is made to the registration statement, exhibits, and schedules. A
copy of the registration statement may be inspected by anyone without charge
at the Public Reference Room maintained by the SEC at 450 Fifth Street, NW,
Judiciary Plaza, Washington, D.C. 20549, and copies of all or any part thereof
may be obtained from the SEC upon payment of certain fees prescribed by the
SEC. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains a World Wide Web site
that contains reports, proxy and information statements, and other information
filed electronically with the SEC. The address of the site is
http://www.sec.gov.
- ------------------
90
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Operations F-4
Consolidated Statement of Cash Flows F-5
Consolidated Statement of Stockholders' Equity (Deficit) F-6
Notes to Consolidated Financial Statements F-7
F-1
EarthWatch Incorporated, dba DigitalGlobe
(A Development Stage Company)
Report of Independent Accountants
===============================================================================
To the Board of Directors and Stockholders of EarthWatch Incorporated, dba
DigitalGlobe:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
EarthWatch Incorporated (a development stage company) and its subsidiaries
("DigitalGlobe") at December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 and for the period from January 1, 1995 (Inception) to
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has recently begun its planned principal
operations and without significant cash flows being generated from operations
it does not currently have sufficient resources with which to sustain
operations on an on-going basis. This raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to this matter are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Denver, Colorado
March 1, 2002
F-2
EarthWatch Incorporated, dba DigitalGlobe
(A Development Stage Company)
Consolidated Balance Sheet
===============================================================================
December 31,
------------------------------
2000 2001
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,725,779 $ 8,308,566
Accounts receivable, net of allowance for doubtful accounts of zero 251,408 2,002,941
Insurance proceeds receivable - restricted 265,000,000 --
Investment securities - restricted 6,295,382 --
Other current assets 398,101 1,471,752
------------- -------------
Total current assets 277,670,670 11,783,259
------------- -------------
Property, plant, and equipment:
Construction in progress 89,716,474 182,349,821
Computer equipment and software 15,365,444 8,247,329
Machinery and equipment 5,770,640 4,016,110
Furniture and fixtures 1,281,911 1,400,535
------------- -------------
Total property, plant, and equipment 112,134,469 196,013,795
Accumulated depreciation and amortization (15,419,714) (8,262,828)
------------- -------------
Net property, plant, and equipment 96,714,755 187,750,967
------------- -------------
Debt issuance costs, net 4,682,127 11,008,165
Other assets 310,664 89,971
------------- -------------
TOTAL ASSETS $ 379,378,216 $ 210,632,362
============= =============
LIABILITIES, MANDATORY REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Current Liabilities:
Accounts payable $ 11,289,385 $ 3,132,960
Accounts payable to related parties 982,232 128,253
Accrued liabilities 3,988,060 11,757,356
Accrued liabilities to related party -- 700,000
Current portion of long-term debt 195,484,650 5,971,025
------------- -------------
Total current liabilities 211,744,327 21,689,594
Long-term debt, net -- 60,872,872
------------- -------------
Total liabilities 211,744,327 82,562,466
------------- -------------
Commitments (Note 10)
Mandatorily redeemable preferred stock due 2009
7% Cumulative convertible - Series A; $.001 par value; 10,000,000 and 12,000,000 shares
authorized and 8,051,273, and 8,629,830 shares issued and outstanding as of December
31, 2000 and 2001, respectively; aggregate liquidation preference of $30,204,405
as of December 31, 2001 27,473,699 29,584,007
7% Cumulative convertible - Series B; $.001 par value; 10,000,000 and 12,000,000 shares
authorized and 8,051,273, and 8,629,830 shares issued and outstanding as of
December 31, 2000 and 2001, respectively; aggregate liquidation preference of
$30,204,405 as of December 31, 2001 27,473,699 29,584,007
8.5% Cumulative convertible - Series C; $.001 par value; 25,000,000 and 50,000,000
shares authorized and 25,000,000, and 39,522,036 shares issued and outstanding as
of December 31, 2000 and 2001, respectively; aggregate liquidation preference
of $138,327,126 as of December 31, 2001 86,298,993 99,099,453
------------- -------------
Total mandatorily redeemable preferred stock 141,246,391 158,267,467
------------- -------------
Stockholders' equity (deficit)
Common stock; $.001 par value; 100,000,000 and 150,000,000 shares authorized and 195,420
and 562,088 shares issued and outstanding at December 31, 2000 and 2001, respectively 195 562
Additional paid-in capital 61,824,829 54,327,601
Deferred stock compensation (534,600) (332,636)
Deficit accumulated during the development stage (34,902,926) (84,193,098)
------------- -------------
Total stockholders' equity (deficit) 26,387,498 (30,197,571)
------------- -------------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 379,378,216 $ 210,632,362
============= =============
The accompanying notes are in integral part of these consolidated financial
statements.
F-3
EarthWatch Incorporated, dba DigitalGlobe
(A Development Stage Company)
Consolidated Statement of Operations
===============================================================================
Period from
January 1, 1995
Year Ended December 31, (Inception) to
----------------------------------------------- December 31,
1999 2000 2001 2001
------------- ------------- ------------- -------------
Revenue $ 5,913,310 $ 3,336,052 $ 12,009,472 $ 28,396,963
Cost of goods sold 5,120,575 2,098,513 9,392,616 22,532,855
------------- ------------- ------------- -------------
Gross profit (loss) 792,735 1,237,539 2,616,856 5,864,108
------------- ------------- ------------- -------------
Expenses:
Selling, general, and administrative 12,762,636 15,332,973 15,115,732 65,196,247
Research and development 6,956,244 13,442,214 11,910,026 83,845,808
Loss (gain) from impairment of fixed assets,
net of insurance recoveries -- (107,607,601) -- (81,489,890)
Gain from arbitration settlement -- -- -- (1,514,776)
------------- ------------- ------------- -------------
Total expenses 19,718,880 (78,832,414) 27,025,758 66,037,389
------------- ------------- ------------- -------------
Gain (loss) from operations (18,926,145) 80,069,953 (24,408,902) (60,173,281)
Interest expense (5,481,820) (4,492,399) (4,726,377) (16,215,287)
Interest income 4,089,199 4,104,378 2,883,472 18,233,835
------------- ------------- ------------- -------------
Income (loss) before provision
for income taxes (20,318,766) 79,681,932 (26,251,807) (58,154,733)
Provision for income taxes -- (3,000,000) -- (3,000,000)
------------- ------------- ------------- -------------
Loss before extraordinary loss on early
extinguishment of debt (20,318,766) 76,681,932 (26,251,807) (61,154,733)
Extraordinary loss on early extinguishment of debt -- -- (23,038,365) (23,038,365)
------------- ------------- ------------- -------------
Net income (loss) (20,318,766) 76,681,932 (49,290,172) (84,193,098)
Mandatorily redeemable preferred stock
dividends and accretion (6,690,537) (11,268,058) (7,623,552) (25,582,147)
------------- ------------- ------------- -------------
Net income (loss) attributable to
common stockholders $ (27,009,303) $ 65,413,874 $ (56,913,724) $(109,775,245)
============= ============= ============= =============
The accompanying notes are in integral part of these consolidated financial
statements.
F-4
EarthWatch Incorporated, dba DigitalGlobe
(A Development Stage Company)
Consolidated Statement of Cash Flows
===============================================================================
Period from
January 1, 1995
Year Ended December 31, (Inception) to
------------------------------------------- December 31,
1999 2000 2001 2001
------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (20,318,766) $ 76,681,932 $ (49,290,172) $ (84,193,098)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation expense 3,885,611 3,775,680 3,370,616 20,372,361
Non-cash interest expense 4,752,339 4,428,974 4,725,976 14,823,356
Non-cash extraordinary loss on early extinguishment of debt -- -- 3,148,098 3,148,098
Non-cash (gain) loss from disposals and impairments of property
plant, and equipment, net of insurance recoveries 3,346 (107,607,601) -- (79,886,959)
Non-cash stock compensation -- 921,400 201,964 1,123,364
Changes in assets and liabilities:
Accounts receivable, net (47,995) 516,621 (1,751,533) (1,003,816)
Other assets (458,088) 588,541 (852,958) (1,339,349)
Accounts payable 8,001,287 (1,018,055) (8,156,425) 2,620,351
Accounts payable to related parties (763,291) 336,768 (853,979) 128,253
Accrued interest payable to related parties -- -- (38,279,332) (38,279,332)
Accrued liabilities (1,474,643) 2,484,652 7,769,296 9,630,566
Accrued liabilities to related party -- -- 700,000 700,000
------------- ------------- ------------- -------------
Net cash provided (used) by operating activities (6,420,200) (18,891,088) (79,268,449) (152,156,205)
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities (27,686,994) -- (236,760,935) (281,909,267)
Proceeds from maturities of investment securities 5,853,910 25,105,946 243,056,317 281,751,173
Proceeds from sales of property, plant, and equipment 1,213 -- -- 4,216,978
Insurance proceeds from loss of satellites -- -- 265,000,000 294,000,000
Construction in progress additions (72,681,412) (78,888,733) (71,225,666) (337,079,620)
Other property, plant, and equipment additions (2,557,024) (3,750,845) (1,773,479) (17,334,947)
------------- ------------- ------------- -------------
Net cash provided (used) by investing activities (97,070,307) (57,533,632) 198,296,237 (56,355,683)
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments related to) issuance of
long-term notes, net 97,450,086 -- (1,830,418) 143,887,956
Proceeds from issuance of preferred and common stock, net 83,512,114 49,929 126,701 191,299,035
Cash acquired in merger -- -- -- 916,457
Principal payments on debt (322,984) (92,744) (114,741,284) (119,282,994)
------------- ------------- ------------- -------------
Net cash provided (used) by financing activities 180,639,216 (42,815) (116,445,001) 216,820,454
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 77,148,709 (76,467,535) 2,582,787 8,308,566
Cash and cash equivalents, beginning of period 5,044,605 82,193,314 5,725,779 --
------------- ------------- ------------- -------------
Cash and cash equivalents, end of period $ 82,193,314 $ 5,725,779 $ 8,308,566 $ 8,308,566
============= ============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 3,150,575 $ 3,153 $ 799 $ 12,672,460
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Assets acquired pursuant to capital-lease and
financing obligations $ -- $ -- $ 9,000,000 $ 13,599,935
Net book value of assets acquired in merger -- -- -- 4,290,496
Liabilities assumed in merger -- -- -- 3,738,588
Stockholder advances converted to equity -- -- -- 1,030,000
Property in-kind contributed by stockholder -- -- -- 7,521,028
Non-cash interest capitalized in construction in progress 11,340,000 24,328,936 12,407,681 59,947,617
Issuance of mandatorily redeemable preferred stock 39,765,364 10,940,902 15,667,528 66,373,794
The accompanying notes are in integral part of these consolidated financial
statements.
F-5
EarthWatch Incorporated, dba DigitalGlobe
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
=================================================================================================================================
Convertible Convertible Convertible
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
-------------------------- -------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 1995 (inception) -- $ -- -- $ -- - $ --
Issuance of stock in exchange for future
cash contributions and contributions
of property in-kind 8,000,000 14,400,000 -- -- -- --
Contribution of net assets in merger 5,362,285 551,908 -- -- -- --
Issuance of common stock for services
and for stock options exercised -- -- -- -- -- --
Issuance of preferred stock 5,475,001 21,712,635 189,040 1,890,400 -- --
Property in-kind, conversion of debt, and
Cash contributions from stockholder -- -- -- -- -- --
Net and comprehensive income (loss) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 18,837,286 36,664,543 189,040 1,890,400 -- --
Restatement of capital stock and additional
Paid-in capital for reincorporation as
of January 1, 1996 -- (36,645,706) -- (1,890,211) -- --
Issuance of stock in exchange for property
in-kind and other, net 513,124 513 22,260 22 -- --
Issuance of preferred stock -- -- 100,000 100 7,000,000 7,000
Property in-kind contributed by stockholder -- -- -- -- -- --
Net and comprehensive income (loss) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 19,350,410 19,350 311,300 311 7,000,000 7,000
Issuance of common stock -- -- -- -- -- --
Issuance of common stock for services
and for stock options exercised -- -- -- -- -- --
Issuance of preferred stock -- -- -- -- -- --
Other -- -- -- -- -- --
Net and comprehensive income (loss) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 19,350,410 19,350 311,300 311 7,000,000 7,000
Issuance of preferred and common stock for
stock options exercised 17,916 18 -- -- -- --
Net and comprehensive income (loss) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 19,368,326 19,368 311,300 311 7,000,000 7,000
Issuance of preferred and common stock for
stock options exercised -- -- -- -- -- --
Issuance of common stock for warrants
exercised -- -- -- -- -- --
Surrender and cancellation of shares from
Ball Technologies Holdings Corp. (2,761,983) (2,762) -- -- -- --
Reclassification of preferred and common
stock into Series C 8.5% Cumulative
Convertible Redeemable Preferred Stock
Due 2009 in connection with the
recapitalization (16,606,343) (16,606) (311,300) (311) (7,000,000) (7,000)
Issuance of preferred and common stock
in connection with the recapitalization -- -- -- -- -- --
Mandatorily redeemable preferred stock
dividends and accretion -- -- -- -- -- --
Net and comprehensive income (loss) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 -- -- -- -- -- --
Issuance of preferred and common stock --
for stock options exercised -- -- -- -- -- --
Deferred stock compensation -- -- -- -- -- --
Amortization of deferred stock compensation -- -- -- -- -- --
Mandatorily redeemable preferred stock
dividends and accretion -- -- -- -- -- --
Net and comprehensive income (loss) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 -- -- -- -- -- --
Issuance of preferred and common stock -- -- -- -- -- --
for stock options exercised -- -- -- -- -- --
Amortization of deferred stock
compensation -- -- -- -- -- --
Mandatorily redeemable preferred stock
dividends and accretion -- -- -- -- -- --
Net and comprehensive income (loss) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 -- $ -- -- $ -- - $ --
============ ============ ============ ============ ============ ============
Convertible
Series D Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
------------- ------------- ------------- ------------- -------------
Balance at January 1, 1995 (inception) -- $ -- -- $ -- $ --
Issuance of stock in exchange for future
cash contributions and contributions
of property in-kind -- -- 1 -- --
Contribution of net assets in merger -- -- -- -- --
Issuance of common stock for services
and for stock options exercised -- -- 79,500 63,600 --
Issuance of preferred stock -- -- -- -- --
Property in-kind, conversion of debt, and
Cash contributions from stockholder -- -- -- -- --
Net and comprehensive income (loss) -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1995 -- -- 79,501 63,600 --
Restatement of capital stock and additional
Paid-in capital for reincorporation as
of January 1, 1996 -- -- -- (63,521) 38,599,438
Issuance of stock in exchange for property
in-kind and other, net -- -- -- -- 2,288,561
Issuance of preferred stock 400,000 400 -- -- 69,833,305
Property in-kind contributed by stockholder -- -- -- -- (25,944)
Net and comprehensive income (loss) -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1996 400,000 400 79,501 79 110,695,360
Issuance of common stock -- -- -- -- 1,229,240
Issuance of common stock for services
and for stock options exercised -- -- 69,416 70 55,463
Issuance of preferred stock 600,000 600 -- -- 5,999,400
Other -- -- -- -- (4,773)
Net and comprehensive income (loss) -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1997 1,000,000 1,000 148,917 149 117,974,690
Issuance of preferred and common stock for
Stock options exercised -- -- 54,631 55 50,799
Net and comprehensive income (loss) -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1998 1,000,000 1,000 203,548 204 118,025,489
Issuance of preferred and common stock for
stock options exercised -- -- 1,000 1 799
Issuance of common stock for warrants
Exercised -- -- 1,556,000 1,556 14,004
Surrender and cancellation of shares from
Ball Technologies Holdings Corp. -- -- -- -- 2,762
Reclassification of preferred and common
stock into Series C 8.5% Cumulative
Convertible Redeemable Preferred Stock
Due 2009 in connection with the
recapitalization (1,000,000) (1,000) (1,760,548) (1,761) (39,765,364)
Issuance of preferred and common stock
in connection with the recapitalization -- -- 1 -- --
Mandatorily redeemable preferred stock
dividends and accretion -- -- -- -- (6,690,537)
Net and comprehensive income (loss) -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1999 -- -- 1 -- 71,587,153
Issuance of preferred and common stock
For stock options exercised -- -- 195,419 195 49,734
Deferred stock compensation -- -- -- -- 1,456,000
Amortization of deferred stock compensation -- -- -- -- --
Mandatorily redeemable preferred stock
Dividends and accretion -- -- -- -- (11,268,058)
Net and comprehensive income (loss) -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31,2000 -- -- 195,420 195 61,824,829
Issuance of preferred and common stock
for stock options exercised -- -- 366,668 367 126,324
Amortization of deferred stock
Compensation -- -- -- -- --
Mandatorily redeemable preferred stock
Dividends and accretion -- -- -- -- (7,623,552)
Net and comprehensive income (loss) -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2001 -- -- $ 562,088 $ 562 $ 54,327,601
============= ============= ============= ============= =============
Accumulated Deficit Accumulated
Other During the Total
Comprehensive Development Stockholders'
Other Income(loss) Stage Equity (Deficit)
------------- ------------- ------------- ----------------
Balance at January 1, 1995 (inception) $ -- $ -- $ -- $ --
Issuance of stock in exchange for future
cash contributions and contributions
of property in-kind (14,400,000) -- -- --
Contribution of net assets in merger -- -- -- 551,908
Issuance of common stock for services
and for stock options exercised -- -- -- 63,600
Issuance of preferred stock -- -- -- 23,603,035
Property in-kind, conversion of debt, and
Cash contributions from stockholder 13,381,523 -- -- 13,381,523
Net and comprehensive income (loss) -- -- (3,909,208) (3,909,208)
------------- ------------- ------------- -------------
Balance at December 31, 1995 (1,018,477) -- (3,909,208) 33,690,858
Restatement of capital stock and additional
Paid-in capital for reincorporation as
of January 1, 1996 -- -- -- --
Issuance of stock in exchange for property
in-kind and other, net -- -- -- 2,289,096
Issuance of preferred stock -- -- -- 69,840,805
Property in-kind contributed by stockholder 1,018,477 -- -- 992,533
Net and comprehensive income (loss) -- -- (23,706,344) (23,706,344)
------------- ------------- ------------- -------------
Balance at December 31, 1996 -- -- (27,615,552) 83,106,948
Issuance of common stock -- -- -- 1,229,240
Issuance of common stock for services
and for stock options exercised -- -- -- 55,533
Issuance of preferred stock -- -- -- 6,000,000
Other -- -- -- (4,773)
Net and comprehensive income (loss) -- 80,400 (50,730,985) (50,650,585)
------------- ------------- ------------- -------------
Balance at December 31, 1997 -- 80,400 (78,346,537) 39,736,363
Issuance of preferred and common stock for
Stock options exercised -- -- -- 50,872
Net and comprehensive income (loss) -- (36,971) (12,919,555) (12,956,526)
------------- ------------- ------------- -------------
Balance at December 31, 1998 -- 43,429 (91,266,092) 26,830,709
Issuance of preferred and common stock for
stock options exercised -- -- -- 800
Issuance of common stock for warrants
Exercised -- -- -- 15,560
Surrender and cancellation of shares from
Ball Technologies Holdings Corp. -- -- -- --
Reclassification of preferred and common
stock into Series C 8.5% Cumulative
Convertible Redeemable Preferred Stock
Due 2009 in connection with the
recapitalization -- -- -- (39,792,042)
Issuance of preferred and common stock
in connection with the recapitalization -- -- -- --
Mandatorily redeemable preferred stock
dividends and accretion -- -- -- (6,690,537)
Net and comprehensive income (loss) -- (159,382) (20,318,766) (20,478,148)
------------- ------------- ------------- -------------
Balance at December 31, 1999 -- (115,953) (111,584,858) (40,113,658)
Issuance of preferred and common stock
For stock options exercised -- -- -- 49,929
Deferred stock compensation (1,456,000) -- -- --
Amortization of deferred stock compensation 921,400 -- -- 921,400
Mandatorily redeemable preferred stock
Dividends and accretion -- -- -- (11,268,058)
Net and comprehensive income (loss) -- 115,953 76,681,932 76,797,885
------------- ------------- ------------- -------------
Balance at December 31, 2000 (534,600) -- (34,902,926) 26,387,498
Issuance of preferred and common stock
for stock options exercised -- -- -- 126,691
Amortization of deferred stock
Compensation 201,964 -- -- 201,964
Mandatorily redeemable preferred stock
Dividends and accretion -- -- -- (7,623,552)
Net and comprehensive income (loss) -- -- (49,290,172) (49,290,172)
------------- ------------- ------------- -------------
Balance at December 31, 2001 $ (332,636) $ -- $ (84,193,098) $ (30,197,571)
============= ============= ============= =============
The accompanying notes are in integral part of these consolidated financial
statements.
F-6
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. General Information and Financial Condition
EarthWatch Incorporated and its subsidiaries ("DigitalGlobe"
or the "Company"), a development stage company, was incorporated on
September 30, 1994 under the laws of the State of Colorado and, on
August 21, 1995, was reincorporated in the State of Delaware. The
Company commenced operations on March 31, 1995 with the contribution of
the net assets of WorldView Imaging Corporation ("WorldView") and
certain assets of Ball Corporation ("Ball") (see below). The Company is
a supplier of digital geographic imagery and is building
high-resolution commercial imaging satellites to generate high-quality,
direct-to-desktop digital imagery of the earth's surface. The Company's
current and anticipated customers include utility, real estate,
engineering, transportation, agricultural, and media companies as well
as federal, state, and local governments.
On March 31, 1995, Ball and WorldView consummated the merger
pursuant to an Agreement and Plan of Merger (the "Agreement"), which
was entered into on January 25, 1995. Pursuant to this Agreement, the
stockholders of WorldView contributed assets and liabilities of
WorldView with a net carrying value of $551,908 in exchange for
5,362,285 shares of the Company's Series A preferred stock ("Series A
Preferred Stock"). Pursuant to this Agreement, Ball provided two
gimbaled mirror systems in exchange for 875,000 shares of Series A
Preferred Stock. Ball also provided $10,000,000 of cash in exchange for
7,125,000 shares of Series A Preferred Stock. The contributed net
assets were recorded by the Company at amounts equal to Ball's and
WorldView's basis in such net assets.
On November 20, 2000, the first QuickBird satellite was
launched from Plesetsk, Russia. The satellite failed to achieve orbit,
which resulted in a total loss of the satellite and its write off
totaling $157 million in fiscal 2000. In December 2000, the Company
filed insurance claims for the loss of the satellite with its various
insurance carriers totaling $265 million (the full amount of which was
received as of March 26, 2001), resulting in a net gain on the loss of
the satellite of approximately $108 million in fiscal 2000.
On February 28, 2001, as required by the indentures governing
our 12 1/2% Senior Notes due 2005 and our 13% Senior Discount Notes due
2007, respectively, we offered to purchase all of our outstanding notes
at their accreted values per their respective indentures on the date of
purchase, using the insurance proceeds relating to the loss of our
QuickBird 1 satellite in November 2000. The offer expired on April 2,
2001, and we repurchased $127.4 million in principal amount at maturity
of outstanding 13% notes and all outstanding 12 1/2% notes on April 3,
2001, resulting in an extraordinary loss on early extinguishment of
debt of approximately $23.0 million. The extraordinary loss on early
extinguishment of debt was the result of the write-off of unamortized
debt discount and deferred financing costs associated with the redeemed
notes. The combined repurchase price totaled $172.9 million.
In connection with the offer, we entered into a
Recapitalization Agreement and Consent dated as of April 2, 2001 (the
"Recapitalization Agreement") with certain holders of our 13% notes.
Pursuant to the Recapitalization Agreement, these note holders agreed
to refrain from tendering their notes in the offer, thus allowing us to
have the use of the funds that would otherwise be used to repurchase
their notes. Pursuant to the Recapitalization Agreement, we also:
. granted registration rights to certain holders of notes and
Series C preferred stock;
. obtained the consent of the holders of notes and amended the
indenture governing the notes in certain respects;
. amended our certificate of incorporation to (a) require that
we purchase, at each holder's option, that holder's shares of
our Series A and B preferred stock, if an insurable event
occurs under the QuickBird 2 insurance policy, (b) increase
the number of authorized shares of our common stock and each
series of our preferred stock, and (c) extend the time period
by one year during which holders of our preferred stock may
convert their shares into shares of our common stock;
. issued 10,843,297 additional shares of our Series C preferred
stock to the holders of the notes that signed the
Recapitalization Agreement and their assignees;
. purchased launch and in-orbit insurance for our QuickBird 2
satellite; and
. pledged the insurance on the second QuickBird satellite in
favor of The Bank of New York, as collateral agent for (a) the
holders of notes and for Ball, and (b) the holders of our
Series A preferred stock and Series B preferred stock.
F-7
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
In April 2001, we secured a $9.0 million borrowing facility
with Ball Aerospace and Technologies Corp. ("Ball Aerospace"), a wholly
owned subsidiary of Ball and one of our stockholders, which we used to
fund the completion of the second QuickBird satellite.
We do not expect to generate positive cash flow from
operations until at least the third quarter of 2002. Accordingly, our
existing capital resources will not be sufficient to meet our
anticipated cash needs in fiscal 2002, including the payment of an
insurance premium due in April 2002. We believe that we currently have
an agreement in principle with our existing investors to loan to us
funds sufficient to meet our anticipated cash needs to fiscal 2002 and
beyond. Failure to consummate the agreement in principle or obtain
additional financing capital when needed would significantly diminish
or eliminate our ability to continue as a going concern.
2. Summary of Significant Accounting Principles
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany investments, accounts, and transactions have been
eliminated upon consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments, excluding
restricted investment securities, purchased with an original maturity
of three months or less to be cash equivalents. Cash equivalents are
carried at amortized cost.
Investment Securities
The Company accounts for its investment securities in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, Accounting for Certain Investments in Debt and Equity
Securities, which requires that individual debt and equity securities
be classified into one of three categories: trading, held to maturity,
or available for sale. The Company determines the appropriate
classification of investment securities at the time of purchase and
reevaluates such designation at each balance sheet date.
Property and Equipment
Property and equipment are recorded at cost. Pursuant to SFAS
No. 34, Capitalization of Interest Cost, the cost of significant assets
includes capitalized interest incurred during the construction and
development period. The costs of satellites under construction are
capitalized during the construction phase, assuming the eventual
successful launch and in-orbit operation of the satellite. If a
satellite were to fail during launch or while in-orbit, the resultant
loss would be charged to expense in the period such loss was incurred.
The amount of any such loss would be reduced to the extent of insurance
proceeds received as a result of the launch or in-orbit failure.
Depreciation is computed using the straight-line method over
the estimated useful lives of the respective assets (three to seven
years). Leasehold improvements and assets acquired pursuant to
capital-lease obligations are amortized on a straight-line basis over
the shorter of their useful lives or lease terms; such amortization is
included in depreciation expense. Repairs and maintenance are expensed
as incurred.
Long-Lived Assets
The Company evaluates the recoverability of its long-lived
assets based on undiscounted cash flows whenever events or changes in
circumstances occur which indicate the carrying amount of an asset may
not be recoverable. Impairments are recognized as the excess of the
carrying amount of the asset over its fair value as estimated, based on
the present value of expected future cash flows.
F-8
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Revenue Recognition
Revenue is primarily derived from the sale of third-party
imagery under contracts to customers. Revenue is also earned processing
third-party data, such as aerial photography, into usable digital
imagery. Revenue from these sales is recognized when the product has
been delivered to the customer.
Research and Development Costs
The Company records as research and development expense all
engineering costs associated with the design of its satellites where
the Company maintains the risk associated with design failure. Once the
satellite is ready for commercial production, engineering costs are
capitalized as investments in satellite equipment.
Advertising Costs
Advertising costs are expensed as incurred and historically
have been immaterial.
Stock-Based Compensation
Employee stock awards under the Company's stock option plan
are accounted for in accordance with Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees and
related interpretations. Stock-based awards to nonemployees, if any,
are accounted for in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation and related interpretations.
Income Taxes
Deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end
based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable
earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized.
Comprehensive Income (Loss)
Comprehensive income or loss includes all changes in equity
during a period from non-owner sources. Total comprehensive income
(loss), which includes unrealized gains and losses on investments
classified as available-for-sale securities, was ($20,478,148),
$76,797,885, and ($49,290,172) for the years ended December 31, 1999,
2000, and 2001, respectively.
Fair Values of Financial Instruments
The Company's financial instruments include cash and cash
equivalents, investment securities, accounts receivable, accounts
payable, accrued liabilities, and debt. The carrying amounts of
financial instruments, other than investments and its 13% Senior
Discount Notes, approximate fair value due to their short-term
maturities. The Company's investment securities were accounted for at
fair value. As the 13% Senior Discount Notes are not regularly traded,
the Company estimated their fair value of approximately $62.1 million
at December 31, 2001, using a discounted cash flow model and a 15%
discount rate.
Concentration of Credit Risk and Significant Customers
The Company's cash and cash equivalents and investment
securities are maintained in various financial institutions. The
Company has not experienced any losses in such accounts and believes it
is not exposed to any significant credit risk in this area.
F-9
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Revenue percentages from each of the Company's significant
customers were as follows for the years ended December 31:
1999 2000 2001
---- ---- ----
Customer A 90.1% 38.6% 66.8%
Customer B 9.1% 54.3% 23.0%
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
significant estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported
amounts of revenue and expenses during the periods. Actual results
could differ from these estimates, making it reasonably possible that a
change in these estimates could occur in the near-term.
Reclassifications
Certain items previously reported in specific financial
statement captions have been reclassified to conform to the current
presentation.
New Accounting Pronouncements
SFAS No. 141, "Business Combinations," was issued in June 2001
and revises the financial accounting and reporting for business
combinations. This statement is effective for all business combinations
initiated after June 30, 2001 and for all business combinations
accounted for using the purchase method for which the acquisition date
is July 1, 2001, or later. The adoption of this standard did not have a
material impact on the Company's financial statements.
SFAS No. 142, "Goodwill and Other Intangible Assets," was
issued in June 2001 and revises the financial accounting and reporting
for intangible assets. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001.
The Company will adopt this standard in the first quarter of 2002 and
anticipates that the adoption will not have a material impact on its
financial statements.
SFAS No. 143, "Accounting for Asset Retirement Obligations,"
was issued in June 2001 and revises the financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company will adopt this standard in
the first quarter of 2003 and anticipates that the adoption will not
have a material impact on its financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued in August 2001 and revises the financial
accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. This statement is effective
for financial statements issued for fiscal years beginning after
December 15, 2001. The Company will adopt this standard in the first
quarter of 2002 and anticipates that the adoption will not have a
material impact on its financial statements.
F-10
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
3. Investment Securities
In connection with the issuance of the 13% senior discount
notes (the "Senior Discount Notes"), the Company purchased U.S.
Treasury notes to be held in escrow as security for the premiums on the
launch insurance on the QuickBird 1 satellite.
Gross
Unrealized
Gains
Investment Securities - Restricted Cost (Losses) Fair Value
---------------------------------- ---- -------- ----------
U.S. Government securities as of December 31, 2000:
Maturing in one year or less $6,295,382 (none) $6,295,382
========== ==========
U.S. Government securities as of December 31, 2001:
Maturing in one year or less (none) (none) (none)
4. Construction In Progress, Losses from Impairments of Fixed Assets and
Insurance Recoveries
Construction in progress consists primarily of satellite
construction and launch costs, ground station construction costs, and
third-party developed software. Construction in progress consisted of
the following at December 31:
2000 2001
---- ----
QuickBird satellites $55,952,495 $ 146,550,743
DigitalGlobe software 26,570,191 26,900,191
Ground station equipment 7,193,788 8,898,887
----------- -------------
$89,716,474 $ 182,349,821
=========== =============
In 1997, the Company launched and lost contact with its
EarlyBird 1 satellite. As a result, the Company wrote off in fiscal
1997 accumulated construction costs for the EarlyBird satellite program
of approximately $25.5 million, net of insurance recoveries of $29
million.
During the year ended December 31, 1998, the Company
determined that certain software would not be used with the QuickBird
satellite system. Accordingly, the total accumulated development costs
of $599,000 are included in the Statement of Operations as a loss from
impairment of fixed assets for the year ended December 31, 1998.
On November 20, 2000, the first QuickBird satellite was
launched from Plesetsk, Russia. This satellite failed to achieve orbit,
which resulted in a total loss of the satellite and its write off
totaling $157 million in fiscal 2000. In December 2000, the Company
filed insurance claims for the loss of the satellite with its various
insurance carriers totaling $265 million, resulting in a net gain on
the loss of the satellite of approximately $108 million in fiscal 2000.
5. Debt
12 1/2% Senior Notes and Warrant Issuance
On March 19, 1997, the Company issued $50,000,000 in Senior
Notes representing 50,000 units. Each Unit included one warrant (the
"Warrants") to purchase 31.12 shares of Common Stock at an exercise
price of $0.01 per share, subject to adjustment. The Senior Notes
ranked pari passu in right of payment with all existing and future
unsubordinated unsecured indebtedness of the Company.
In April 1999, the Company amended and restated the Senior
Notes Indenture, dated as of March 1997. Under the amended and restated
Senior Notes Indenture, the maturity date was extended from March 1,
2001 to March 1, 2005. The Company was to accrete the next six
semi-annual interest payments, which would have resulted in an increase
of the principal of the securities to $72 million. The interest rate
remained at 12 1/2%. The Company recorded an additional discount on the
Senior Notes equal to the difference between the current principal
balance and the principal balance at
F-11
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
maturity. In conjunction with the recapitalization and restructuring of
the debt, the Warrants were exercised for the purchase of 1,556,000
shares of Common Stock. The Senior Notes were redeemed on April 3, 2001
(see Note 1).
13% Senior Discount Notes and Series C 8 1/2% Convertible Redeemable
Preferred Stock Issuance
On July 12, 1999 the Company received $136,237,390 gross
proceeds from a debt and equity offering. This offering represented
199,000 units, each of which consisted of one Senior Discount Note due
July 15, 2007 ("Senior Discount Note") and 49.095 shares of the
Company's Series C 8 1/2% Cumulative Convertible Redeemable Preferred
Stock ("Series C Convertible Preferred Stock"). Each note had an
initial accreted value of $684.61 and has a principal amount at
maturity of $1,000.00. The Senior Discount Notes do not begin to accrue
cash interest until July 15, 2002. Beginning on January 15, 2003,
interest will be payable on January 15 and July 15 of each year.
Issuance costs of $6.0 million were incurred in connection
with the issuance of the units. Of these costs, $4.5 million were
allocated to the Senior Discount Notes and $1.5 million were allocated
to the Series C Convertible Preferred Stock. The Company allocated the
gross proceeds between the debt and equity securities issued using
their relative fair values. This allocation resulted in additional debt
discount of $34,195,000.
The Senior Discount Notes rank equally with the other
unsubordinated indebtedness of the Company. The Senior Discount Notes
will be senior to any subordinated indebtedness of the Company. The
Senior Discount Notes are secured by the insurance policies covering
the launch and on-orbit performance of our QuickBird satellite. In
conjunction with the recapitalization and restructuring of the debt
(see Note1), the Company repurchased $127.4 million in principal amount
at maturity of the Senior Discount Notes.
Vendor Financing Facilities
In April 2001, we secured a $9.0 million borrowing facility
with Ball Aerospace & Technologies Corp., one of our stockholders,
which we used to fund the completion of our second QuickBird satellite.
This vendor financing facility accrues interest at an annual rate of
11%, which becomes payable in May 2002. Beginning in June 2002 and
ending in March 2003, principal, in equal monthly amounts, and interest
are payable in cash each month. In conjunction with this arrangement,
we agreed to issue to Ball Aerospace & Technologies Corp. 903,608
shares of Series C preferred stock.
In February 2001, we secured a commitment for a $20.75 million
borrowing facility with Boeing Capital Services Corporation ("BCSC").
If drawn, the facility would accrue interest at LIBOR plus 4% to 6%,
depending upon the duration of the borrowing, and would be payable
quarterly in arrears. The commitment is subject to the execution of a
credit agreement and the Company having $125 million of contractually
committed orders or some form of facility guarantee in place. As we
have not yet met these requirements, these funds are not currently
available. The facility is available through September 30, 2002, will
have a two and a half year term and has an annual commitment fee of 50
basis points payable quarterly in arrears. At December 31, 2001, the
Company had incurred deferred financing costs of approximately $500,000
related to this facility.
F-12
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Company's debt is comprised of the following at December 31:
2000 2001
---- ----
13% Senior Discount Notes, net of unamortized discount of
$64,852,862, and $13,892,769, respectively, effective
rate of 18.3% $ 134,147,138 $ 57,757,231
12 1/2% Senior Notes, net of unamortized discount of
$10,731,089 and none, respectively, effective rate of
12.9% 61,268,911 -
11% Vendor financing facility, net of unamortized discount
of zero and $458,137, respectively, effective rate of
17.5% - 9,086,666
Capital-lease obligations 68,601 -
------------- -------------
195,484,650 66,843,897
Less: current portion (195,484,650) (5,971,025)
------------- -------------
$ - $ 60,872,872
============= =============
6. Stockholders' Equity
In conjunction with the Company's reincorporation in Delaware
on August 21, 1995, the Company changed the par value of its
outstanding common stock ("Common Stock") and all convertible preferred
stock from no par value to a par value of $0.001.
Recapitalization
A special meeting of the Company's stockholders was called in
April 1999 to discuss a preferred stock financing and recapitalization
of the Company. The stockholders approved and adopted an Amended and
Restated Certificate of Incorporation and a Recapitalization Agreement,
which resulted in three new series of EarthWatch Preferred Stock. At
the closing, shares of the Company's new Series A 7% Cumulative
Convertible Redeemable Preferred Stock ("Series A Convertible Preferred
Stock"), Series B 7% Cumulative Convertible Redeemable Preferred Stock
("Series B Convertible Preferred Stock"), and new Common Stock were
sold and issued for an aggregate cash payment of $50,000,000. In
accordance with the Recapitalization Agreement, all outstanding shares
of Common Stock and former Series A, B, C, and D preferred stock were
exchanged (at a 1 to .44116 ratio for all outstanding Preferred Stock
and at a 1 to .210202 ratio for all outstanding Common Stock) for an
aggregate of 11,042,075 shares of new Series C Convertible Preferred
Stock.
Additional Funding
As discussed in Note 5--Debt, 199,000 units, each of which
consisted of one Senior Discount Note and 49.095 shares of Series C
Convertible Preferred Stock were issued in July 1999.
Description of EarthWatch Stock
The following description summarizes certain terms of the
Company's capital stock and certain provisions of the Company's amended
and restated certificate of incorporation and bylaws.
Old Series A and B Convertible Preferred Stock
Each share of Series A Convertible Preferred Stock (the "Old
Series A Preferred Stock") and Series B Convertible Preferred Stock
(the "Old Series B Preferred Stock") was, as of December 31, 1998,
convertible into one share of Common Stock, subject to future
adjustment in the event of recapitalizations or dividends of Common
Stock. The holders of Old Series A Preferred Stock had the contractual
right to receive additional shares upon certain issuances of stock for
a price less than $4.00 per share. The conversion ratio of Old Series B
Preferred Stock was subject to adjustment upon certain issuances of
stock for a price less than $10.00 per share.
F-13
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
All Old Series A and B Preferred Stock, by their terms, were
convertible at the option of the holder at any time and converted into
Common Stock simultaneously upon an initial public offering with gross
proceeds of at least $5,000,000 or with the written notice to the
Company from holders of a majority of the outstanding shares of either
of the two series of participating preferred stock consenting thereto.
Upon conversion, all accrued and unpaid dividends, whether or not
declared, were canceled.
All Old Series A and B Preferred Stock were voting and had
liquidation preferences (Old Series A Stock and Series B Stock at $4.00
and $10.00 per share, respectively, plus an amount equal to all
declared but unpaid dividends on each share).
When, and only if, dividends were declared by the Company's
Board of Directors, the Series A Stock and Series B Stock participated
pari passu and had a right to receive dividends of $0.32 per share per
annum prior to any dividends paid to holders of Common Stock. Upon the
distribution to each common stockholder of an amount per share equal to
$4.00 divided by the Old Series A Stock conversion ratio, the Old
Series A Stock, Old Series B Stock, and Common Stock shared in any
remaining liquidation distributions on a pro rata as-converted basis.
Old Series C Senior Convertible Preferred Stock Issuance
On April 30, 1996, the Company issued 7,000,000 shares of 12%
Series C Convertible Senior Preferred Stock (the "Old Series C
Preferred Stock") at a price of $10.00 per share. Holders of the Old
Series C Preferred Stock were entitled to dividends at an annual rate
of 12% of the accreted liquidation preference on a quarterly basis
commencing June 30, 1996. All unpaid dividends compounded quarterly at
the annual dividend rate. The Company did not declare or pay in cash
the dividends accrued as of December 31, 1998. Accordingly, the
liquidation preference increased from $10.00 to $13.72 per share as of
December 31, 1998.
Each share of Old Series C Preferred Stock was convertible, at
the option of the holder, at any time into one share of Common Stock of
the Company, subject to adjustment in certain events. Accrued and
unpaid dividends may be converted concurrently with the conversion of
the Old Series C Preferred Stock, at the option of the holder only upon
certain events, at a conversion price equal to 85% of the market price
of the Company's Common Stock.
Old Series D Convertible Preferred Stock
The Old Series D Convertible Preferred Stock (the "Old Series
D Preferred Stock") had the same terms as the Old Series B Stock but
excluded anti-dilution protection.
Series A and Series B Convertible Redeemable Preferred Stock
Except with respect to the voting rights and representation on
the board of directors, the Company's Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock are identical in all
respects.
Rank. Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock are pari passu and rank senior to Series C
Convertible Preferred Stock and Common Stock with respect to dividends,
liquidation preference, and redemption.
Dividends. The holders of Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock are entitled to receive
cumulative dividends, whether or not declared by the Company's board of
directors, at an annual rate of 7% until no later than June 15, 2003.
Such dividends are payable quarterly on March 31, June 30, September
30, and December 31, and commenced on June 30, 1999. Such dividends may
be paid, subject to certain limitations, at the Company's option,
either in cash or in additional shares of Series A Convertible
Preferred Stock or Series B Convertible Preferred Stock, as applicable,
until June 15, 2003. After June 15, 2003, dividends will accrue at an
annual rate of 7% of the liquidation preference and will be payable,
when, as, and if declared by the board of directors, in cash only.
If any dividend is not paid in full in cash on a quarterly
payment date after June 15, 2003, the liquidation preference of the
Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock will be increased by an amount equal to the product of (a) the
amount per share not paid divided by the total amount payable per share
and (b) one quarter of the dividend rate multiplied by the effective
liquidation preference. The Company is prohibited from
F-14
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
paying dividends on any shares of stock having rights junior to the
Series A and Series B Convertible Preferred Stock until all accumulated
dividends have been paid on the Series A and Series B Convertible
Preferred Stock.
Liquidation Preference. Upon liquidation, dissolution, or
winding up, the holders of Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock will be entitled to receive out of
the assets available for distribution prior to and in preference of the
Series C Convertible Preferred Stock, an amount equal to $3.50 per
share, plus all accrued and unpaid dividends, subject to adjustment.
Conversion. From June 15, 1999 and until June 15, 2003, each
share of Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock is convertible at the option of the holder into that
number of shares of Common Stock obtained by dividing the applicable
liquidation preference, plus any accumulated but unpaid dividends by
$3.50, subject to anti-dilution adjustments. Prior to June 15, 2003,
each share of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock will automatically convert into Common
Stock at the applicable conversion ratio upon the earlier of (a) an
initial public offering of shares of Common Stock with an aggregate
public offering price of at least $35,000,000 and (b) the listing of
shares of the Company's Common Stock under certain circumstances. After
June 15, 2003, each share of Series A Preferred Stock and Series B
Preferred Stock shall not be convertible into common stock.
Anti-dilution. The conversion price of the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock is
subject to adjustment under certain circumstances, including upon any
subsequent issuance of capital stock. The issuance of the Series C
Convertible Preferred Stock resulted in an adjustment in the conversion
prices of the Series A and Series B Convertible Preferred Stock.
Redemption. The Company is required to redeem all of the
Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock outstanding on March 31, 2009, at a redemption price equal to
100% of the then existing applicable liquidation preference, plus
accrued and unpaid dividends to the date of redemption, subject to the
legal availability of funds therefor.
Voting Rights. Each holder of Series A Convertible Preferred
Stock is entitled to .65 (subject to adjustment) votes per share held
(on an as-converted basis) and each holder of Series B Convertible
Preferred Stock is entitled to 1.35 (subject to adjustment) votes per
share held (on an as-converted basis).
Board Representation. The holders of Series A Convertible
Preferred Stock has the right to elect two persons to the board of
directors and the holders of the Series B Convertible Preferred Stock
have the right to elect four persons to the board of directors.
Series C Convertible Redeemable Preferred Stock
Rank. The Series C Convertible Preferred Stock is junior to
the Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock, but senior to the Common Stock, with respect to
dividends, liquidation preference, and redemption.
Dividends. The holders of Series C Convertible Preferred Stock
are entitled to cumulative dividends, whether or not declared by the
board of directors, at an annual rate of 8.5% until no later than June
15, 2003. Such dividends are payable quarterly on March 31, June 30,
September 30, and December 31, and commenced on June 30, 1999. Until
June 15, 2003, such dividends may be paid, subject to certain
limitations, at the Company's option, either in cash or in additional
shares of Series C Convertible Preferred Stock. After June 15, 2003,
dividends will accrue at an annual rate of 8.5% of the liquidation
preference and will be payable, when, as, and if declared by the board
of directors, in cash only.
If any dividend is not paid in full in cash on a quarterly
payment date after June 15, 2003, the liquidation preference of the
Series C Convertible Preferred Stock will be increased by an amount
equal to the product of (a) the amount per share not paid divided by
the total amount payable per share and (b) one quarter of the dividend
rate multiplied by the effective liquidation preference. The Company is
prohibited from paying dividends on any shares of stock having rights
junior to the Series C Convertible Preferred Stock until all
accumulated dividends have been paid on the Series C Convertible
Preferred Stock.
F-15
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Liquidation Preference. Upon liquidation, dissolution, or
winding up, the holders of the Series C Convertible Preferred Stock
will be entitled to receive out of the assets available for
distribution, following payment of the Series A and Series B
liquidation preference, an amount equal to $3.50 per share, plus all
accrued and unpaid dividends, subject to adjustment.
Conversion. Until June 15, 2003, each share of Series C
Convertible Preferred Stock will be convertible at the option of the
holder into that number of shares of Common Stock obtained by dividing
the Series C liquidation preference, plus any accumulated but unpaid
dividends by $3.50, subject to anti-dilution adjustments. Prior to June
15, 2003, each share of Series C Convertible Preferred Stock will
automatically convert into Common Stock at the applicable conversion
ratio upon the earlier of (a) an initial public offering of shares of
Common Stock with an aggregate public offering price of at least
$35,000,000 and (b) the listing of shares of the Company's Common Stock
under certain circumstances. After June 15, 2003, each share of Series
C preferred stock shall not be convertible into common stock.
Antidilution. The conversion price of the Series C Convertible
Preferred Stock is subject to adjustment under certain circumstances.
Redemption. The Company is required to redeem all of the
Series C Convertible Preferred Stock outstanding on March 31, 2009, at
a redemption price equal to 100% of the effective liquidation
preference, plus accrued and unpaid dividends to the date of
redemption, subject to the legal availability of funds therefor.
Voting Rights. Each holder of DigitalGlobe Series C
Convertible Preferred Stock is entitled to one (subject to adjustment)
vote per share on an "as-converted" basis.
Board Representation. The holders of the Series C Convertible
Preferred Stock are entitled to elect three members of the board of
directors.
Tag-along Rights. If one stockholder or a group of
stockholders proposes to sell any shares of capital stock in one
transaction such that, following such sale, shares of capital stock
representing more than 35% of the then outstanding shares (on a
fully-diluted basis) will have been sold to one holder or a group of
related holders, then each holder of Series C Convertible Preferred
Stock shall have the right to receive notice of such a transaction and
shall also have the right to participate in the transaction and sell a
proportionate number of such holders' Series C Convertible Preferred
Stock in such transaction.
Common Stock
Holders of Common Stock are entitled to one vote for each
share held of record at all meetings of the stockholders. Holders of
Common Stock are not entitled to cumulative voting rights with respect
to the election of directors. Subject to preferences that are
applicable to outstanding shares of preferred stock, holders of Common
Stock are entitled to receive ratably such dividends as may be declared
by the board of directors out of funds legally available to be paid.
In the event of a liquidation, dissolution, or winding up,
holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference
of the outstanding preferred stock. Holders of Common Stock have no
preemptive rights and no right to convert their Common Stock into any
other securities. There are no redemption provisions applicable to the
Common Stock. The outstanding shares of Common Stock are fully paid and
nonassessable.
7. Stock Options and Warrants
The Company maintains a 1995 Stock Option/Stock Issuance Plan
(the "95 Plan") pursuant to which incentive and nonqualified stock
options to purchase shares of the Company's stock or the stock itself
have been issued to employees, officers, directors, and consultants.
Under the 95 Plan, incentive stock options were granted with exercise
prices not less than the fair value of the stock on the various dates
of grant, as determined by the Company's Board of Directors. Options
granted pursuant to the 95 Plan are subject to certain terms and
conditions as contained in the 95 Plan itself, have a ten-year term,
generally vest over a four-year period, and are immediately
exercisable. Upon termination of
F-16
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
services to the Company by optionees, any acquired but unvested shares
are subject to repurchase by the Company at the original exercise
price. During 1999, the Board of Directors amended the 95 Plan
eliminating future grants. As a result of the Recapitalization
Agreement adopted in 1999, the stock from any exercised options under
the 95 Plan automatically convert to the new Series C Convertible
Preferred Stock at the rates established in the Recapitalization
Agreement.
On February 15, 2000, the Board of Directors approved the
written 1999 Equity Incentive Plan (the "99 Plan") pursuant to which
incentive and nonqualified stock options to purchase shares of the
Company's stock or the stock itself may be issued to employees,
officers, directors, and consultants. Under the 99 Plan, incentive
stock options are granted with exercise prices not less than the fair
value of the stock on the various dates of grant, as determined by the
Company's Board of Directors. Options granted pursuant to the 99 Plan
are subject to certain terms and conditions as contained in the 99 Plan
itself, have a ten-year term, generally vest over a four-year period,
and are immediately exercisable. Upon termination of services to the
Company by optionees, any acquired but unvested shares are subject to
repurchase by the Company at the original exercise price. At December
31, 2001, there were 6,122,816 shares available for grant under the 99
Plan.
The following is a summary of stock option activity:
Number
Number Weighted- Weighted of Series Weighted
of Series A Average Number Average C Average
Preferred Exercise of Common Exercise Preferred Exercise
Shares Price Shares Price Shares Price
---------- ------ ----- ------ ------- ------
Outstanding at January 1, 1997 37,800 $0.05 1,158,300 $0.80
Granted -- -- 620,295 0.80
Exercised -- -- (10,282) 0.80
Expired (117,571) 0.80
--
--------- -----------
Outstanding at December 31, 1997 37,800 0.05 1,650,742 0.80
Granted -- - 798,655 0.80
Exercised (17,916) 0.05 (54,631) 0.80
Expired or terminated (2,084) 0.05 (1,019,595) 0.80
---------- ----------
Outstanding at December 31, 1998 17,800 0.05 1,375,171 0.80
As converted (17,800) 0.05 (1,375,171) 0.80 296,916 $3.71
Adjustment for conversion rounding -- -- -- -- (5) 3.71
Granted -- -- -- -- 12,297 3.71
Exercised -- -- -- (5,025) 3.71
Expired or terminated -- -- -- -- (10,859) 3.71
--------- ----------- ----------
Outstanding at December 31, 1999 -- -- -- -- 293,324 3.71
Granted -- -- 3,719,075 0.25 -- --
Exercised -- -- (195,419) 0.25 (293) 3.81
Expired or terminated -- -- (284,329) 0.25 (39,731) 3.81
--------- -------- ----------
Outstanding at December 31, 2000 -- 3,239,327 0.25 253,300 3.69
Granted -- -- 775,740 0.25 -- --
Exercised -- -- (366,670) 0.25 (9,201) 3.81
Expired or terminated -- -- (333,302) 0.25 (15,001) 3.81
--------- ---------- ----------
Outstanding at December 31, 2001 -- 3,315,095 0.25 229,098 3.68
========= =========== =======
Weighted-average remaining contractual
life 8.5 years 5.0 years
Range of exercise prices 0.25 0.05 - 3.81
Outstanding options vested 2,173,316 0.25 229,098 3.68
Weighted-average grant-date fair values were as follows:
1999 2000 2001
---- ---- ----
Exercise price * market value -- $0.57 --
Exercise price = market value $0.94 0.07 $ 0.05
/1/ * represents less then
F-17
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The fair value of each option grant was estimated on the date
of grant using the Black-Scholes option-pricing model with the
following assumptions:
1999 2000 2001
---- ---- ----
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 0.00% 0.00% 0.00%
Risk free interest rate 4.60% - 5.14% 6.50% 3.90% -4.90%
Expected life of options (years) 5.00 5.00 5.00
Prior to fiscal 2000, the Company had not recognized any stock
compensation expense in its financial statements. As part of its fiscal
2000 yearend close process, the Company recorded approximately $1.5
million of deferred stock compensation expense in accordance with APB
No. 25. Had compensation expense for the Company's stock options been
determined based on the fair values at the grant dates for awards under
the plan consistent with the method of accounting prescribed by SFAS
No. 123, Accounting for Stock-based Compensation, the Company's net
loss would have been as follows for the year ended December 31 (in
thousands):
1999 2000 2001
---- ---- ----
Net income (loss) - as reported $(20,319) $76,682 $(49,290)
Net loss - pro forma (20,396) 76,402 (49,505)
8. Income Taxes
The provision for income taxes consists of the following for
the fiscal years ended December 31:
1999 2000 2001
---- ---- ----
Current provision
Federal $ -- $2,500,000 $ --
State -- 500,000 --
-------- ---------- -------
Provision for income taxes $ -- $3,000,000 $ --
======== ========== =======
At December 31, 2001, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $171.5
million. In addition, the Company has research and development tax
credits of approximately $1.6 million. If unused, the carryforwards and
credits will begin to expire in 2010. The Internal Revenue code places
certain limitations on the annual amount of net operating loss
carryforwards, which can be utilized if certain changes in the
Company's ownership occurs. The Company believes that such changes have
occurred and could occur in the future to further limit the utilization
of the carryforwards.
The Company's deferred tax assets and liabilities are
comprised of the following as of December 31:
2000 2001
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 52,615,023 $ 67,037,921
Fixed assets -- --
Other 5,859,826 4,782,873
------------ ------------
Gross deferred tax assets 58,474,849 71,820,794
------------ ------------
Deferred tax liabilities:
Fixed assets (41,707,211) (35,873,919)
------------- -------------
Net deferred tax assets 16,767,638 35,946,875
(16,767,638) (35,946,875)
------------- -------------
Net deferred tax assets (liabilities) $ -- $ --
============= =============
Net deferred tax assets have been reduced to zero by a
valuation allowance based on current evidence which indicates that it
is considered more likely than not that these benefits will not be
realized.
F-18
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following is a reconciliation of the statutory U.S.
federal income tax rate to the Company's effective income tax rate of
continuing operations for the fiscal years ended December 31:
1999 2000 2001
---- ---- ----
Federal income tax rate 34.0% 35.0% 35.0%
State income tax rate, net of federal benefit 5.0 4.7 3.9
Meals and entertainment (0.2) (1.0) 0.4
Disqualified interest -- 1.2 (0.5)
Effect of change in valuation allowance and other items
(38.8) (36.1) (38.8)
------- ------ ------
Effective income tax rate --% 3.8% --%
======= ====== ======
9. Benefit Plan
In October 1995, the Company adopted a 401k Savings and
Retirement Plan (the "401k Plan"), a tax-qualified plan covering all of
its employees. Employees may elect to contribute, subject to certain
limitations, up to 60% of their annual compensation to the 401k plan.
The 401k Plan provides that the Company may contribute matching or
additional contributions to the 401k Plan at the discretion of the
Board of Directors. The Company has not made any contributions to the
401k Plan since its inception.
10. Commitments
The Company leases its facilities under various operating
lease arrangements. Future minimum lease payments under noncancelable
operating leases and other contractual commitments as of December 31,
2001 are summarized below:
2002 $ 7,553,409
2003 1,015,138
2004 913,068
2005 349,885
2006 and thereafter -
-----------
Total $ 9,831,500
===========
The Company has minimum purchase requirements in 2002 and 2003
under the SPOT Image Corporation agreement discussed below and under
other agreements in effect at December 31, 2001. Rent expense
approximated $888,305, $1,451,324, and $1,071,709 for the years ended
December 31, 1999, 2000, and 2001, respectively.
11. Material Relationships and Related Party Transactions
Ball Aerospace & Technologies Corp.
The Company has had various contracts with Ball Aerospace &
Technologies Corp., a stockholder of the Company, since inception for
the design and manufacture of satellites. The Company made payments to
Ball Aerospace totaling $33,455,000, $16,225,217, $4,080,214 and
$89,374,969 under these contracts for the years ended December 31,
1999, 2000, and 2001, and for the period from January 1, 1995
(inception) through December 31, 2001, respectively. At December 31,
2000 and 2001, amounts totaling $537,298 and $40,066 are included in
accounts payable to Ball Aerospace. In addition, see discussion of
financing provided by Ball Aerospace in Notes 1 and 5.
Mr. Vanlandingham, a director of EarthWatch, is the President
and Chief Executive Officer of Ball Aerospace.
F-19
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Hitachi, Ltd./Hitachi Software Engineering Company, Ltd.
Hitachi, Ltd. ("Hitachi"), a stockholder of the Company,
currently is a master international distributor of our products, and
the exclusive distributor in most of Asia. Under the Company's
distribution agreement, Hitachi will be entitled to purchase our
products at significant discounts. Additionally, the Company has
entered into an agreement with Hitachi Software Engineering Company,
Ltd. ("Hitachi Software"), an affiliate of Hitachi, Ltd., for the
development and delivery of a product processor and to cross-license
certain intellectual property rights related to the Company's ground
system and the proprietary software of Hitachi Software. The license
grants Hitachi Software the right to offer customers ground systems
that permit them to receive data directly from the Company's QuickBird
satellite. The Company made payments to Hitachi Software totaling
$2,167,000 under this agreement for the year ended December 31, 2000.
No other payments have been made to Hitachi or Hitachi Software nor are
any amounts owed as of December 31, 2001.
Mr. Kodaira, a director of DigitalGlobe, is the General
Manager of the Geospatial Information Division of Hitachi Software.
ITT Industries, Inc.
Since December 1998, the Company has had various contracts
with the ITT Systems division of ITT Industries, Inc. ("ITT"), a
stockholder of the Company, for system engineering and other efforts
associated with the scheduling and tasking module of the QuickBird
satellites, the development of a satellite simulator and certain other
research and development efforts. The Company made payments to ITT
totaling $2,946,117, $3,083,399, 171,175 and 6,200,691 under these
contracts for the years ended December 31, 1999, 2000 and 2001, and for
the period from January 1, 1995 (inception) through December 2001
respectively. At December 31, 2000 and 2001, amounts totaling $28,020
and $712,560 are included in accounts payable and accrued liabilities
to ITT.
Mr. Foley, a director of DigitalGlobe, is the Treasurer of ITT
Industries. Mr. Driesse, a director of DigitalGlobe, is the President
of ITT Industries' Defense Division.
MacDonald Dettwiler and Associates
Since June 1996, the Company and MacDonald Dettwiler and
Associates ("MDA"), a stockholder of the Company, have had an agreement
whereby the Company has purchased various goods and services from MDA.
Amounts totaling $3,091,653, $2,034,831, $772,386 and $7,218,197 have
been paid to MDA during the years ended December 31, 1999, 2000, and
2001, and for the period from January 1, 1995 (inception) through
December 31, 2001, respectively. At December 31, 2000 and 2001, amounts
totaling $236,220 and $75,626 are included in accounts payable and
accrued liabilities to Ball Aerospace.
Morgan Stanley & Co. Incorporated
Morgan Stanley & Co. Incorporated ("Morgan Stanley"), a
stockholder of the Company, acted as placement agent in connection with
the Company's offering in April 1996 of 7,000,000 shares of the
Company's former Series C preferred stock and the Company's offering in
March 1997 of 50,000 units, each consisting of one note and one warrant
to purchase 31.12 shares of the Company's common stock. Morgan Stanley
also acted as placement agent in connection with the Company's offering
in July 1999 of 199,000 units, each consisting of one 13% note and
49.095 shares of the Company's existing Series C preferred stock. In
connection with its role in these offerings, Morgan Stanley received
customary commissions and discounts in its capacity as placement agent.
Morgan Stanley acts as exclusive financial advisor to
EarthWatch under a five-year agreement. Morgan Stanley received
$750,000 and $1.0 million in connection with its advisory role in the
recapitalizations in April 1999 and 2001, respectively.
Mr. Petrick, a director of DigitalGlobe, is a Managing
Director of Morgan Stanley.
F-20
EARTHWATCH INCORPORATED, DBA DIGITALGLOBE
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
SPOT Image Corporation
On January 25, 2002, the Company acquired exclusive rights for
the distribution of satellite products and services to the United
States agriculture and defense markets from SPOT Image Corporation, a
subsidiary of SPOT Image S.A., in exchange for approximately $50.0
million of cash and certain data purchase commitments. The data
purchase commitments vary by period during the six and one-half year
term of the agreement. If we do not meet 80% of our data purchase
obligations after any contract year of the agreement, we may terminate
the agreement. However, upon termination we remain obligated for 45% of
the next years' minimum data purchase commitment. Minimum payments
under the agreement are currently approximately $7.0 million and $3.8
million in 2002 and 2003, respectively.
United Start Corporation/Assured Space Access, Inc
In 1998, the Company entered into an agreement with United
Start Corporation ("United Start") pursuant to which United Start
provided launch and associated services for the QuickBird 1 satellite
launch and we have an option to launch another satellite. The Company
made payments to United Start under this agreement of approximately
$3.3 million, $5.2 million, $2.3 million and $10.8 million in 1999,
2000, and 2001, and for the period from January 1, 1995(inception)
through December 31, 2001, respectively. At December 31, 2000, amounts
totaling $2,240,000 are included in accounts payable and accrued
liabilities to United Start. In addition, the Company made payments to
Assured Space Access, Inc., which performed services in connection with
the launch of the first QuickBird satellite, of approximately $1.1
million in 1999 and $662,781 in 2000.
Mr. Lushtak, a former director of DigitalGlobe, was
Co-Chairman and Chief Executive Officer of United Start, and is
Chairman and Chief Executive Officer of Assured Space Access.
12. Summary of Activity by Geographical Area
U.S. Other Consolidated
---- ----- ------------
Net Sales (in thousands)
------------------------
1999 $ 5,913.3 $ -- $ 5,913.3
2000 3,336.1 -- 3,336.1
2001 11,802.6 206.9 12,009.5
Long-Lived Assets (in thousands)
--------------------------------
1999 $161,093.6 $1,678.3 $162,771.9
2000 110,047.7 2,086.8 112,134.5
2001 194,325.5 1,688.3 196,013.8
F-21
================================================================================
WE HAVE NOT AUTHORIZED ANY PERSON TO MAKE A STATEMENT THAT DIFFERS FROM WHAT IS
IN THIS PROSPECTUS. IF ANY PERSON DOES MAKE A STATEMENT THAT DIFFERS FROM WHAT
IS IN THIS PROSPECTUS, YOU SHOULD NOT RELY ON IT. THIS PROSPECTUS IS NOT AN
OFFER TO SELL, NOR IS IT SEEKING AN OFFER TO BUY, THESE SECURITIES IN ANY STATE
IN WHICH THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION IN THIS PROSPECTUS
IS COMPLETE AND ACCURATE AS OF ITS DATE, BUT THE INFORMATION MAY CHANGE AFTER
THAT DATE.
EARTHWATCH INCORPORATED
13% SENIOR DISCOUNT NOTES DUE 2007
------------
PROSPECTUS
------------
March __, 2001
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table shows the costs and expenses to be incurred, other
than underwriting discounts and commissions, in connection with the offering
described in this registration statement, all of which will be paid by the
registrant. All amounts are estimates, other than the SEC registration fee.
SEC registration fee..............................$ 4,290
Accounting fees and expenses.......................100,000
Legal fees and expenses............................150,000
Printing and engraving expenses.....................20,000
Transfer Agent and registrar fees.......................--
Miscellaneous expenses..............................10,000
Total.............................................$284,290
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article X of our Amended and Restated Certificate of Incorporation
provides for the indemnification of our directors to the fullest extent
permissible under Delaware law.
Article XI of our Bylaws provides that we will indemnify our officers,
directors, and employees against any and all liability and reasonable expenses
incurred in connection with any claim, action, suit, or proceeding in which that
person may become involved by reason of their relationship to us, provided that
the person acted in good faith and in a manner reasonably believed to be in our
best interests. Our bylaws prevent us from indemnifying an officer, director, or
employee to the extent not permitted under Delaware law as well as in the
following circumstances:
. as to amounts paid or payable to us for or based upon the director,
officer, or employee having gained any personal profit or advantage
to which he was not legally entitled; or
. as to amounts paid or payable to us for accounting profits made from
the purchase or sale of our securities within the meaning of Section
16(b) of the Securities Exchange Act of 1934, as amended.
Our bylaws also provide that we will grant indemnification only if our
board of directors, outside legal counsel, or a court of competent jurisdiction
determines that the officer, director, or employee has met the applicable
standard of conduct as described above, or if the officer, director, or employee
has been wholly successful with respect to the claim, action, suit, or
proceeding.
Section 145 of the Delaware General Corporation Law permits us to include
in our charter documents, and in agreements between a corporation and its
directors and officers, provisions expanding the scope of indemnification beyond
that specifically provided by the current law.
We maintain liability insurance coverage for our directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of our transactions since January 1, 1997,
involving sales of our securities that were not registered under the Securities
Act of 1933, as amended:
(1) In March 1997, we sold 50,000 units, each consisting of one note and
one warrant to purchase 31.12 shares of common stock for an aggregate purchase
price of $50 million to accredited investors in reliance on Rule 144A
promulgated under the Securities Act. Morgan Stanley served as the placement
agent in connection with this offering and received a placement fee of
approximately $1.5 million.
(2) In April 1999, as a result of our recapitalization:
. all of our outstanding shares of common stock and preferred stock
were exchanged (at a 1 to .44116 ratio for all outstanding preferred
stock and a 1 to .210202 ratio for all outstanding common stock) for
an aggregate of 11,042,075 shares of newly created Series C preferred
stock;
. all warrants issued in connection with our 1997 units offering were
exercised for an aggregate of 327,074 shares of new Series C
preferred stock for aggregate proceeds to us of $15,600;
. all warrants issued to Odetics, Incorporated to purchase Series A
preferred stock automatically converted by their terms into warrants
to purchase an aggregate of 12,463 shares of new Series C preferred
stock;
. all outstanding options to purchase common stock or preferred stock
were automatically converted by their terms into options to purchase
an aggregate of 306,700 shares of new Series C preferred stock;
. Ball Technologies surrendered 2,761,983 shares of Series A preferred
stock to us (which we cancelled and retired);
. we have included 30,500 shares of common stock issued to the
Waterstone Group in the number of shares that were exchanged for new
Series C preferred stock in the recapitalization;
. ITT Industries invested $25 million in exchange for 7,142,857 shares
of new Series A preferred stock;
. Morgan Stanley invested $15 million in exchange for 4,285,714 shares
of new Series B preferred stock and one share of new common stock;
. Capital Research invested $10 million in exchange for 2,857,143
shares of new Series B preferred stock; and
. our 12 1/2% Senior Notes due March 1, 2001 were exchanged for new
12 1/2% Senior Notes having a maturity of March 1, 2005.
Each of the purchasers in these transactions were accredited investors.
Accordingly, we relied on the exemptions from registration provided by Rule 144A
promulgated under the Securities Act or Section 4(2) of the Securities Act to
effect these transactions. Morgan Stanley served as our financial advisor in
connection with the recapitalization and received $750,000 in connection with
its advisory role.
(3) In July 1999, we sold 199,000 units, each consisting of one 13% Senior
Discount Note due 2007 and 49.095 shares of Series C preferred stock for $199
million to accredited investors in reliance on Rule 144A promulgated under the
Securities Act. Morgan Stanley served as the placement agent in connection with
this offering and received a placement fee of approximately $1.5 million.
(4) From May 1995 to April 1999, we granted options to purchase 585,349
shares of Series C preferred stock under our 1995 Stock Option/Stock Issuance
Plan; 48,094 shares of Series C preferred stock were issued upon exercise of
these options and 272,629 options are outstanding. All options were granted
under Rule 701 promulgated under the Securities Act or, for those employees who
are our officers or directors or that are accredited investors, Section 4(2) of
the Securities Act.
(5) From February 2000 to February 2002, we have granted options to
purchase 4,635,261 shares of common stock under our 1999 Equity Incentive Plan;
800,882 shares of common stock were issued upon exercise of these options and
3,206,470 options are outstanding. All options were granted under Rule 701
promulgated under the Securities Act or, for those employees who are our
officers or directors or that are accredited investors, Section 4(2) of the
Securities Act.
(6) In June 2001, we issued 10,843,297 shares of Series C preferred stock
to holders of notes in partial consideration for those holders refraining from
tendering their notes in our previous tender offer. Each of the purchasers in
this transaction were accredited investors. Accordingly, we relied on the
exemptions from registration
provided by Regulation D promulgated under the Securities Act or Section 4(2) of
the Securities Act to effect this transaction. Morgan Stanley served as our
financial advisor in connection with these and related transactions and received
$1 million in connection with its advisory role.
(7) In June 2001, we issued 903,608 shares of Series C preferred stock to
Ball Aerospace, an accredited investor, in connection with its provision of
vendor financing. We relied on the exemption from registration provided by
Regulation D promulgated under the Securities Act or Section 4(2) of the
Securities Act to effect this transaction.
Appropriate legends are affixed to the stock certificates issued in the
transactions listed above. Similar legends were imposed in connection with any
subsequent sales of any such securities. Each of the purchasers that are our
employees or directors had access to information through their employment by us.
Each purchaser was given the opportunity to ask questions of and request
information from us. Each investor represented and acknowledged to us in writing
that it had this opportunity. Some of the purchasers asked questions and
requested information. We complied with all requests that we deemed reasonable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
Exhibit Number Description
- -------------- -----------
1.1* Placement Agreement dated July 7, 1999 by and between
EarthWatch and Morgan Stanley & Co. Incorporated.
2.1* Recapitalization Agreement dated as of April 8, 1999
among EarthWatch, Morgan Stanley & Co. Incorporated,
Capital Research and Management Company, for the
benefit of American High-Income Trust, American
Variable Insurance Series Asset Allocation Fund,
American Variable Insurance Series Bond Fund, American
Variable Insurance Series High-Yield Bond Fund and
Bond Fund of America, Inc., Ball Technologies Holdings
Corp. and ITT Industries, Inc.
2.2** Recapitalization Agreement and Consent dated as of
April 2, 2001 by and among EarthWatch Incorporated,
Morgan Stanley & Co. Incorporated, Post Balanced Fund,
Post High Yield LP, Post Total Return Fund, Opportunity
Fund, Dickstein & Co., L.P., Dickstein International
Limited, Hitachi Software Engineering Co., Ltd., Sun
America High Income Fund and Sun America Series Trust
High Yield Portfolio.
3.1* Amended and Restated Certificate of Incorporation, as
amended.
3.2* Bylaws, as currently in effect.
3.3**** Certificate of Amendment to Amended and Restated
Certificate of Incorporation.
3.4***** Certificate of Amendment to Amended and Restated
Certificate of Incorporation.
4.1* Stockholders' Agreement dated as of April 8, 1999 among
EarthWatch, Morgan Stanley & Co. Incorporated, Capital
Research and Management Company, for the benefit of
American High Income Trust, American Variable Insurance
Series Asset Yield Bond Fund and Bond and Bond Fund of
America, Inc., ITT Industries, Inc. and the other
persons listed on the signature pages thereto.
4.3* Indenture dated as of July 12, 1999, by and between
EarthWatch and The Bank of New York, including form of
13% Senior Discount Note Due 2007.
4.6* Series C Preferred Registration Rights Agreement dated
as of July 7, 1999 between EarthWatch and Morgan Stanley
& Co. Incorporated.
4.7* Notes registration rights agreement dated as of July 12,
1999 between EarthWatch and Morgan Stanley & Co.
Incorporated.
4.8* Specimen 13% Senior Discount Note Due 2007.
4.10** Notes Registration Rights Agreement dated as of April 3,
2001 by and among EarthWatch, The Bank of New York and
Morgan Stanley & Co. Incorporated.
4.11** Series C Preferred Registration Rights Agreement dated
as of April 3, 2001 by and among EarthWatch, Morgan
Stanley & Co. Incorporated, Post Balanced Fund, Post
High Yield LP, Post Total Return Fund, Opportunity Fund,
Dickstein & Co., L.P., Dickstein International Limited,
Sun America High Income Fund, Sun America Series Trust
High Yield Portfolio, Hitachi Software Engineering Co.,
Ltd. and Ball Technologies Holdings Corp.
4.12** Pledge Agreement dated as of April 3, 2001 by and among
EarthWatch, The Bank of New York, as trustee, and The
Bank of New York, as securities intermediary.
4.13** First Supplemental Indenture dated April 16, 2001, by
and between EarthWatch and The Bank of New York, as
trustee.
4.14**** Senior Collateral Pledge and Security Agreement, dated
as of June 15, 2001, between EarthWatch Incorporated
and The Bank of New York, as collateral agent.
4.15**** Junior Collateral Pledge and Security Agreement, dated
as of June 15, 2001, between EarthWatch Incorporated
and The Bank of New York, as collateral agent.
5.1 + Opinion of Baker & McKenzie.
10.1* EarthWatch Incorporated 1995 Stock Option Stock
Issuance Plan.
10.2* EarthWatch Incorporated 1999 Equity Incentive Plan.
10.3* Ball-EarthWatch Agreement dated as of April 8, 1999 by
and between EarthWatch and Ball Technologies Holdings
Corp.
10.4* Contract for QuickBird Spacecraft dated as of June 9,
1998, as amended, by and between EarthWatch and Ball
Aerospace & Technologies Corp.
10.5* Engineering Services Agreement dated as of March 6,
1996, as amended, by and between EarthWatch and Ball
Aerospace & Technologies Corp.
10.6* Strategic Supplier Agreement dated as of February 26,
1999, by and between EarthWatch and ITT Industries, Inc.
10.7* Agreement for the EarthWatch QuickBird Sensor Subsystem
dated as of October 15, 1996, as amended, by and between
EarthWatch and Eastman Kodak Company.
10.8* EarthWatch-Hitachi Imaging Distribution Agreement dated
as of June 4, 1995, as amended, by and between
EarthWatch and Hitachi, Ltd.
10.9* Distributor Agreement dated as of August 1, 1997, by and
between Nuovo Telespazio, S.p.A.
10.10* Launch Services Agreement dated as of April 1, 1999, by
and between EarthWatch and United Start Corporation.
10.11* Lease Agreement between EarthWatch and Pratt Land
Limited Liability Company.
10.12*** Delta II Launch Services Agreement between Earthwatch
and Delta Launch Services, Inc. (Confidential treatment
has been requested for portions of this document.)
10.13*** Credit Agreement, dated as of April 20, 2001, by and
between EarthWatch and Ball Aerospace & Technologies
Corp.
10.14* Amendment Seven to Contract 9602-0117 (Engineering
Services Agreement), dated January 4, 2001, by and
between EarthWatch and Ball Aerospace & Technologies
Corp.
12.1 ****** Statements Regarding Computation of Ratio of Earnings to
Fixed Charges.
21.1 ****** Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 + Consent of Baker & McKenzie.
24.1 + Power of Attorney.
25.1 + Statement of .
* Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the registrant's registration statement on Forms S-4
and S-1/A (File No. 333-39202).
** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the registrant's Form 8-K filed with the SEC on
April 25, 2001.
*** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the registrant's Form 10-Q for the quarterly period
ended March 31, 2001.
**** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the registrant's Form 8-K filed with the SEC on June
20, 2001.
***** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the registrant's Form 8-K filed with the SEC on
December 26, 2001.
****** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the registrant's Form 10-K for the year ended
December 31, 2001.
+ Previously filed.
(b) Financial Statement Schedules
Schedules are not listed above because the information to be set forth
therein is not applicable or is shown in the financial statements or the notes
thereto.
ITEM 17. UNDERTAKINGS.
We hereby undertake:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding, is asserted by the director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of the issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and
contained in a form of prospectus filed by the registrant under
Rule 424(b)(1) or (4) or 497 (h) under the Securities Act of 1933
shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
securities at that time shall be deemed to be the initial bona
fide offering thereof.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, we have
duly caused this Registration Statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in the City of Longmont, State of
Colorado on March 29, 2002.
EARTHWATCH INCORPORATED
By: /s/ Herbert F. Satterlee III
----------------------------------
Herbert F. Satterlee III
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Herbert F. Satterlee III President and Chief Executive Officer, March 29, 2001
- ------------------------------------ Director, Chairman
Herbert F. Satterlee III (Principal Executive Officer)
/s/ Henry E. Dubois Chief Operating Officer, March 29, 2001
- ------------------------------------ Chief Financial Officer,
Henry E. Dubois Executive Vice President
(Principal Financial and
Accounting Officer)
* Chief Technical Officer, March 29, 2001
- ------------------------------------ Executive Vice President, Director
Walter S. Scott
* Director March 29, 2001
- ------------------------------------
Paul M. Albert, Jr.
* Director March 29, 2001
- ------------------------------------
Henry J. Driesse
* Director March 29, 2001
- ------------------------------------
Donald E. Foley
* Director March 29, 2001
- ------------------------------------
Anne Karalekas
* Director March 29, 2001
- ------------------------------------
Takatoshi Kodaira
* Director March 29, 2001
- ------------------------------------
Michael J. Petrick
* Director March 29, 2001
- ------------------------------------
Donald W. Vanlandingham
* By: /s/ Henry E. Dubois
--------------------
Henry E. Dubois
Attorney-in-fact
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
1.1* Placement Agreement dated July 7, 1999 by and between
EarthWatch and Morgan Stanley & Co. Incorporated.
2.1* Recapitalization Agreement dated as of April 8, 1999
among EarthWatch, Morgan Stanley & Co. Incorporated,
Capital Research and Management Company, for the
benefit of American High-Income Trust, American
Variable Insurance Series Asset Allocation Fund,
American Variable Insurance Series Bond Fund, American
Variable Insurance Series High-Yield Bond Fund and
Bond Fund of America, Inc., Ball Technologies Holdings
Corp. and ITT Industries, Inc.
2.2** Recapitalization Agreement and Consent dated as of
April 2, 2001 by and among EarthWatch Incorporated,
Morgan Stanley & Co. Incorporated, Post Balanced Fund,
Post High Yield LP, Post Total Return Fund,
Opportunity Fund, Dickstein & Co., L.P., Dickstein
International Limited, Hitachi Software Engineering
Co., Ltd., Sun America High Income Fund and Sun
America Series Trust High Yield Portfolio.
3.1* Amended and Restated Certificate of Incorporation, as
amended.
3.2* Bylaws, as currently in effect.
3.3**** Certificate of Amendment to Amended and Restated
Certificate of Incorporation.
3.4***** Certificate of Amendment to Amended and Restated
Certificate of Incorporation.
4.1* Stockholders' Agreement dated as of April 8, 1999
among EarthWatch, Morgan Stanley & Co. Incorporated,
Capital Research and Management Company, for the
benefit of American High Income Trust, American
Variable Insurance Series Asset Yield Bond Fund and
Bond and Bond Fund of America, Inc., ITT Industries,
Inc. and the other persons listed on the signature
pages thereto.
4.3* Indenture dated as of July 12, 1999, by and between
EarthWatch and The Bank of New York, including form of
13% Senior Discount Note Due 2007.
4.6* Series C Preferred Registration Rights Agreement dated
as of July 7, 1999 between EarthWatch and Morgan
Stanley & Co. Incorporated.
4.7* Notes registration rights agreement dated as of July
12, 1999 between EarthWatch and Morgan Stanley & Co.
Incorporated.
4.8* Specimen 13% Senior Discount Note Due 2007.
4.10** Notes Registration Rights Agreement dated as of April
3, 2001 by and among EarthWatch, The Bank of New York
and Morgan Stanley & Co. Incorporated.
4.11** Series C Preferred Registration Rights Agreement dated
as of April 3, 2001 by and among EarthWatch, Morgan
Stanley & Co. Incorporated, Post Balanced Fund, Post
High Yield LP, Post Total Return Fund, Opportunity
Fund, Dickstein & Co., L.P., Dickstein International
Limited, Sun America High Income Fund, Sun America
Series Trust High Yield Portfolio, Hitachi Software
Engineering Co., Ltd. and Ball Technologies Holdings
Corp.
4.12** Pledge Agreement dated as of April 3, 2001 by and
among EarthWatch, The Bank of New York, as trustee,
and The Bank of New York, as securities intermediary.
4.13** First Supplemental Indenture dated April 16, 2001, by
and between EarthWatch and The Bank of New York, as
trustee.
4.14**** Senior Collateral Pledge and Security Agreement, dated
as of June 15, 2001, between EarthWatch Incorporated
and The Bank of New York, as collateral agent.
4.15**** Junior Collateral Pledge and Security Agreement, dated
as of June 15, 2001, between EarthWatch Incorporated
and The Bank of New York, as collateral agent.
5.1 + Opinion of Baker & McKenzie.
10.1* EarthWatch Incorporated 1995 Stock Option Stock
Issuance Plan.
10.2* EarthWatch Incorporated 1999 Equity Incentive Plan.
10.3* Ball-EarthWatch Agreement dated as of April 8, 1999 by
and between EarthWatch and Ball Technologies Holdings
Corp.
10.4* Contract for QuickBird Spacecraft dated as of June 9,
1998, as amended, by and between EarthWatch and Ball
Aerospace & Technologies Corp.
10.5* Engineering Services Agreement dated as of March 6,
1996, as amended, by and between EarthWatch and Ball
Aerospace & Technologies Corp.
10.6* Strategic Supplier Agreement dated as of February 26,
1999, by and between EarthWatch and ITT Industries,
Inc.
10.7* Agreement for the EarthWatch QuickBird Sensor
Subsystem dated as of October 15, 1996, as amended, by
and between EarthWatch and Eastman Kodak Company.
10.8* EarthWatch-Hitachi Imaging Distribution Agreement
dated as of June 4, 1995, as amended, by and between
EarthWatch and Hitachi, Ltd.
10.9* Distributor Agreement dated as of August 1, 1997, by
and between Nuovo Telespazio, S.p.A.
10.10* Launch Services Agreement dated as of April 1, 1999,
by and between EarthWatch and United Start
Corporation.
10.11* Lease Agreement between EarthWatch and Pratt Land
Limited Liability Company.
10.12*** Delta II Launch Services Agreement between Earthwatch
and Delta Launch Services, Inc. (Confidential
treatment has been requested for portions of this
document.)
10.13*** Credit Agreement, dated as of April 20, 2001, by and
between EarthWatch and Ball Aerospace & Technologies
Corp.
10.14* Amendment Seven to Contract 9602-0117 (Engineering
Services Agreement), dated January 4, 2001, by and
between EarthWatch and Ball Aerospace & Technologies
Corp.
12.1 ****** Statements Regarding Computation of Ratio of Earnings
to Fixed Charges.
21.1 ****** Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 + Consent of Baker & McKenzie.
24.1 + Power of Attorney.
25.1 + Statement of Eligibility of Trustee.
* Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the registrant's registration statement on Forms S-4
and S-1/A (File No. 333-39202).
** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the registrant's Form 8-K filed with the SEC on
April 25, 2001.
*** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the registrant's Form 10-Q for the quarterly period
ended March 31, 2001.
**** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the registrant's Form 8-K filed with the SEC on June
20, 2001.
***** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the registrant's Form 8-K filed with the SEC on
December 26, 2001.
****** Incorporated by reference to the exhibits with the corresponding
exhibit numbers in the registrant's Form 10-K for the year ended
December 31, 2001.
+ Previously filed.