UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 Commission file number: 333-39202 and 333-65014 EarthWatch Incorporated (Exact name of registrant as specified in its charter) Delaware 31-1420852 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 1900 Pike Road Longmont, Colorado 80501 (Address of principal executive offices, including zip code) (303) 682-3800 (Registrant's telephone number, including area code) Securities registered pursuant to Sections 12(b) or 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $199,800 as of February 28, 2002. The registrant had 799,010 shares of outstanding common stock as of February 28, 2002. Documents incorporated by reference: None 1 ============================================================================================ Table of Contents Page ---- PART I Item 1. Business. 3 Item 2. Properties. 17 Item 3. Legal Proceedings. 17 Item 4. Submission of Matters to a Vote of Security Holders. 17 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters. 18 Item 6. Selected Financial Data. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 22 Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 32 Item 8. Financial Statements and Supplementary Data. 32 Item 9. Changes In and Disagreements With Independent Accountants on Accounting and Financial Disclosure. 59 PART III Item 10. Directors and Executive Officers of the Registrant. 59 Item 11. Executive Compensation. 64 Item 12. Security Ownership of Certain Beneficial Owners and Management. 67 Item 13. Certain Relationships and Related Transactions. 68 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 71 Signatures 72 ---------------------------------------------------------------- Reference is made in this document to Digital Globe(R) and Your Planet Online(R), which are registered trademarks owned by us and Seconds on Orbit(TM), which is a trademark of ours. 2 PART I SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements in this Annual Report on Form 10-K 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 such forward-looking statements. These factors include, among others, those listed under "Business," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Annual Report on Form 10-K and in the other documents we file with the Securities and Exchange Commission, including Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 File No. 333-65014 as filed in March 2002. In some cases, you can identify forward-looking statements by terminology, such as "may," "will," "should," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of these terms or 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 the forward-looking statements. Item 1. 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. 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 3 operate a high-resolution satellite for commercial use and was developing the EarlyBird satellites (predecessor satellites to our 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 re-establish 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 did not generate any revenue from our proposed primary satellite imagery business through 2001 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. 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 GIS 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. 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 4 . 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 requires 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 GIS 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 5 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. In addition to our direct sales efforts, we intend to 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 should allow 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 & Technologies Corp., 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. 6 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, and to update such imagery more frequently. 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 and Eurimage, a majority-owned unit of Telespazio, serve as master international distributors of our products and services in Asia and Europe, respectively. 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. 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 the portion of our imaging capacity not being used to address specific customer requests to prospectively collect and archive imagery of key geographies and markets. 7 We believe that once our proprietary DigitalGlobe database 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, GIS, 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 into the DigitalGlobe, our master database for imagery information, imagery collected by our satellite and other airborne and satellite systems, 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-ROMs 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. In addition, we can process and enhance acquired imagery to make it more useful for 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." 8 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 will 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. Master international distributors We have formed strategic relationships with Hitachi Software in Asia and Telespazio in Europe, through its subsidiary, Eurimage, to be our master international distributors. Hitachi Software is developing innovative information products to expand distribution of our imagery to both businesses and individuals. 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 who 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 database by means of our Web-based user interface. Similar to widely available search tools and browsers, 9 the DigitalGlobe database 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 and other areas of interest worldwide, and will be able to continually update this imagery. We also maintain a geospatial operations facility to produce 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. 10 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 and maintain 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 QuickBird 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 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 11 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, we do not view aerial providers as direct competitors. Conversely, we intend to work with these companies and expect that many may 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. 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 0.8-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 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. ImageSat launched its 1.8-meter resolution satellite in December 2000 and is currently selling 1.8-meter resolution commercial imagery. Their 0.8-meter resolution satellite is scheduled for launch in 2003. Based upon 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. 12 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 and 64 gigabytes of storage. In contrast, our QuickBird satellite offers a 16-kilometer swath width and 128 gigabytes of on-board storage. When we are fully operational, we believe 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 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 ("NOAA") 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 also entered into a contract with ITT Industries under which it provided the QuickBird satellite scheduling and tasking system, and a QuickBird spacecraft simulator. In addition, we have contracted with ITT Industries to assist us in developing technical specifications of the sensors for our next generation satellites. Ball Aerospace Ball Aerospace & Technologies Corp. 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. 13 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 GIS software and hardware. Hitachi Software has established relationships in both the military and commercial GIS markets in Asia, which, we believe, are currently the fastest growing GIS 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 GIS 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, Ltd. 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 14 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 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 to our 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. 15 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 our 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 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. 16 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. Item 2. 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. Item 3. Legal Proceedings. We are not currently a party to any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. On November 14, 2001, we held an annual stockholders' meeting for the election of Directors. The names of the directors and the results of the vote for such directors are described below: Director For Withheld - -------- --- --------- Paul M. Albert Jr. 72,778,599 20,069,004 Henry J. Driesse 72,737,106 20,110,497 Donald E. Foley 72,737,106 20,110,497 Anne Karalekas 72,736,432 20,111,171 Takatoshi Kodaira 72,785,035 20,062,569 Michael J. Petrick 72,784,255 20,063,348 Herbert F. Satterlee III 72,778,599 20,069,004 Walter S. Scott 72,769,017 20,078,586 Donald W. Vanlandingham 72,778,599 20,069,004 Based on these voting results, each of the foregoing persons was re-elected as a director. On November 15, 2001, we solicited the written consent of our stockholders in lieu of a special meeting to approve an amendment of the Certificate of Incorporation to extend by one year the period of time during which our board can pay dividends to the holders of the Series A, B, and C preferred stock in additional shares of A, B or C preferred stock, as the case may be. The amendment also extends by one year the period of time at which our board must begin to pay dividends to the holders of the Series A, B, or C preferred stock in cash, if declared. There were 85,333,303 votes in favor of the amendment and 7,525,281 votes that were withheld. There 17 were 17,514,925 Series A votes, 36,377,152 Series B votes, 31,347,438 Series C votes and 93,789 common votes in favor of the amendment. PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters. Market information. There currently is no established public trading market for our common stock or preferred stock. Holders. As of December 31, 2001, our common stock and preferred stock were issued and outstanding as follows: Approximate Shares Shares Number of Record Stock Issued Authorized Outstanding Holders Preferred Stock /(1)/ 74,000,000 56,781,696 112 Common Stock 150,000,000 562,088 73 /(1)/As of December 31, 2001, the preferred stock consists of (i) 12 million authorized shares of 7% cumulative convertible redeemable preferred stock due 2009, Series A, par value $0.001 per share, of which 8,629,830 shares are issued; (ii) 12 million authorized shares of 7% cumulative convertible redeemable preferred stock due 2009, Series B, par value $0.001 per share, of which 8,629,830 shares are issued; and (iii) 50 million authorized shares of 8.5% cumulative convertible redeemable preferred stock due 2009, Series C, of which 39,522,036 shares are issued. Dividends. 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 18 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. Recent Sales of Unregistered Securities. The following is a summary of our transactions since January 1, 2001, involving sales of our securities that were not registered under the Securities Act of 1933, as amended: During fiscal year 2001, we granted options to purchase 775,740 shares of common stock under our 1999 Equity Incentive Plan at an exercise price of $0.25 per share. There were 366,670 shares of common stock and 9,201 shares of Series C preferred stock issued upon exercise of options at exercise prices ranging from $0.25 per share to $3.81 per share. There were 3,544,193 options outstanding under the Company's four stock option plans. 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. In June 2001, we issued 10,843,297 shares of Series C preferred stock to holders of 13% Senior Discount Notes due 2007 in partial consideration for those holders refraining from tendering their notes in our previous tender offer. Each of the purchasers in this transaction was an accredited investor. 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. 19 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 exemptions 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. 20 Item 6. Selected Financial Data. The following selected 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 in Item 7 in this Annual Report on Form 10-K. The consolidated balance sheet data as of December 31, 2000 and 2001, and 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 in Item 8 in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. 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) <c> 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) 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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. 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 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 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 purchase 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; 22 . 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 QuickBird satellite; . 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. We have realized significant operating losses and negative earnings before interest, taxes, depreciation, and amortization, or 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 that 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 23 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 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 data imagery to date, and 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. 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 will also 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 on a straight-line basis over seven years. 24 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 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. 25 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 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 tentatively 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. 26 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. 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. 27 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 Administrative Expenses. 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 28 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 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- 29 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. 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. 30 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 liabilities* 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 in 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. 31 Item 7A. 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 transactions denominated in a foreign currency. Therefore, our exposure to interest rate and foreign exchange fluctuations is minimal. Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS Page Report of Independent Accountants 33 Consolidated Balance Sheet 34 Consolidated Statement of Operations 35 Consolidated Statement of Cash Flows 36 Consolidated Statement of Stockholders' Equity (Deficit) 37 Notes to Consolidated Financial Statements 38 32 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 33 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. 34 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 an integral part of these consolidated financial statements. 35 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Consolidated Statement of Cash Flows =============================================================================== Period from January 1, 1995 (Inception) to Year Ended December 31, 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 an integral part of these consolidated financial statements. 36 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Consolidated Statement of Stockholders' Equity (Deficit) =============================================================================== Convertible Convertible Convertible Senior 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 Contribution of net assets in merger - - 1 - - 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) - - - - - ------------- ---------------- ---------- -------------- -------------- - - 79,501 63,600 - Balance at December 31, 1995 Restatement of capital stock and additional paid-in capital for reincorporation of January 1, 1996 - - - (63,521) 38,599,438 Issuance of stock in exchange for 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) -------------- ---------------- ----------------- ---------------- (1,018,477) - (3,909,208) 33,690,858 Balance at December 31, 1995 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 an integral part of these consolidated financial statements. 37 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. 38 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements (Continued) - ------------------------------------------------------------------------------- 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. 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 in 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. 39 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements (Continued) - ------------------------------------------------------------------------------- 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 40 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements (Continued) - ------------------------------------------------------------------------------- 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. 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), 41 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements (Continued) - ------------------------------------------------------------------------------- $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. 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 42 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements (Continued) - ------------------------------------------------------------------------------- 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. 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) 43 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements (Continued) - ------------------------------------------------------------------------------- 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 44 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements (Continued) - ------------------------------------------------------------------------------- difference between the current principal balance and the principal balance at 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. 45 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements (Continued) - ------------------------------------------------------------------------------- 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. 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 46 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements (Continued) - ------------------------------------------------------------------------------- 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. 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 47 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements(Continued) - ------------------------------------------------------------------------------- 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, 48 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements (Continued) - ------------------------------------------------------------------------------- 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 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 49 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements(Continued) - ------------------------------------------------------------------------------- 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. 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. 50 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements(Continued) - ------------------------------------------------------------------------------- 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. 51 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements(Continued) - ------------------------------------------------------------------------------- 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 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. 52 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements(Continued) - ------------------------------------------------------------------------------- Number Weighted- Weighted- Number Weighted of Series A Average Number Average of Series 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 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% - 6.50% 3.90% - 5.14% 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 * less than 53 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements(Continued) - ------------------------------------------------------------------------------- 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 consistof 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) $ -- $ -- ============= ============= 54 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements(Continued) - ------------------------------------------------------------------------------- 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. 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. 55 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements(Continued) - ------------------------------------------------------------------------------- 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. 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 56 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements(Continued) - ------------------------------------------------------------------------------- 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, respectively, 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. 57 EarthWatch Incorporated, dba DigitalGlobe (A Development Stage Company) Notes to Consolidated Financial Statements(Continued) - ------------------------------------------------------------------------------- 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 58 Item 9. Changes in and Disagreements With Independent Accountants on Accounting and Financial Disclosure. There were no matters required to be reported under this item. PART III Item 10. Directors and Executive Officers of the Registrant. 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 59 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 of Space and Ground Systems 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. 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 60 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.. 61 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. 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 1989 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 Engineering Co., Ltd. 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 62 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 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. 63 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. Section 16(a) Beneficial Ownership Reporting Compliance Not applicable. Item 11. 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 $100,000: Long-term Compensation Annual Compensation ------------ ------------------- Securities Name and Principal Position Year Salary ($) 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. 64 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. 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 Shares Value Unexercised Options at the Money Options at Acquired on December 31, 2001 December 31, 2001 ----------------- ----------------- 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. 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 65 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 in response to Item 10. No member of this Committee was at any time during the 2001 fiscal year or at any other time an officer or employee of DigitalGlobe. No executive officer or director 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 or compensation committee 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." 66 Item 12. Security Ownership of Certain Beneficial Owners and Management. 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 -- -- 3,451,932 40.0 -- * -- -- 15.0 Company /4/ Ball Technologies & Holdings -- -- -- -- 5,771,928 14.5 -- -- 5.8 Corp. /5/ 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/ -- -- -- -- * 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. 67 /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. /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. Item 13. 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 68 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 these 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. Transactions 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 69 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. 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 13% 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 our 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 70 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. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statements. The financial statements listed in the Index to Financial Statements that appears in Item 8 on Page 32 of this Report on Form 10-K are filed as part of this report. 2. 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. 3. Exhibits. See the Index to Exhibits which appears at the end of this document and which is incorporated by reference herein. (b) Reports on Form 8-K. A report on Form 8-K was filed on December 26, 2001 to report that we solicited our stockholders' consent to an amendment to our Certificate of Incorporation. The amendment, which was approved by our stockholders, extends by one year the period of time during which we may pay dividends to holders of the Series A, B or C preferred stock, as the case may be, in 71 cash or in additional shares of Series A, B or C preferred stock, as the case may be. The amendment also extends by one year the date by which we must begin to pay dividends to the holders of the Series A, B or C preferred stock in cash. The report also reported our press release announcing the release of our first commercial imagery from our QuickBird satellite, which was successfully launched on October 18, 2001. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EARTHWATCH INCORPORATED d/b/a DIGITALGLOBE (Registrant) By: /s/ Herbert F. Satterlee III ---------------------------------- Herbert F. Satterlee III President and Chief Executive Officer March 29, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Herbert F. Satterlee III President and Chief Executive Officer March 29, 2002 - ----------------------------- Herbert F. Satterlee III Director, Chairman (Principal Executive Officer) ----------------------------- /s/ Henry E. Dubois Chief Operating Officer, March 29, 2002 - -------------------- Henry E. Dubois Chief Financial Officer, Executive Vice President (Principal Financial and Accounting Officer) /s/ Walter S. Scott Chief Technical Officer, March 29, 2002 - ------------------- Walter S. Scott Director /s/ Paul M. Albert Jr. Director March 29, 2002 - ---------------------- Paul M. Albert, Jr. 72 /s/ Donald E. Foley Director March 29, 2002 - -------------------- Donald E. Foley /s/ Henry J. Driesse Director March 29, 2002 - --------------------- Henry J. Driesse /s/ Anne Karalekas Director March 29, 2002 - ------------------ Anne Karalekas /s/ Takatoshi Kodaira Director March 29, 2002 - --------------------- Takatoshi Kodaira /s/ Michael J. Petrick Director March 29, 2002 - ----------------------- Michael J. Petrick /s/ Donald W. Vanlandingham Director March 29, 2002 - ---------------------------- Donald W. Vanlandingham 73 EARTHWATCH INCORPORATED d/b/a DIGITALGLOBE Annual Report on Form 10-K For the year ended December 31, 2001 Index to Exhibits Exhibit Number Description of Exhibits Exhibit Number Description - ----------- --------- 2.1* Recapitalization Agreement dated as of April 8, 1999 by and 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, of EarthWatch, as currently in effect. 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. 74 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. 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 provided for portions of this document until March 31, 2005) 75 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. * Incorporated by reference to the exhibits with the corresponding exhibit numbers in EarthWatch's registration statement on Forms S-4 (File No. 333-39202) and S-1/A (File No. 333-65014). ** Incorporated by reference to the exhibits with the corresponding exhibit numbers in EarthWatch's Form 8-K filed with the SEC on April 25, 2001. ***Incorporated by reference to the exhibits with the corresponding exhibit numbers in EarthWatch's Form 10-Q for the quarterly period ended March 31, 2001. **** Incorporated by reference to the exhibits with the corresponding exhibit numbers in EarthWatch's Form 8-K filed with the SEC on June 20, 2001. *****Incorporated by reference to the exhibits with the corresponding exhibit numbers in EarthWatch's Form 8-K filed with the SEC on December 26, 2001. (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. 76