As filed with the Securities and Exchange Commission on June 1, 2001
Registration No. 333-39202
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
POST-EFFECTIVE AMENDMENT NO. 1
ON FORM S-1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________
EarthWatch Incorporated
(Exact name of registrant as specified in its charter)
Delaware 3663 31-1420852
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
EarthWatch Incorporated
1900 Pike Road
Longmont, Colorado 80501
(303) 682-3800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Herbert F. Satterlee III
President and Chief Executive Officer
EarthWatch Incorporated
1900 Pike Road
Longmont, Colorado 80501
(303) 682-3800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
Alan G. Harvey, Esq.
Baker & McKenzie
2300 Trammel Crow Center
2001 Ross Avenue
Dallas, Texas 75201
(214) 978-3000
___________
Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this registration statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
================================================================================
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ The information in this prospectus is not complete and may be changed. We +
+ may not sell these securities until the registration statement filed with +
+ the Securities Exchange Commission is effective. This prospectus is not an +
+ offer to sell and we are not soliciting offers to buy securities, in any +
+ state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 1, 2001
PROSPECTUS
EarthWatch Incorporated
13% SENIOR DISCOUNT NOTES DUE 2007
We currently have outstanding 13% Senior Discount Notes due 2007 which have
a principal amount at maturity of $71,650,000. These notes were issued on
August 11, 2000, and were registered under the Securities Act. They were issued
in exchange for notes with substantially similar terms to these notes that had
not been registered.
The notes rank equally in right of payment with all of our existing and
future unsubordinated and unsecured indebtedness.
____________________
Investing in the notes involves risks. See "Risk factors" beginning on
page 8.
____________________
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
____________________
Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc. (collectively,
"Morgan Stanley Dean Witter") will use this prospectus in connection with
offers and sales of the notes in market-making transactions at negotiated
prices related to prevailing market prices at the time of sale. Morgan Stanley
Dean Witter may act as principal or agent in the transactions. EarthWatch will
receive no portion of the proceeds of the sales of the notes and will bear the
expenses incident to the registration of the notes. If Morgan Stanley Dean
Witter conducts any market-making activities, it may be required to deliver a
"market-making prospectus" when effecting offers and sales of the notes because
of the equity ownership of EarthWatch by affiliates of Morgan Stanley Dean
Witter. For so long as a market-making prospectus is required to be delivered,
the ability of Morgan Stanley Dean Witter to make a market in the notes may be
dependent, in part, on the ability of EarthWatch to maintain a current market-
making prospectus.
The date of this prospectus is _____________, 2001.
TABLE OF CONTENTS
Page
----
Summary............................................................................................ 1
Risk factors....................................................................................... 8
Special note regarding forward-looking statements.................................................. 18
Use of proceeds.................................................................................... 19
Dividend policy.................................................................................... 19
Capitalization..................................................................................... 20
Selected historical financial data................................................................. 21
Management's discussion and analysis of financial condition and results of operations.............. 22
Business........................................................................................... 30
Management......................................................................................... 41
Limitation of liability and indemnification matters................................................ 49
Certain relationships and related transactions..................................................... 50
Principal stockholders............................................................................. 53
Recapitalizations.................................................................................. 55
Description of material indebtedness............................................................... 58
Form of notes...................................................................................... 59
Description of the notes........................................................................... 60
Description of capital stock....................................................................... 91
United States federal income tax consequences...................................................... 96
Plan of distribution............................................................................... 99
Legal matters...................................................................................... 99
Experts............................................................................................ 99
Where you can find more information................................................................ 100
Index to financial statements...................................................................... F-1
_________________________
You should rely only on the information provided in this prospectus. We have
authorized no one to provide you with different information. Neither we nor
Morgan Stanley Dean Witter are making an offer of these securities in any state
where the offer is not permitted. You should not assume that the information in
this prospectus or any prospectus supplement is accurate as of any date other
than the date on the front of the document.
SUMMARY
You should read the following summary together with the detailed
information regarding EarthWatch, including "Risk factors" and the financial
statements, including the notes to the financial statements, appearing elsewhere
in this prospectus. Digital Globe(R) and Your Planet Online(R) are our
registered trademarks, and Seconds on Orbit(TM) is our trademark. References
herein to the "EarthWatch system" refer collectively to our planned satellite,
ground stations, the Digital Globe, and our distribution system.
EarthWatch Incorporated
We plan to create and market a variety of information products derived from
satellite imagery of the earth's surface. We are currently building one
satellite capable of collecting high-resolution digital imagery of the earth's
surface, as well as a comprehensive image collection, enhancement, and digital
archive system known as our Digital Globe database. Our QuickBird satellite is
designed to collect 0.6-meter resolution gray scale and 2.5-meter resolution
color imagery of the earth and will have an ability to revisit most areas within
three to five days. Although we launched the QuickBird 1 satellite on November
20, 2000, it failed to achieve orbit. The QuickBird 1 satellite was not
recoverable. Our previous satellite, the EarlyBird 1, was launched in December
1997, but we lost contact with it and determined that it was a total loss. We
plan to launch the QuickBird 2 satellite in October 2001.
We believe that our system will allow us to provide high-resolution
imagery-based products at a low cost and in the forms most useful to our
targeted customer segments. For sophisticated government, scientific, and
commercial users, we expect to deliver raw imagery data on a near real-time
basis in response to specific customer requests. In addition, we can process and
enhance the imagery data to make them more useful to our customers. For example,
we can add precision correction, elevation, terrain, and topographic information
or integrate information from other sources such as political borders or utility
infrastructure. We also expect to collect and store imagery for resale in our
Digital Globe archive database. This will allow us to produce satellite imagery
at negligible incremental cost, facilitating an array of new geographic
information, mapping, multimedia applications, and markets that do not currently
use geographic imagery.
Geographic imagery is used in a broad and increasing range of applications.
Most governments and businesses need geographic information. The United States
and foreign governments use geographic imagery for national security
reconnaissance. Local and municipal governments use geographic imagery for land
use and infrastructure planning, resource management, and environmental
monitoring. Geographic imagery products are also important to a variety of
industries, including mapping, surveying, agriculture, forestry, environmental
protection, and mineral and oil exploration.
Industry estimates of worldwide revenues for aerial imagery exceed $2
billion annually, according to Frost & Sullivan. We believe the broader market
for geographic imagery and derivative products and services significantly
exceeds this amount and that the near-term world market for high spatial
resolution satellite imagery will exceed $1 billion annually. We believe this
market will grow as low-cost, high-quality satellite imagery becomes
commercially available, stimulating demand for satellite imagery-based products
and services and encouraging development of new products and applications.
High-resolution satellites have significant advantages over aerial
photography and low-resolution satellites that are currently used to collect
geographic imagery. Aerial photography provides accurate, high-resolution
overhead imagery of discrete areas, but can be subject to a number of
limitations, including:
. limited coverage area;
. slow delivery time;
. restricted ability to fly over certain areas; and
. high marginal cost of images.
1
In addition, we believe that many aerial providers still have a limited
ability to produce imagery in a digital format, which constrains their ability
to process and enhance images and to maintain a low cost, readily accessible
image archive.
Existing low spatial resolution satellite imagery systems, such as Landsat
and the French satellite consortium SPOT, can provide imagery that is less
costly and covers wider areas than aerial photography, but the low spatial
resolution of these satellite systems significantly limits their usefulness for
many applications.
High spatial resolution satellite imagery has fewer of these limitations
and has several additional advantages. In addition to providing high spatial
resolution gray scale (panchromatic) imagery, high-resolution satellites can
take precise color and infrared (multispectral) images, enabling a wide range of
monitoring, detection, and exploration applications. The digital format of
satellite imagery facilitates quick delivery, enables low-cost archiving, allows
for image enhancement and manipulation, and preserves much more of the
information value than analog imagery.
We are not aware of any additional competitors that plan to enter this
market other than our three announced competitors:
. Space Imaging, Inc., which successfully launched its first 1-meter
resolution satellite in September 1999 and has begun serving the
commercial market;
. Orbital Imaging Corp., or Orbimage, which is developing two 1-meter
high-resolution imaging systems, which are scheduled for launch during
the third and fourth quarters of 2001, as publicly announced; and
. ImageSat International (formerly known as West Indian Space Ltd.),
which successfully launched a 1.8-meter resolution satellite in
December 2000 and has announced plans to launch a 1-meter high-
resolution satellite for commercial use during the third quarter of
2001.
We believe there are significant barriers for other potential entrants. The
design, creation, launch, and operation of an integrated high-resolution
commercial satellite system require significant expertise and knowledge. We and
each of our three announced competitors have been developing commercial
satellite imagery systems for more than five years. We believe it would take a
new potential competitor more than two 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
EarthWatch, together with the other announced entrants, will have a significant
advantage over new market entrants.
Initially, we expect to provide imagery primarily to the United States and
foreign governments and agencies. The United States government supports the
development of a commercial satellite imaging industry and is now taking steps
to include commercial providers in several major security, mapping, and earth
monitoring programs. For example, the United States government is currently
upgrading its EagleVision mobile reconnaissance ground stations to accommodate
high-resolution commercial satellite imagery. Between NASA and the Department of
Defense, the United States government has identified over $1 billion in
prospective purchases of imagery products and related value-added services that
it expects to obtain from commercial vendors in the next five years. As one of
three announced United States entrants, we believe we are well positioned to
secure a portion of this business. We have already provided commercial imagery
products to NASA and the National Imagery and Mapping Agency, or NIMA.
Governments of many foreign countries have a strong national security
interest in obtaining near real-time high-resolution imagery of their borders
and neighboring countries. This type of imagery has generally not been available
to governments other than those of the United States, France, Israel, and the
former Soviet Union. We have submitted proposals to foreign governments and
commercial entities, with several of these being prospective customers. We have
entered into contracts with agencies in two countries, have outstanding
proposals for contracts with agencies in fifteen countries, and are in
discussions with many other countries to provide them with a wide range of
images and other products when QuickBird 2 has been launched. We believe that
once QuickBird 2 is operational, we will be able to quickly convert customer
interest into contracts and revenue opportunities.
2
We are also targeting as potential customers civilian agencies and local
and municipal governments that currently use aerial and low-resolution satellite
imagery for mapping, environmental monitoring, land use, and infrastructure
planning. In the longer term, we expect that our customers will include
commercial users in industries such as mapping and surveying, oil, gas, and
mineral exploration, agriculture, forestry, scientific and environmental
monitoring, and insurance risk analysis and damage assessment. We also expect
value-added resellers to develop products based on satellite imagery from our
Digital Globe database for various commercial and consumer-oriented
applications, such as real estate assessment, travel planning, commodities
forecasting, economic intelligence, and entertainment.
We are committed to achieving leadership positions in specific markets for
digital imagery and derivative information products. Our strategy to achieve our
objectives includes the following elements:
. become a leading provider of imagery-driven solutions;
. pursue targeted market entry and expansion;
. maintain leadership through partnerships with leading technology
companies.
. leverage our technical advantages;
. build direct relationships with key customers and market influencers;
and
. develop a comprehensive Digital Globe archive.
EarthWatch 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.
Recent recapitalization transactions
On February 28, 2001, as required by the indentures governing the
notes and our then-outstanding 12 1/2% Senior Notes due 2005, we offered to
purchase all of the outstanding notes and our then-outstanding 12 1/2% notes at
their accreted value on the date of purchase, using the insurance proceeds
relating to the loss of our QuickBird 1 satellite. 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. The combined
repurchase price totaled $172.9 million.
In connection with the offer, we entered into a Recapitalization Agreement
and Consent dated as of April 2, 2001 with certain holders of the notes.
Pursuant to the Recapitalization Agreement, these holders agreed to refrain from
tendering their notes in the offer, thus allowing us to have the use of the
funds that would otherwise be used to repurchase their notes.
Pursuant to the Recapitalization Agreement, we also granted registration
rights to certain holders of notes and Series C preferred stock and pledged
government securities to secure certain repurchase rights of the noteholders.
Furthermore, we obtained the consent of the holders of notes and amended the
indenture governing the notes in certain respects.
In the Recapitalization Agreement, we also agreed, among other things, that
we would, by no later than June 15, 2001:
. obtain at least $9 million of vendor financing from Ball Aerospace &
Technologies Corp., or Ball Aerospace;
. amend our certificate of incorporation in certain respects;
. issue 10,843,297 additional shares of our Series C preferred stock to
the holders of the notes that signed the Recapitalization Agreement;
. purchase at least $155 million of QuickBird 2 insurance; and
3
. pledge the QuickBird 2 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 cannot assure you that the contemplated transactions will be completed.
If we do not, among other things, consummate the transactions required to be
consummated by June 15, 2001, we must complete by August 1, 2001 an offer to
purchase all of the then-outstanding notes for a purchase price equal to their
accreted value as of the date of purchase. See "Recapitalizations - 2001
Recapitalization" for a further discussion of the recent recapitalizations.
4
Summary of the terms of the notes
The notes.................................. 13% Senior Discount Notes due 2007, which have an aggregate
principal amount at maturity of $71,650,000.
Maturity................................... July 15, 2007.
Interest payment dates..................... The notes will not begin to accrue cash interest until July
15, 2002. Beginning on January 15, 2003, interest on the
notes will be payable semiannually in cash on January 15 and
July 15 of each year.
Optional redemption........................ We may, at our option, redeem the notes beginning on July
15, 2004. The initial redemption price is 106.5% of the
principal amount at maturity, plus accrued interest. The
redemption price of the notes will then decline each year
until maturity. See "Description of the notes - Optional
redemption."
Change of control.......................... Upon a change of control of EarthWatch, we will be required
to make an offer to purchase the notes at a purchase price
equal to 101% of their accreted value on the date of
repurchase, plus any accrued and unpaid interest. We cannot
assure you that we will have sufficient funds available at
the time of any change of control to make any required debt
repayment, including repurchases of the notes.
Collateral to secure certain obligations... We have pledged treasury securities in an amount equal to
the accreted value of all outstanding notes as of August 1,
2001, to secure our obligation to repurchase the notes if we
do not comply with certain of our obligations under the
Recapitalization Agreement by June 15, 2001. These
obligations include obtaining launch insurance, amending our
certificate of incorporation, obtaining certain vendor finan
cing, and issuing certain shares of our Series C preferred
stock to the signatories to the Recapitalization Agreement.
If we do not comply with these obligations by June 15, 2001,
we will be required to commence an offer to purchase the
notes at a purchase price equal to their accreted value,
plus any accrued and unpaid interest to the date of
purchase. Any such repurchase must be completed on or before
August 1, 2001.
Insurance collateral....................... We have agreed to obtain a $155 million insurance policy for
the QuickBird 2 satellite to cover risks associated with the
launch and first year of operations of QuickBird 2. The
notes will be secured equally with up to $9 million in
principal amount of vendor financing by any proceeds of
insurance policies covering certain aspects of our QuickBird
2 satellite.
If the trustee for the notes receives proceeds from the
insurance policy covering risks related to QuickBird 2, we
will make an offer to repay the vendor financing described
above and purchase the notes at a purchase price equal to
their accreted value, plus any accrued and unpaid interest
to the date of purchase. To the extent that the aggregate
accreted value and accrued interest of the notes tendered in
response to the offer to purchase and the amount of vendor
financing requested to be repaid exceeds the amount of
insurance proceeds available for such offer, holders of the
notes that subscribe to the offer to purchase and the lender
in the vendor financing will receive a ratable portion of
the
5
insurance proceeds. To the extent the accreted value and
interest on the notes tendered, together with the vendor
financing to be repaid, are less than the available
proceeds, the excess will be placed into a similar pledge
account to secure a put right on behalf of the holders of
our Series A and B preferred stock, and any remaining funds
after exercise of this put right will be returned to
EarthWatch.
Ranking.................................... The notes rank equally in right of payment with all of our
unsubordinated and unsecured indebtedness. At April 30,
2001, we had no indebtedness outstanding which ranked
equally in right of payment with the notes.
Restrictive covenants...................... The indenture under which the notes have been issued
contains covenants that, among other things, restrict our
ability and the ability of our subsidiaries to:
. incur additional debt;
. incur liens;
. engage in sale-leaseback transactions;
. pay dividends or make other distributions in
respect of our capital stock;
. redeem capital stock; or
. make investments or restricted payments.
However, these limitations are subject to a number of
important qualifications and exceptions. We are, among other
things, permitted to incur additional indebtedness,
including secured debt, under specified circumstances.
Form of notes.............................. The notes have been issued in fully registered form, without
coupons. The notes have been deposited with The Bank of New
York, as custodian for The Depository Trust Company, and
registered in the name of Cede & Co. in the form of one or
more global notes. Holders of the notes own book-entry
interests in the global note, and evidence of these
interests is kept in the records maintained by The
Depository Trust Company. See "Form of notes."
Use of proceeds............................ We will not receive any proceeds from this offering.
6
Summary historical financial data
The following summary financial data are qualified by reference to, and
should be read in conjunction with, our consolidated financial statements and
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus. The
consolidated balance sheet data as of December 31, 1999 and 2000, and the
consolidated statement of operations for each of the three years ended December
31, 2000, are derived from our audited consolidated financial statements and the
notes thereto included elsewhere in this prospectus. The consolidated balance
sheet data as of December 31, 1996, 1997, and 1998, and the consolidated
statement of operations for each of the two years ended December 31, 1997, are
derived from our historical consolidated financial statements not included in
this prospectus. The consolidated balance sheet data as of March 31, 2000 and
2001, and the consolidated statement of operations for the three-month periods
then ended and for the period from January 1, 1995 (inception) to March 31,
2001, are derived from unaudited consolidated financial statements included
elsewhere in this prospectus which have been prepared on the same basis as the
audited consolidated financial statements and, in our opinion, include all
adjustments, consisting only of normal recurring adjustments, which are
necessary to present fairly the results of operations and financial position of
EarthWatch for the period in accordance with generally accepted accounting
principles. Historical results may not be indicative of results for any future
period.
Period from
January 1, 1995
Three Months (Inception) to
Year Ended December 31, Ended March 31, March 31,
-------------------------------------------------- ------------------
1996 1997 1998 1999 2000 2000 2001 2001
-------- --------- -------- -------- -------- -------- -------- ---------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Consolidated Statement of Operations Data:
Revenue $ 1,900 $ 437 $ 1,809 $ 5,913 $ 3,336 $ 2,019 $ 3,818 $ 20,205
-------- --------- -------- -------- -------- -------- -------- ---------
Cost of goods sold 1,922 382 1,905 5,120 2,099 1,343 2,970 16,110
Selling, general, and administrative 5,992 8,588 4,975 12,763 15,333 3,016 2,794 52,875
Research and development 20,178 19,121 9,113 6,956 13,442 2,380 2,158 74,094
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 (26,192) (53,173) (13,268) (18,926) 80,070 (4,720) (4,105) (39,870)
Interest expense (63) (86) (1,340) (5,482) (4,492 ) (1,984) (4,726) (16,215)
Interest income 2,549 2,528 1,688 4,089 4,104 1,332 1,626 16,977
Income tax provision - - - - 3,000 - - (3,000)
-------- --------- -------- -------- -------- -------- -------- ---------
Net income (loss) $(23,706) $ (50,731) $(12,920) $(20,319) $ 76,682 $ (5,372) $ (7,205) $ (42,108)
======== ========= ======== ======== ======== ======== ======== =========
Other Consolidated Financial Data:
Capital expenditures $ 33,952 $ 54,271 $ 26,037 $ 75,238 $ 82,640 $ 15,800 $ 1,591 $ 283,007
Cash provided (used) by operating activities (20,967) (14,192) (10,864) (6,420) (18,891 ) (6,070) (10,874) (83,762)
Cash used by investing activities (33,951) (68,290) 11,471 (97,070) (57,534 ) (12,986) 32,943 (221,709)
Cash provided (used) by financing activities 68,452 53,668 (1,972) 180,639 (43 ) (19) (14) 333,251
Ratio of earnings to fixed charges - - - - 2.89x - - -
Deficiency of earnings to fixed charges (23,851) (56,401) (18,976) (31,659) - (10,668) (10,783) (90,226)
Consolidated Balance Sheet Data
(end of period):
Cash and cash equivalents $ 35,224 $ 6,410 $ 5,045 $ 82,193 $ 5,726 $ 63,119 $ 27,781
Total assets 90,547 104,299 85,328 271,469 379,378 268,412 372,550
Total debt 1,188 51,511 49,804 167,148 195,485 174,216 203,592
Mandatorily redeemable preferred stock - - - 129,978 141,246 132,788 144,175
Stockholders' equity (deficit) 83,107 39,737 26,831 (40,114) 26,387 (48,229) 16,301
7
RISK FACTORS
The notes entail a high degree of risk, including the following risks.
If any of the events described in the following risks actually occur, our
business, operating results, financial condition, or ability to pay principal or
interest on the notes could be materially adversely affected. In that event, you
may lose all or part of your investment. You should carefully consider the
following factors and other information in this prospectus before deciding to
purchase the notes.
Risks related to our financial history, condition, and requirements.
Our limited operating history makes an evaluation of our prospects
difficult and the notes a highly speculative investment.
We have a limited operating history from which you can evaluate our
business and prospects. Our company is in a development stage. As a young
company, we face risks and uncertainties relating to our ability to successfully
implement our business plan. You should consider the significant risks,
expenses, and difficulties encountered by companies like us in their early
stages of development in a highly regulated, high technology industry.
Specifically, we must successfully deploy our satellite and introduce new
services and products on a commercial basis in an industry that is still
evolving. If we do not successfully address these risks and uncertainties, our
business, operating results, and financial condition will be materially
adversely affected.
Since commencing operations on March 31, 1995, we have invested in research
and development and incurred substantial operating costs, as well as selling and
general and administrative expenses. Four days after launching our first
satellite, EarlyBird 1, in December 1997, we lost contact with it, resulting in
a total loss of that satellite. Our second satellite, QuickBird 1, was lost on
launch on November 20, 2000, due to a failure to achieve orbit. As a result, we
have not generated significant revenue from the sale of licenses for the use of
imagery products. Given our limited operating history, you have only limited
operating and financial data on which to evaluate our performance. Also, our
historical financial results are not representative of what we expect to achieve
after our launch of QuickBird 2. Our business plan depends upon:
. the timely construction and deployment of QuickBird 2 and 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 commercially available satellite imagery we plan to offer.
We have a history of losses, we expect to incur additional losses in the
near future, and we may not achieve or sustain profitability.
We have not achieved profitability and, since inception, we have generated
no significant revenues from our proposed satellite imaging business. We had
accumulated net losses of approximately $42 million at March 31, 2001.
Our business strategy requires substantial capital and operating
expenditures before we can begin to realize any significant revenues. We expect
to incur significant operating losses as we continue to develop our satellite
and imaging network and as we begin to market our products. We expect to
continue to incur negative cash flow and substantial operating losses at least
through the third quarter of 2002. Our ability to become profitable and to
generate positive cash flow will depend on our ability to sell imagery to
existing markets for geographic imagery and develop new markets for geographic
imagery. In addition, our revenues and operating results could vary
significantly from period to period.
We expect to experience a delay in generating revenue for some time after
the QuickBird 2 satellite is launched. We will need several months to test the
system prior to serving our customers. In addition, we anticipate that many
customers will wait to commit to enter into contracts until after QuickBird 2 is
successfully launched and
8
fully operational. We also expect that many customers will wait until 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 such customers upgrade or
construct their own ground stations, they will need to receive delivery of our
imagery through our ground stations and distribution systems.
We experienced significant delays in launching QuickBird 1 and EarlyBird 1,
a predecessor satellite to QuickBird 1, and incurred greater than anticipated
costs in designing, building and launching those satellites. In addition, we
have experienced delays in building QuickBird 2 and have incurred greater than
anticipated costs for its design and construction. If we experience any
additional delays or a failure in the launch of QuickBird 2, we could incur
losses for a longer period and may require significant additional financing. If
we experience a delay or cannot obtain additional financing, we may not be able
to continue our operations.
We may need additional financing.
Based on our current operating plan and provided we can obtain qualifying
insurance for QuickBird 2, we believe that existing capital resources will meet
our anticipated cash needs through fiscal 2002. However, we cannot assure you
that we will have sufficient funds to service the notes or our other
indebtedness or to fund our other liquidity needs, including our anticipated
capital expenditures, or that these expenditures will fall within our estimates.
If we face any launch delays, if the system takes longer to become
operational, if technical or regulatory developments require that we modify the
design of the EarthWatch system, if we are unable to obtain qualifying insurance
for QuickBird 2, if we are unable to achieve our revenue targets, or if we incur
other additional unforeseen costs, we will likely require additional capital. In
addition, a significant delay in the launch of QuickBird 2 would require us to
modify our operating plan and to defer substantial amounts of planned capital
expenditures. This, in turn, would delay deployment of the complete EarthWatch
system and may prevent us from continuing as a going concern. We may also need
to raise additional capital to support the construction and deployment of our
next generation satellites.
We do not have a revolving credit facility or other source of readily
available capital. Therefore, any shortfall in funds available for our
operations or to service our debt would cause us serious liquidity problems. In
such case, we would need to seek additional financing which we may not be able
to obtain on commercially reasonable terms or at all. Failure to obtain such
additional financing may result in a material adverse effect on our business and
could prevent us from continuing as a going concern.
Our substantial indebtedness could adversely affect our financial condition
and prevent us from fulfilling our payment obligations under the notes.
We currently have a significant amount of indebtedness. As of April 30,
2001, we had approximately $61.8 million of accreted value of debt. Such
indebtedness will have a fully accreted value of $71.7 million on July 15, 2002.
The notes will begin to accrue cash interest on July 15, 2002, which interest
will be payable semiannually in cash on January 15 and July 15 of each year,
beginning on January 15, 2003. In addition, we have obtained $9.0 million of
vendor financing which we intend to use to fund the completion of QuickBird 2.
This vendor financing facility will accrue interest at an annual rate of 11%,
which will become payable seven months following the launch of QuickBird 2.
Beginning with the eighth month and ending with the eighteenth month following
the launch of QuickBird 2, principal, in equal monthly amounts, and interest are
payable in cash each month. We may also raise additional financing in the
future.
The amount of our indebtedness could have important consequences to you.
For example, it could:
. make it more difficult for us to satisfy our obligations with respect
to payments on the notes;
. require us to dedicate a substantial portion of our cash flow from
operations, if any, to repaying indebtedness, thereby reducing the
availability of cash flow to fund operating expenses, working capital,
capital expenditures, and other general corporate purposes;
9
. limit our flexibility in planning for or reacting to changes in our
business and the satellite imaging industry, placing us at a
competitive disadvantage;
. limit our ability to borrow additional funds for working capital,
capital expenditures, debt service requirements, or other purposes;
and
. limit our ability to react to changing market conditions, changes in
our industry, or economic downturns.
We will require a significant amount of cash to service our indebtedness.
Our ability to make scheduled payments of principal and interest on our
indebtedness and to fund planned capital expenditures, development expenses, and
operating costs will depend on our ability to generate cash in the future
through sales of imagery products and services. Our ability to generate cash
will depend on our successful deployment of high-resolution satellites,
implementation of our marketing and distribution strategy, customer demand for
our imagery products and services, and, to a certain extent, general economic,
financial, competitive, regulatory, and other factors beyond our control. If we
are unable to generate sufficient cash from our operations, we will be required
to identify and secure additional financing. However, we cannot assure you that
additional financing will be available to us on acceptable terms or at all.
Consequently, we could be required to significantly reduce or suspend our
operations, seek a merger partner, sell the business, or seek additional
financing.
We must make significant additional capital expenditures.
We expect to incur significant capital expenditures to construct and launch
the QuickBird 2 satellite and to upgrade both our ground stations and other
operating systems. The QuickBird 2 satellite is now in final assembly and
testing. We expect to spend approximately $80.1 million to complete, launch, and
insure QuickBird 2 and its related systems, in addition to the approximately
$59.6 million that has been spent through March 31, 2001. The QuickBird 2
satellite is scheduled for launch in 2001 and has a designed useful life of five
years. We have begun to develop plans for the next-generation satellites that
will replace QuickBird 2. The first replacement satellite is planned for launch
by 2005. We expect to incur in excess of $400 million of research and
development costs and capital expenditures to develop our next-generation
satellites. However, we cannot assure you that such funds will be available to
us on acceptable terms or at all. Consequently, we could be required to
significantly reduce or suspend our operations, seek a merger partner, sell the
business, or seek additional financing.
Our cost to insure future launches may increase.
Due to the launch failure of QuickBird 1 and the failure of EarlyBird 1 on
orbit, we have made claims on the insurance policies covering both of these
satellites. Due to these claims, we may be unable to obtain insurance for
QuickBird 2 on commercially reasonable terms or at all. Our $265 million of
insurance policies for QuickBird 1 cost us approximately $38.3 million in
premiums, but any insurance for QuickBird 2 may be significantly more expensive
or unavailable.
The cost of launch insurance for a particular satellite is based on many
factors, including failure rates of similar launch vehicles or satellite
components. An adverse change in insurance market conditions, or the failure of
a satellite using similar components or a similar launch vehicle, could
significantly increase the cost of insurance on future launches. Recently, there
have been several commercial satellite launch failures. Additionally, there have
been numerous government launch failures which were not insured. Consequently,
the launch insurance industry is assessing the impact of failed launches and
examining the resulting claims. These factors could cause the market terms of
future insurance policies to be significantly less favorable than those
currently available, may result in limits on amounts of coverage that we can
obtain, or may prevent us from obtaining insurance at all. We cannot assure you
that launch insurance for QuickBird 2 or our next generation satellites will be
available on acceptable terms, or at all.
Our current revenues depend on a limited number of customers.
NASA accounted for approximately 39%, and NIMA accounted for approximately
54%, of our revenue during the fiscal year ended December 31, 2000. Any
termination of our relationships with NASA and NIMA would have
10
a material adverse effect on our current operating results and financial
condition. NASA and NIMA retain our services on a case-by-case basis and may
choose at any time to use another firm to provide the services that we perform.
Therefore, any shift in either NASA's or NIMA's decisions to continue to use our
services could also result in substantially reduced revenues for us.
Our use of net operating losses to offset taxes may be limited.
Under the Internal Revenue Code as currently in effect, utilization of our
net operating loss carryforwards against future taxable income could be limited
if we are treated as having experienced an ownership change, as defined in the
Code. We believe that we may have experienced an ownership change as a result of
certain prior transactions. Future events also may result in an ownership change
that could result in limitations on our ability to utilize our net operating
loss carryforwards. In addition, the Internal Revenue Code restricts our ability
to utilize net operating losses to a limited period of time after they are
incurred.
Risks relating to our planned satellite launch and operations.
A delay in launching the QuickBird 2 satellite will adversely affect us.
Prior to launch, we must fully construct, test, and transport our satellite
to the launch site and install the satellite on the launch vehicle. We also must
coordinate the launch campaign, the shipment of equipment and materials, and the
setup of such equipment and materials at the launch site. These steps are
complex and entail numerous risks. Also, many of these activities are entirely
outside of our control. Difficulties in any aspect of this process or a delay in
launching the QuickBird 2 satellite will adversely affect our business,
operating results, financial condition, and ability to pay interest and
principal on the notes. We have already lost the QuickBird 1 satellite and
cannot afford a delay in our scheduled launch date for QuickBird 2 in October
2001. One of our competitors, Space Imaging, successfully launched a satellite
in September 1999 and has been distributing imagery to its customers since that
time. Also, ImageSat successfully launched its high-resolution EROS A1 satellite
in December 2000 and began receiving high-resolution imagery shortly thereafter.
Any further delay may put us at a significant competitive disadvantage by
allowing our competitors more time to launch a satellite before us and to
establish themselves in the market.
A launch failure would adversely affect our ability to deliver imagery
products and services.
Satellite launches are subject to significant risks, including disabling
damage to or loss of the satellite. We cannot assure you that our planned
satellite launches will be successful. The interruption of our business that
would result from a launch failure would materially adversely affect our
business, operating results, financial condition, and ability to repay the
notes.
We cannot assure you that our satellites will operate as designed.
We have limited experience in producing our products, contracting for such
production, and providing services. To date, we are still in the process of
developing our products and services and have yet to fully establish our
processes and facilities. Problems may occur in the future with respect to
product or service quality, performance, and reliability. If such problems
occur, we could experience increased costs, delays in, or cancellations of
orders, loss of customers, and product returns, any one of which would
materially adversely affect our business, operating results, financial
condition, and our ability to pay interest and principal on the notes. See
"Business--Products and services."
We cannot assure you that QuickBird 2 will operate successfully or that it
will continue to operate throughout its expected design life. Even if this
satellite is launched and operated properly, minor technical flaws in its
sensors, power supply, data recorder, communications systems, or other
components could significantly degrade its performance, which could materially
affect our ability to collect and market imagery products. For example, our
EarlyBird 1 satellite was successfully launched, but we lost contact with it
four days later. After we were unable to reestablish communications, we
determined that the satellite was a total loss.
11
Our QuickBird 2 satellite will employ advanced technology that will be
subject to severe environmental stresses during launch and in space that could
adversely affect its performance. Hardware component problems in space could
require premature satellite replacement, with attendant costs and revenue
losses. In addition, human operators may make mistakes in issuing commands,
negatively impacting our satellite's performance.
If QuickBird 2 were to fail prematurely, we could experience significant
delays while we replace the satellite. During this period, our revenue would
decline significantly, as we would have no images to sell from the failed
satellite. This could also adversely affect market acceptance of our imagery
products and our competitive position if other companies are able to launch and
successfully operate similar satellites. Even if any such loss of satellite
capacity were covered by insurance, we cannot assure you that we would have on
hand, or be able to obtain in a timely manner, the necessary funds to cover the
costs of a replacement satellite.
Our satellites have limited design lives and are expensive to replace.
Satellites have limited useful lives. We determine a satellite's useful
life, or design life, using a complex calculation involving the probabilities of
failure of the satellite's components from design or manufacturing defects,
environmental stresses, or other causes. The designed useful life of a QuickBird
satellite is five years. We expect the performance of the QuickBird 2 satellite
to decline near the end of its design life. However, we cannot assure you that
each satellite will function properly for its expected design life. We
anticipate using funds primarily generated from operations to develop next
generation high-resolution satellites. We expect the cost of the next generation
satellites to be significant. If we do not generate sufficient funds from
operations or are unable to obtain financing from outside sources, we will not
be able to develop next generation satellites to replace the QuickBird 2
satellite at the end of its design life. This would materially and adversely
affect our business, operating results, financial condition, and ability to pay
principal and interest on the notes and our other indebtedness.
Our business depends on component and software suppliers.
We are highly dependent on other companies for the development and
manufacture of various components critical to our operation. These components
include software and products for our satellite systems, ground stations,
Digital Globe database archive, data distribution network, and the launch of our
satellite. Many of the sources for these components are our primary source of
supply, including Ball Aerospace, Eastman Kodak Company, Fokker Space B.V.,
Datron/Transco Inc., InfoFusion, LLC, ITT Industries, Inc., Kongsberg Spacetec
A.S., L3 Communications Storm Control Systems, Inc., and MacDonald Dettwiler &
Associates, Ltd.
The EarthWatch system will be delayed if these or other companies and
subcontractors fail to complete development or produce these components on a
timely basis. Additionally, the failure of any such components to function as
required will adversely affect our business.
Our business depends on the continued functioning of our data centers.
We must protect our data centers against damage from fire, earthquake,
power loss, telecommunications failure, and similar events. We plan to take
precautions to protect ourselves from events that could interrupt our
operations, including the implementation of redundant systems, offsite storage
of back-up data, and sprinkler systems in the data centers. Our master
international distributors will maintain separate archives of portions of our
imagery data and we plan to enter into arrangements with other high volume
customers for alternative data back-up storage. We cannot assure you that such
precautions will be adequate, and our operations may still be interrupted,
possibly for extended periods. Although we have insurance to cover damage to our
data centers, and we also carry business interruption insurance to cover the
loss of revenue that would result if one of our data centers was damaged or
destroyed, the insurance proceeds might not sufficiently compensate us for
interruptions of our operations.
12
Risks related to government regulation of our industry.
We are subject to extensive government regulation.
Our business is subject to extensive regulation in the United States and in
foreign jurisdictions in which we may operate or in which our products may be
sold. Regulatory changes could significantly impact our operations by:
. restricting our development efforts and those of our customers;
. restricting the amount and type of data that we can collect;
. making current products obsolete;
. restricting sales or distribution of our products; or
. increasing competition.
We might need to modify our products or operations to comply with such
regulations. Such modifications could be expensive and time-consuming.
Foreign governments may attempt to limit or prohibit sales of images into
their country or other countries. The United States government imposes
restrictions on our ability to collect and sell imagery covering Israel and
could elect to limit or proscribe sales of imagery covering other countries or
regions. Additionally, the United States government may limit our ability to
distribute images in order to protect the safety and security of the United
States or allied military forces.
We could in the future be subjected to new laws, policies, or regulations,
or changes in the interpretation or application of existing laws, policies, and
regulations that modify the present regulatory environment in the United States
or abroad. U.S. regulators could decide to impose limitations on U.S. companies
that are currently applicable only to other countries or other regulatory
limitations that affect satellite remote imaging operations. Any limitations of
this kind could materially adversely affect our business.
National Oceanic and Atmospheric Administration Licenses. We are required
to hold, and have obtained, licenses from the National Oceanic and Atmospheric
Administration of the United States Department of Commerce for the operation of
our commercial remote sensing satellite system. These licenses regulate our
activities in several areas. For example, the collection and distribution of
data and the percentage of foreign ownership of our company may be controlled
for purposes of national security or foreign policy in certain circumstances.
Federal Communications Commission Licenses. We are required to hold, and
have obtained, licenses from the Federal Communications Commission for the
operation of radio frequency devices on board our satellite and at United States
ground stations. Any future regulatory changes could materially adversely affect
our business, operating results, financial condition, and our ability to pay
interest and principal on the notes and our other indebtedness. In addition, the
terms of the FCC license require that we meet certain construction and launch
deadlines. Currently, our FCC license, as amended, requires construction of
QuickBird 2 to be completed by May 2001, followed by launch no later than
December 2001. If we are unable to meet these deadlines and are unable to obtain
an additional amendment to the FCC license, our business, operating results,
financial condition, and our ability to pay interest and principal on the notes
and our other indebtedness could be materially adversely affected.
Risks related to the market for our products and services.
Our business will suffer if we do not compete successfully in the
collection and distribution of digital geographic and image data.
We expect to encounter substantial competition in the market for digital
geographic and image data. We expect to face competition from traditional
sources of image-based information, including aerial photography, and from
13
high-resolution satellite systems developed and operated by other commercial
enterprises or foreign governments. Industry analysts generally expect that
aerial photography will remain the dominant source of imagery because it offers
superior spatial resolution as compared to imagery produced by commercial
satellites.
Aerial photography offers high-resolution imagery, is efficient and
competitively priced, and currently enjoys a majority share of the overhead
imagery market. We expect that aerial photography firms will continue to offer
products that are competitive with ours in many applications.
We also face competition from high-resolution commercial satellite
ventures, including Space Imaging, Orbimage, and ImageSat. Space Imaging, a
joint venture including Lockheed Martin, E-Systems, and Mitsubishi, has
developed a high-resolution imaging system. Space Imaging successfully launched
a high-resolution satellite in September 1999 and has begun serving the
commercial market. Space Imaging also has the right to distribute imagery for
Landsat 4 and 5 and for the Indian Remote Sensing System. It also has access to
significant technological and capital resources. Orbimage, a wholly-owned
subsidiary of Orbital Sciences Corporation, is developing two high-resolution
imaging systems, which are scheduled for launch during the third and fourth
quarters of 2001, as publicly announced. In addition, ImageSat successfully
launched a 1.8-meter resolution satellite in December 2000 and has announced
plans to launch a 1-meter high-resolution satellite for commercial use during
the third quarter of 2001.
We also will face competition from new and emerging technologies, possibly
including satellites with higher resolution and radar. We cannot assure you
that we will be able to compete successfully against current and future
competitors, or that competitive pressures faced by us will not materially
adversely affect our business, operating results, financial condition, or our
ability to pay principal and interest on the notes and our other indebtedness.
Our business may become subject to intense price competition.
As more of our competitors successfully launch earth-observing imaging
satellites, our business will become increasingly competitive. The cost to
enter our business is very high, while operating costs, on a day-to-day basis,
are lower. Therefore, one of our competitors may substantially reduce prices in
an effort to gain market share and eliminate other market participants, and
still be able to carry on business and finance operations. A reduction in
prices by one of our competitors would force us to reduce our prices in order to
maintain market share. Any significant price reduction in the market could have
a material adverse effect on our revenues, operating results, financial
condition, and our ability to pay principal and interest on the notes and our
other indebtedness.
Our dependence on third party distributors, sales agents, and value-added
resellers could result in marketing and distribution delays.
We plan to market and license our products using a network of distributors
covering major world regions and, on a regional basis, through local
distributors retained by the major distributors. We currently have agreements
with certain of our strategic partners to serve as master international
distributors, with exclusive distribution rights for at least four years to
certain of our products in Europe, Asia, and Australia. We are currently
engaged in discussions with other potential distributors, sales agents, and
value-added resellers.
Our ability to terminate a distributor who is not performing satisfactorily
may be limited. Inadequate performance by a master international distributor
would adversely affect our ability to develop markets in the regions for which
the master international distributor is responsible and could result in
substantially greater expenditures by us in order to develop such markets. Our
operating results will be highly dependent upon:
. our ability to maintain our existing master international distributor
arrangements;
. our ability to establish and maintain coverage of major geographic
areas and establish access to customers and markets; and
. the ability of our distributors, sales agents, and value-added
resellers to successfully market our products.
14
Market acceptance of our products and services is uncertain.
We intend to address the needs of existing imagery markets and to develop
new markets. Our success will depend on demand for satellite imagery with a
resolution of one meter or less, which to date has not been widely available
commercially. Consequently, it is difficult to predict the ultimate size of the
market and the demand for products and services based on this type of imagery.
Our strategy to target certain markets for our satellite imagery is based
on a number of assumptions, some or all of which may prove to be incorrect. Our
description of potential markets for our products and services, and estimates of
the addressable markets that we discuss in this prospectus, represent our view
as of the date of this prospectus. Actual markets could vary materially from
these estimates.
As is typical in many emerging markets, demand and market acceptance for a
new product or service is subject to many uncertainties. We cannot assure you
that our products will achieve market acceptance in existing imagery markets or
that new markets will develop. Even if markets for our imagery develop, we may
capture a smaller share of these markets than we currently anticipate. We have
entered into contracts to supply imagery, which provide for agreed upon minimum
and maximum purchases by our customers of imagery and value-added products and
services. We cannot assure you that our customers will purchase any such data in
excess of minimum contractual obligations. Lack of significant market acceptance
of our products and services, delays in acceptance, or failure of certain
markets to develop would have a material adverse effect on our business,
operating results, and financial condition, and would negatively affect our
ability to pay interest and principal on the notes and our other indebtedness.
Our business will suffer if we are not able to expand into international
markets or compete effectively in those markets.
We expect to derive a significant portion of our revenues from
international markets. We have limited experience internationally and may not be
able to compete effectively in international markets. International operations
are subject to certain risks, such as:
. increases in tariffs, taxes, and other trade barriers;
. difficulties in collecting accounts receivable and longer collection
periods;
. fluctuations in currency exchange rates;
. changes in political and economic stability;
. potentially adverse tax consequences;
. government regulations; and
. reduced protection for intellectual property rights in certain
countries.
Any of these factors could materially adversely affect our international
revenues and, consequently, our business, operating results, and financial
condition.
We face technological risks.
The EarthWatch system is exposed to the risks inherent in a complex
satellite system employing advanced technologies. The technology used in the
EarthWatch system has never been used in an integrated commercial system and has
been or must be adapted to meet our specific needs. The operation of the
EarthWatch system will require the design and integration of advanced digital
technologies throughout our satellite, ground station, and data gathering and
distribution networks. The failure to develop, produce, and implement the
EarthWatch system or any of its elements could delay the operation of the
EarthWatch system or render it unable to perform to the quality
15
standards required for success. We believe that, based upon presently available
information, our QuickBird 2 satellite will, at the time of launch, be
technologically competitive with other high-resolution satellites. However,
because of substantial and continual technological change, we may be unable to
maintain our competitive position, and our business, results of operations, and
financial condition may be adversely affected. Therefore, we may be unable to
pay interest and principal on the notes and our other indebtedness.
Risks relating to our personnel and intellectual property.
Our business will suffer if we do not attract and retain additional highly-
skilled personnel or manage our growth effectively.
Our future success depends on our ability to identify, attract, hire, and
train highly-skilled technical, managerial, sales, and marketing personnel.
Competition for skilled technical personnel is intense. Some of our competitors
have significantly greater financial resources than us and may be able to more
easily attract such skilled personnel. Moreover, competition for technical
talent in the Denver metropolitan area is particularly intense. Failure to
attract and retain the necessary technical, managerial, sales, and marketing
personnel could materially adversely affect our business, operating results, and
financial condition.
We may experience periods of rapid growth. If we fail to manage our growth,
this could materially adversely affect our business, operating results, and
financial condition. We must effectively manage our operational, financial, and
accounting systems, procedures, and controls to manage this future growth.
We may not be able to successfully operate our business if we lose key
personnel.
We believe that our success will depend on the continued services of our
senior management team and other key personnel, including Herbert F. Satterlee
III, our Chief Executive Officer and President, Dr. Walter S. Scott, our Chief
Technical Officer and Executive Vice President, and Henry Dubois, our Chief
Operating Officer, Chief Financial Officer, and Executive Vice President. The
loss of the services of any of our senior management team or other key employees
could materially adversely affect our business, operating results, and financial
condition. We generally have not entered into written employment contracts with
any members of management. Furthermore, we do not maintain key person life
insurance on our management personnel.
Our limited ability to protect our intellectual property and proprietary
information may adversely affect our competitive position.
Trade secrets, copyright laws, nondisclosure agreements, and other
proprietary rights are important to our success and competitive position. Our
efforts to protect our proprietary rights may be inadequate and may not prevent
others from using our proprietary rights. Existing trade secret and copyright
laws offer only limited protection. Further, effective trade secret and
copyright protection may not be available in every country in which our services
or products are made available, and policing unauthorized use of our proprietary
information is difficult.
The unauthorized misappropriation of our proprietary rights could have a
material adverse effect on our business, operating results, and financial
condition. Our expected use of the Internet as a means of distribution for our
images may exacerbate the risks, as it places our imagery data in the hands of
our customers in a form readily duplicated and transferable to other persons
without our consent. If we resort to legal proceedings to enforce our
proprietary rights, the proceedings could be burdensome and expensive, and the
outcome could be uncertain.
Claims of intellectual property infringement expose us to costs and
potential losses.
Because we have contracted for a significant portion of our infrastructure,
suppliers often grant us licenses to use their intellectual property embodied in
the hardware and software supplied, and indemnification for any infringement of
intellectual property rights in connection with such use. Despite this
indemnification, we may be subject to claims alleging infringement by us of
third party proprietary rights. If any of our products or services infringes
third party rights, we may not be able to obtain permission to use such
intellectual property on commercially reasonable terms. This could require us
to expend significant resources to make our products and
16
services noninfringing or to discontinue the use of such products and services.
Any claim of infringement also could cause us to incur substantial costs
defending against the claim, even if the claim is without merit. Finally, a
party making such a claim could secure a judgment that requires us to pay
substantial damages or that prevents us from using or selling our products and
services. Any of these events could have a material adverse effect on our
business, operating results, financial condition, and our ability to pay
principal and interest on the notes and our other indebtedness.
Claims of invasion of privacy or misappropriation of trade secrets could be
expensive and cause substantial losses.
Because our QuickBird 2 satellite will be capable of obtaining imagery in
finer detail than has been possible to date by other commercial systems, we may
be subject to claims of invasion of privacy, misappropriation of trade secrets,
or other novel claims by persons or companies that may object to our collection
of satellite imagery of their property. Such claims could cause us to incur
substantial costs defending against such claims, even if the claim is without
merit. Finally, a party making such a claim could secure a judgment that
requires us to pay substantial damages or that prevents us from collecting or
using imagery. Any of these events could have a material adverse effect on our
business, operating results, financial condition, and our ability to pay
principal and interest on the notes and our other indebtedness.
Risks relating to the notes.
Any launch insurance coverage may not provide adequate protection against
satellite loss or impairment.
We anticipate that holders of the notes will have an indirect security
interest in proceeds from one or more insurance policies covering the launch and
first year of operations of QuickBird 2. Holders' interests in these policies
will be shared on an equal basis with Ball, as the lender in our vendor
financing, through a collateral pledge and security agreement. We believe the
security interest that will be granted in favor of holders of the notes will be
perfected to the extent feasible under the governing laws of Colorado, Delaware
and New York. However, there is ambiguity in the governing law of these
jurisdictions with respect to perfecting a security interest in proceeds of an
insurance policy. As a result, we cannot assure you that the rights of holders
of the notes to receive payments on the notes from such insurance proceeds will
not be superseded by another creditor or class of creditors. Moreover, a default
by any of our insurers in their obligations to pay upon a loss would reduce the
proceeds available to holders of the notes.
Any launch insurance policies will contain customary exclusions, such as
war, insurrection, or willful act, the occurrence of any of which would result
in a lack of insurance coverage, which could have a material adverse effect on
our business, operating results, and financial condition.
We cannot assure you that an active trading market will develop for the
notes.
Morgan Stanley Dean Witter has advised us that it may make a market in the
notes. Morgan Stanley Dean Witter is not obligated to do so and such market-
making activities, if any, may be discontinued at any time without notice, in
its sole discretion. We have not and do not intend to apply for listing of the
notes on any securities exchange or through the Nasdaq National Market. The
notes may trade at a discount, depending upon prevailing interest rates, the
market for similar securities, our performance, and other factors. We cannot be
certain, therefore, that an active market for the notes will develop, or if such
a market does develop, that it will continue. See "Plan of distribution."
As of the date hereof, we have notes outstanding with an aggregate
principal amount at maturity of $71.7 million.
We may not have the ability to raise the funds necessary to finance the
change of control offer required by the notes.
Upon the occurrence of certain change of control events, we will be
required to offer to repurchase the notes at a price equal to 101% of their
accreted value, plus accrued interest. It is possible that we will not have
sufficient
17
funds at the time of the change of control to make the required repurchases. If
we are unable to make the required repurchases, we would be in default under the
notes.
Purchasers of the notes will be required to include amounts in gross income
for federal income tax purposes in advance of receipt of cash payments.
The notes have been issued with original issue discount for United States
federal income tax purposes. As a result, U.S. holders (as defined in "United
States federal income tax consequences") will be required to include amounts in
income in respect of the notes on a constant yield to maturity basis in advance
of the receipt of the cash to which such income is attributable. See "United
States federal income tax consequences--Original issue discount."
We may not be able to deduct a portion of the original issue discount that
accrues on the notes.
The notes are applicable high-yield discount obligations, as defined in the
Internal Revenue Code, and the following rules will apply if the yield to
maturity of the notes exceeds the "applicable federal rate" in effect at the
time of their issuance, plus five percentage points. Under these rules, if the
yield to maturity of the notes exceeds the applicable federal rate plus five
percentage points, we will not be able to deduct a portion of the original issue
discount that accrues on the notes, and the remaining original issue discount on
the notes will not be deductible by us until we pay the original issue discount
in cash. See "United States federal income tax consequences--Applicable high-
yield discount obligations."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Risk factors," "Management's
discussion and analysis of financial condition and results of operations,"
"Business," and elsewhere in this prospectus constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties,
and other factors that may cause our or our industry's results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by the forward-looking statements. These factors include, among others,
those listed under "Risk factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology,
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of these
terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance, or achievements. Our actual results and the timing of
certain events could differ materially from those anticipated in these forward-
looking statements.
18
USE OF PROCEEDS
This prospectus is to be used by Morgan Stanley Dean Witter in connection
with offers and sales of the notes in market-making transactions at negotiated
prices related to prevailing market prices at the time of sale. Morgan Stanley
Dean Witter may act as principal or agent in such transactions. We will not
receive any proceeds from the sale of the notes by the selling noteholders.
DIVIDEND POLICY
The following is a summary of our dividend policy with respect to shares of
our common and preferred stock.
Common stock
The holders of our common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of funds legally
available to be paid. We have not paid any dividends to the holders of our
common stock and do not intend to pay dividends to such holders in the
foreseeable future.
Series A and Series B preferred stock
The holders of our Series A preferred stock and Series B preferred stock
are entitled to receive cumulative dividends, whether or not declared by our
board of directors, at an annual rate of 7% of the liquidation preference amount
until no later than June 15, 2002. 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, 2002, 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, 2002, the
liquidation preference of the Series A preferred stock and Series B preferred
stock will be increased by an amount equal to the product of (a) the amount per
share not paid divided by the total amount payable per share and (b) one quarter
of the dividend rate multiplied by the effective liquidation preference. Under
our amended and restated certificate of incorporation, we are prohibited from
paying dividends on any shares of stock having rights junior to the Series A and
Series B preferred stock until all accumulated dividends have been paid on the
Series A and Series B preferred stock.
Our board of directors has approved, and we are currently seeking consents
of our stockholders to approve, an amendment to our certificate of incorporation
that will extend the date on which dividends may begin to increase the
liquidation preference of the Series A and Series B preferred stock from June
15, 2002 to June 15, 2003.
Series C preferred stock
Until June 15, 2002, 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, 2002, 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, 2002, the liquidation preference of the
Series C preferred stock will be increased by an amount equal to the product of
(a) the amount per share not paid divided by the total amount payable per share
and (b) one quarter of the dividend rate multiplied by the effective liquidation
preference. Under our amended and restated certificate of incorporation, we are
prohibited from paying dividends on any shares of stock having rights junior to
the Series C preferred stock until all accumulated dividends have been paid on
the Series C preferred stock.
However, the terms of the indenture governing the notes restricts our
ability to pay dividends on, or make distributions in respect to, our capital
stock. See "Description of the notes."
19
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company at March 31, 2001 and (ii) the capitalization of the Company at March
31, 2001 as adjusted to give effect to the results of the tender offer for the
Company's notes which occurred on April 3, 2001 and the transactions
contemplated by the recapitalization agreement, including the vendor financing
with Ball Aerospace. This table should be read in conjunction with the
consolidated financial statements and related notes thereto included elsewhere
in this prospectus.
Historical As Adjusted
--------------- ---------------
(in thousands)
Cash and cash equivalents $ 27,781 $ 26,781/(1)/
Investment securities - restricted 236,761 63,878/(2)/
--------- ---------
Total cash and cash equivalents and investment securities $ 264,542 $ 90,659
========= =========
Long-term debt (including current maturities):
13% Senior Discount Notes $ 140,330 $ 41,916/(3)/
12 1/2% Senior Notes 63,223 --/(3)/
Other 39 39
--------- ---------
Total long-term debt 203,592 41,955
--------- ---------
Mandatorily redeemable preferred stock/(4)/:
Series A convertible preferred stock 27,988 27,988
Series B convertible preferred stock 27,988 27,988
Series C convertible preferred stock 88,199 97,597/(5)/
--------- ---------
Total mandatorily redeemable preferred stock 144,175 153,573
--------- ---------
Stockholders' equity (deficit):
Common stock -- --
Additional paid-in-capital 58,902 58,902
Deferred stock compensation (493) (493)
Deficit accumulated during the development stage (42,108) (65,147)/(6)/
--------- ---------
Total stockholders' equity (deficit) 16,301 (6,738)
--------- ---------
Total long-term debt, mandatorily redeemable preferred stock, and
stockholders' equity (deficit) $ 364,068 $ 188,790
========= =========
(1) Adjusted to reflect the $1,000,000 fee paid to Morgan Stanley Dean Witter
for services in connection with the recapitalization.
(2) Adjusted to reflect the payment of $172,882,746 to repurchase notes in
the tender offer.
(3) Adjusted to reflect the purchase of debt securities in the tender offer
and the anticipated issuance of shares of Series C preferred stock
pursuant to the recapitalization agreement.
(4) The mandatorily redeemable Series A, Series B, and Series C preferred
stock are required to be redeemed on March 31, 2009 at a redemption price
equal to 100% of the then applicable liquidation preference, plus accrued
and unpaid dividends to the date of redemption. The mandatorily
redeemable Series A, Series B, and Series C preferred stock are entitled
to cumulative dividends, payable quarterly in cash, additional shares, or
an increase in liquidation preference, as applicable. The annual dividend
rates are 7.0% for the Series A and B preferred stock and 8.5% for the
Series C preferred stock. The indenture governing the notes restricts our
ability to pay cash dividends.
(5) Adjusted to reflect the anticipated issuance of 11,746,905 shares of
Series C preferred stock to the parties to the recapitalization agreement
and to the provider of the vendor financing.
(6) Adjusted to reflect the estimated extraordinary loss on early
extinguishment of debt of $23,038,065, representing the excess amount
paid over net book value of the notes and 12 1/2% notes repurchased in
the tender offer.
20
SELECTED HISTORICAL 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 elsewhere in this prospectus. The
consolidated balance sheet data as of December 31, 1999 and 2000, and the
consolidated statement of operations for each of the three years ended December
31, 2000, are derived from our audited consolidated financial statements and the
notes thereto included elsewhere in this prospectus. The consolidated balance
sheet data as of December 31, 1996, 1997, and 1998, and the consolidated
statement of operations for each of the two years ended December 31, 1997, are
derived from our historical consolidated financial statements not included in
this prospectus. The consolidated balance sheet data as of March 31, 200O and
2001, and the consolidated statement of operations for the three-month periods
then ended and for the period from January 1, 1995 (inception) to March 31,
2001, are derived from unaudited consolidated financial statements included
elsewhere in this prospectus which have been prepared on the same basis as the
audited consolidated financial statements and, in our opinion, include all
adjustments, consisting only of normal recurring adjustments, which are
necessary to present fairly the results of operations and financial position of
EarthWatch for the period in accordance with generally accepted accounting
principles. Historical results may not be indicative of results for any future
period.
Three Months
Year Ended December 31, Ended March 31,
---------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
-------- --------- -------- -------- -------- -------- --------
(in thousands) (UNAUDITED) (UNAUDITED)
Consolidated Statement of Operations Data:
Revenue $ 1,900 $ 437 $ 1,809 $ 5,913 $ 3,336 $ 2,019 $ 3,818
-------- --------- -------- -------- -------- -------- --------
Cost of goods sold 1,922 382 1,905 5,120 2,099 1,343 2,970
Selling, general, and administrative 5,992 8,588 4,975 12,763 15,333 3,016 2,794
Research and development 20,178 19,121 9,113 6,956 13,442 2,380 2,158
Gain (loss) from impairment of fixed assets,
net of insurance recoveries - (25,519) (599) - 107,608 - -
Gain from arbitration settlement - - 1,515 - - - -
Gain (loss) from operations (26,192) (53,173) (13,268) (18,926) 80,070 (4,720) (4,105)
Interest expense (63) (86) (1,340) (5,482) (4,492) (1,984) (4,726)
Interest income 2,549 2,528 1,688 4,089 4,104 1,332 1,626
Income tax provision - - - - 3,000 - -
-------- --------- -------- -------- -------- -------- --------
Net income (loss) $(23,706) $ (50,731) $(12,920) $(20,319) $ 76,682 $ (5,372) $ (7,205)
======== ========= ======== ======== ======== ======== ========
Other Consolidated Financial Data:
Capital expenditures $ 33,952 $ 54,271 $ 26,037 $ 75,238 $ 82,640 $ 15,800 $ 1,591
Cash provided (used) by operating activities (20,967) (14,192) (10,864) (6,420) (18,891) (6,070) (10,874)
Cash used by investing activities (33,951) (68,290) 11,471 (97,070) (57,534) (12,986) 32,943
Cash provided (used) by financing activities 68,452 53,668 (1,972) 180,639 (43) (19) (14)
Ratio of earnings to fixed charges - - - - 2.89x - -
Deficiency of earnings to fixed charges (23,851) (56,401) (18,976) (31,659) - (10,668) (10,783)
Consolidated Balance Sheet Data (end of period):
Cash and cash equivalents $ 35,224 $ 6,410 $ 5,045 $ 82,193 $ 5,726 $ 63,119 $ 27,781
Total assets 90,547 104,299 85,328 271,469 379,378 268,412 372,550
Total debt 1,188 51,511 49,804 167,148 195,485 174,216 203,592
Mandatorily redeemable preferred stock - - - 129,978 141,246 132,788 144,175
Stockholders' equity (deficit) 83,107 39,737 26,831 (40,114) 26,387 (48,229) 16,301
Period From
January 1, 1995
(Inception) to
March 31,
2001
---------------
(UNAUDITED)
Consolidated Statement of Operations Data:
Revenue $ 20,205
---------
Cost of goods sold 16,110
Selling, general, and administrative 52,875
Research and development 74,094
Gain (loss) from impairment of fixed assets,
net of insurance recoveries (81,490)
Gain from arbitration settlement (1,515)
Gain (loss) from operations (39,870)
Interest expense (16,215)
Interest income 16,977
Income tax provision (3,000)
---------
Net income (loss) $ (42,108)
=========
Other Consolidated Financial Data:
Capital expenditures $ 283,007
Cash provided (used) by operating activities (83,762)
Cash used by investing activities (221,709)
Cash provided (used) by financing activities 333,251
Ratio of earnings to fixed charges -
Deficiency of earnings to fixed charges (90,226)
Consolidated Balance Sheet Data (end of period):
Cash and cash equivalents
Total assets
Total debt
Mandatorily redeemable preferred stock
Stockholders' equity (deficit)
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and notes
thereto included elsewhere in this prospectus. This discussion contains forward-
looking statements that involve risks and uncertainties. Actual results may
differ materially from those indicated in such forward-looking statements.
Factors that may cause such a difference include, but are not limited to, those
discussed in "Risk factors" and "Business."
Overview
We plan to create and market a variety of information products derived from
satellite imagery of the earth's surface. We are currently building a satellite
capable of collecting high-resolution digital imagery of the earth's surface, as
well as a comprehensive image collection, enhancement, and digital archive
system known as our Digital Globe database. Our QuickBird 2 satellite is
designed to collect 0.6-meter resolution gray scale and 2.5-meter resolution
color imagery of the earth and will have an ability to revisit most areas within
three to five days. We plan to launch the QuickBird 2 satellite in October
2001.
We were originally incorporated as a wholly-owned subsidiary of Ball
Corporation. On March 31, 1995, we merged with WorldView Imaging Corporation,
which had been founded by Dr. Walter S. Scott, our Chief Technical Officer and
Executive Vice President. In connection with the merger, Ball contributed
certain assets and technology, in addition to making a substantial cash
investment. WorldView received the first United States government license to
operate a high-resolution satellite for commercial use and was developing the
EarlyBird satellites (predecessor satellites to the QuickBird satellites) when
it merged with us.
We are in an early development stage. Since the merger, we have invested in
research and development to develop our satellite system and have incurred
substantial operating costs and selling, general, and administrative expenses.
We completed and launched EarlyBird 1, our first satellite, in December 1997.
However, four days after a successful launch, we lost contact with EarlyBird 1.
We were unable to reestablish communications and determined that the satellite
was a total loss. Although we launched an additional satellite called the
QuickBird 1 on November 20, 2000, it failed to achieve orbit, which resulted in
a total loss of the satellite. As a result, we have not generated any
significant revenue from our proposed primary satellite imagery business and
will not do so until we successfully launch and begin selling imagery generated
by QuickBird 2. We have generated only limited revenue from other related
projects.
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. Morgan
Stanley also received one share of common stock. This investment by the new
equity partners caused the existing stockholders, including Ball, to become
minority owners. As a result, we may have experienced a change in control. See
"Recapitalizations." Also, we obtained the consent of holders of the notes to
amend the indenture governing the notes and change the terms of such securities,
including extending their maturity to March 1, 2005.
On July 12, 1999, we completed a private offering of 199,000 units,
consisting of the notes and shares of preferred stock. Each unit consisted of a
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 notes for registered
notes. We did not receive any proceeds from this exchange offer.
On February 28, 2001, as required by the indentures governing the notes and
our 12 1/2% notes, we offered to purchase all of our outstanding notes and 12
1/2% notes at their accreted value 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 the notes and all outstanding 12 1/2%
22
notes on April 3, 2001, resulting in an extraordinary loss on early
extinguishment of debt of approximately $23.0 million. The combined repurchase
price totaled $172.9 million.
In connection with the offer, we entered into the Recapitalization
Agreement with certain holders of the notes. Pursuant to the Recapitalization
Agreement, these noteholders agreed to refrain from tendering their notes in the
offer, thus allowing us to have the use of the funds that would otherwise be
used to repurchase their notes. We also granted registration rights to certain
holders of the notes and Series C preferred stock and pledged government
securities to secure certain repurchase rights of the noteholders. Furthermore,
we obtained the consent of these noteholders and amended the indenture governing
the notes in certain respects.
In the Recapitalization Agreement, we also agreed, among other things, that
we would, by no later than June 15, 2001:
. obtain at least $9 million of vendor financing from Ball Aerospace;
. amend 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;
. issue 10,843,297 additional shares of our Series C preferred stock to
the holders of the notes that signed the Recapitalization Agreement;
. purchase at least $155 million of QuickBird 2 insurance insurance
covering the launch and in-orbit operations of our QuickBird 2
satellite; and
. pledge the QuickBird 2 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 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 QuickBird 2 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
timely construction and successful deployment of QuickBird 2 and 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 EarthWatch 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 QuickBird 2 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 expect to begin generating revenue several months after QuickBird 2 is
launched. We will use this initial period to test the system. In the first
year of QuickBird 2's operations, we expect that most of our revenues will come
from government customers that enter into pre-launch contracts with us. We
anticipate that many customers will wait to enter into imagery contracts until
after QuickBird 2 is successfully launched and fully operational.
23
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 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.
Revenue
We have generated our revenues primarily from the processing and sale of
geographic imagery purchased from third party suppliers. Once 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.
We believe that our first-come, first-served approach to contracting
Seconds on Orbit on the QuickBird satellite will appeal to customers who want
high priority tasking. We are engaged in discussions with various potential
customers, primarily foreign and domestic government agencies, and we believe
these discussions will lead to a number of contracts soon after we launch. 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.
We expect that Seconds on Orbit will represent our largest source of revenue
over the next several years. Seconds on Orbit contracts are designated to
establish a fixed dollar amount for tasking time on the satellite, which is
billed on a quarterly basis, whether or not the rental time or resulting images
are used.
In addition to selling tasking time on a satellite under a Seconds on Orbit
contract, we also plan to sell specific images requested by customers.
We believe that our planned value-added imagery products represent the
greatest potential for long-term growth. Such products include licensing of
archived EarthWatch 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 current costs are indicative of our anticipated
costs. Currently, cost of goods sold includes third party geographic imagery
sold under contract. Once our satellite and production facilities are
operational, cost of goods sold also will include expenses incurred to operate
the data and value-added production facilities, ground stations, and satellite
operations, as well as depreciation for these facilities. In addition, cost of
goods sold will include depreciation of the satellite (once it is placed in
service), including launch insurance, capitalized interest, and ground system
construction. Since the designed useful life of the satellite is five years, we
expect to depreciate it on a straight-line basis over a similar period.
We do not expect our operating cost of goods sold, including labor in
production, satellite operations, and ground operations, to vary significantly
with revenues. The level of these costs will be established prior to the launch
of QuickBird 2 and we expect them to remain relatively flat thereafter. 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 prior to the launch due to sales staff
additions and increased marketing efforts. While a portion of these expenses is
fixed, most of them will increase with revenue, particularly sales commissions,
which vary directly with sales levels.
24
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 decrease in 2001 as a result of staff reductions
through the third quarter of 2001, due to the failed launch of QuickBird 1. We
expect them to increase after the launch of QuickBird 2 as we begin our planned
commercial operations. As these expenses are primarily fixed, we believe they
will decrease as a percentage of revenue over time.
Research and development
Research and development costs are principally expensed as incurred and
reflect the cost of the design of the satellites, data processing, value-added
production facilities, and ground station systems. We record as research and
development expense all engineering costs associated with the preliminary design
of our satellites where we maintain the risk associated with design failure.
Once the design of the satellite is stable and not subject to significant
additional modifications, we capitalize additional costs as investments in
satellite equipment. Also included are the costs of research and development
for ongoing operational improvements and new product and application
development. It is our intention to consistently fund the development of new
products, processes, and image applications in addition to developing next
generation satellite systems.
Satellite failure
Due to the loss of our QuickBird 1 satellite on November 20, 2000, we wrote
off approximately $157 million of QuickBird 1 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 QuickBird 1, 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.
Capital expenditures
We expect to incur significant capital expenditures to construct and launch
the QuickBird 2 satellite, and upgrade both our ground stations and other
operating systems. As of March 31, 2000, we have spent a total of $224.3
million for both QuickBird 1 and QuickBird 2 and related systems. The QuickBird
2 satellite is now in final assembly and testing. It has a designed useful life
of five years. We expect to spend an additional $80.1 million to complete,
launch, and insure QuickBird 2 and its related systems.
We have begun to develop plans for the satellites that will replace
QuickBird 2. The first replacement satellite is planned for launch by 2005. We
expect to incur significant research and development costs and capital
expenditures to develop these next generation satellites. We believe these
satellites will provide significant additional capacity and significantly
increase our revenue opportunities compared to the QuickBird system.
25
Results of Operations
Three months ended March 31, 2000 compared with three months ended March 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 $2.0 million for the three-month period ended March
31, 2000 to $3.8 million for the three-month period ended March 31, 2001.
Varying delivery dates within new and existing contracts have resulted in
significant revenue fluctuations for these two periods. Revenue for the
remainder of fiscal 2000 decreased substantially in anticipation of the launch
of QuickBird 1. A similar decrease is not expected in fiscal 2001.
Cost of Goods Sold. Our cost of goods sold includes third party geographic
imagery purchased for sale under contract. As a result of our increased
revenue, our cost of goods sold consequently increased from $1.3 million for the
three-month period ended March 31, 2000 to $3.0 million for the three-month
period ended March 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 $3.0 million and $2.8 million for the three-month
periods ended March 31, 2000 and 2001, respectively. These expenses decreased
due to staff reductions and reduced operating activities following the loss of
QuickBird 1. We expect these costs to increase in the future as we increase
staff levels and implement new procedures in preparation for full-scale
operations and market entry of our products and services.
Research and Development. Our research and development costs were $2.4
million and $2.2 million for the three-month periods ended March 31, 2000 and
2001, respectively. These expenses decreased due to staff reductions and
reduced operating activities following the loss of QuickBird 1.
Interest Expense. Interest expense increased significantly from $2.0
million for the three-month period ended March 31, 2000 to $4.7 million for the
three-month period ended March 31, 2001. This increase was the result of higher
average debt balances outstanding during the three-month period ended March 31,
2001 and lower capitalization of interest due to the completion of QuickBird 1
in 2000.
Interest Income. Interest income increased from $1.3 million for the three-
month period ended March 31, 2000 to $1.6 million for the three-month period
ended March 31, 2001. This increase was the result of higher average investment
balances outstanding during the three-month period ended March 31, 2001.
Net Loss. We had net losses of $5.4 million and $7.2 million for the three-
month periods ended March 31, 2000 and 2001, respectively.
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
26
1999 to $5.7 million in 2000 as a result of increases in sales staff and
increased marketing efforts in preparation for market entry of the Company's
products and services, originally anticipated for year end 2000.
Research and development. Research and development costs increased from
$7.0 million for the year ended December 31, 1999 to $13.4 million for the year
ended December 31, 2000. The increase was attributable to additional staff and
systems development for launch and satellite systems.
Loss (gain) from impairment of fixed assets, net of insurance recoveries.
No gains or losses from impairment of fixed assets were recognized in 1999, but
due to the loss of our QuickBird 1 satellite on November 20, 2000, we wrote off
approximately $157 million of QuickBird 1 costs in 2000. The impact was a
decrease in balance sheet values, specifically, construction in progress
(satellite) assets in the year end consolidated financial statements for 2000.
We also recognized in the year 2000, a receivable in the amount of $265 million
for insurance proceeds due to the loss of QuickBird 1, resulting in a net gain
on the loss of our satellite of approximately $108 million.
Interest expense. Interest expense decreased from approximately $5.5
million in 1999 to $4.5 million in 2000, as a result of increased capitalization
of interest on the higher average balance of construction in progress during
2000.
Interest income. Interest income of approximately $4.1 million was
substantially consistent in 1999 and 2000. Cash available for investment has
steadily declined since the unit offering in July 1999 as we have drawn upon
these amounts to fund our operations. Although a greater amount of cash was
available for investment in the latter half of 1999, interest income for 2000
was approximately the same due to having more funds available during a longer
portion of 2000 than in 1999 and overall higher interest rates in 2000.
Provision for income taxes. Due to losses incurred each year since
inception, there was no provision for income taxes recorded until 2000. We
recorded a provision for income taxes in 2000 for alternative minimum taxes. We
had net operating loss carryforwards of $89.0 million as of December 31, 1999
and $134.5 million as of December 31, 2000; however, such deferred tax benefits
and the fiscal 2000 alternative minimum tax credit were not recorded as assets
because we have no history of profitability. In addition, utilization of net
operating loss carryforwards may be subject to limitation, depending on changes
in our ownership.
Net income (loss). We had a net loss of $20.3 million in 1999 versus net
income of $76.7 million in 2000. Our net income in 2000 was the result of the
recognition of the insurance proceeds from the loss of our QuickBird 1
satellite.
Year ended December 31, 1998 compared with year ended December 31, 1999
Revenue. Our revenue increased from $1.8 million in 1998 to $5.9 million in
1999. Our revenue generated from service contracts and sales from archives for
1998 and 1999 was $400,000 for each year.
Cost of goods sold. Our cost of goods sold increased from $1.9 million in
1998 to $5.1 million in 1999. Our costs for third-party geographic imagery
increased from $1.2 million in 1998 to $5.1 million in 1999. Our costs for
providing services under other service contracts decreased from $700,000 in 1998
to zero in 1999. We do not believe that these costs reflect our anticipated
costs of generating satellite imagery once our initial satellite and production
facilities are operational, or when acquiring imaging and other data from other
sources.
Selling, general, and administrative expenses. Selling, general, and
administrative expenses increased from $5.0 million in 1998 to $12.8 million in
1999. General and administrative expenses increased from $3.2 million in 1998
to $9.9 million in 1999. These increased during 1999 as we implemented new
systems and procedures in preparation for full-scale operations. Selling and
marketing expenses increased from $1.8 million in 1998 to $2.9 million in 1999.
These increased in 1999 as a result of increases in sales staff and increased
marketing efforts in preparation for anticipated market entry of our products
and services in 2000.
Research and development. Research and development costs decreased from
$9.1 million in 1998 to $7.0 million in 1999. Costs associated with the design
of the satellites decreased from $3.3 million in 1998 to $2.5
27
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
In connection with our offer to repurchase the notes and our 12 1/2% notes,
we entered into a Recapitalization Agreement dated as of April 2, 2001 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. See "Recapitalizations - 2001 Recapitalization."
In April 2001, we secured a $9.0 million borrowing facility with Ball
Aerospace, one of our stockholders, which we intend to use to fund the
completion of QuickBird 2. This vendor financing facility will accrue interest
at an annual rate of 11%, which will become payable seven months following the
launch of QuickBird 2. Beginning with the eighth month and ending with the
eighteenth month following the launch of QuickBird 2, 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 903,608 shares of
Series C preferred stock.
We cannot assure you that the remaining contemplated transactions under the
Recapitalization Agreement and the Ball facility will be completed. If we do
not, among other things, consummate the transactions required to be consummated
by June 15, 2001, we must complete by August 1, 2001 an offer to purchase all of
the then-outstanding notes for a purchase price equal to their accreted value as
of the date of purchase.
We had net cash used by operating activities of $10.9 million for the three-
month period ended March 31, 2001 and $6.1 million for the three-month period
ended March 31, 2000. This difference was primarily the result of a reduction in
accounts payable outstanding, resulting from the finalization of our
Recapitalization Agreement.
As a result of receiving $265 million of insurance proceeds, we had net cash
provided by investing activities of $32.9 million for the three-month period
ended March 31, 2001 as compared to $13.0 million used by investing activities
during the same period in 2000. As a result of our collateral agreement with our
note holders, $236.8 million of these proceeds were deposited into a restricted
escrow account for the repurchase of notes submitted in our tender offer.
Excluding the insurance proceeds and deposits in the restricted escrow account,
we had $4.7 million of cash provided by investing activities in 2001 as compared
to $13.0 million used by investing activities during the same period in 2000.
This increase was primarily the result of the release of restricted investments
for final payment of the QuickBird 1 insurance premiums during the three-month
period ended March 31, 2001.
Based on our current operating plan and provided we can complete the other
contemplated transactions in the Recapitalization Agreement prior to June 15,
2001, we believe that existing capital resources will meet our anticipated cash
needs through fiscal 2002. If we face any launch delays, if our satellite system
takes longer to become operational, if technical or regulatory developments
require that we modify the design of our satellite system, if we are unable to
complete the other contemplated transactions by June 15, 2001, if we are unable
to
28
achieve our revenue targets, or if we incur other additional unforeseen costs,
we may require additional capital. We do not have a revolving credit facility or
other source of readily available capital. Therefore, any shortfall in funds
available for our operations or to service our debt would cause us serious
liquidity problems. In such case, we would need to seek additional financing
which we may not be able to obtain on commercially reasonable terms or at all.
Failure to obtain such additional financing may result in a material adverse
effect on our business and could prevent us from continuing as a going concern.
Quantitative and qualitative disclosures about market risk
We invest our cash and cash equivalents and restricted investments in short-
term, U.S. dollar interest-bearing, investment grade securities with maturities
less than 90 days. As of March 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 currently do not hold any variable interest rate debt or
lines of credit, and currently do not generally enter into any transactions
denominated in a foreign currency. Therefore, our exposure to interest rate and
foreign exchange fluctuations is minimal.
As of March 31, 2001, we estimate the fair value of our debt to be
approximately $233.2 million using its accreted value plus accrued and unpaid
interest as of that date. This methodology was utilized as a result of our
tender offer in effect on that date and our requirement to make a repurchase
offer for the untendered notes in the event qualifying insurance for QuickBird 2
is not obtained by the required date. Upon the resolution of the insurance
contingency, the fair value of the untendered notes will depend upon rates for
similar instruments at that time. To the extent interest rates increase, our
costs of financing would increase at such time as we are required to refinance
our debt.
29
BUSINESS
We were originally incorporated on September 30, 1994 as a wholly-owned
subsidiary of Ball Corporation. On March 31, 1995, we merged with WorldView
Imaging Corporation, which had been founded by Dr. Walter S. Scott, our Chief
Technical Officer and Executive Vice President. In connection with the merger,
Ball contributed certain assets and technology, in addition to making a
substantial cash investment. WorldView received the first United States
government license to operate a high-resolution satellite for commercial use and
was developing the EarlyBird satellites (predecessor satellites to the QuickBird
satellites) when it merged with us. In August 21, 1995, we reincorporated in the
State of Delaware.
We believe that we will possess one of the best commercially available systems
for producing low-cost, high-resolution, map-quality imagery and information
products over large areas of the earth's surface. We are currently building a
satellite capable of collecting high-resolution digital imagery of the earth's
surface, as well as a comprehensive image collection, enhancement, and digital
archive system, our Digital Globe database. Our QuickBird 2 satellite is
designed to collect 0.6-meter resolution gray scale and 2.5-meter resolution
color imagery of the earth and will have an ability to revisit most areas within
three to five days. Although we launched a 1-meter QuickBird satellite,
QuickBird 1, on November 20, 2000, there was a failure to achieve orbit, which
resulted in the total loss of the satellite. Our previous satellite, the
EarlyBird 1, was launched in December 1997, but we lost contact with it and
determined that it was a total loss. We plan to launch QuickBird 2 in the fall
of 2001.
We believe that our system will allow us to provide high-resolution imagery-
based products at a low cost and in the forms most useful to our targeted
customer segments. For sophisticated government, scientific, and commercial
users, we expect to deliver imagery data on a near real-time basis in response
to specific customer requests. In addition, we can process and enhance imagery
data to make them more useful to our customers. For example, we can add
precision correction, elevation, terrain, and topographic information or
integrate information from other sources such as political borders or utility
infrastructure. We also expect to collect and store imagery for resale in our
Digital Globe(R) archive database. This will allow us to produce satellite
imagery at negligible incremental cost, facilitating an array of new geographic
information, mapping, multimedia applications, and markets that do not currently
use geographic imagery.
Industry estimates of worldwide revenues for aerial imagery exceed $2 billion
annually, according to Frost & Sullivan. We believe the broader market for
geographic imagery and derivative products and services significantly exceeds
this amount and that the near-term world market for high spatial resolution
satellite imagery will exceed $1 billion annually. We believe this market will
grow as low-cost, high-quality satellite imagery becomes commercially available,
stimulating demand for satellite imagery-based products and services, and
encouraging development of new products and applications.
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
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. One-meter and lower
spatial resolution imagery 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 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:
30
. Space Imaging, Inc., which successfully launched its first 1-meter
resolution satellite in September 1999 and has begun serving the commercial
market;
. Orbital Imaging Corp., or Orbimage, which is developing two 1-meter high-
resolution imaging systems, which are scheduled for launch during the third
and fourth quarters of 2001, as publicly announced; and
. ImageSat International (formerly known as West Indian Space Ltd.), which
successfully launched a 1.8-meter resolution satellite in December 2000 and
has announced plans to launch a 1-meter high-resolution satellite for
commercial use during the third quarter of 2001.
We believe there are significant barriers for other potential entrants. The
design, creation, launch, and operation of an integrated high-resolution
commercial satellite system require significant expertise and knowledge. We and
each of our three announced competitors have been developing commercial
satellite imagery systems for more than five years. We believe it would take a
new potential competitor more than two 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
EarthWatch, together with the other announced entrants, will have a significant
advantage.
We also believe that the emergence of high-resolution commercial remote
sensing satellites will stimulate new spending to create and update Geographic
Information Systems databases, especially in emerging markets in Asia,
Australia, the Middle East, and South America. Furthermore, we believe that a
larger, more profitable market will evolve for value-added information products
derived from raw imagery data processed and packaged to meet the demands of
specific users. Traditionally, overhead imagery products have been marketed in
the form of raw data. We seek to be a leading provider of value-added imagery-
based applications and services, rather than just a provider of satellite
imagery. We believe our advanced image processing technology and user-friendly
distribution network will enable us to make imagery easy to use, affordable, and
accessible. We believe that our focus on developing industry-specific products
will stimulate demand and expand the market for satellite imagery and related
products.
Strategy
We are committed to achieving leadership positions in specific markets for
digital imagery and derivative information products. Our strategy to achieve our
objectives includes the following elements:
Become a leading provider of imagery-driven solutions
Overhead imagery products have traditionally been marketed in the form of raw
data. However, we believe that a larger, more profitable market will evolve for
value-added information products derived from raw imagery data, processed and
packaged to meet the demands of specific users. We seek to be a leading provider
of value-added imagery-based applications and services, rather than just a
provider of satellite imagery. We believe our advanced image processing
technology and user-friendly distribution network will enable us to make imagery
easy to use, affordable, and accessible. We intend to continuously develop
industry-specific value-added products, such as tailored damage assessment
products for the insurance industry and crop monitoring products for the
agriculture industry. We believe that our focus on industry-specific products
will stimulate demand and expand the market for satellite imagery and related
products.
Pursue targeted market entry and expansion
Recognizing that we cannot address every possible sales opportunity ourselves,
we will focus on specific customer segments and new commercial markets. We plan
to focus 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
31
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 expect to 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, Datron/Transco Inc., Hitachi, Ltd., ITT Industries,
Inc., MacDonald Dettwiler & Associates, Ltd., and Nuova Telespazio S.p.A. have
supplied us with much of the technology, components, and services for our
satellite imaging system. These partnerships have enabled us to reduce our
satellite development costs significantly. In addition to making a $25 million
equity investment in EarthWatch in April 1999, ITT Industries has entered into a
strategic supplier agreement with us, committing us to use ITT Industries as the
provider and integrator of sensors for the next ten years.
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;
. the largest image storage capacity; and
. state of the art satellite pointing, or geolocation accuracy.
We believe that within three years of our first QuickBird launch, we will be
able to archive most key urban areas and other areas of interest worldwide.
With the loss of QuickBird 1, and the corresponding decreased capacity,
imagery, and revisit times inherent in a one-satellite system, populating our
archive will require more time than previously planned. Even with this decrease,
we believe the above technical advantages will allow us to collect more usable
imagery per day than our competitors, enabling us to provide more imagery to our
customers, to update such imagery more frequently, and, assuming equivalent
launch dates, to build an imagery archive more rapidly.
We believe that these advantages, taken together, will provide one of the best
commercially available systems for producing low cost, high-resolution, map
quality imagery over large areas of the earth's surface. We plan to position our
satellite in an orbit that will provide revisit capability from three to five
days, so that once it is operational, 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
32
program, Hitachi will serve as the master international distributor of our
products and services in Asia, and Eurimage, a majority-owned unit of Nuova
Telespazio, will do the same in Europe. We also plan to license our products
through value-added resellers in North America and in those regions of the world
not covered by exclusive reseller distribution agreements.
In contrast to our competitors, we intend to create an open system to support
purchasers of raw imagery data who desire to process such data using their own
facilities. We plan to provide to purchasers the detailed support data,
including our satellite camera model and downlink formats, necessary to enable
them to perform their own image processing. By supporting open systems
interoperability, we believe we can stimulate third party software developers
and value-added resellers to develop innovative products and applications that
use our imagery data. We also intend to establish relationships with one or more
leading retail websites to sell our mapping and other imagery products directly
to consumers.
Develop comprehensive Digital Globe archive
We plan to create an Internet-based proprietary database of imagery collected
from our QuickBird 2 satellite and other third party satellite and aerial
imaging companies. Over the next several years, we expect that specific customer
requests will utilize approximately 20-30% of our available imaging capacity. 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.
We believe that once our proprietary Digital Globe 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, Geographic Information
Systems, and mapping. Within the market for federal, state, and local government
users, we expect to serve 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 plan to offer high-resolution panchromatic and multispectral imagery
collected from our QuickBird 2 satellite, and currently offer very high-
resolution radar imagery and other third-party data. We also plan to develop and
market specific value-added products for commercial applications. We will
incorporate imagery collected by our satellite and other airborne and satellite
systems into the Digital Globe, providing imagery to customers primarily in
digital form that can be easily stored and processed on a computer. Our
customers may also receive products in other forms, such as on CD-ROM or printed
copy.
We intend to 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 is designed to allow customers
to purchase imaging time on our satellites, with the option of downlinking
directly to customer ground stations. Customers can also purchase imagery of a
desired location. In addition, we can process and enhance acquired imagery to
make it more useful to a customer.
33
We expect to price our products according to market conditions and perceived
consumer value, not production cost. In addition, we intend to retain ownership
of all imagery collected by our satellite and to license our imagery to
customers in a manner similar to software licenses. See "--Proprietary rights."
Sales, marketing, and distribution
We currently are delivering 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
Eurimage in Europe to be our master international distributors. Hitachi Software
is developing innovative information products to expand distribution of our
imagery to both businesses and individuals. Eurimage is the largest distributor
of satellite imagery in Europe and has an extensive distribution system in
place. We believe both master international distributors have developed, and
will continue to develop, value-added resellers in their respective regions. The
master international distributors will serve as resellers and value-added
resellers in their respective regions. Such activities include providing online
distribution channels and direct links to our headquarters in Longmont,
Colorado. Eurimage has implemented a Web-based ordering and delivery system for
its existing customers and is in the process of modifying this system to include
QuickBird products.
Value-added resellers
We are currently selecting value-added resellers based on demonstrated
distribution capability within target market segments. We are seeking value-
added resellers that are strong product advocates, especially in markets where
the application value of high-resolution imagery remains unproven. We are basing
our selections on capability and willingness to work cooperatively with
EarthWatch 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 Digital Globe 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 Digital Globe by means of our Web-
based user interface. Similar to widely available search tools and browsers, the
Digital Globe 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 Digital
Globe products will be 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 will be matched with successful results obtained from the
satellite downlink. We expect that specific orders for large areas will require
tasking over several orbits and days.
34
QuickBird 2 satellite and ground system operations
QuickBird 2 satellite
We intend to launch and operate one satellite. Ball Aerospace is currently
constructing and integrating this satellite at its facility in Boulder,
Colorado. The QuickBird 2 spacecraft is currently in final assembly and testing.
Satellite launch arrangements
We entered into a launch services agreement with Delta Launch Services, Inc.
in February 2001. Delta Launch Services, Inc. is a subsidiary of Boeing Company.
We plan to launch QuickBird 2 on a Delta II launch vehicle from Vandenberg Air
Force Base in California.
Ground stations and satellite control
Our QuickBird 2 satellite will be supported by two ground stations located in
Fairbanks, Alaska and Tromso, Norway. We will control our satellite from the
mission control center at our headquarters in Longmont, Colorado. This facility
was prepared to handle the EarlyBird satellite at the time it was launched and
the related equipment has undergone upgrades to support the QuickBird
satellites.
Digital Globe archive and geospatial operations
The Digital Globe 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 within three years of a successful
QuickBird 2 launch, we will be able to archive most key urban areas and other
areas of interest worldwide, and will be able to continually update this
imagery. We also maintain a geospatial operations facility to produce
orthoimages and digital elevation models from a variety of data sources.
Risk mitigation
Proven technology
We have followed a low-cost design philosophy that capitalizes on the
expertise of our strategic partners while incorporating proven technology used
by other satellite systems.
Insurance
We are currently evaluating our alternatives for obtaining transit and launch
insurance covering QuickBird 2, but have not yet made any determination with
respect thereto. The indenture governing the notes requires us to obtain launch
and in-orbit insurance by June 15, 2001.
We have contracted with Ball Aerospace to construct and deliver the QuickBird
2 satellite. In connection with this contract, Ball Aerospace is required to
insure the satellite during construction and testing, and until the time it
leaves the Ball Aerospace facilities. Prior to delivery of the satellite, we may
obtain a transit insurance policy covering the satellite from the time it leaves
the Ball Aerospace facilities until the time the launch vehicle is intentionally
ignited.
Research and development
We plan to continue to invest in research and development to develop improved
satellite technology, develop the Digital Globe archive, and maintain
technological leadership in geographic imagery products and related systems. We
will also acquire licenses for existing technology where we determine that
adapting existing technology would be less expensive than developing it
internally.
35
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 against independent
aerial photography companies, as well as radar and low-resolution commercial
satellite systems such as Landsat, SPOT, and the 6-meter resolution satellite
launched by the Indian Government. However, we expect our competition in the
future to come primarily from high-resolution satellite systems developed and
operated by other commercial enterprises or foreign governments.
Aerial photography
Commercial aerial photogrammetry firms serve highly fragmented and localized
markets. Customers requiring imagery from different geographic areas must
coordinate with several providers, which increases the cost and time necessary
to obtain imagery data. For large projects, aerial photogrammetry firms usually
require substantial lead-time, resulting in a product that may be out of date by
the time it is delivered. Also, these firms typically produce aerial imagery in
analog form on photographic film rather than in digital form, making post-image
processing more difficult and hindering development of value-added applications
such as complex mosaics.
Satellite imagery addresses many of the limitations of aerial photography,
allowing cost effective collection of data over large areas in a short time,
access to remote regions of the world and restricted airspace, and timely
delivery of data in digital form. Nonetheless, for certain applications, aerial
photography is highly efficient and competitively priced. Since these
applications tend to require a limited geographic scope and spatial resolution
of less than one meter, we do not view aerial providers as direct competitors.
Conversely, we intend to work with these companies and expect that many will
purchase, enhance, and resell our imagery to their customers. We also expect to
continue to purchase and resell aerial imagery to enrich our Digital Globe
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 entrants, including Orbimage and ImageSat,
have launched or announced plans to launch satellites shortly prior to QuickBird
2.
Space Imaging. Space Imaging, a joint venture owned collectively by Lockheed
Martin, E-Systems, and Mitsubishi, has successfully launched and deployed a 1-
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 the rights to market and sell, in the United States of America,
imagery from RadarSat 2, a high-resolution commercial radar imaging satellite
being constructed by the Canadian government. Orbimage is also developing two 1-
meter resolution satellites, OrbView 3 and OrbView 4, which are scheduled for
launch during the third and fourth quarters of 2001, as publicly announced.
ImageSat. ImageSat International (formerly known as West Indian Space Ltd.) 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 1-meter
resolution commercial imaging satellites named EROS, one of which is for the
Israeli government and was launched in December 2000, and one of which is for
commercial use and is scheduled for launch in 2001. Based on the announced
specification for EROS satellites, we believe that they will offer lower
performance than our QuickBird satellite. However, ImageSat is associated with
the Israeli government and, if subsidized, could be able to compete aggressively
on
36
price. ImageSat's first customer, the Israeli government, has announced that it
has reserved the full capacity of ImageSat's first and third satellites in
specific geographic areas.
Although the satellites of each of the companies mentioned above have similar
spatial and spectral resolutions as the QuickBird system, based on their public
announcements, we believe that our QuickBird system will offer significant
technical advantages over the competition.
We believe that the Orbimage and ImageSat satellites appear to be better
suited for reconnaissance than for mapping. QuickBird and IKONOS qualify as both
mapping and reconnaissance satellites.
Space Imaging's IKONOS is designed to offer mapping capability. However, we do
not believe that the IKONOS satellite will compete equally with QuickBird in
terms of collection capacity and positional accuracy. The IKONOS satellite
offers only an 11-kilometer swath, 64 gigabytes of storage, and a maximum
positional accuracy of four meters. In contrast, we expect QuickBird to offer a
16-kilometer swath width, 128 gigabytes of on-board storage, and geolocation
accuracy as good as two meters with ground control. We believe that we will be
able to collect more imagery per day than Orbimage or Space Imaging.
Accordingly, we should have more images to sell and should be able to populate
our digital archive faster than these competitors.
Strategic relationships
We have teamed with the six strategic partners listed below. These partners
are leaders in their respective industries, and we believe that their expertise
and resources will contribute significantly to establishing EarthWatch 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 EarthWatch, some of
which equity stakes were obtained in exchange for providing EarthWatch with
goods or services.
ITT Industries
ITT Industries, Inc. is a leading global supplier of sophisticated military
defense systems and industrial components for the transportation, construction,
and aerospace industries. ITT Industries has provided innovative satellite
sensor systems to NASA and the National Oceanic and Atmospheric Administration
for more than 25 years. In addition to making an equity investment in EarthWatch
in April 1999, ITT Industries entered into a 10-year strategic supplier
agreement as integrator of sensors for future EarthWatch systems. ITT Industries
will provide such sensors and associated services on a best value basis. We have
entered into a contract with ITT Industries under which it provided the
QuickBird satellite scheduling and tasking system, and a QuickBird spacecraft
simulator. In addition, we have contracted with ITT Industries to assist us in
developing technical specifications and the sensors for our next generation
satellites.
Ball Aerospace
Ball Aerospace is a leading supplier of remote sensing, military, and space
technology. Ball Aerospace has developed and successfully executed 37 satellite-
related projects. Additionally, Ball Aerospace has developed and implemented the
in-orbit solution for problems faced by the Hubble Space Telescope's optical
system. As the prime contractor for the QuickBird system, Ball Aerospace
provides design, construction, and integration for the imaging payload and
spacecraft bus of the QuickBird 2 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 Geographic Information Systems markets in Asia, which, we
believe, are currently the fastest growing Geographic Information Systems
markets in the world. Hitachi Software will serve as our master international
distributor in Asia.
37
Nuova Telespazio/Eurimage
Nuova Telespazio, S.p.A. is a leading owner and operator of satellite data
downlink and control facilities in Europe. Nuova Telespazio maintains a large
earth observation division with extensive international Geographic Information
Systems and mapping capabilities. It is also a part owner of Eurimage, a company
that manages the largest European satellite imagery sales and distribution
network. Eurimage is our master international distributor in Europe. Under our
distributor agreement with Nuova Telespazio, Eurimage will be entitled to
purchase our products at discounts of up to 50% of our retail price for end-
distribution in Europe.
MacDonald Dettwiler & Associates
MacDonald Dettwiler & Associates, Ltd. is a leading supplier of ground
processing systems for civilian satellite data and has provided our image data
archiving and distribution capabilities. In November 1995, Orbital Sciences, one
of our competitors, acquired MacDonald Dettwiler. We believe that our rights to
software developed by MacDonald Dettwiler and access to alternative providers
would allow us to proceed without MacDonald Dettwiler if Orbital Sciences were
to prevent MacDonald Dettwiler from providing such assistance. We believe this
risk was significantly reduced with the acquisition of shares representing one-
third of MacDonald Dettwiler by CAI Capital Partners & Co. II, L.P. in December
1999, and with MacDonald Dettwiler's initial public offering of stock in July
2000.
Datron
Datron/Transco Inc. provides products and services for emerging radio and
satellite communication markets, primarily for ground uplink facilities. Datron
is supplying 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
NASA accounted for approximately 39%, and NIMA accounted for approximately
54%, of our revenue during the fiscal year ended December 31, 2000. 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.
Proprietary rights
We have developed proprietary technology relating to our data processing
systems, and imagery product processing and distribution systems. We also have
acquired the right to use technology from our strategic partners. We plan to
combine components and systems incorporating our technology and our strategic
partners' technology to produce one or more satellites, an image archive, and a
distribution network. We do not hold any patents and 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 "Digital Globe," a graphic representation of
the Digital Globe, "Your Planet Online," and "SOO." We have submitted, and will
continue to submit, trademark applications for our operations.
Government regulation
Our business is subject to regulation in the United States and abroad.
38
Commercial remote sensing license
We have received our licenses from the National Oceanic and Atmospheric
Administration for QuickBird satellite operations. The licenses contain
restrictions to protect the foreign and national security policies of the United
States and to implement United States obligations under various international
agreements. Under such licenses, we must also provide the United States
government with access to, and the use of, our data at commercial market prices.
The United States government may limit the commercial distribution of such data
in certain circumstances.
Communications frequency license
We have licenses issued by the Federal Communications Commission, or FCC, to
operate radio frequency devices aboard our satellites and at ground stations
located in the United States. The FCC has allocated to us frequency spectrum for
telemetry, tracking and control operations, and data downlinks, and we have
obtained a license for QuickBird 2. 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. The original
license required the satellites to be constructed by July 1999 and to be
launched by January 2000. The first satellite was QuickBird 1, which suffered a
launch failure in November 2000. As currently amended, the license requires
construction of QuickBird 2 to be completed by May 2001, followed by launch no
later than December 2001.
In order to operate internationally and comply with international regulations,
the FCC has undertaken the international coordination process before the
International Telecommunications Union (ITU) on our behalf. The ITU frequency
coordination is necessary to maintain interference protection with other
international satellite systems and there is no assurance that this coordination
will be completed successfully.
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 EarthWatch 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.
Launch license
We have submitted the required license application to the Office of Defense
Trade Controls for QuickBird 2. We could in the future be subjected to new laws,
policies, or regulations, or changes in the interpretation or application of
existing laws, policies, and regulations that modify the present regulatory
environment in the United States or abroad. U.S. regulators could decide to
impose limitations on U.S. companies that are currently applicable only to other
countries or other regulatory limitations that affect satellite remote imaging
operations. Any limitations of this kind could materially adversely affect our
business.
Employees
As of April 30, 2001, we employed 139 full-time employees. Of these employees,
31 are in data systems, 51 are in ground, product, and space operations, 22 are
in marketing, sales, and customer service, and 35 are in executive, finance, and
administration. None of our employees are represented by a labor union or are
covered by a collective bargaining agreement. We consider our employee relations
to be good.
39
Properties
Our principal executive offices consist of approximately 55,274 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 $57,000. We
also lease approximately ten acres for the site of a ground station located in
Fairbanks, Alaska and 400 square feet for the site of a ground station located
in Tromso, Norway. The term of the Alaska lease expires on July 10, 2005, and
the term of the Norway lease expires six months following the cessation of
QuickBird operations. Our payments under these leases are approximately $4,000
semi-annually for the Alaska lease, and approximately $15,000 (based on current
exchange rates) annually for the Norway lease.
Legal proceedings
We are not currently a party to any material pending legal proceedings.
40
MANAGEMENT
Directors, executive officers, and key employees
The following table provides information concerning our directors, executive
officers, and certain key employees as of May 18, 2001:
Name Age Position
- -------------------------------------------------- ----- ----------------------------------------------------------------
Herbert F. Satterlee III.......................... 46 Chief Executive Officer, President, and Director
Henry E. Dubois................................... 39 Chief Operating Officer, Chief Financial Officer, and
Executive Vice President
Dr. Walter S. Scott............................... 43 Chief Technical Officer, Executive Vice President, and
Director
Neal T. Anderson.................................. 56 Vice President Space Segment
Mark A. Hargrove.................................. 44 Chief Information Officer and Vice President of Operations
Jeffrey S. Kerridge............................... 39 Vice President Sales
Shawn R. Thompson, Esq............................ 46 Secretary of the Board
Paul M. Albert, Jr................................ 58 Director
Henry J. Driesse.................................. 57 Director
Donald E. Foley................................... 49 Director
Anne Karalekas.................................... 54 Director
Takatoshi Kodaira................................. 53 Director
Michael J. Petrick................................ 39 Director
Donald W. Vanlandingham........................... 61 Director
Herbert F. Satterlee III has served as Chief Executive Officer, President, and
a director since he joined EarthWatch 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 the company's earth observing
satellite. Additionally, from October 1978 to June 1998, Mr. Satterlee spent 19
years with The Boeing Company, holding senior management positions on programs
such as Teledesic, UK/ROF AWACS (international defense), and the B-1 Bomber
Simulator (United States defense).
Henry E. Dubois has served as Chief Operating Officer, Chief Financial
Officer, and Executive Vice President since September 1999. From June 1995 to
December 1998, Mr. Dubois served as Advisor to the Board of Directors, Chief
Executive Officer, and Chief Financial Officer of P.T. Centralindo Panca Sakti,
a telecommunication and multimedia company in Indonesia. From March 1993 to
February 1995, Mr. Dubois served as Senior Vice President of P.T. Ongko Multi
Corpora, a diversified conglomerate based in Indonesia. From October 1987 to
February 1993, he served as a consultant and in financial functions for Booz
Allen and Hamilton in Asia. From August 1985 to September 1987, he served in
financial functions for Exxon Corporation.
Dr. 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 EarthWatch since June 1999 and from March 1995 until April 1999.
From May 1998 to June 1998, Dr. Scott served as our interim Chief Executive
Officer. Dr. Scott founded WorldView, our predecessor, in January 1992 and
served as its Chief Technical Officer, Chairman of the Board, and Chief
Financial Officer from January 1992 to March 1995. From January 1986 to February
1993, he served in a variety of positions at the Lawrence Livermore National
Laboratory, including program leader of the Brilliant Pebbles Strategic Defense
Initiative program. In addition, he developed low-cost lightweight satellite
technology, managed the successful launch of several space flight experiments,
and developed computer automated design tools for the manufacture of hybrid
wafer scale integrated circuits. From June 1982 to December 1985, he was founder
and president of Scott Consulting, a software and consulting firm.
Neal T. Anderson has served as Vice President Space Segment since September
1999. Mr. Anderson is responsible for overall management of the development,
production, test, and launch of the QuickBird spacecrafts. From March 1995 to
September 1999, Mr. Anderson served as Senior Director, Space Segment. Mr.
Anderson's experience includes marketing, engineering, and management of over 25
spacecraft programs. From January 1994
41
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 EarthWatch. 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 EarthWatch in September 1996 as our Director,
Defense/Intelligence Programs. His responsibilities in that position included
managing EarthWatch's direct sales and marketing efforts with the United States
Department of Defense and Intelligence Community and with Middle East and
European foreign government accounts. From February 1984 until August 1996, Mr.
Kerridge served in a variety of capacities for the Central Intelligence Agency's
National Photographic Interpretation Center, including strategic planning,
division level officer, program management, branch chief, and analyst.
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 EarthWatch since June 1999.
Since December 1996, Mr. Albert has been retained as a consultant and/or
employee of The Globecon Group, a financial services consulting company. Prior
to such time, from September 1996 to November 1996, Mr. Albert served as a
consultant to Eccles Associates, Inc., a financial consulting company working
primarily with multinational financial institutions in developing countries.
From September 1983 to February 1996, he served as a Managing Director,
Investment Banking of Prudential Securities, Inc., a financial services company.
Mr. Albert also serves as a Director of Teletrac, Inc.
Henry J. Driesse has served as a director of EarthWatch 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 EarthWatch since June 1999. Since
May 1996, Mr. Foley has served as the 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 EarthWatch since November 1999.
From September 1996 until October 1999, Ms. Karalekas served as General Manager
for Microsoft's online guide, MSN Sidewalk Washington. From 1985 until 1996,
Ms. Karalekas held several positions at the Washington Post newspaper, including
Director of Marketing, Publisher of the Washington Post Magazine, and Director
of the Specialty Products Group. Between 1978 and 1985, Ms. Karalekas was a
member of McKinsey & Co., a management consulting firm. From 1975 until 1978,
she served as Senior Staff member of the Senate Select Committee on
Intelligence.
Takatoshi Kodaira served as a director of EarthWatch from June 1995 to April
1999, and since June 1999. Since April 1999, Mr. Kodaira has served as the
General Manager, Geospatial Information Division of Hitachi Software. From
August 1994 to April 1999, Mr. Kodaira served as the Department Manager of the
New Business Development Department of Hitachi, where he was responsible for
identifying and developing new business opportunities. From August 1992 to
August 1994, Mr. Kodaira was a Department Manager of the Defense Systems
42
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 EarthWatch 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., and Premium Standard Farms, Inc.
Donald W. Vanlandingham has served as a director of EarthWatch since October
1996. Mr. Vanlandingham has served as President and Chief Executive Officer of
Ball Aerospace since January 1997. Mr. Vanlandingham joined Ball Corporation,
an affiliate of Ball Aerospace, in July 1967 as Production Engineer and has held
various managerial positions over the last 30 years within the aerospace
operations of Ball Corporation.
Board composition
The composition of our board of directors is governed by a stockholders'
agreement entered into in connection with our recapitalization in April 1999.
The stockholders' agreement provides for a board of directors consisting of 11
members. The holder of the Series A preferred stock is entitled to designate
two directors, the holders of the Series B preferred stock are entitled to
designate four directors, our Chief Executive Officer is entitled to designate
two directors, and a majority of the holders of the Series C preferred stock are
entitled to designate the remaining three 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 ten members, as the Series B stockholders have
only designated three members.
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 Messrs. Kodaira and
Vanlandingham as two 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.
During fiscal year 2000, our board of directors held 8 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 director was a member during the time he was serving as such during fiscal
year 2000.
Committees of the board of directors
The Compensation Committee consists of Messrs. Petrick 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
Foley, 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 and 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.
The Finance Committee is chaired by Mr. Foley, and consists of Messrs. Albert,
Foley, Petrick, and Satterlee. The Finance Committee is responsible for
oversight of our company's financial policies.
43
Director compensation
The majority of the directors on the board are compensated by their employer
and are 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 $2,500 per meeting, for up to six
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 an
initial grant of non-qualified stock options to purchase 15,000 shares of common
stock at a price of $0.25 per share. Additionally, Mr. Albert and Ms. Karalekas
will each receive grants of options to purchase 7,500 shares of common stock at
the end of each calendar year in which they serve as directors, prorated for
their period of service as a director during the first year in which they served
as a director.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of our board of directors for the
2000 fiscal year were those named above. No member of the Compensation Committee
was at any time during the 2000 fiscal year or at any other time an officer or
employee of EarthWatch.
No executive officer of EarthWatch has served on the board of directors or
compensation committee of any other entity that has or has had one or more
executive officers serving as a member of the board of directors of EarthWatch.
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 EarthWatch. See "Certain Relationships and Related
Transactions."
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 1998, 1999 and 2000 by our
Chief Executive Officer and our four next most highly compensated executive
officers whose total compensation in fiscal 2000 equaled or exceeded $100,000:
Summary compensation table
Long-term
Annual Compensation Compensation
------------------------------ ----------------------
Securities
Name and Principal Position Year Salary ($) Bonus ($) Underlying Options/(1)/
- ------------------------------------- ----- ----------- ---------- ------------------------
Herbert F. Satterlee III,
Chief Executive Officer, President, and
Director.................................. 2000 256,250 -- 55,000
1999 203,333 40,000 --
1998 101,591 -- 84,081
Walter S. Scott,
Chief Technical Officer and Director....... 2000 181,500 -- 40,000
1999 165,000 45,000 --
1998 138,546 -- 5,255
Henry E. Dubois,
Chief Operating Officer, Chief Financial
Officer, and Executive Vice President..... 2000 231,000 37,500 55,000
1999 75,000 30,000 175,000
1998 -- -- --
44
Long-term
Annual Compensation Compensation
------------------------------ ----------------------
Securities
Name and Principal Position Year Salary ($) Bonus ($) Underlying Options/(1)/
- ------------------------------------- ----- ----------- ---------- ------------------------
John C. Jasper,
Vice President Data Systems/(2)/........... 2000 181,000 29,000 39,000
1999 53,200 12,000 100,000
1998 -- -- --
Jeffrey S. Kerridge,
Vice President Sales....................... 2000 220,048/(3)/ -- 38,300
1999 198,690/(3)/ 30,000 --
1998 118,119 -- 9,459
(1) The options granted to each of the named executive officers in 2000 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) Mr. Jasper resigned in May 2001.
(3) The compensation paid to Mr. Kerridge for his services includes sales
commissions of $57,205for 1999 and $41,048 for 2000.
Option grants in 2000
The following table sets forth certain information regarding options that we
granted during the year ended December 31, 2000 to the named executive officers:
Option Grants in Last Fiscal Year
Percent of Total Potential Realizable Value At
Number of Options Granted Assumed Annual Rates of Stock Price
Options to Employees in Exercise Price Appreciation for Option Term
-----------------------------------
Name Granted (1) Fiscal Year Per Share (2) Expiration Date 5% 10%
- ------------------------ ---------------------------------------------------------------------- -------------- ----------------
Herbert F. Satterlee III 55,000 1.5% $0.25 December 15, 2010 $22,397 $35,664
Walter S. Scott 40,000 1.1 0.25 December 15, 2010 16,289 25,937
Henry E. Dubois 55,000 1.5 0.25 December 15, 2010 22,397 35,664
John C. Jasper (3) 39,000 1.1 0.25 December 15, 2010 15,882 25,289
Jeffrey S. Kerridge 38,300 1.0 0.25 December 15, 2010 15,597 24,835
(1) Based on 3,704,075 options granted during 2000.
(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.
(3) Mr. Jasper resigned in May 2001.
2000 option exercises and year end option values
The following table sets forth information concerning the value realized upon
exercise of options during 2000 and the number and value of unexercised options
held by each of the named executive officers at December 31, 2000.
Number of Value of Unexercised In
Shares Unexercised Options at the Money Options at
Acquired on Value December 31, 2000 December 31, 2000
------------------------------- -------------------------------
Exercise Realized Exercisable(1) Unexercisable Exercisable Unexercisable
--------------- ------------- ---------------- ------------- ------------- ---------------
Herbert F. Satterlee III -- -- 455,000 -- -- --
Walter S. Scott -- -- 543,850 -- -- --
Henry E. Dubois -- -- 230,000 -- -- --
John C. Jasper(2) -- -- 139,000 -- -- --
Jeffrey S. Kerridge -- -- 138,300 -- -- --
45
(1) All options are immediately exercisable, subject to repurchase by
EarthWatch of any unvested shares at the exercise price upon cessation of
the optionee's service to EarthWatch.
(2) Mr. Jasper resigned in May 2001.
Employee benefit plans
1995 Stock Option/Stock Issuance Plan
Our 1995 Stock Option/Stock Issuance Plan was adopted and approved by our
board of directors in May 1995 and by our stockholders in June 1995. We
terminated the 1995 Plan effective upon the closing of the recapitalization in
April 1999.
Options granted under the 1995 Plan were originally options to purchase our
common stock. In connection with the 1999 recapitalization, all outstanding
options were automatically converted into options to purchase shares of our
Series C preferred stock. The exercise price of such options was adjusted based
on the conversion ratio applicable to the common stock in connection with the
recapitalization. Options currently outstanding under the 1995 Plan will
continue in full force and effect under the terms of the plan until such
outstanding options are exercised or terminated.
As of April 30, 2001 and on an as-converted basis, we had granted options
under the 1995 Plan to purchase 589,550 shares of Series C preferred stock, of
which options to purchase 48,404 shares had been exercised, options to purchase
302,002 shares had been cancelled (due to expiration or otherwise), and options
to purchase 239,144 shares at a weighted average exercise price of $3.806 per
share remained outstanding.
The 1995 Plan provided for the grant of incentive stock options to employees
and nonstatutory stock options to employees, directors, and consultants. The
1995 Plan also provided for the grant of restricted stock to employees,
directors, and consultants. The 1995 Plan is administered by the board or a
committee appointed by the board which determines recipients and types of awards
to be granted, including the exercise price, number of shares subject to the
award, and the vesting and exercisability thereof.
The maximum term of options granted under the 1995 Plan is ten years. The
board determines the exercise price of options granted under the 1995 Plan,
provided that the exercise price of an incentive stock option may not be less
than 100% of the fair market value of the Series C preferred stock on the date
of the option grant (110% in the case of participants holding more than 10% of
the combined voting rights of our outstanding capital stock) and the exercise
price of a nonstatutory stock option cannot be less than 85% of the fair market
value of the Series C preferred stock on the date of the option grant.
Options granted under the 1995 Plan vest at the rate specified in the
applicable option agreement and are not transferable. An optionee whose
relationship with us ceases for any reason, other than by death or disability,
may exercise vested options in the three-month period following such cessation,
unless such options terminate or expire sooner by their terms. Vested options
may be exercised for up to 12 months after an optionee's relationship with us
ceases due to death or disability.
Upon certain changes in control of our ownership, each outstanding option will
terminate unless assumed by the successor corporation.
Predecessor Stock Option Plan
In connection with the merger with WorldView in March 1995, we assumed options
issued under WorldView's 1994 Stock Option/Stock Issuance Plan. In connection
with the 1999 recapitalization, all outstanding options under the WorldView Plan
were automatically converted into options to purchase shares of our Series C
preferred stock.
As of April 30, 2001 and on an as-converted basis, options to purchase an
aggregate of approximately 7,853 shares of Series C preferred stock, at a
weighted average exercise price of $0.105 per share, remained outstanding under
the WorldView Plan.
46
The maximum term of options granted under the WorldView Plan is ten years.
Options granted under the WorldView Plan are nontransferable. An optionee whose
relationship with us ceases for any reason, other than by death or disability,
may exercise vested options in the three-month period following such cessation,
unless such options terminate or expire sooner by their terms. Holders may
exercise vested options for up to 12 months after an optionee's relationship
with us ceases due to death or disability.
1999 Equity Incentive Plan
In February 2000, our board of directors approved a 1999 Equity Incentive
Plan, under which 10,000,000 shares of common stock have been reserved for
issuance. Our stockholders approved this plan in December 2000. The plan
provides for the grant of incentive stock options to employees and nonstatutory
stock options, stock bonuses, and restricted stock awards to employees,
directors, and consultants to purchase common stock. The purpose of the plan is
to secure and retain qualified personnel and to provide incentives to such
personnel to achieve success for the company. The plan is administered by the
board or a committee appointed by the board, which determines recipients and
types of awards to be granted, including the exercise price, number of shares
subject to the award, and the exercisability thereof.
As of April 30, 2001, we had granted options to certain employees under the
plan to purchase an aggregate of 3,777,804 shares of common stock, of which
options to purchase 217,900 shares had been exercised, options to purchase
383,529 shares had been cancelled (due to expiration or otherwise), and options
to purchase 3,176,375 shares at a weighted average exercise price of $0.25 per
share remained outstanding.
The term of an option granted under the plan is stated in the option
agreement. The terms of options granted under the plan may not exceed ten years
generally and the term of an incentive stock option granted to a participant
holding more than 10% of the combined voting rights of our outstanding capital
stock may not exceed five years. Options granted under the plan generally vest
and become exercisable as set forth in the option agreement; provided that
options granted prior to the initial listing of any of our securities on a
national securities exchange to an employee who is not an officer, director, or
consultant vest at a rate of 20% over five years from the date of grant. The
option agreement may provide for an early exercise by the optionee, a right of
repurchase of vested options by us, a right of first refusal, or a re-load
option in which an optionee who exercises an option by surrendering already-
owned shares of our common stock may be granted a further option.
In general, no option, stock bonus, or restricted stock award may be
transferred by the optionee other than by will or the laws of descent or
distribution, and each option may be exercised, during the lifetime of the
optionee, only by such optionee. An optionee whose relationship with us or any
related corporation ceases for any reason (other than by death or permanent and
total disability) may exercise options in the 30-day period following such
cessation, unless such options terminate or expire sooner, by their terms, but
only to the extent the option had vested on such date of cessation. In
addition, in the event of the cessation of an optionee's employment, we may
repurchase any unvested shares granted under a stock bonus or restricted stock
award. In the event of death or total and permanent disability, the option may
be exercised in the twelve-month period following the date of death or total and
permanent disability unless such options terminate or expire sooner, but only to
the extent the option had vested on the date of death or disability.
In the event we merge with or into another corporation, all outstanding
options may either be assumed or an equivalent option may be substituted by the
surviving entity or, if such options are not assumed or substituted, such
options shall become exercisable as to all of the shares subject to the options,
including shares as to which they would not otherwise be exercisable. In the
event that options become exercisable in lieu of assumption or substitution, the
board of directors shall notify optionees that all options shall be fully
exercisable for a period of 15 days, after which time the options shall
terminate.
The board of directors determines the exercise price of options granted under
the plan at the time of grant, provided that the exercise price of all incentive
stock options generally must be at least equal to the fair market value of the
shares on the date of grant. The exercise price of a nonstatutory stock option
cannot be less than 85% of the fair market value of the shares on the date of
grant. With respect to any participant who is a 10% holder of the combined
voting rights of our outstanding capital stock, the exercise price of any
incentive stock option or any
47
nonstatutory stock option granted must equal at least 110% of the fair market
value on the grant date and the exercise price of any stock bonus or restricted
stock award must be at least equal to the fair market value of the shares on the
date of grant. The consideration for exercising any incentive stock option or
any nonstatutory stock option may consist of cash, promissory note, delivery of
already-owned shares of our common stock, or such other consideration or method
of payment as determined by the board of directors to the extent permitted under
applicable law. No incentive stock options may be granted to a participant,
which, when aggregated with all other incentive stock options granted to such
participant, would have an aggregate fair market value in excess of $100,000
becoming exercisable in any calendar year. Stock bonuses and restricted stock
awards may be issued either alone, in addition to, or in tandem with stock
options granted under the plan. The plan will terminate on February 14, 2010,
unless sooner terminated by the board of directors.
401(k) Plan
We have a 401(k) plan, pursuant to which eligible employees may elect to
reduce their current salary by up to 15%, subject to other IRS limitations, and
have the amount of such reduction contributed to the 401(k) plan. Any
contributions by us to the 401(k) plan are discretionary. The 401(k) plan is
intended to qualify under section 401 of the Internal Revenue Code so that
contributions by participants to the 401(k) plan, and income earned on those
contributions, are not taxed to participants until withdrawn from the 401(k)
plan.
48
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation contains a provision to eliminate the
personal liability of our directors for monetary damages for breach or alleged
breach of their fiduciary duties as directors except to the extent the exemption
from or limitation of liability is not permitted under Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except for
liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
In addition, our certificate of incorporation and bylaws provide that we will
indemnify our officers, directors, and employees against any and all liability
and reasonable expenses incurred in connection with any claim, action, suit, or
proceeding in which that person may become involved by reason of their
relationship to the company, provided that the person acted in good faith and in
a manner reasonably believed to be in our best interests. Our bylaws prevent us
from indemnifying an officer, director, or employee to the extent not permitted
under Delaware law as well as in the following circumstances:
. as to amounts paid or payable to us for or based upon the director,
officer, or employee having gained any personal profit or advantage to
which he was not legally entitled; or
. as to amounts paid or payable to us for accounting profits made from the
purchase or sale of our securities within the meaning of Section 16(b) of
the Securities Exchange Act of 1934, as amended.
Our bylaws also provide that we will grant indemnification only if our board
of directors, outside legal counsel, or a court of competent jurisdiction
determines that the officer, director, or employee has met the applicable
standard of conduct as described above, or if the officer, director, or employee
has been wholly successful with respect to the claim, action, suit, or
proceeding.
We have obtained directors' and officers' liability insurance but have not
entered into indemnity agreements with any of our officers, directors, or
employees.
49
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 10% of our
outstanding capital stock, for engineering services in connection with the
QuickBird spacecraft. This agreement currently remains in effect.
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 QuickBird 1, with a total fixed cost of $34.1
million. In April 1999, we exercised our option to purchase a second QuickBird
satellite at a cost of $31.1 million. We made payments to Ball Aerospace under
the Ball Aerospace agreements of approximately $34 million in 1999 and
approximately $15.4 million in 2000.
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 intend to use to fund the completion of QuickBird 2.
This financing facility will accrue interest at an annual rate of 11%, which
becomes payable seven months following the launch of QuickBird 2. Beginning
with the eighth month and ending with the eighteenth month following the launch
of QuickBird 2, principal, in equal monthly amounts, and interest are payable in
cash each month. Our obligations under the financing facility, together with the
notes, will be secured by the insurance policy for the QuickBird 2 launch and
operations. See "Recapitalizations - 2001 Recapitalization." In conjunction
with this arrangement, we agreed to issue Ball Aerospace 903,608 shares of
Series C preferred stock.
Mr. Vanlandingham, a director of EarthWatch, is the President and Chief
Executive Officer of Ball Aerospace.
Transaction with Hitachi Software
Hitachi, Ltd., which holds approximately 3.8% of our outstanding capital
stock, currently is a master international distributor of our products, and the
exclusive distributor in most of Asia. Under our distribution agreement,
Hitachi will be entitled to purchase our products at discounts of up to 76% of
our retail price for end-distribution in Asia for the first $400,000 worth of
our products and at discounts of up to 40% thereafter. 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 agreed to issue Hitachi Software
1,967,381 shares of Series C preferred stock.
Mr. Kodaira, a director of EarthWatch, is the General Manager of the
Geospatial Information Division of Hitachi Software.
50
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 the
QuickBird 1 and QuickBird 2 satellites and the development of a satellite
simulator. We made payments to ITT Industries, under these agreements, of
approximately $2.9 million in 1999 and approximately $3.0 million in 2000.
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 EarthWatch 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. We made payments under this agreement of
approximately $109,000 during 1999 and $140,528 during 2000.
Mr. Driesse, a director of Earthwatch, is a Vice President of ITT Industries
and the President of ITT Industries' Defense Division. Mr. Foley, a director of
EarthWatch, is the Treasurer of ITT Industries. Dr. Marvin R. Sambur, a former
director of EarthWatch, was the President and General Manager of ITT Industries'
Aerospace/Communications Division.
Transactions with Morgan Stanley
Morgan Stanley & Co. Incorporated, which holds in excess of 10% of our
outstanding capital stock, acted as placement agent in connection with our
offering in April 1996 of 7,000,000 shares of our former Series C preferred
stock and our offering in March 1997 of 50,000 units, each consisting of one
note and one warrant to purchase 31.12 shares of our common stock. Morgan
Stanley also acted as placement agent in connection with our offering in July
1999 of 199,000 units, each consisting of one note and 49.095 shares of our
existing Series C preferred stock. In connection with its role in these
offerings, Morgan Stanley received customary commissions and discounts in its
capacity as placement agent.
On May 15, 2001, Morgan Stanley held 4,915,302 shares of Series B preferred
stock, had beneficial ownership of 321,158 shares of Series C preferred stock,
and one share of common stock, as well as $25.2 million principal amount at
maturity of the notes. In addition, Morgan Stanley acts as exclusive financial
advisor to EarthWatch under a five-year agreement. In connection with its
advisory role in the 1999 recapitalization, Morgan Stanley received $750,000 in
April 1999, and in connection with its advisory role in the 2001
recapitalization it received $1.0 million in April 2001.
Morgan Stanley was also a party to our recapitalization transactions in April
2001, as the holder of approximately $44.7 million in principal amount at
maturity of notes. In connection with these transactions, we agreed to issue
Morgan Stanley 6,757,198 shares of Series C preferred stock. We also agreed to
grant certain additional registration rights to Morgan Stanley's transferees for
the notes that Morgan Stanley held at the time of the recapitalization, and to
maintain current a market-making prospectus for Morgan Stanley with respect to
the notes.
Mr. Petrick, a director of EarthWatch, is a Managing Director of Morgan
Stanley.
Transactions with United Start Corporation
We have an agreement with United Start Corporation, pursuant to which United
Start provided launch and associated services for the QuickBird 1 satellite
launch and granted us an option to obtain launch services for another satellite.
We made payments to United Start under this agreement of approximately $3.3
million in 1999 and approximately $5.2 million in 2000. In addition, we made
payments to Assured Space Access, Inc., which performed services in connection
with the launch of the QuickBird 1 satellite, of approximately $1.1 million in
1999 and $662,781 in 2000.
51
Mr. Lushtak, a former director of EarthWatch, is Co-Chairman and Chief
Executive Officer of United Start, and is Chairman and Chief Executive Officer
of Assured Space Access.
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.
52
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our voting capital stock as of May 15, 2001 and on an
as adjusted basis giving effect to the shares to be issued pursuant to our
April 2001 recapitalization transactions, the Ball vendor financing and shares
issuable as dividends after increasing the number of authorized shares of
Series C preferred stock 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.
Actual/(1)/
---------------------------------------------------------------------------------------------------
Directors, Percent of
Named Executive Series A Percent Series B Percent Series C Percent Percent of Total
Officers, and Preferred of Preferred of Preferred of Common Common Voting
5% Stockholders Stock Series Stock Series Stock Series Stock Stock Power
- ------------------------------------------------------------------------------------------------------------------------------------
ITT Industries, Inc./(2)/....... 8,192,170 100.0% -- -- -- -- -- -- 17.9%
Morgan Stanley & Co
Incorporated/(3)/.............. -- -- 4,915,302 60.0% 321,158 1.3% 1 * 22.8%
Capital Research and
Management Company/(4)/........ -- -- 3,276,868 40.0% 929,091 3.7% -- -- 16.3%
Ball Technologies Holdings
Corp./(5)/..................... -- -- -- -- 4,432,900 17.6% -- -- 6.9%
Hitachi, Ltd/(6)/............... -- -- -- -- 2,422,050 9.6% -- -- 3.8%
Dr. Walter S. Scott/(7)/........ -- -- -- -- 623,595 2.5% 538,595 15.9% 1.8%
Herbert F. Satterlee III/(8)/... -- -- -- -- 84,081 * 370,919 10.9% *
Henry E. Dubois................. -- -- -- -- -- -- 230,000 6.8% *
Jeffrey S. Kerridge/(9)/........ -- -- -- -- 12,034 * 126,266 3.7% *
Neal T. Anderson/(10)/.......... -- -- -- -- 10,018 * 70,015 2.1% *
Paul M. Albert, Jr./(11)/....... -- -- -- -- -- -- 26,250 * *
Henry J. Driesse/(12)/.......... -- -- -- -- -- -- -- -- --
Donald E. Foley/(13)/........... -- -- -- -- -- -- -- -- --
Anne Karalekas/(14)/............ -- -- -- -- -- -- 24,375 * *
Takatoshi Kodaira/(15)/......... -- -- -- -- 2,422,050 9.6% -- -- 3.8%
Michael J. Petrick/(16)/........ -- -- -- -- -- -- -- -- --
Donald W. Vanlandingham/(17)/... -- -- -- -- -- -- -- -- --
All executive officers and
directors as a group
(15 persons)................... -- -- -- -- 3,154,773 12.5% 1,697,425 50.0% 7.6%
As Adjusted/(1)/
- --------------------------------------------------------------------------------------------------
Directors, Percent of
Named Executive Series C Total
Officers, and Preferred Percent Voting
5% Stockholders Stock of Series Power
- --------------------------------------------------------------------------------------------------
ITT Industries, Inc./(2)/....... 2,421,392 6.4% 20.7%
Morgan Stanley & Co
Incorporated/(3)/.............. 4,134,108 11.0% 27.1%
Capital Research and
Management Company/(4)/........ 948,834 2.5% 16.1%
Ball Technologies Holdings
Corp./(5)/..................... 5,434,738 14.5% 5.9%
Hitachi, Ltd/(6)/............... 4,442,289 11.8% 4.8%
Dr. Walter S. Scott/(7)/........ 637,297 1.7% 1.3%
Herbert F. Satterlee III/(8)/... 84,081 * *
Henry E. Dubois................. -- -- *
Jeffrey S. Kerridge/(9)/........ 12,034 * *
Neal T. Anderson/(10)/.......... 10,023 * *
Paul M. Albert, Jr./(11)/....... -- -- *
Henry J. Driesse/(12)/.......... -- -- --
Donald E. Foley/(13)/........... -- -- --
Anne Karalekas/(14)/............ -- -- *
Takatoshi Kodaira/(15)/......... 4,442,289 11.8% 4.8%
Michael J. Petrick/(16)/........ -- -- --
Donald W. Vanlandingham/(17)/... -- -- --
All executive officers and
directors as a group
(15 persons)................... 5,188,719 13.8% 7.4%
______________
* 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 May 15, 2001, are deemed
outstanding for computing the percentage of the person or entity
holding such securities, but are not outstanding for computing the
percentage of any other person or entity. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power
with respect to all shares of common stock and preferred stock shown
as beneficially owned by them.
(2) The address of ITT Industries, Inc. is 4 West Red Oak Lane, White
Plains, New York 10604.
(3) The address of Morgan Stanley & Co. Incorporated is 1585 Broadway, New
York, New York 10036. Morgan Stanley also holds one share of common
stock.
(4) The shares of Series B preferred stock reflected as being held by
Capital Research Management Company, a registered investment advisor,
are held by the following entities to whom Capital Research Management
Company provides investment services: The Bond Fund of America, Inc.,
1,064,982 shares; American Variable Insurance Funds, 1,392,669 shares;
and American High Income Trust, 819,217 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 5-79 Onoe-cho, Nakaku, Yokohama,
Japan 231-0015.
(7) Includes 5,255 shares of Series C preferred stock and 538,595 shares
of common stock issuable upon 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.
(8) Consists of 84,081 shares of Series C preferred stock and 370,919
shares of common stock issuable upon exercise of outstanding options.
(9) Consists of 12,034 shares of Series C preferred stock and 126,266
shares of common stock issuable upon exercise of outstanding options.
53
(10) Includes 10,018 shares of Series C preferred stock and 70,015 shares
of common stock issuable upon exercise of outstanding options.
(11) Includes 7,500 shares of common stock issuable upon exercise of
outstanding options. The address of Mr. Albert is 135 Main Street,
South Salem, New York 10590.
(12) 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 held by ITT Industries. Mr. Driesse disclaims
beneficial ownership of shares held by ITT Industries.
(13) The address of Mr. Foley is c/o ITT Industries, Inc., 4 West Red Oak
Lane, White Plains, New York 10604.
(14) Consists of 24,375 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.
(15) Includes 2,422,050 shares of Series C preferred stock held by
Hitachi, Ltd. on an actual basis and 4,442,289 shares on an as
adjusted basis. The address of Mr. Kodaira is c/o Hitachi, Ltd. 5-79
Onoe-cho, Nakaku, Yokohama, Japan 231-0015.
(16) The address of Mr. Petrick is c/o Morgan Stanley & Co. Incorporated,
1585 Broadway, New York, New York 10036.
(17) 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 of Series C preferred stock held
by Ball Technologies Holdings Corp. Mr. Vanlandingham disclaims
beneficial ownership of shares held by Ball Technologies.
54
RECAPITALIZATIONS
1999 Recapitalization
In April 1999, we completed a recapitalization. The recapitalization was
undertaken in order to enable us to raise the additional capital necessary to
pursue the QuickBird program. As a result of the recapitalization:
. all of our outstanding shares of common stock and preferred stock were
exchanged (at a 1 to .44116 ratio for all outstanding preferred stock
and a 1 to .210202 ratio for all outstanding common stock) for an
aggregate of 11,042,075 shares of newly created Series C preferred
stock;
. all warrants issued in connection with our 1997 units offering were
exercised for an aggregate of 327,074 shares of new Series C preferred
stock for aggregate proceeds to us of $15,600;
. all warrants issued to Odetics, Incorporated to purchase Series A
preferred stock automatically converted by their terms into warrants to
purchase an aggregate of 12,463 shares of new Series C preferred stock;
. all outstanding options to purchase common stock or preferred stock were
automatically converted by their terms into options to purchase an
aggregate of 306,700 shares of new Series C preferred stock;
. Ball Technologies surrendered 2,761,983 shares of Series A preferred
stock to us (which we cancelled and retired);
. we have included 30,500 shares of common stock issued to the Waterstone
Group in the number of shares that were exchanged for new Series C
preferred stock in the recapitalization;
. ITT Industries invested $25 million in exchange for 7,142,857 shares of
new Series A preferred stock;
. Morgan Stanley invested $15 million in exchange for 4,285,714 shares of
new Series B preferred stock and one share of new common stock;
. Capital Research invested $10 million in exchange for 2,857,143 shares
of new Series B preferred stock;
. our 12 1/2% Senior Notes due March 1, 2001 were exchanged for new 12
1/2% Senior Notes having a maturity of March 1, 2005. As a result of
this exchange, the remaining unamortized discount relating to the value
attributed to the 1997 warrants (issued in connection with the 12 1/2%
Notes) of $592,000 at March 31, 1999 was charged to operations,
resulting in an initial accreted value of $50.0 million for the notes.
The notes provide for payment of interest in kind through March 2002,
and are collateralized by the launch insurance policy; and
. we entered into a new stockholders' agreement with Ball Corporation, ITT
Industries, Capital Research, Morgan Stanley, and other major
stockholders providing for an expanded board of directors, setting forth
approval requirements regarding certain transactions and corporate
matters, and granting registration rights to the holders of our
preferred stock.
55
The following table shows the impact of the 1999 recapitalization on our
capital stock:
Number of shares issued and outstanding
before and after recapitalization
Before % After %
-------- ----- ---------- -----
Old Series A Preferred/(1)/............................................................ 16,606,343 58.9% -- --
Old Series A Preferred Options......................................................... 17,800 0.1 -- --
Old Series A Preferred Warrants........................................................ 28,250 0.1 -- --
Old Series B Preferred................................................................. 311,300 1.1 -- --
Old Series C Preferred................................................................. 7,000,000 24.8 -- --
Old Series D Preferred................................................................. 1,000,000 3.5 -- --
Old Common............................................................................. 235,048 0.8 -- --
Old Common Stock Options............................................................... 1,421,712 5.0 -- --
Old Common Stock Warrants.............................................................. 1,556,000 5.5 -- --
New Series A Preferred................................................................. -- -- 7,142,857 26.8%
New Series B Preferred................................................................. -- -- 7,142,857 26.8
New Series C Preferred/(2)/............................................................ -- -- 12,083,435 45.3
New Series C Preferred Options/(3)/.................................................... -- -- 306,699 1.1
New Preferred Series C Warrants........................................................ -- -- 12,463 --
Common................................................................................. -- -- 1 --
----------- ------ ----------- ------
28,176,453 100.0% 26,688,312 100.0%
_____________
(1) Reflects Ball Technologies' surrender of 2,761,983 shares.
(2) Reflects the purchase in July 1999 by Ball Technologies of 714,286
shares of new Series C preferred stock for $2.5 million.
(3) The exercise price of the options to purchase Series C preferred stock
is $3.81.
A change in control of EarthWatch may have occurred on April 8, 1999 in
connection with this recapitalization. ITT Industries, Morgan Stanley, and
Capital Research may be deemed to have acquired control of EarthWatch through
the acquisitions by ITT Industries of 7,142,857 shares of Series A preferred
stock in exchange for $25 million, by Morgan Stanley 4,285,714 shares of Series
B preferred stock and one share of common stock in exchange for $15 million, and
by Capital Research of 2,857,143 shares of Series B preferred stock in exchange
for $10 million. As of May 15, 2001, ITT Industries held 17.9%, Morgan Stanley
held 22.8%, and Capital Research held 16.3% of our total voting power.
2001 Recapitalization
On February 28, 2001, as required by the indentures governing the
notes and our then-outstanding 12 1/2% Senior Notes due 2005, we offered to
purchase all of our outstanding notes and 12 1/2% notes at their accreted value
on the date of purchase, using the insurance proceeds relating to the loss of
our QuickBird 1 satellite. The offer expired on April 2, 2001, and we
repurchased $127.4 million in principal amount at maturity of the outstanding
notes and all outstanding 12 1/2% notes on April 3, 2001. The combined
repurchase price totaled $172.9 million.
In connection with the offer, we entered into the Recapitalization Agreement
on April 2, 2001 with certain holders of the notes. Pursuant to the
Recapitalization Agreement, these holders agreed to refrain from tendering their
notes in the offer, thus allowing us to have the use of the funds that would
otherwise be used to repurchase their notes.
On April 3, 2001, pursuant to the Recapitalization Agreement, we entered
into:
. a Pledge Agreement, pursuant to which we agreed to pledge to the
trustee for the notes, for the benefit of the holders of the notes,
United States government securities in an amount equal to the
aggregate accreted value of all outstanding notes on August 1, 2001;
. a Notes Registration Rights Agreement, which provides certain
registration rights to Morgan Stanley's transferees for the notes that
Morgan Stanley held at the time of the recapitalization, and requires
us to maintain current a market-making prospectus for Morgan Stanley
with respect to the notes; and
56
. a Series C Preferred Registration Rights Agreement, which provides
certain registration rights with respect to shares of our common stock
issuable upon conversion of the shares of Series C preferred stock to
be issued pursuant to the Recapitalization Agreement.
Pursuant to the Recapitalization Agreement, we obtained the consent of the
holders of notes and amended the indenture governing the notes on April 16, 2001
to require us to:
. obtain launch and in-orbit operations insurance for our anticipated
QuickBird 2 satellite; and
. offer to repurchase the notes at their accreted value on the date of
repurchase (1) if all of the contemplated transactions under the
Recapitalization Agreement are not completed by June 15, 2001,
consummating this offer no later than August 1, 2001, and (2) if an
insurable event occurs under the QuickBird 2 insurance policy,
consummate this offer no later than 60 days after it begins.
In the Recapitalization Agreement, we also agreed, among other things, that
we would, by no later than June 15, 2001:
. obtain at least $9 million of vendor financing from Ball Aerospace;
. amend our certificate of incorporation to (1) require that we
purchase, at each holder's option, that holder's shares of our Series
A and B preferred stock, if an insurable event occurs under the
QuickBird 2 insurance policy, (2) increase the number of authorized
shares of our common stock and each series of our preferred stock, and
(3) extend the time period by one year during which holders of our
preferred stock may convert their shares into shares of our common
stock;
. issue an aggregate of 10,843,297 additional shares of our Series C
preferred stock to the holders of the notes that signed the
Recapitalization Agreement;
. purchase QuickBird 2 insurance in an amount no less than $155 million;
and
. pledge the QuickBird 2 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 cannot assure you that the contemplated transactions will be completed.
If we do not consummate the transactions required to be consummated by June 15,
2001, we must complete by August 1, 2001 an offer to purchase all of the then-
outstanding notes for a purchase price equal to their accreted value as of the
date of purchase.
The foregoing description is qualified in its entirety by the terms and
conditions of the Recapitalization Agreement, the Notes Registration Rights
Agreement, the Series C Preferred Registration Rights Agreement and the Pledge
Agreement, in each case including the exhibits and schedules thereto, each of
which agreements is filed as an exhibit to the registration statement of which
this prospectus forms a part.
See "Description of capital stock" for a description of the terms of the
new Series A, Series B, and Series C preferred stock issued in the 1999
recapitalization and for a description of the stockholders' agreement. See "Form
of notes" and "Description of the notes" for a description of the terms of the
notes.
57
DESCRIPTION OF MATERIAL INDEBTEDNESS
Ball Aerospace credit agreement
In April 2001, we entered into a $9.0 million credit agreement with Ball
Aerospace which we intend to use to fund the completion of QuickBird 2. This
agreement will accrue interest at an annual rate of 11%, which becomes payable
seven months following the launch of QuickBird 2. Beginning with the eighth
month and ending with the eighteenth month following the launch of QuickBird 2,
principal, in equal monthly amounts, and interest are payable in cash each
month.
We may borrow funds under the agreement from time to time until the date that
Ball Aerospace tenders to us the QuickBird 2 satellite, but only to the extent
that such funds are due and payable under the contract for construction of the
satellite. We may prepay all or part of any loan under the agreement at any
time without penalty. In addition, we must generally prepay a portion of our
outstanding borrowings under the agreement if we dispose of any assets that
constitute collateral under the agreement or if we receive insurance proceeds
under the launch or, under certain circumstances, pre-launch insurance policies.
Furthermore, we must prepay all outstanding borrowings under the agreement if we
undergo a change of control or do not complete the QuickBird 2 launch by
November 30, 2001 (other than as a result of Ball Aerospace's failure to deliver
the satellite as required) or by October 15, 2002 (for any reason). If we fail
to complete the QuickBird 2 launch by April 15, 2002, the annual interest rate
will increase to 15%.
Our obligations under the agreement, together with the notes, will be secured
by the insurance policies for the QuickBird 2 launch and operations, as well as
transit and pre-launch insurance that we have agreed to obtain for that
satellite. See "Recapitalizations - 2001 Recapitalization." In addition, we
have granted, or agreed to grant, a first priority security interest to Ball
Aerospace in the QuickBird 2 satellite and associated property delivered by Ball
and their proceeds.
The agreement limits the existence of liens on the collateral thereunder, and
also limits our ability to enter into merger and consolidation transactions,
enter into certain intercompany encumbrances and restrictions, change our places
of business or our legal name, enter into transactions with our affiliates,
dispose of collateral, pay dividends and make distributions.
In conjunction with this agreement, we agreed to issue Ball Aerospace 903,608
shares of Series C preferred stock as of or promptly following the time of
consummation of the recapitalization transactions. See "Recapitalizations -
2001 Recapitalization."
13% Senior Discount Notes
Notes with a principal amount at maturity of approximately $71.7 million are
outstanding. For a description of the terms of the notes, see "Form of notes"
and "Description of the notes."
58
FORM OF NOTES
The certificates representing the notes were issued in fully registered form,
without coupons. Except as described in the next paragraph, the notes have been
deposited with The Bank of New York, as custodian for DTC, and registered in the
name of Cede & Co., as DTC's nominee, in the form of one or more global notes.
Holders of the notes own book-entry interests in the global note evidenced by
records maintained by DTC.
Book-entry interests may be exchanged for certificated notes of like tenor and
equal aggregate principal amount if:
(1) DTC notifies us that it is unwilling or unable to continue as
depositary or we determine that DTC is unable to continue as depositary
and we fail to appoint a successor depositary within 90 days;
(2) we provide for the exchange pursuant to the terms of the indenture; or
(3) we determine that the book-entry interests will no longer be
represented by global notes and we execute and deliver to the trustee
under the indenture instructions to that effect.
As of the date of this prospectus, no certificated notes are issued and
outstanding.
59
DESCRIPTION OF THE NOTES
We issued the notes under an indenture between our company, as issuer, and The
Bank of New York, as trustee (the "Trustee"). The following is a summary of the
material provisions of the indenture. For a complete statement of the terms, we
refer you to the indenture, which is filed as an exhibit to the registration
statement of which this prospectus is a part. Certain provisions of the
indenture are made a part thereof by the Trust Indenture Act of 1939, as
amended. Definitions or particular terms in the indenture supplement this
summary. For definitions of certain capitalized terms used in the following
summary, see "--Certain definitions" below.
General
The notes are unsecured (except to the extent described under "--Security"
below), unsubordinated obligations of our company, which have an aggregate
principal amount at maturity of $1,000 per note, and will mature on July 15,
2007. Interest on the notes accrues at the rate of 13% per annum and is payable
semiannually in arrears (to holders of record at the close of business on
January 1 or July 1 immediately preceding the Interest Payment Date) on January
15 and July 15 of each year. Accrual of cash interest does not begin until July
15, 2002 and payment of interest does not begin until January 15, 2003.
Interest is computed on the basis of a 360-day year of twelve 30-day months.
The notes were issued at a discount of $684.61 per $1,000 of principal amount at
maturity.
The principal, interest, and premium, if any, on the notes is payable, and the
notes may be exchanged or transferred, at the office or agency of our company in
the Borough of Manhattan, the City of New York (which initially will be the
corporate trust office of the Trustee at 101 Barclay Street, Floor 21 West, New
York, New York 10286; Attention: Corporate Trust Trustee Administration);
provided that, at our option, payment of interest may be made by check mailed to
the holders at their addresses as they appear in the security register
maintained by the Trustee.
The notes were issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity or any integral multiple
thereof. No service charge was made for any registration of transfer of notes,
but we may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The notes were originally issued as a part of a unit, consisting of one note
with a principal amount at maturity of $1,000 and 49.095 shares of Series C
cumulative convertible redeemable preferred stock. Each share of Series C
preferred stock entitles its holder to purchase one share of common stock, par
value $.001, of EarthWatch. The note and shares of Series C preferred stock
included in each unit automatically became separately transferable on January
12, 2000.
Optional redemption
We can redeem the notes at our option, in whole or in part, at any time or
from time to time, on or after July 15, 2004 and prior to maturity. The notes
may be redeemed at the redemption prices, expressed in percentages of principal
amount at maturity, set forth below, plus accrued and unpaid interest to the
redemption date, if redeemed during the 12-month period commencing July 15 of
the years set forth below. Our right of redemption is subject to the rights of
holders of record on the relevant regular record date that is on or prior to the
redemption date to receive interest due on an interest payment date.
Year Redemption Price
- ---- ----------------
2004................................................................................................ 106.500%
2005................................................................................................ 104.333%
2006................................................................................................ 102.167%
2007................................................................................................ 100.000%
Selection and notice of redemption
To redeem the notes, we must give the holder not less than 30 nor more than 60
days' prior notice, which we must mail to the holder by first class mail to the
holder's last address as it appears in the security register.
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In the case of any partial redemption, the Trustee will select the notes for
redemption:
. in compliance with the requirements of the principal national securities
exchange, if any, on which the notes are listed, or
. if the notes are not listed on a national securities exchange, on a pro
rata basis, by lot or by such other method as the Trustee in its sole
discretion will deem to be fair and appropriate.
No note of $1,000 in principal amount at maturity or less will be redeemed in
part. If any note is to be redeemed in part only, the notice of redemption
relating to such note will state the portion of the principal amount of such
note to be redeemed. A note in principal amount equal to the unredeemed portion
will be issued in the name of the holder thereof upon cancellation of the
original note.
Sinking fund
There are no sinking fund payments for the notes.
Registration rights
On August 11, 2000, we exchanged all originally-issued notes for new notes,
the terms of which are identical to the originally-issued notes (except that the
new notes do not bear legends restricting the transfer thereof or provide for
registration rights or additional interest). When the exchange offer was
completed, our original obligation to register or exchange notes terminated.
On April 3, 2001, in connection with our recapitalization transactions, we
agreed to conduct an exchange offer with respect to certain outstanding notes
then held by Morgan Stanley. If we do not consummate this exchange offer (or
effect a shelf registration) by October 15, 2001, we have agreed to pay
additional interest to the record holders of notes at a rate of 0.5% per annum
semi-annually, with accrual commencing October 15, 2001, and payment commencing
January 15, 2002, until the exchange offer is consummated or the shelf
registration statement is declared effective.
Ranking
The Indebtedness evidenced by the notes ranks equally in priority of payment
with all present and future unsubordinated indebtedness of our company, and
senior in right of payment to all existing and future subordinated indebtedness
of our company. In addition, all existing and future liabilities, including
trade payables and indebtedness, including any subordinated indebtedness, of our
subsidiaries and all of our secured indebtedness will be effectively senior to
the notes. We and our subsidiaries may incur substantial additional
Indebtedness, including secured Indebtedness, under the indenture.
Security
Pledge Agreement
The Trustee is a beneficiary, through the Collateral Trustee, of an interest
under a Pledge Agreement dated as of April 3, 2001. The Pledge Agreement
provides the Trustee with an interest in U.S. government securities securing a
portion of the premiums for the QuickBird 2 Launch Insurance. These government
securities are in an amount sufficient to permit the repurchase by August 1,
2001 of all of the notes if we are required to repurchase the notes as described
below under "Covenants - Repurchase of notes upon a failure to meet certain
conditions."
By purchasing the notes, you will be deemed to consent to the terms of the
Pledge Agreement as it presently exists and as it may be amended from time to
time and to authorize the Collateral Trustee to perform its obligations and
exercise its rights thereunder. You further agree that, in the event of any
distribution in respect of the Collateral, such distribution will be treated as
a prepayment, without premium, of the notes to the extent of such distribution,
61
and the principal amount of the notes as of such date, and any accrued interest
on the notes, will be deemed reduced by the aggregate amount of any such
distribution in respect of the notes.
We will do, or cause to be done, anything necessary or required under the
Pledge Agreement to confirm the interest of the Collateral Trustee in the
Collateral thereunder, so as to render such Collateral available for the
security and benefit of the indenture and the notes according to the expressed
intent of the Pledge Agreement, the indenture, and the notes. We will also
take, or cause to be taken, upon the Trustee's request, any actions reasonably
required to cause the Pledge Agreement to create and maintain, as security for
our obligations under the indenture and the notes, valid and enforceable first
priority liens on the Collateral thereunder in favor of the Collateral Trustee
prior to the rights of all third persons and free from other Liens.
The release of any Collateral under the Pledge Agreement will not be deemed to
impair the security under the indenture if and to the extent that such
Collateral is released in accordance with the terms of the indenture and the
Security Documents. To the extent applicable, we will comply with, or cause to
be complied with, Section 314(d) of the Trust Indenture Act of 1939, as amended,
relating to the release of property or securities from the Lien and security
interest of the Pledge Agreement and the substitution for such property or
securities of other property or securities. Any certificate or opinion required
by Section 314(d) may be made by an officer of EarthWatch, other than in cases
where Section 314(d) requires that such certificate or opinion be made by an
independent person, in which case such Person will be an independent expert
selected or approved by the Trustee in the exercise of reasonable care.
We will also comply with, or cause to be complied with, Section 314(b)
relating to opinions of counsel regarding the Lien under the Pledge Agreement.
To the extent permitted under the relevant provisions of the indenture, the
Trustee may accept as evidence of compliance with such foregoing provisions the
appropriate statements contained in such instruments.
Pledge and Security Agreement
The Trustee will be a beneficiary upon execution thereof, through the
Collateral Trustee, of a Senior Collateral Pledge and Security Agreement that we
are required to enter into by June 15, 2001. This Pledge and Security Agreement
will provide the Trustee with an interest in any and all proceeds of the
QuickBird 2 Launch Insurance. Under the terms of the Pledge and Security
Agreement, holders of the notes will share such proceeds, if any, equally with
the holder of up to $9 million of Vendor Financing.
By purchasing the notes, you will be deemed to consent to the terms of the
Pledge and Security Agreement as it presently exists and as it may be amended
from time to time and to authorize the Collateral Trustee to perform its
obligations and exercise its rights thereunder. You further agree that, in the
event of any distribution in respect of the Collateral, such distribution will
be treated as a prepayment, without premium, of the notes to the extent of such
distribution, and the principal amount of the notes as of such date, and any
accrued interest on the notes, will be deemed reduced by the aggregate amount of
any such distribution in respect of the notes.
We will do, or cause to be done, anything necessary or required under the
Pledge and Security Agreement to confirm the interest of the Collateral Trustee
in the Collateral thereunder, so as to render such Collateral available for the
security and benefit of the indenture and the notes according to the expressed
intent of the Pledge and Security Agreement, the indenture, and the notes. We
will also take, or cause to be taken, upon the Trustee's request, any actions
reasonably required to cause the Pledge and Security Agreement to create and
maintain, as security for our obligations under the indenture and the notes,
valid and enforceable first priority liens on the Collateral thereunder in favor
of the Collateral Trustee prior to the rights of all third persons and free from
other Liens.
The release of any Collateral under the Pledge and Security Agreement will not
be deemed to impair the security under the indenture if and to the extent that
such Collateral is released in accordance with the terms of the indenture and
the Security Documents. To the extent applicable, we will comply with, or cause
to be complied with, Section 314(d) of the Trust Indenture Act of 1939, as
amended, relating to the release of property or securities from the Lien and
security interest of the Pledge and Security Agreement and the substitution for
such property or securities of other property or securities. Any certificate or
opinion required by Section 314(d) may be made by an
62
officer of EarthWatch, other than in cases where Section 314(d) requires that
such certificate or opinion be made by an independent person, in which case such
Person will be an independent expert selected or approved by the Trustee in the
exercise of reasonable care.
We will also comply with, or cause to be complied with, Section 314(b)
relating to opinions of counsel regarding the Lien under the Pledge and Security
Agreement. To the extent permitted under the relevant provisions of the
indenture, the Trustee may accept as evidence of compliance with such foregoing
provisions the appropriate statements contained in such instruments.
The Trustee and the Collateral Trustee under the Pledge and Security Agreement
are authorized to enter into modifications, amendments, and supplements to the
Pledge and Security Agreement for the purpose of effectively securing up to $9
million principal amount of Vendor Financing on a pro rata basis with the notes.
Certain definitions
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the indenture.
"Accreted Value" means, for any Specified Date, the amount provided below for
each $1,000 principal amount at maturity of notes:
(1) if the Specified Date occurs on one of the following semiannual dates,
the Accreted Value will equal the amount set forth below for such
semiannual accrual date:
Semiannual Accrual Date Accreted Value
- ----------------------- --------------
January 15, 2000....................................................................................... $ 729.88
July 15, 2000.......................................................................................... $ 777.32
January 15, 2001....................................................................................... $ 827.24
July 15, 2001.......................................................................................... $ 881.65
January 15, 2002....................................................................................... $ 938.96
July 15, 2002.......................................................................................... $1,000.00
(2) if the Specified Date occurs before the first semiannual accrual date,
the Accreted Value will equal the sum of
(a) $684.61, and
(b) an amount equal to the product of:
(1) the Accreted Value for the first semiannual accrual date less
$684.61 multiplied by
(2) a fraction, the numerator of which is the number of days from
the Closing Date to the Specified Date, using a 360-day year
of twelve 30-day months, and the denominator of which is the
number of days from the Closing Date to the first semiannual
accrual date, using a 360-day year of twelve 30-day months;
(3) if the Specified Date occurs between two semiannual accrual dates, the
Accreted Value will equal the sum of:
(a) the Accreted Value for the semiannual accrual date immediately
preceding such Specified Date, and
(b) an amount equal to the product of:
63
(1) the Accreted Value for the immediately following semiannual
accrual date less the Accreted Value for the immediately
preceding semiannual accrual date multiplied by
(2) a fraction, the numerator of which is the number of days from the
immediately preceding semiannual accrual date to the Specified
Date, using a 360-day year of twelve 30-day months, and the
denominator of which is 180; or
(4) if the Specified Date occurs after the last semiannual accrual date,
the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary of EarthWatch or assumed in connection with an
Asset Acquisition by a Subsidiary of EarthWatch and not Incurred in connection
with, or in anticipation of, such Person becoming a Subsidiary of EarthWatch or
such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income or loss of EarthWatch and its Subsidiaries for such period determined in
conformity with GAAP. However, the following items are excluded in computing
Adjusted Consolidated Net Income:
(1) the net income of any Person, other than net income attributable to a
Subsidiary, in which any Person other than EarthWatch or any of its
Subsidiaries has a joint interest, except to the extent of the amount of
dividends or other distributions actually paid to EarthWatch or any of its
Subsidiaries by such other Person during such period;
(2) except to the extent includable under clause (1) above, the net income or
loss of any Person accrued prior to the date it becomes a Subsidiary or is
merged into or consolidated with EarthWatch or any of its Subsidiaries or
all or substantially all of the property and assets of such person are
acquired by EarthWatch or any of its Subsidiaries;
(3) the net income of any Subsidiary (determined by excluding income resulting
from transfer of assets by EarthWatch or a Subsidiary to another
Subsidiary) to the extent that the declaration or payment of dividends or
similar distributions by such Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Subsidiary;
(4) any gains or losses, on an after-tax basis, attributable to Asset Sales;
and
(5) all extraordinary gains and extraordinary losses.
Calculations for the purpose of determining Adjusted Consolidated Net Income
shall be made without giving effect to (a) the amortization of any expenses
incurred in connection with the offering of the notes and (b) except as
otherwise provided, the amortization of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with such Person. For purposes of this definition, "control" and the
correlative meanings of the terms "controlling," "controlled by," and "under
common control with," as applied to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting securities,
by contract, or otherwise.
"Asset Acquisition" means:
(1) an investment by EarthWatch or any of its Subsidiaries in any other Person
pursuant to which such Person becomes a Subsidiary of EarthWatch or is
merged into or consolidated with EarthWatch or any of its
64
Subsidiaries; provided that such Person's primary business is related,
ancillary, or complementary to the businesses of EarthWatch and its
Subsidiaries on the date of such investment; or
(2) an acquisition by EarthWatch or any of its Subsidiaries of the property
and assets of any Person other than EarthWatch or any of its Subsidiaries
that constitute substantially all of a division or line of business of
such Person; provided that the property and assets acquired are related,
ancillary, or complementary to the businesses of EarthWatch and its
Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by EarthWatch or any
of its Subsidiaries (other than to EarthWatch or to one of its Subsidiaries) of:
(1) all or substantially all of the Capital Stock of any of EarthWatch's
Subsidiaries; or
(2) all or substantially all of the assets that constitute a division or line
of business of EarthWatch or any of its Subsidiaries.
"Asset Sale" means any sale, transfer, or other disposition, including by way
of merger, consolidation, or sale-leaseback transaction, in one transaction or a
series of related transactions by EarthWatch or any of its Subsidiaries to any
Person other than EarthWatch or any of its Subsidiaries of:
(1) all or any of the Capital Stock of any Subsidiary;
(2) all or substantially all of the property and assets of an operating unit
or business of EarthWatch or any of its Subsidiaries; or
(3) any other property and assets of EarthWatch or any of its Subsidiaries
outside the ordinary course of business of EarthWatch or such Subsidiary,
and,
in each case, that is not governed by the provisions of the indenture applicable
to mergers, consolidations, and sales of assets of EarthWatch. For purposes of
this definition, "Asset Sale" does not include:
(1) sales or other dispositions of inventory, receivables, and other current
assets; or
(2) sales or other dispositions of assets for consideration at least equal to
the fair market value of the assets sold or disposed of.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing:
(1) the sum of the products of:
(a) the number of years from such date of determination to the dates of
each successive scheduled principal payment of such debt security; and
(b) the amount of such principal payment by
(2) the sum of all such principal payments.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, or other equivalents, however designated, whether
voting or non-voting, in equity of such Person, whether outstanding on or issued
after the Closing Date, including all common stock and preferred stock.
65
"Capitalized Lease" means, as applied to any Person, any lease of any
property, whether real, personal, or mixed, of which the discounted present
value of the rental obligations of such person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Change of Control" means such time as:
(1) a "person" or "group" within the meaning of Sections 13(d) and 14(d)(2) of
the Exchange Act, other than the Permitted Holders, in each case together
with their respective Affiliates, becomes the ultimate "beneficial owner"
as defined in Rule 13d-3 under the Exchange Act, of more than 35% of the
total voting power of the Voting Stock of EarthWatch on a fully diluted
basis and such ownership is greater than the amount of voting power of the
Voting Stock of EarthWatch, on a fully diluted basis, held by the
Permitted Holders and their respective Affiliates on such date; or
(2) individuals who on the Closing Date constitute the board of directors of
EarthWatch, together with any new directors whose election by the board of
directors or whose nomination by the board of directors for election by
EarthWatch's stockholders was either (a) approved by a vote of at least
two-thirds of the members of the board of directors then in office who
either were members of the board of directors on the Closing Date or whose
election or nomination for election was previously so approved or (b)
implemented under the "Composition of the Board" provision of the
Stockholders' Agreement, cease for any reason to constitute a majority of
the members of the board of directors of EarthWatch then in office.
"Charter Amendments" means the amendment of the Company's Certificate of
Incorporation, substantially in the form attached to the Recapitalization
Agreement as Exhibit G.
"Closing Date" means July 12, 1999, the actual date on which the original
notes were issued under the indenture.
"Collateral" means:
(1) with respect to the Pledge Agreement, the Government Securities and the
other collateral described in the Pledge Agreement; and
(2) with respect to the Pledge and Security Agreement, the QuickBird 2 Launch
Insurance and the other collateral described in the Pledge and Security
Agreement.
"Collateral Trustee" means:
(1) with respect to the Pledge Agreement, the Trustee or any successor or
substitute collateral trustee for the Collateral under the Pledge
Agreement acting as such for itself and the holders of the notes; and
(2) with respect to the Pledge and Security Agreement, the Trustee or any
successor or substitute collateral trustee for the Collateral under the
Pledge and Security Agreement acting as such for itself, the holders of
the notes and the holder(s) of the Vendor Financing.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net Income
for such period plus, to the extent such amount was deducted in calculating such
Adjusted Consolidated Net Income:
(1) Consolidated Interest Expense;
(2) income taxes (other than income taxes (either positive or negative)
attributable to extraordinary and non-recurring gains or losses or sales
of assets);
(3) depreciation expense;
(4) amortization expense; and
66
(5) all other non-cash items reducing Adjusted Consolidated Net Income (other
than items that will require cash payments and for which an accrual or
reserve is, or is required by GAAP to be, made), less all non-cash items
increasing Adjusted Consolidated Net Income, all as determined on a
consolidated basis for EarthWatch and its Subsidiaries in conformity with
GAAP; provided that, if any Subsidiary of EarthWatch is not a Wholly Owned
Subsidiary, Consolidated EBITDA will be reduced (to the extent not
otherwise reduced in accordance with GAAP) by an amount equal to (A) the
amount of the Adjusted Consolidated Net Income attributable to such
Subsidiary multiplied by (B) the percentage ownership interest in the
income of such Subsidiary not owned on the last day of such period by
EarthWatch or any of its Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount of
interest in respect of Indebtedness (including, without limitation, amortization
of original issue discount on any Indebtedness and the interest portion of any
deferred payment obligation, calculated in accordance with the effective
interest method of accounting; all commissions, discounts, and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by EarthWatch or any of its
Subsidiaries) and all but the principal component of rentals in respect of
Capitalized Lease Obligations paid, accrued, or scheduled to be paid or to be
accrued by EarthWatch and its Subsidiaries during such period; excluding,
however:
(1) any amount of such interest of any Subsidiary of EarthWatch if the net
income of such Subsidiary of EarthWatch is excluded in the calculation of
Adjusted Consolidated Net Income pursuant to clause (3) of the definition
thereof (but only in the same proportion as the net income of such
Subsidiary is excluded from the calculation of Adjusted Consolidated Net
Income pursuant to clause (3) of the definition thereof); and
(2) any premiums, fees, and expenses (and any amortization thereof) payable in
connection with the offering of the notes and Series C preferred stock,
all as determined on a consolidated basis (without taking into account the
Subsidiaries of EarthWatch) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of:
(1) the aggregate amount of Indebtedness of EarthWatch and its Subsidiaries on
a consolidated basis outstanding on such Transaction Date to:
(2) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of EarthWatch have been
filed with the SEC or provided to the Trustee pursuant to the "SEC reports
and reports to holders" covenant described below (such four fiscal quarter
period being the "Four Quarter Period"); provided that, in making the
foregoing calculation:
(A) pro forma effect will be given to any Indebtedness to be Incurred or
repaid on the Transaction Date;
(B) pro forma effect will be given to Asset Dispositions and Asset
Acquisitions (including giving pro forma effect to the application of
proceeds of any Asset Disposition) that occur from the beginning of
the Four Quarter Period through the Transaction Date (the "Reference
Period"), as if they had occurred and such proceeds had been applied
on the first day of such Reference Period; and
(C) pro forma effect will be given to asset dispositions and asset
acquisitions (including giving pro forma effect to the application of
proceeds of any asset disposition) that have been made by any Person
that has become a Subsidiary of EarthWatch or has been merged with or
into EarthWatch or any of its Subsidiaries during such Reference
Period and that would have constituted Asset Dispositions or Asset
Acquisitions had such transactions occurred when such Person was a
Subsidiary as if such asset dispositions or asset acquisitions were
Asset Dispositions or Asset Acquisitions that occurred on the first
day of such Reference Period; provided that to the extent that clause
(B) or (C) of this sentence requires that pro forma effect be given to
an Asset Acquisition or Asset Disposition, such pro forma calculation
shall be based upon the four full fiscal quarters immediately
preceding the Transaction
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Date of the Person, division, or line of business of the Person, that
is acquired or disposed of for which financial information is
available.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect
EarthWatch or any of its Subsidiaries against fluctuations in currency values.
"Default" means any event that is, or after notice or passage of time or both
would be, an Event of Default.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the board of directors, whose determination shall be conclusive if
evidenced by a board resolution; provided that for purposes of clause (viii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act will be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property (other than
cash or cash equivalents) received by EarthWatch exceeds $10 million, the fair
market value of such property will be determined by a nationally recognized
investment banking firm and set forth in their written opinion which shall be
delivered to the Trustee.
"First QuickBird Satellite" means the QuickBird 1 spacecraft manufactured
under the contract dated June 9, 1998, between Ball Aerospace and EarthWatch,
for the QuickBird spacecraft number SE.IM.PRJ.0004.A, including amendments and
exhibits attached thereto, and related attached components and equipment.
"GAAP" means generally accepted accounting principles in the United States of
America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the indenture will be computed in conformity with GAAP applied on a consistent
basis.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person:
(1) to purchase or pay, or to advance or supply funds for the purchase or
payment of, such Indebtedness or other obligation of such other Person,
whether arising by virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities, or services, to take-
or-pay, or to maintain financial statement conditions or otherwise; or
(2) entered into for purposes of assuring in any other manner the obligee of
such Indebtedness or other obligation of the payment thereof or to protect
such obligee against loss in respect thereof, in whole or in part, or
other obligation in whole or in part.
However, the term "Guarantee" does not include endorsements for collection or
deposit in the ordinary course of business. The term "Guarantee" used as a verb
has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee, or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" by means of the acquisition of more than 50% of the
Capital Stock of any Person; provided that neither the accrual of interest nor
the accretion of original issue discount will be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person at any date of determination
without duplication:
(1) all indebtedness of such Person for borrowed money;
68
(2) all obligations of such Person evidenced by bonds, debentures, notes, or
other similar instruments;
(3) all obligations of such Person in respect of letters of credit or other
similar instruments, including reimbursement obligations with respect
thereto, but excluding obligations with respect to letters of credit,
including trade letters of credit, securing obligations, other than
obligations described in (1) or (2) above or (5), (6), or (7) below,
entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if drawn upon, to the
extent such drawing is reimbursed no later than the third business day
following receipt by such Person of a demand for reimbursement;
(4) all obligations of such Person to pay the deferred and unpaid purchase
price of property or services, which purchase price is due more than six
months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, except
Trade Payables;
(5) all obligations of such Person under a Capitalized Lease;
(6) all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person, but
the amount of such Indebtedness will be the lesser of the fair market
value of such asset at such date of determination and the amount of such
Indebtedness;
(7) all Indebtedness of other Persons Guaranteed by such Person to the extent
such Indebtedness is Guaranteed by such Person; and
(8) to the extent not otherwise included in this definition, obligations under
Currency Agreements and Interest Rate Agreements.
The amount of Indebtedness of any Person at any date will be the outstanding
balance at such date or, in the case of a revolving credit or other similar
facility, the total amount of funds outstanding and/or available on the date of
determination, of all unconditional obligations as described above and, with
respect to contingent obligations, the maximum liability upon the occurrence of
the contingency giving rise to the obligation. However:
(1) the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP, and
(2) Indebtedness will not include any liability for federal, state, local, or
other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, or other similar agreement or arrangement
designed to protect EarthWatch or any of its Subsidiaries against fluctuations
in interest rates in respect of Indebtedness to or under which EarthWatch or any
of its Subsidiaries is a party or a beneficiary on the Closing Date or becomes a
party or a beneficiary thereafter, so long as the notional principal amount of
any Interest Rate Agreement does not exceed the principal amount of the
Indebtedness of EarthWatch and its Subsidiaries that bears interest at floating
rates.
"Investment" in any Person means:
(1) any direct or indirect advance, loan, or other extension of credit,
including by way of Guarantee or similar arrangement, but excluding
advances to customers in the ordinary course of business that are, in
conformity with GAAP, recorded as accounts receivable on the balance sheet
of EarthWatch or its Subsidiaries; or
(2) any capital contribution by means of any transfer of cash or other
property to others or any payment for property or services for the
account or use of others to, or any purchase or acquisition of Capital
Stock, bonds, notes, debentures, or other similar instruments issued by
such Person.
69
The term "Investment" also includes the fair market value of the Capital Stock
or any other Investment held by EarthWatch or any of its Subsidiaries of or in
any Person that has ceased to be a Subsidiary.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien, or
charge of any kind, including any conditional sale or other title retention
agreement or lease in the nature of a security interest or any agreement to give
any security interest.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means:
(1) with respect to any Asset Sale, the proceeds of such Asset Sale in the
form of cash or cash equivalents, including payments in respect of
deferred payment obligations, to the extent corresponding to the
principal, but not interest, component of such obligations, when received
in the form of cash or cash equivalents, except to the extent such
obligations are financed or sold with recourse to EarthWatch or any
Subsidiary, and proceeds from the conversion of other property received
when converted to cash or cash equivalents, net of:
(a) brokerage commissions and other fees and expenses related to such Asset
Sale, including fees and expenses of counsel and investment bankers;
(b) provisions for all taxes, whether or not such taxes will actually be
paid or are payable, as a result of such Asset Sale without regard to
the consolidated results of operations of EarthWatch and its
Subsidiaries, taken as a whole;
(c) payments made to repay Indebtedness or any other obligation outstanding
at the time of such Asset Sale that either is secured by a Lien on the
property or assets sold, or is required to be paid as a result of such
sale; and
(d) appropriate amounts to be provided by EarthWatch or any Subsidiary as a
reserve against any liabilities associated with such Asset Sale,
including pension and other post-employment benefit liabilities,
liabilities related to environmental matters, and liabilities under any
indemnification obligations associated with such Asset Sale, all as
determined in conformity with GAAP; and
(2) with respect to any issuance or sale of Capital Stock, the proceeds of
such issuance or sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations, to the extent
corresponding to the principal, but not interest, component of such
obligations, when received in the form of cash or cash equivalents, except
to the extent such obligations are financed or sold with recourse to
EarthWatch or any of its Subsidiaries, and proceeds from the conversion of
other property received when converted to cash or cash equivalents, net of
attorneys' fees, accountants' fees, underwriters' or placement agents'
fees, discounts or commissions and brokerage, consultant and other fees
incurred in connection with such issuance or sale, and net of taxes paid
or payable as a result of such conversion.
"Offer to Purchase" means an offer to purchase notes by EarthWatch from the
holders of the notes commenced by mailing a notice to the Trustee and each such
holder, stating that:
(1) all notes validly tendered will be accepted for payment;
(2) the purchase price and the applicable payment date;
(3) any note not tendered will continue to accrue interest, or original issue
discount, pursuant to its terms;
(4) unless EarthWatch defaults in the payment of the purchase price, any note
accepted for payment pursuant to the Offer to Purchase will cease to
accrue interest, or original issue discount, on and after the applicable
payment date;
70
(5) holders of notes electing to have a note purchased pursuant to the Offer
to Purchase will be required to surrender the note, together with the form
entitled "Option of the Holder to Elect Purchase" on the reverse side of
such note completed, to the paying agent at the address specified in the
notice, prior to the close of business on the business day immediately
preceding the applicable payment date;
(6) holders of notes will be entitled to withdraw their election if the paying
agent receives, not later than the close of business on the third business
day immediately preceding such payment date, a facsimile transmission or
letter setting forth the name of such holder, the principal amount of
notes delivered for purchase and a statement that such holder is
withdrawing his election to have such notes purchased; and
(7) holders of notes whose notes are being purchased only in part will be
issued notes equal in principal amount to the unpurchased portion of the
notes surrendered. For this purpose, each note purchased and each note
issued will have a principal amount at maturity of $1,000 or an integral
multiple of $1,000.
On the applicable payment date, EarthWatch will:
(1) accept for payment on an equal basis notes or portions of notes tendered
in response to an Offer to Purchase;
(2) deposit with the paying agent money sufficient to pay the purchase price
of all notes or portions of notes accepted; and
(3) deliver, or cause to be delivered, to the Trustee all notes or portions of
notes accepted, together with an officers' certificate specifying the
notes or portions thereof accepted for payment by EarthWatch.
The paying agent will promptly mail to the holders of notes so accepted
payment in an amount equal to the purchase price, and the Trustee will promptly
authenticate and mail to such holders a note equal in principal amount to any
unpurchased portion of the note surrendered. However, each note purchased and
each note issued will have a principal amount at maturity of $1,000 or integral
multiples of $1,000. EarthWatch will publicly announce the results of an Offer
to Purchase as soon as practicable after the payment date. The Trustee will act
as the paying agent for an Offer to Purchase. EarthWatch will comply with Rule
14e-1 under the Exchange Act and any other securities laws and regulations under
the Exchange Act to the extent such laws and regulations are applicable, in the
event that EarthWatch is required to repurchase notes pursuant to an Offer to
Purchase.
"Permitted Holders" means Morgan Stanley & Co. Incorporated, American High
Income Trust, American Variable Insurance Series Asset Allocation Fund, American
Variable Insurance Series Bond Fund, American Variable Insurance Series High-
Yield Bond Fund, The Bond Fund of America, Inc., ITT Industries, Inc., and Ball
Technology Holdings Corp.
"Permitted Investment" means:
(1) an Investment in EarthWatch or a Subsidiary or a Person who will, upon the
making of such Investment, become a Subsidiary or be merged or
consolidated with or into or transfer or convey all or substantially all
its assets to EarthWatch or a Subsidiary; provided that such Person's
primary business is related, ancillary, or complementary to the businesses
of EarthWatch and its Subsidiaries on the date of such Investment;
(2) Temporary Cash Investments;
(3) payroll, travel, and similar advances to cover matters that are expected
at the time of such advances ultimately to be treated as expenses in
accordance with GAAP;
(4) stock, obligations, or securities received in satisfaction of judgments;
and
(5) Investments in Currency Agreements and Interest Rate Agreements permitted
under the "Limitation on Indebtedness" covenant to the extent that such
Investments relate to actual obligations owed by or owed to
71
EarthWatch or any Subsidiary, and the face or notional amount of such
Investment does not exceed the amount of the underlying obligation to
which such Investment relates.
"Permitted Liens" means:
(1) Liens for taxes, assessments, governmental charges, or claims that are
being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted, and for which a reserve or other
appropriate provision, if any, as will be required to be made to conform
with GAAP will have been made;
(2) statutory and common law Liens of landlords and carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen or other similar Liens
arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as will be required to be
made to conform with GAAP will have been made;
(3) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance, and other
types of social security;
(4) Liens incurred or deposits made to secure the performance of tenders,
bids, leases, statutory or regulatory obligations, bankers' acceptances,
surety and appeal bonds, government contracts, performance and return-of-
money bonds, and other obligations of a similar nature incurred in the
ordinary course of business, exclusive of obligations for the payment of
borrowed money;
(5) easements, rights-of-way, municipal and zoning ordinances, and similar
charges, encumbrances, title defects, or other irregularities that do not
materially interfere with the ordinary course of business of EarthWatch or
any of its Subsidiaries;
(6) Liens, including extensions and renewals, upon real or personal property
acquired after the Closing Date, so long as:
(a) any such Lien is created solely for the purpose of securing
Indebtedness incurred, in accordance with the "Limitation on
Indebtedness" covenant (1) to finance the cost, including the cost of
improvement or construction, of the item of property or assets subject
to such Lien and such Lien is created prior to, at the time of, or
within six months after the latest of the acquisition, the completion
of construction, and the commencement of full operation of such
property, or (2) to refinance any indebtedness previously so secured,
(b) the principal amount of the Indebtedness secured by such Lien does not
exceed 100% of such cost, and
(c) any such Lien will not extend to or cover any property or assets other
than such item of property or assets and any improvements on such
item;
(7) leases or subleases granted to others that do not materially interfere
with the ordinary course of business of EarthWatch and its Subsidiaries,
taken as a whole;
(8) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of EarthWatch or its
Subsidiaries and that relate to such property or assets;
(9) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
(10) Liens arising from filing Uniform Commercial Code financing statements
regarding leases;
(11) Liens on property of, or on shares of Capital Stock or Indebtedness of,
any Person existing at the time such Person becomes, or becomes a part of
EarthWatch or any of its Subsidiaries, so long as such Liens do not
72
extend to or cover any property or assets of EarthWatch or any such
Subsidiary other than the property or assets acquired;
(12) Liens in favor of EarthWatch or any of its Subsidiaries;
(13) Liens arising from the rendering of a final judgment or order against
EarthWatch or any of its Subsidiaries that does not give rise to an Event
of Default;
(14) Liens securing reimbursement obligations with respect to letters of credit
that encumber documents and other property and that relate to such letters
of credit and the products and proceeds of such letters of credit;
(15) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payment of customs duties in connection with the importation
of goods;
(16) Liens encumbering customary initial deposits and margin deposits, and
other Liens that are within the general parameters customary in the
industry and incurred in the ordinary course of business, in each case
securing Indebtedness under Interest Rate Agreements and Currency
Agreements and forward contracts, options, future contracts, futures
options, or similar agreements or arrangements designed solely to protect
EarthWatch or any of its Subsidiaries from fluctuations in interest rates,
currencies, or the price of commodities;
(17) Liens arising out of conditional sale, title retention, consignment, or
similar arrangements for the sale of goods entered into by EarthWatch or
any of its Subsidiaries in the ordinary course of business in accordance
with the past practices of EarthWatch and its Subsidiaries prior to the
Closing Date;
(18) Liens on or sales of receivables;
(19) Liens, including any extensions or renewals of such Liens, so long as any
such extensions or renewals do not increase the amount of the obligations
secured by such Liens, existing on the Closing Date;
(20) Liens granted after the Closing Date on any assets or capital stock of
EarthWatch or its Subsidiaries that are created in favor of the holders
of notes or a representative of such holders;
(21) Liens with respect to the assets of a Subsidiary of EarthWatch granted by
such Subsidiary to EarthWatch or one of its Wholly Owned Subsidiaries to
secure Indebtedness owing to EarthWatch or such other Subsidiary;
(22) Liens securing Indebtedness which is incurred to refinance secured
Indebtedness, so long as such Liens do not extend to or cover any property
or assets of EarthWatch or any of its Subsidiaries, other than the
property or assets securing the Indebtedness being refinanced; and
(23) any and all Liens granted under and in connection with the Security
Documents.
However, Permitted Liens shall not include any Liens on the QuickBird 2
satellite or the QuickBird 2 Launch Insurance, except:
. in the case of Liens on the QuickBird 2 Launch Insurance, Liens thereon in
favor of the Collateral Trustee under the Pledge and Security Agreement or
otherwise securing the notes or the Vendor Financing, and Liens in favor of
the collateral trustee under the Junior Collateral Pledge and Security
Agreement for the benefit of the holders of the Series A Preferred Stock
and Series B Preferred Stock, provided such Liens shall be junior to the
Liens in favor of the Collateral Trustee under the Pledge and Security
Agreement; and
. with respect to the QuickBird 2 satellite,
(A) Liens described in clause (2) of the above definition,
73
(B) until the attachment of risk under the QuickBird 2 Launch Insurance,
the retention or reservation of title to the QuickBird 2 satellite by
Ball Aerospace under the terms of the Vendor Financing,
(C) following the attachment of risk under the QuickBird 2 Launch
Insurance, Liens to secure up to $9,000,000 principal amount (plus
accrued interest thereon) of Vendor Financing, and
(D) Liens in the proceeds (as defined in Section 9-306(1) of the New York
Uniform Commercial Code) from the disposition of the QuickBird 2
satellite, other than proceeds under the QuickBird 2 Launch Insurance,
to secure up to $9,000,000 million principal amount (plus accrued
interest) of Vendor Financing.
"Person" means an individual, a corporation, a partnership, a limited
liability company, a joint venture, an association, a trust, an unincorporated
organization, or any other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
"Public Equity Offering" means an underwritten primary public offering of
common stock of EarthWatch pursuant to an effective registration statement under
the Securities Act.
"QuickBird 2 Launch Insurance" means launch and in-orbit operations insurance
in respect of the QuickBird 2 satellite, having the terms and provisions
described in Section 4.10(b) and being in form and substance satisfactory to the
Collateral Trustee under the Pledge and Security Agreement.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is:
(1) required to be redeemed on or prior to the Stated Maturity of the notes;
(2) redeemable at the option of the holder of such class or series of Capital
Stock at any time prior to the Stated Maturity of the notes; or
(3) convertible into or exchangeable for Capital Stock referred to in (1) or
(2) above or Indebtedness having a scheduled maturity prior to the Stated
Maturity of the notes.
However, any Capital Stock that constitutes Redeemable Stock only because it
gives the holders of such Capital Stock the right to require such Person to
repurchase or redeem such Capital Stock upon the occurrence of a "change of
control" occurring prior to the Stated Maturity of the notes will not constitute
Redeemable Stock if:
(1) the "change of control" provision applicable to such capital stock is no
more favorable to holders of such Capital Stock than the provisions
contained in the "Repurchase of notes upon a Change of Control" covenant
described below; and
(2) such Capital Stock, or the agreements or instruments governing the
redemption rights of such Capital Stock, specifically provides that such
Person will not repurchase or redeem any such stock under such provision
prior to EarthWatch's repurchase of such notes as are required to be
repurchased under the "Repurchase of notes upon a Change of Control"
covenant described below.
"Restricted Payment" means any payment or other action taken, directly or
indirectly, by EarthWatch or any of its Subsidiaries whereby EarthWatch or any
of its Subsidiaries:
(1) declares or pays any dividend or makes any distribution on or with respect
to its Capital Stock, other than:
(a) dividends or distributions payable solely in shares of its Capital
Stock, other than Redeemable Stock, or in options, warrants or other
rights to acquire shares of such Capital Stock, and
(b) pro rata dividends or distributions on common stock of Subsidiaries of
EarthWatch held by minority stockholders, so long as such dividends do
not in the aggregate exceed the minority stockholders'
74
proportional share of such Subsidiaries' cumulative net income from
the first day of the fiscal quarter beginning immediately after the
Closing Date;
(2) purchases, redeems, retires, or otherwise acquires for value
(a) any shares of Capital Stock of EarthWatch, including options,
warrants, or other rights to acquire such shares of Capital Stock held
by any Person, or
(b) any shares of Capital Stock of a Subsidiary of EarthWatch, including
options, warrants, or other rights to acquire such shares of Capital
Stock, held by any Affiliate of EarthWatch, other than an Affiliate
that is a Wholly Owned Subsidiary of EarthWatch, or held by any
holder, or any Affiliate of such holder, of 5% or more of the Capital
Stock of EarthWatch;
(3) makes any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of EarthWatch that is subordinated
in right of payment to the notes, other than the purchase, repurchase, or
the acquisition of Indebtedness in anticipation of satisfying a sinking
fund obligation, principal installment, or final maturity, in each case
due within one year of the date of acquisition; or
(4) makes any Investment in any Person, other than a Permitted Investment.
The board of directors of EarthWatch will determine in good faith the amount of
any Restricted Payment, if such Restricted Payment is made in a form other than
in cash, and such determination will be conclusive.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Security Documents" means the Pledge Agreement and the Pledge and Security
Agreement.
"Significant Subsidiary" means, at any date of determination, any Subsidiary
of EarthWatch that, together with its Subsidiaries,
(1) for the most recent fiscal year of EarthWatch, accounted for more than 10%
of the consolidated revenues of EarthWatch and its Subsidiaries, or
(2) as of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of EarthWatch and its Subsidiaries, all as set forth
on the most recently available consolidated financial statements of
EarthWatch for such fiscal year.
"Specified Date" means (1) any payment date with respect to an Offer to
Purchase the notes upon a Change of Control, (2) any payment date with respect
to an Offer to Purchase upon an insurance proceeds payment, (3) any redemption
date with respect to an optional redemption of the notes, or (4) any date on
which the notes are due and payable after an Event of Default.
"Stated Maturity" means:
(1) with respect to any debt security, the date specified in such debt
security as the fixed date on which the final installment of principal of
such debt security is due and payable, and
(2) with respect to any scheduled installment of principal of or interest on
any debt security, the date specified in such debt security as the fixed
date on which such installment is due and payable.
"Strategic Subordinated Indebtedness" means Indebtedness of EarthWatch
Incurred to finance the acquisition of a Person engaged in a business that is
related, ancillary, or complementary to the business conducted by EarthWatch or
any of its Subsidiaries, which Indebtedness by its terms, or by the terms of any
agreement or instrument pursuant to which such Indebtedness is Incurred:
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(1) is expressly made subordinate in right of payment to the notes; and
(2) provides that no payment of principal, premium, or interest on, or any
other payment with respect to, such Indebtedness may be made prior to the
payment in full of all of EarthWatch's obligations under the notes;
provided that such Indebtedness may provide for and be repaid at any time
from the proceeds of a capital contribution or the sale of Capital Stock
(other than Redeemable Stock) of EarthWatch after the Incurrence of such
Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation, association,
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following:
(1) direct obligations of the United States of America or any of its agencies,
or obligations fully and unconditionally guaranteed by the United States
of America or any of its agencies;
(2) time deposit accounts, certificates of deposit, and money market deposits
maturing within one year of the date of their acquisition and issued by a
bank or trust company which is organized under the laws of the United
States of America, any state, or any foreign country recognized by the
United States of America, which bank or trust company has capital,
surplus, and undivided profits aggregating in excess of $50 million, or
the foreign currency equivalent of $50 million, and has outstanding debt
which is rated "A", or such similar equivalent rating or higher by at
least one nationally recognized statistical rating organization, as
defined in Rule 436 under the Securities Act, or any money-market fund
sponsored by a registered broker dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in (1) above, which obligations are
entered into with a bank meeting the qualifications described in (2)
above;
(4) commercial paper, maturing not more than 90 days after the date of
acquisition, issued by a corporation, other than an Affiliate of
EarthWatch, organized and in existence under the laws of the United States
of America, any state, or any foreign country recognized by the United
States of America with a rating, at the time as of which any investment is
made, of "P-1" or higher according to Moody's, or "A-1" or higher
according to S&P; and
(5) securities with maturities of six months or less from the date of
acquisition that are issued or fully and unconditionally guaranteed by any
state, commonwealth, or territory of the United States of America, or by
any of their political subdivisions or taxing authorities, and rated at
least "A" by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed, or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means the date on which any Restricted Payment is to be
made.
"Vendor Financing" means the financing to be provided by Ball Technologies &
Aerospace Corp. to EarthWatch in a principal amount not less than $9 million for
the construction and launch of the QuickBird 2 satellite on substantially the
terms set forth on Exhibit A to the Recapitalization Agreement.
"Voting Stock" means, with respect to any person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers, or other voting members of the governing body of such Person.
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"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary, other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law, by such Person or one or more Wholly Owned Subsidiaries of such
Person.
Covenants
Summary
In the indenture, EarthWatch has agreed to certain restrictions that limit its
and its Subsidiaries' ability, among other things, to:
. incur additional debt;
. pay dividends;
. repurchase capital stock or subordinated indebtedness;
. make investments;
. incur liens; and
. engage in sale-leaseback transactions.
If a Change of Control occurs, EarthWatch must commence, within 30 days, and
consummate an Offer to Repurchase all notes at a price equal to 101% of their
Accreted Value on the date of purchase, plus accrued interest, if any, to that
date.
If EarthWatch does not consummate certain transactions by June 15, 2001, it
must commence and, by August 1, 2001, consummate an Offer to Repurchase all
notes, at a price equal to 100% of the Accreted Value of the notes on the date
of purchase, plus any accrued interest to that date. In addition, if and to the
extent that the Trustee receives insurance proceeds on the QuickBird 2 Launch
Insurance, EarthWatch must commence, within 30 days, and consummate an Offer to
Repurchase all notes, up to each holder's (and the holders' of the Vendor
Financing) ratable portion of the insurance proceeds, at a price equal to 100%
of the Accreted Value of the notes on the date of purchase, plus any accrued
interest to that date. See "Covenants - Repurchase of notes upon an insurance
proceeds payment" and "--Repurchase of notes upon a failure to meet certain
conditions."
Limitation on Indebtedness
(a) EarthWatch will not, and will not permit any of its Subsidiaries to, Incur
any Indebtedness (other than the notes and Indebtedness existing on the Closing
Date); provided that EarthWatch may Incur Indebtedness if, after giving effect
to the Incurrence of such Indebtedness and the receipt and application of the
proceeds from such Indebtedness, the Consolidated Leverage Ratio would be
greater than zero and less than 5:1.
Notwithstanding this limitation, EarthWatch and any of its Subsidiaries
(except as specified below) may Incur each and all of the following types of
Indebtedness:
(1) Indebtedness outstanding at any time in an aggregate principal amount not
to exceed $100 million;
(2) Indebtedness owed (A) to EarthWatch evidenced by a promissory note or (B)
to any Subsidiary of EarthWatch; provided that any event which results in
any such Subsidiary of EarthWatch ceasing to be a Subsidiary or any
subsequent transfer of such Indebtedness (other than EarthWatch or another
Subsidiary of EarthWatch) will be deemed, in each case, to constitute an
Incurrence of Indebtedness not permitted by this clause (2);
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(3) Indebtedness issued in exchange for, or the net proceeds of which are used
to refinance or refund, then outstanding Indebtedness (other than
Indebtedness Incurred under clause (1), (2), (4), (8), or (9) of this
paragraph) and any refinancings of such Indebtedness in an amount not to
exceed the amount so refinanced or refunded (plus premiums, accrued
interest, fees, and expenses); provided that Indebtedness, the proceeds of
which are used to refinance or refund the notes, or Indebtedness that
ranks equally with, or is subordinated in right of payment to, the notes
shall only be permitted under this clause (3) if:
(A) in case the notes are refinanced in part or the Indebtedness to be
refinanced ranks equally with the notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which
such new Indebtedness is outstanding, is expressly made to rank
equally with, or subordinate in right of payment to, the remaining
notes,
(B) in case the Indebtedness to be refinanced is subordinated in right of
payment to the notes, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the notes at least to the same
extent that the Indebtedness to be refinanced is subordinated to the
notes and
(C) such new Indebtedness, determined as of the date of Incurrence of such
new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of
such new Indebtedness is at least equal to the remaining Average Life
of the Indebtedness to be refinanced or refunded; and provided further
that in no event may Indebtedness of EarthWatch be refinanced by means
of any Indebtedness of any Subsidiary of EarthWatch pursuant to this
clause (3);
(4) Indebtedness,
(A) in respect of performance, surety or appeal bonds provided in the
ordinary course of business,
(B) under Currency Agreements and Interest Rate Agreements; provided that
such agreements (a) are designed solely to protect EarthWatch or its
Subsidiaries against fluctuations in foreign currency exchange rates
or interest rates and (b) do not increase the Indebtedness of the
obligor outstanding at any time other than as a result of fluctuations
in foreign currency exchange rates or interest rates or by reason of
fees, indemnities, and compensation payable thereunder and
(C) arising from agreements providing for indemnification, adjustment of
purchase price, or similar obligations, or from Guarantees or letters
of credit, surety bonds or performance bonds securing any obligations
of EarthWatch or any of its Subsidiaries pursuant to such agreements,
in any case Incurred in connection with the disposition of any
business, assets, or a Subsidiary of EarthWatch (other than Guarantees
of Indebtedness Incurred by any Person acquiring all or any portion of
such business, assets, or a Subsidiary of EarthWatch for the purpose
of financing such acquisition), in a principal amount not to exceed
the gross proceeds actually received by EarthWatch or of its
Subsidiaries in connection with such disposition;
(5) Indebtedness of EarthWatch, to the extent the net proceeds of such
Indebtedness are promptly (A) used to purchase notes tendered in an Offer
to Purchase made as a result of a Change in Control or (B) deposited to
defease the notes as described below under "Defeasance";
(6) Guarantees of the notes and Guarantees of Indebtedness of EarthWatch by
any of its Subsidiaries; provided any such Subsidiary Guarantees the
notes;
(7) Indebtedness, including Guarantees, Incurred to finance the cost,
including the cost of design, development, acquisition, construction,
insurance, installation, improvement, transportation, launch, or
integration, to acquire satellites, ground systems, image processing
software and systems, or other tangible assets used or useful in the
satellite imaging and related businesses of EarthWatch and its
Subsidiaries (including acquisitions by way of Capitalized Leases and
acquisitions of the Capital Stock of a Person that becomes a Subsidiary of
EarthWatch to the extent of the fair market value of the satellites,
ground
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systems, image processing software and systems, or other tangible assets
so acquired) by EarthWatch or a Subsidiary of EarthWatch after the
Closing Date;
(8) Indebtedness of EarthWatch not to exceed, at any one time outstanding,
two times:
(A) the Net Cash Proceeds received by EarthWatch after the Closing Date
as a capital contribution or from the issuance and sale of its
Capital Stock (other than Redeemable Stock) to a Person that is not a
Subsidiary of EarthWatch, to the extent (I) such capital contribution
or Net Cash Proceeds have not been used pursuant to clause (2)(b) of
the first paragraph or clause (2), (3), or (4) of the second
paragraph of the "Limitation on Restricted Payments" covenant
described below to make a Restricted Payment and (II) if such capital
contribution or Net Cash Proceeds are used to consummate a
transaction under which EarthWatch Incurs Acquired Indebtedness, the
amount of such Net Cash Proceeds exceeds one-half of the amount of
Acquired Indebtedness so Incurred and
(B) 80% of the fair market value of property, other than cash and cash
equivalents, received by EarthWatch after the Closing Date from the
sale of its Capital Stock (other than Redeemable Stock) to a Person
that is not a Subsidiary of EarthWatch, to the extent (I) such
capital contribution or sale of Capital Stock has not been used
pursuant to clause (2), (3), or (4) of the second paragraph of the
"Limitation on Restricted Payments" covenant described below to make
a Restricted Payment and (II) if such capital contribution or Capital
Stock is used to consummate a transaction pursuant to which
EarthWatch Incurs Acquired Indebtedness, 80% of the fair market value
of the property received exceeds one-half of the amount of Acquired
Indebtedness so Incurred, provided that such Indebtedness does not
mature prior to the Stated Maturity of the notes and has an Average
Life longer than the notes;
(9) Acquired Indebtedness;
(10) Strategic Subordinated Indebtedness; and
(11) subordinated Indebtedness of EarthWatch, in addition to Indebtedness
permitted under clauses (1) through (10) above, in aggregate principal
amount outstanding at any time not to exceed $100 million.
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that EarthWatch or a Subsidiary of
EarthWatch may Incur pursuant to this "Limitation on Indebtedness" covenant will
not be deemed to be exceeded, with respect to any outstanding Indebtedness, due
solely to the result of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens, or
obligations with respect to letters of credit supporting Indebtedness otherwise
included in the determination of such particular amount will not be included and
(2) any Liens granted pursuant to the equal and ratable provisions referred to
in the "Limitation on Liens" covenant described below will not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, EarthWatch, in its sole discretion, will classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
Limitation on Restricted Payments
EarthWatch will not, and will not permit any of its Subsidiaries to, directly
or indirectly make any Restricted Payment if at the time of, and after giving
effect to, the proposed Restricted Payment:
(1) a Default or Event of Default will have occurred and be continuing; or
(2) the aggregate amount of all Restricted Payments made after the Closing
Date will exceed the sum of:
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(a) 50% of the aggregate amount of the Adjusted Consolidated Net Income or,
if the Adjusted Consolidated Net Income is a loss, minus 100% of the
amount of such loss, accrued on a cumulative basis during the period,
taken as one accounting period, beginning on the first day of the
fiscal quarter immediately following the Closing Date and ending on the
last day of the last fiscal quarter preceding the Transaction Date for
which reports have been made available to holders of the notes, plus
(b) the aggregate Net Cash Proceeds received by EarthWatch after the
Closing Date from the issuance and sale of its Capital Stock (other
than Redeemable Stock) to a person who is not a Subsidiary of
EarthWatch or from the issuance to a person who is not a Subsidiary of
EarthWatch of any options, warrants, or other rights to acquire Capital
Stock of EarthWatch, in each case excluding any Redeemable Stock or any
options, warrants, or other rights that are redeemable at the option of
the holder, or are required to be redeemed, prior to the Stated
Maturity of the notes, and the Net Cash Proceeds from any capital
contributions to the Company after the Closing Date from Person other
than Subsidiaries of the Company, in each case excluding such Net Cash
Proceeds to the extent used to Incur Indebtedness pursuant to clause
(a)(8) under the "Limitation on Indebtedness" covenant and excluding
Net Cash Proceeds from the issuance of Capital Stock to the extent used
to make Permitted Investment in accordance with clause (6) of such
defined term, plus
(c) an amount equal to the net reduction after the Closing Date in
Investments, other than reductions in Permitted Investments, in any
person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each
case to EarthWatch or any of its Subsidiaries or from the Net Cash
Proceeds from the sale of any such Investment, except to the extent any
such proceeds are included in the calculation of Adjusted Consolidated
Net Income, not to exceed, in each case, the amount of Investments
previously made by EarthWatch or any of its Subsidiaries in such
Person.
The following Restricted Payments may be made so long as, other than in the
case of clauses (1) and (2), no Default or Event of Default has occurred and is
continuing or occurs as a consequence of the Restricted Payments:
(1) the payment of any dividend within 60 days after the date of declaration
of such dividend if, at such date of declaration, such payment would comply with
the prior paragraph;
(2) the repurchase, redemption, or other acquisition of Capital Stock of
EarthWatch, or options, warrants, or other rights to acquire such Capital Stock,
(a) in exchange for, or out of the proceeds of a capital contribution or a
substantially concurrent offering of, shares of Capital Stock, other than
Redeemable Stock, of EarthWatch or (b) for cash in an aggregate amount not to
exceed $2.0 million in any calendar year;
(3) the making of any principal payment or the repurchase, redemption,
retirement, defeasance, or other acquisition for value of Indebtedness of
EarthWatch which is subordinated in right of payment to the notes in exchange
for, or out of the proceeds of a capital contribution or a substantially
concurrent offering of, shares of the Capital Stock, other than Redeemable
Stock, of EarthWatch;
(4) the declaration or payment of dividends on the common stock of EarthWatch
following a Public Equity Offering of such common stock, of up to 5% per year of
the Net Cash Proceeds received by EarthWatch in such Public Equity Offering;
(5) payments or distributions to dissenting stockholders under applicable law
under or in connection with a consolidation, merger, or transfer of assets;
(6) any purchase, redemption, retirement, or other acquisition of Capital
Stock deemed to occur upon exercise of stock options or warrants if such Capital
Stock represents a portion of the exercise price of such options or warrants; or
(7) repurchases of fractional shares of Capital Stock in connection with the
exercise of stock options or warrants to acquire Capital Stock (other than
redeemable stock) of EarthWatch.
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Each Restricted Payment permitted under the preceding paragraph, other than an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in (2)
or (3) above, and the Net Cash Proceeds from any issuance of Capital Stock
referred to in (2) or (3) above, will be included in calculating whether the
conditions of clause (2) of the first paragraph of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments.
Limitation on Liens
EarthWatch will not, and will not permit any of its Subsidiaries to, create,
incur, assume, or suffer to exist any Lien, other than Permitted Liens, on any
of its assets or properties of any character or any shares of Capital Stock or
Indebtedness of any of its Subsidiaries, without making effective provision for
all of the notes and all other amounts due under the indenture to be directly
secured equally and ratably with, or, if the obligation or liability to be
secured by such Lien is subordinated in right of payment to the notes, prior to,
the obligation or liability secured by such Lien. In addition, EarthWatch will
not, and will not permit any Subsidiary to, create, incur, assume, or suffer to
exist any Lien on the QuickBird 2 satellite or the QuickBird 2 Launch Insurance,
except:
(1) in the case of the QuickBird 2 Launch Insurance, Liens thereon in favor of
the Collateral Trustee under the Pledge and Security Agreement or otherwise
securing the notes or the Vendor Financing and Liens thereon in favor of the
collateral trustee under the Junior Collateral Pledge and Security Agreement for
the benefit of the holders of the Series A and Series B preferred stock,
provided such Liens are junior to the Liens in favor of the Collateral Trustee
under the Pledge and Security Agreement; and
(2) with respect to the QuickBird 2 satellite,
. Liens described in clause (2) of the definition of Permitted Liens,
. until the attachment of risk under the QuickBird 2 Launch Insurance,
the retention or reservation of title to the QuickBird 2 satellite by
Ball Aerospace under the terms of the Vendor Financing,
. following the attachment of risk under the QuickBird 2 Launch
Insurance, Liens to secure up to $9 million principal amount (plus
accrued interest thereon) of Vendor Financing, and
. Liens in the proceeds (as defined in Section 9-306(1) of the New York
Uniform Commercial Code) from the disposition of the QuickBird 2
satellite, other than proceeds under the QuickBird 2 Launch Insurance,
to secure up to $9 million principal amount (plus accrued interest) of
Vendor Financing.
Limitation on sale-leaseback transactions
EarthWatch will not, and will not permit any of its Subsidiaries to, enter
into any sale-leaseback transaction involving any of its assets or properties,
whether now owned or acquired later, through which EarthWatch or one of its
Subsidiaries sells or transfers such assets or properties and then or later
leases such assets or properties or any part of them or any other assets or
properties which EarthWatch or such Subsidiary, as the case may be, intends to
use for substantially the same purpose or purposes as the assets or properties
sold or transferred.
This restriction does not apply to any sale-leaseback transaction if:
(1) the lease is for a period, including renewal rights, of three years or
less;
(2) the lease secures or relates to industrial revenue or pollution control
bonds;
(3) the transaction is solely between EarthWatch and any of its Wholly Owned
Subsidiaries or solely between its Wholly Owned Subsidiaries; or
(4) the lease relates to any present or future ground station of EarthWatch or
any of its Subsidiaries.
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Repurchase of notes upon a Change of Control
EarthWatch must commence, within 30 days of the occurrence of a Change of
Control, and must then consummate in accordance with the indenture an Offer to
Purchase for all notes then outstanding, at a purchase price equal to 101% of
the Accreted Value of such notes on the relevant payment date, plus any accrued
interest to the payment date.
There can be no assurance that EarthWatch will have sufficient funds
available at the time of any Change of Control to make any debt payment,
including repurchases of notes, required by this covenant as well as may be
contained in other securities of EarthWatch which might be outstanding at the
time. This covenant will, unless consents are obtained, require EarthWatch to
repay all indebtedness then outstanding which by its terms would prohibit such
note repurchase, either prior to or concurrently with such note repurchase.
Maintenance of properties and insurance
EarthWatch will use its best efforts to obtain and maintain in full force
and effect with respect to each and every satellite, other than the QuickBird 2
satellite, and each permitted replacement satellite therefor, launch insurance
with respect to each such satellite, in each case for a period which EarthWatch
deems reasonable by comparison with other companies in a similar industry, but
in no event for a period less than 30 days commencing on the date of intentional
ignition of the launch vehicle. Such insurance must be sufficient to cover an
amount equal to or greater than the sum of:
(1) the cost to replace such satellite and launch vehicle;
(2) the cost to launch a replacement satellite; and
(3) the cost of launch insurance for such satellite or, in the event that
EarthWatch has reason to believe that the cost of obtaining comparable
insurance for a replacement satellite would be materially higher,
EarthWatch's best estimate of the cost of such comparable insurance.
The insurance policy required to be obtained under this "Maintenance of
properties and insurance" covenant must provide that (1) if 95% or more of a
satellite's capacity is lost, the full amount of insurance will become due and
payable, and (2) if a satellite is able to maintain more than 15% but less than
95% of its capacity, a portion of such insurance based on the lost capacity will
become due and payable.
If EarthWatch receives proceeds from insurance relating to any satellite
under this "Maintenance of properties and insurance" covenant, EarthWatch may
use a portion of such proceeds to repay any vendor or third-party purchase money
financing pertaining to such satellite that is required to be repaid by reason
of the loss giving rise to such insurance proceeds. Until such time as
EarthWatch has at least two satellites operating in orbit:
(1) if EarthWatch does not have any satellites in orbit, EarthWatch will
use the remainder of such proceeds to develop, construct, launch, and
insure a replacement high-resolution satellite of comparable or
superior utility as compared with the satellite being replaced and to
develop the necessary supporting infrastructure for the replacement
satellite and will use its best efforts to launch such replacement
satellite within nine months of the scheduled launch or of the launch
failure giving rise to the loss proceeds; and
(2) if EarthWatch then has only one satellite in orbit, as soon as
practicable after loss of a satellite and, in any event, no more than
28 months after such scheduled launch or launch failure, EarthWatch
will use the remainder of such proceeds to develop, construct, launch,
and insure a second high-resolution satellite of comparable or superior
utility as the satellite being replaced.
If a constellation of two satellites has been successfully launched and
continues to remain operating in orbit, EarthWatch may use such insurance
proceeds for the development or construction of additional satellites or further
development as the board of directors determines is in the best interests of
EarthWatch.
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With respect to the intentional ignition of the launch vehicle for, and any
operation following such ignition of, the QuickBird 2 satellite, EarthWatch has
agreed to use its best efforts to obtain by June 15, 2001, and to thereafter
maintain in full force and effect, the QuickBird 2 Launch Insurance, for a
period which EarthWatch deems reasonable by comparison with other companies in a
similar industry but in no event for a period of less than one year commencing
on the date of intentional ignition of the launch vehicle. The insurance must
name the Collateral Trustee as sole loss payee thereof and must be in an amount
of at least $155 million. It must have substantially the same terms as the
launch and in-orbit insurance with respect to the QuickBird 1 satellite, except:
. for such differences in terms as may be required due to the differences
in construction, launch or in-orbit operations between the QuickBird 1
and QuickBird 2 satellites;
. that the QuickBird 2 Launch Insurance shall only be required to cover
one year of operations after launch for the QuickBird 2 satellite;
. as is acceptable to the holders of a majority of the notes in their
absolute discretion; and
. for such differences that do not adversely affect the holders of notes.
If premiums are not at any time fully paid in respect of the QuickBird 2
Launch Insurance solely by reason of the fact that premiums previously paid have
been returned by the relevant insurance companies, EarthWatch will not thereby
be in default of its insurance obligations so long as all such returned premiums
have been distributed to the Collateral Trustee as provided in the Pledge and
Security Agreement and any amounts subsequently made available to EarthWatch by
the Collateral Trustee in accordance with the Pledge and Security Agreement are
immediately used for the purchase of complying launch insurance. Except as is
acceptable to the holders of a majority of the notes in their absolute
discretion, the QuickBird 2 Launch Insurance must provide that if 66% or more of
a satellite's capacity is lost, the full amount of insurance shall become due
and payable, and that if a satellite is able to maintain more than 34% but less
than 85% of its capacity, a portion of such insurance based on the lost capacity
shall become due and payable.
The Collateral Trustee will be the sole loss payee on the QuickBird 2
Launch Insurance and all proceeds, if any, from any QuickBird 2 Launch Insurance
will be paid directly to the Collateral Trustee for application (1) first to the
Notes and up to $9 million principal amount of Vendor Financing, on a pro rata
basis, in accordance with the provisions of the Pledge and Security Agreement
and (2) second to the collateral trustee under the Junior Pledge and Security
Agreement for the benefit of the Series A and Series B preferred stock in
accordance with the provisions of the Junior Pledge and Security Agreement. If,
notwithstanding the fact that the Collateral Trustee will be the sole loss payee
with respect to the QuickBird 2 Launch Insurance, EarthWatch or any of its
Subsidiaries at any time receives any proceeds relating to the QuickBird 2
Launch Insurance from the relevant insurance company or from any source, other
than the Collateral Trustee in accordance with the Pledge and Security
Agreement, EarthWatch will cause such proceeds to be held in trust for the
benefit of the Collateral Trustee and immediately turned over to the Collateral
Trustee in the same form received with appropriate endorsements.
Repurchase of notes upon an insurance proceeds payment
EarthWatch must commence within 30 days of receipt by the Collateral
Trustee of any proceeds under the QuickBird 2 Launch Insurance, and consummate
within 60 days thereafter, an Offer to Purchase the notes and offer to repay up
to $9 million in principal amount of the Vendor Financing, including any
interest accrued and payable thereon, on a pro rata basis in an aggregate amount
equal to the insurance proceeds not previously subject to an Offer to Purchase
or repayment of the Vendor Financing under this covenant. The purchase price for
the notes in connection with the Offer to Purchase will equal 100% of their
Accreted Value on the payment date plus accrued and unpaid interest, if any, to
such date, and the purchase price for the Vendor Financing to be so repaid shall
be equal to the principal amount thereof plus accrued interest thereon. If the
sum of the aggregate purchase price of the notes tendered in connection with the
Offer to Purchase and the amount of Vendor Financing repaid under this covenant
is less than the insurance proceeds, then the remaining insurance proceeds will
be paid over to the collateral trustee under the Junior Pledge and Security
Agreement, to the extent required under the Junior Pledge and Security
Agreement, and otherwise to EarthWatch, or as EarthWatch may direct.
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Repurchase of notes upon a failure to meet certain conditions
Earthwatch must commence, and consummate by August 1, 2001, an Offer to
Purchase the notes if, as of the close of business on June 15, 2001:
. EarthWatch has not obtained QuickBird 2 Launch Insurance as required by
the covenant described above under "--Repurchase of notes upon an
insurance proceeds payment,"
. the Charter Amendments shall have not been approved and be in full force
and effect;
. EarthWatch has not obtained the Vendor Financing;
. EarthWatch has not issued shares of Series C preferred stock as required
under the Recapitalization Agreement; or
. EarthWatch has not executed and delivered the Pledge and Security
Agreement, the Junior Pledge and Security Agreement and certain other
documents required under the Recapitalization Agreement.
The purchase price for the notes in connection with such Offer to Purchase will
equal 100% of their Accreted Value on the payment date.
Rating of notes
EarthWatch will use its best efforts to obtain a rating for the notes from
either Moody's or S&P or, if neither firm is then in the business of providing
such ratings, from another nationally recognized statistical rating
organization, as defined in Rule 436 under the Securities Act at any time after
the later to occur of (1) the date that is one year after the Closing Date and
(2) the date that is six months after the date of the launch of QuickBird 2, and
to keep a rating with respect to the notes continuously in effect through the
maturity or redemption of the notes.
SEC reports and reports to holders
At all times from and after the earlier of (1) the commencement of an
exchange offer or effectiveness of a shelf registration statement
("registration") and (2) the date that is one year after the Closing Date,
whether or not EarthWatch is then required to file reports with the SEC,
EarthWatch will file with the SEC all such reports and other information as it
would be required to file with the SEC by Sections 13(a) or 15(d) of that Act as
if it were subject to such requirements. EarthWatch will supply the Trustee and
each holder of Notes or will supply to the Trustee for forwarding to each such
holder, without cost to such holder, copies of such reports and other
information. At all times prior to registration, upon the request of any holder
of notes or any prospective purchaser, EarthWatch also will supply such holder
or prospective purchasers with the information required under Rule 144A under
the Securities Act.
Events of Default
The following events are defined as "Events of Default" in the indenture:
(1) default in the payment of principal of, or any premium on, any note
when the same becomes due and payable at maturity, upon acceleration,
redemption, or otherwise;
(2) default in the payment of interest on any note when the same becomes
due and payable, and such default continues for a period of 30 days;
(3) the failure to make or consummate an Offer to Purchase in accordance
with the "Repurchase of notes upon a Change of Control," "Repurchase of
notes upon an insurance proceeds payment" or "Repurchase of notes upon
failure to meet certain conditions" covenants;
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(4) EarthWatch defaults in the performance of or breaches any other
covenant or agreement of EarthWatch in the indenture or under the
notes, other than a default specified in clause (1), (2), or (3) above
or under the Security Documents, and such default or breach continues
for a period of 30 consecutive days after written notice by the Trustee
or the holders of 25% or more in aggregate principal amount of the
notes;
(5) there occurs with respect to any issue or issues of Indebtedness of
EarthWatch or any Significant Subsidiary having an outstanding
principal amount of $1 million or more in the aggregate for all such
issues of all such persons, whether such Indebtedness now exists or is
created after the Closing Date,
(a) an event of default that has caused the holder of such Indebtedness
to declare such Indebtedness to be due and payable prior to its
Stated Maturity and such Indebtedness has not been discharged in
full or such acceleration has not been rescinded or annulled within
30 days of such acceleration; and/or
(b) the failure to make a principal payment at the final, but not any
interim, fixed maturity and such defaulted payment is not made,
waived, or extended within 30 days of such payment default; or
(c) there occurs with respect to the Vendor Financing any default in
the performance or observance of any term, condition, covenant, or
agreement contained in such Indebtedness or in any agreement
related to such Indebtedness, or any other event specified in any
such Indebtedness or agreement, if the effect of such event is to
cause, or permit the holder or holders of such Indebtedness (or any
trustee or other representative of any such holder(s)) to cause,
such Indebtedness to become due prior to its Stated Maturity;
(6) any final judgment or order not covered by insurance for the payment of
money in excess of $1 million in the aggregate for all such final
judgments or orders against all such persons, treating any deductibles,
self-insurance, or retention as not so covered, is rendered against
EarthWatch or any Significant Subsidiary and is not paid or discharged,
and there is any period of 30 consecutive days following entry of the
final judgment or order that causes the aggregate amount for all such
final judgments or orders outstanding and not paid or discharged
against all such persons to exceed $1 million during which a stay of
enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, is not in effect;
(7) a court having jurisdiction in the premises enters a decree or order
for
(a) relief in respect of EarthWatch or any Significant Subsidiary in an
involuntary case under any applicable bankruptcy, insolvency, or
other similar law in effect now or after the Closing Date;
(b) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator, or similar official of EarthWatch or any
Significant Subsidiary or for all or substantially all of the
property and assets of EarthWatch or any Significant Subsidiary;
(c) the winding up or liquidation of the affairs of EarthWatch or any
Significant Subsidiary and, in each case, such decree or order will
remain in effect for a period of 60 consecutive days without being
stayed or put on hold by a court;
(8) EarthWatch or any Significant Subsidiary
(a) commences a voluntary case under any applicable bankruptcy,
insolvency, or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case
under any such law;
(b) consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator, or similar
official of EarthWatch or any Significant Subsidiary or for all or
substantially all of the property and assets of EarthWatch or any
Significant Subsidiary; or
(c) effects any general assignment for the benefit of creditors;
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(9) there occurs with respect to the QuickBird 2 Satellite (a) the loss of
5% or more of such satellite's capacity or (b) any other event that
permits or requires the payment of any proceeds of the QuickBird 2
Launch Insurance by an insurance company under such policy and, in
either such case, such proceeds are not paid over to the Collateral
Trustee within 90 days of the demand being made under the applicable
QuickBird 2 Launch Insurance policy; or
(10) the Collateral Trustee under the Pledge Agreement does not have at all
times a first priority perfected security interest in the Collateral
under the Pledge Agreement, or the Collateral Trustee under the Pledge
and Security Agreement does not have at all times a first priority
perfected security interest in the Collateral under the Pledge and
Security Agreement.
If an Event of Default, other than one specified in clause (7) or (8) above
that occurs with respect to EarthWatch, occurs and is continuing under the
indenture, the Trustee or the holders of at least 25% in aggregate principal
amount at maturity of the notes then outstanding, by written notice to
EarthWatch and to the Trustee if such notice is given by the holders, may, and
the Trustee at the request of such holders will, declare the Accreted Value of,
premium (if any), and accrued interest on the notes to be immediately due and
payable. Upon a declaration of acceleration, such Accreted Value of, premium (if
any), and accrued interest will be immediately due and payable.
In the event of a declaration of acceleration because an Event of Default
set forth in clause (5) above has occurred and is continuing, such declaration
of acceleration is automatically rescinded and annulled if the event of default
triggering such Event of Default under clause (5) will be remedied or cured by
EarthWatch or the relevant Significant Subsidiary or waived by the holders of
the relevant Indebtedness within 60 days after the declaration of acceleration
with respect thereto.
If an Event of Default specified in clause (7) or (8) above occurs with
respect to EarthWatch, the Accreted Value of, premium (if any), and accrued
interest on the Notes then outstanding will automatically become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder. Holders of at least a majority in principal amount
of the outstanding notes, by written notice to EarthWatch and to the Trustee,
may waive all past defaults and rescind and annul a declaration of acceleration
and the consequences of such acceleration if:
(1) all existing Events of Default, other than the nonpayment of the
Accreted Value of, premium (if any), and interest on the Notes that
have become due solely by such declaration of acceleration, have been
cured or waived; and
(2) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction.
This waiver provision does not apply to a default caused by the nonpayment
of the Accreted Value of, premium (if any), and interest on, any note as
specified in clause (1) or (2) above or under a provision of the indenture that
cannot be modified or amended without the consent of the holder of each
outstanding note affected. For information as to the waiver of defaults, see "--
Modification and waiver."
The holders of at least a majority in aggregate principal amount of the
outstanding notes may direct the time, method, and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of holders of notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction, received from holders of notes.
A holder may not pursue any remedy with respect to the indenture or the
notes unless:
(1) the holder gives the Trustee written notice of a continuing Event of
Default;
(2) the holders of at least 25% in aggregate principal amount of
outstanding notes make a written request to the Trustee to pursue the
remedy;
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(3) such holder or holders offer(s) the Trustee indemnity satisfactory to
the Trustee against any costs, liability, or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period, the holders of a majority in aggregate
principal amount at maturity of the outstanding notes do not give the
Trustee a direction that is inconsistent with the request.
However, such limitations do not apply to the right of any holder of a note
to receive payment of the Accreted Value of, premium (if any), or interest on,
such note or to bring suit for the enforcement of any such payment, on or after
the due date expressed in the notes, which right will not be impaired or
affected without the consent of the holder.
The indenture requires the two principal accounting officers of EarthWatch
to certify, on or before a date not more than 90 days after the end of each
fiscal year, that a review has been conducted of the activities of EarthWatch
and its Subsidiaries and EarthWatch's and its Subsidiaries' performance under
the indenture and that EarthWatch has fulfilled all obligations thereunder, or,
if there has been a default in the fulfillment of any such obligation,
specifying each such default and the nature and status of such default.
EarthWatch will also be obligated to notify the Trustee of any default or
defaults in the performance of any covenants or agreements under the indenture.
Consolidation, merger and sale of assets
EarthWatch will not consolidate with, merge with or into, or sell, convey,
transfer, lease, or otherwise dispose of all or substantially all of its
property and assets to any person or permit any person to merge with or into
EarthWatch unless:
(1) EarthWatch will be the continuing person, or the person, if other than
EarthWatch, formed by such consolidation or into which EarthWatch is
merged or that acquired or leased such property and assets of
EarthWatch will be a corporation organized and validly existing under
the laws of the United States of America or any of its jurisdictions
and expressly assumes, by a supplemental indenture, executed and
delivered to the Trustee and the Collateral Trustee, all of the
obligations of EarthWatch on all of the notes and under the indenture;
(2) immediately after giving effect to such transaction, no Default or
Event of Default will have occurred and be continuing; and
(3) EarthWatch delivers to the Trustee an officers' certificate and
opinion of counsel, in each case stating that such consolidation,
merger, or transfer and such supplemental indenture complies with this
provision and that all conditions precedent provided for in the
indenture relating to such transaction have been complied with.
Defeasance
Summary
EarthWatch may, at its option, terminate its obligations under the notes
and the indenture, in the manner described in the paragraph below titled "Legal
defeasance." This defeasance, commonly known as "legal defeasance," means that
EarthWatch will be deemed to have paid and discharged any and all obligations in
respect of the Notes other than, among other matters, its obligation to:
. register the transfer or exchange of the notes;
. replace stolen, lost, or mutilated notes;
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. maintain paying agencies; and
. hold monies in trust for payment of the obligations under the notes.
In addition, EarthWatch may, at its option, terminate its obligations with
respect to certain covenants under the indenture in the manner described in the
paragraph below titled "Covenant defeasance." This defeasance is commonly known
as "covenant defeasance."
Legal defeasance
EarthWatch may exercise its legal defeasance option with respect to notes
that mature or are to be called for redemption within one year if, among other
things:
(1) EarthWatch deposits with the Trustee, in trust, money, and/or U.S.
Government Obligations, that through the payment of interest and
principal in accordance with their terms, will provide money in an
amount sufficient to pay the principal of, premium (if any), and
accrued interest on the notes on the Stated Maturity of such payments
in accordance with the terms of the indenture and the Notes;
(2) no Default or Event of Default will have occurred and be continuing on
the date of such deposit and such deposit will not result in a breach
or violation of, or constitute a default under, the indenture or any
other agreement or instrument to which EarthWatch is a party or by
which EarthWatch is bound; and
(3) if at such time the notes are listed on a national securities
exchange, EarthWatch has delivered to the Trustee an opinion of
counsel to the effect that the notes will not be delisted as a result
of such deposit, defeasance, and discharge.
Covenant defeasance
EarthWatch may exercise its covenant defeasance option if, among other
things, it:
(1) deposits with the Trustee, in trust, money, and/or U.S. Government
Obligations, that through the payment of interest and principal in
accordance with their terms, will provide money in an amount
sufficient to pay the principal of, premium (if any), and accrued
interest on the notes on the Stated Maturity of such payments in
accordance with the terms of the indenture and the notes;
(2) satisfies the provisions described in clauses (2) and (3) under the
discussion "Legal defeasance" above; and
(3) delivers to the Trustee an opinion of counsel to the effect that (a)
the creation of the defeasance trust does not violate the Investment
Company Act of 1940, (b) holders will not recognize income, gain, or
loss for federal income tax purposes as a result of EarthWatch's
exercise of its option under this defeasance provision and will be
subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such
deposit, defeasance, and discharge had not occurred and (c) after the
passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the U.S. Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law.
Once EarthWatch has satisfied these conditions, the provisions of the
indenture will no longer be in effect with respect to all of the covenants
described under "Covenants;" clauses (4) and (9) under "Events of Default" with
respect to certain covenants; and clauses (5) and (6) under "Events of Default."
Defeasance and certain other Events of Default
If EarthWatch exercises its option to omit compliance with certain
covenants and provisions of the indenture with respect to the notes as described
in the immediately preceding paragraph and the notes are declared due and
payable because of the occurrence of an Event of Default that remains
applicable, the amount of money and/or U.S. Government Obligations on deposit
with the Trustee will be sufficient to pay amounts due on the notes at the time
of
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their Stated Maturity but may not be sufficient to pay amounts due on the notes
at the time of the acceleration resulting from such Event of Default. However,
EarthWatch will remain liable for such payments.
Modification and waiver
Modifications and amendments of the indenture may be made by EarthWatch and
the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount at maturity of the outstanding notes. However, no
such modification or amendment may, without the consent of each holder affected
thereby:
(1) change the Stated Maturity of the principal of, or any installment of
interest on, any note;
(2) reduce the Accreted Value of, or premium, if any, or interest on, any
note;
(3) change the place or currency of payment of principal of, or premium,
if any, or interest on, any note;
(4) impair the right to institute suit for the enforcement of any payment
of any note on or after the Stated Maturity, or, in the case of a
redemption, on or after the Redemption Date, of any note;
(5) reduce the above-stated percentage of outstanding notes the consent of
whose holders is necessary to modify or amend the indenture;
(6) waive a default in the payment of principal of, or premium, if any, or
interest on, the notes;
(7) alter the obligation of EarthWatch to offer to purchase the notes in
accordance with the indenture following the occurrence of a Change of
Control or waive any default in the performance of such obligation;
(8) reduce the percentage or aggregate principal amount at maturity of
outstanding notes, the consent of whose holders is necessary for
waiver of compliance with certain provisions of the indenture or for
waiver of certain defaults; or
(9) alter EarthWatch's obligation to purchase the notes under the
"Repurchase of notes upon an insurance proceeds payment" and
"Repurchase of notes upon a failure to meet certain conditions"
covenants.
In addition, without the consent of 66 2/3% of the holders affected
thereby, the Trustee may not direct the Collateral Trustee or otherwise permit
the release of any Collateral except as expressly provided in the Security
Documents.
No personal liability of incorporators, stockholders, officers, directors, or
employees
No incorporator, stockholder, officer, director, employee, or controlling
person of EarthWatch or any of its successors will have any liability for any of
EarthWatch's obligations under the notes or the indenture, or for any claim
based on, or in respect of, such obligations or their creation. Each holder, by
accepting the notes, waives and releases all such liability.
Concerning the Trustee
Except during the continuance of a Default, the Trustee will not be liable,
except for the performance of such duties as are specifically set forth in such
indenture. If an Event of Default has occurred and is continuing, the Trustee
will use the same degree of care and skill in its exercise of the rights and
powers vested in it under the indenture as a prudent person would exercise under
the circumstances in the conduct of such person's own affairs.
The indenture and provisions of the Trust Indenture Act of 1939, as
amended, that are incorporated by reference into the indenture contain
limitations on the rights of the Trustee, should it become a creditor of
EarthWatch, to obtain payment of claims in certain cases or to realize on
certain property received by it in respect of
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any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions but if it acquires any conflicting interest, it must
eliminate such conflict or resign.
The Trustee is also the Collateral Trustee under the Pledge Agreement and
Pledge and Security Agreement and the collateral trustee under the Junior Pledge
and Security Agreement.
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DESCRIPTION OF CAPITAL STOCK
The following description summarizes material terms of our capital stock
and is qualified in its entirety by reference to the actual terms of the capital
stock contained in our amended and restated certificate of incorporation and
bylaws, which are filed as exhibits to the registration statement of which this
prospectus forms a part.
Our certificate of incorporation authorizes us to issue 100,000,000 shares
of common stock, par value $.001 per share, and 45,000,000 shares of preferred
stock, par value $.001 per share. We are currently authorized to issue
10,000,000 shares of Series A preferred stock, 10,000,000 shares of Series B
preferred stock, and 25,000,000 shares of Series C preferred stock.
Our board of directors has approved, and has submitted to our stockholders
for approval, amendments to our certificate of incorporation that would, among
other things, increase our authorized shares to 150,000,000 shares of common
stock and 74,000,000 shares of preferred stock, consisting of 12,000,000 shares
of Series A preferred stock, 12,000,000 shares of Series B preferred stock and
50,000,000 shares of Series C preferred stock.
As of March 31, 2001, we had outstanding 215,438 shares of common stock,
8,192,170 shares of Series A preferred stock, 8,192,170 shares of Series B
preferred stock, and 25,000,000 shares of Series C preferred stock.
Common stock
The holders of common stock are entitled to one vote for each share held of
record at all meetings of the stockholders, and are not entitled to cumulative
voting rights with respect to the election of directors. Subject to preferences
that are applicable to outstanding shares of preferred stock, the holders of
common stock are entitled to receive ratably such dividends as may be declared
by the board of directors out of funds legally available to be paid.
In the event of a liquidation, dissolution, or winding up, the holders of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preference of the outstanding preferred
stock. The holders of common stock have no preemptive rights and no right to
convert their common stock into any other securities. There are no redemption
provisions applicable to the common stock. The outstanding shares of common
stock are fully paid and nonassessable.
Series A and Series B preferred stock
Except with respect to the voting rights and representation on the board of
directors as set forth below, our Series A preferred stock and Series B
preferred stock are identical in all material respects.
Rank. Our Series A preferred stock and Series B preferred stock rank
equally with each other and senior to our Series C preferred stock and common
stock with respect to dividends, liquidation preference, and redemption.
Dividends. The holders of our Series A preferred stock and Series B
preferred stock are entitled to receive cumulative dividends, whether or not
declared by our board of directors, at an annual rate of 7% of the liquidation
preference amount until no later than June 15, 2002. Such dividends are payable
quarterly on March 31, June 30, September 30, and December 31, and commenced on
June 30, 1999. Such dividends may be paid, subject to certain limitations, at
our option, either in cash or in additional shares of Series A preferred stock
or Series B preferred stock, as applicable, until June 15, 2002. After June 15,
2002, 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, 2002, the liquidation preference of the
Series A preferred stock and Series B preferred stock will be increased by an
amount equal to the product of (a) the amount per share not paid divided by the
total amount payable per share and (b) one quarter of the dividend rate
multiplied by the effective liquidation preference. We are prohibited from
paying dividends on any shares of stock having rights junior to the Series A and
Series B preferred stock until all accumulated dividends have been paid on the
Series A and Series B preferred stock.
Liquidation preference. Upon our liquidation, dissolution, or winding up,
the holders of Series A preferred stock and Series B preferred stock will be
entitled to receive out of the assets available for distribution prior to and
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in preference of the Series C preferred stock, an amount equal to $3.50 per
share, plus all accrued and unpaid dividends, subject to adjustment.
Conversion. From June 15, 1999 and until June 15, 2002 (or, if the proposed
amendments to our certificate of incorporation are approved, June 15, 2003),
each share of Series A preferred stock and Series B preferred stock is
convertible at the option of the holder into that number of shares of common
stock obtained by dividing the applicable liquidation preference, plus any
accumulated but unpaid dividends by $3.50, subject to antidilution adjustments.
Prior to June 15, 2002 (or, if the proposed amendments to our certificate of
incorporation are approved, June 15, 2003), each share of Series A preferred
stock and Series B preferred stock will automatically convert into common stock
at the applicable conversion ratio upon the earlier of (a) our initial public
offering of shares of common stock with an aggregate public offering price of at
least $35 million and (b) the listing of shares of our common stock under
certain circumstances. After June 15, 2002 (or, if the proposed amendments to
our certificate of incorporation are approved, June 15, 2003), each share of
Series A preferred stock and Series B preferred stock shall not be convertible
into common stock.
Antidilution. The conversion price of the Series A preferred stock and
Series B preferred stock is subject to adjustment under certain circumstances,
including upon any subsequent issuance of capital stock. The issuance of the
Series C preferred stock resulted in an adjustment in the conversion prices of
the Series A preferred stock and Series B preferred stock. See "Principal
stockholders".
Redemption. We are required to redeem all of the Series A preferred stock
and Series B preferred stock outstanding on March 31, 2009, at a redemption
price equal to 100% of the then existing applicable liquidation preference, plus
accrued and unpaid dividends to the date of redemption, subject to the legal
availability of funds.
Voting rights. Each holder of Series A preferred stock is entitled to .65
(subject to adjustment) votes per share held (on an as-converted basis) and each
holder of Series B preferred stock is entitled to 1.35 (subject to adjustment)
votes per share held (on an as-converted basis).
Board representation. The holder of Series A preferred stock has the right
to designate two persons to our board of directors and the holders of the Series
B preferred stock have the right to designate four persons to our board of
directors.
Put right. The proposed amendments to our certificate of incorporation
include a put right to be granted to the holders of Series A and Series B
preferred stock. This right would permit holders to sell us, and require us to
purchase, from any source of funds legally available therefor, up to all of
their shares of Series A and Series B preferred stock. The right would become
exercisable upon notice from us that we (or the collateral trustee under the
Junior Pledge and Security Agreement) have received insurance proceeds under the
QuickBird 2 satellite launch and in-orbit operations insurance policy. The
right would expire 60 days after it becomes exercisable. The purchase price for
the shares would equal their liquidation preference, plus accrued and unpaid
dividends to the date of purchase. If the aggregate purchase price would
otherwise exceed the available insurance proceeds, the number of shares of
Series A and Series B preferred stock to be purchased would be reduced on a pro
rata basis. This provision will not become effective unless we receive the
necessary stockholder approvals and consummate (or obtain an effective waiver
of) certain transactions contemplated by the Recapitalization Agreement.
Series C preferred stock
Rank. The Series C preferred stock is junior to the Series A preferred
stock and Series B preferred stock, but senior to the common stock, with respect
to dividends, liquidation preference, and redemption.
Dividends. The holders of Series C preferred stock are entitled to
cumulative dividends, whether or not declared by the board of directors, at an
annual rate of 8.5% until no later than June 15, 2002. Such dividends are
payable quarterly on March 31, June 30, September 30, and December 31, and
commenced on June 30, 1999. Until June 15, 2002, 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, 2002, 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, 2002, the liquidation
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preference of the Series C preferred stock will be increased by an amount equal
to the product of (a) the amount per share not paid divided by the total amount
payable per share and (b) one quarter of the dividend rate multiplied by the
effective liquidation preference. We are prohibited from paying dividends on any
shares of stock having rights junior to the Series C preferred stock until all
accumulated dividends have been paid on the Series C preferred stock.
Liquidation preference. Upon our liquidation, dissolution, or winding up,
the holders of the Series C preferred stock will be entitled to receive out of
the assets available for distribution following payment of the Series A and
Series B liquidation preference an amount equal to $3.50 per share, plus all
accrued and unpaid dividends, subject to adjustment.
Conversion. Until June 15, 2002 (or, if the proposed amendments to our
certificate of incorporation are approved, June 15, 2003), each share of Series
C preferred stock will be convertible at the option of the holder into that
number of shares of common stock obtained by dividing the Series C liquidation
preference, plus any accumulated but unpaid dividends by $3.50, subject to
antidilution adjustments. Prior to June 15, 2002 (or, if the proposed
amendments to our certificate of incorporation are approved, June 15, 2003),
each share of Series C preferred stock will automatically convert into common
stock at the applicable conversion ratio upon the earlier of (a) our initial
public offering of shares of common stock with an aggregate public offering
price of at least $35 million and (b) the listing of shares of our common stock
under certain circumstances. After June 15, 2002 (or, if the proposed
amendments to our certificate of incorporation are approved, June 15, 2003),
each share of Series C preferred stock shall not be convertible into common
stock.
Antidilution. The conversion price of the Series C preferred stock is
subject to adjustment under certain circumstances.
Redemption. We are required to redeem all of the Series C preferred stock
outstanding on March 31, 2009, at a redemption price equal to 100% of the then
liquidation preference, plus accrued and unpaid dividends to the date of
redemption, subject to the legal availability of funds.
Voting rights. Each holder of Series C preferred stock is entitled to one
(subject to adjustment) vote per share held on an "as-converted" basis.
Board representation. The holders of the Series C preferred stock are
entitled to designate three members of the board of directors.
Tag along rights. If one of our stockholders or a group of our stockholders
proposes to sell any shares of capital stock in one transaction such that,
following such sale, shares of capital stock representing more than 35% of the
then outstanding shares (on a fully diluted basis) will have been sold to one
holder or a group of related holders, then each holder of Series C preferred
stock shall have the right to receive notice of such a transaction and shall
also have the right to participate in the transaction and sell a proportionate
number of such holders' Series C preferred stock in such transaction.
Stockholders' agreement
In connection with our recapitalization, we entered into a stockholders'
agreement which provides for voting agreements with respect to election of
directors, agreements requiring board approval for major transactions, and
registration rights for holders of our Series C preferred stock.
93
Election of additional directors
The stockholders' agreement provides for a board of 11 members. The holder of
the Series A preferred stock is entitled to designate two directors, the holders
of the Series B preferred stock are entitled to designate four directors, our
Chief Executive Officer is entitled to designate two directors, and the holders
of the Series C preferred stock are entitled to designate the remaining three
directors. If the percentage ownership of the holders of Series A and Series B
preferred stock changes, the numbers of directors that those holders are
entitled to designate may be adjusted.
Approval requirements
The stockholders' agreement provides that a majority of the Board, a majority
of the directors designated by the holder of the Series A preferred stock, and a
majority of the directors designated by the holders of the Series B preferred
stock must approve certain corporate actions, including:
. amendments to our certificate of incorporation, bylaws, and other
organizational documents;
. the amendment, termination, or waiver of any provision under the
recapitalization agreement;
. the issuance of equity securities;
. the grant or exercise of certain shares or equity interests, options,
warrants, or conversion, or other rights;
. any new agreements granting any preemptive, antidilution, or registration
rights with respect to any class of securities;
. the incurrence of any indebtedness over $25 million; and
. the replacement of independent auditors or making material changes to
accounting methodology.
The proposed amendments to our certificate of incorporation, if approved, will
have the effect of reducing the amount described in the penultimate bullet point
above from $25 million to $10 million.
Registration rights
The holders of the Series A, Series B, and Series C preferred stock each have
three rights to demand a registration of their securities having an aggregate
fair market value of at least $5 million beginning on the 90th day following the
successful launch and commercially viable operation, for a period of 60
consecutive days, of QuickBird 1, or any successor satellite, and unlimited
piggyback registration rights.
Transfer agent and registrar
The transfer agent and registrar for our common stock and preferred stock is
The Bank of New York.
Delaware law and certain charter provisions
Our certificate of incorporation does not provide for cumulative voting for
the election of directors. As a result, the holders of shares representing a
majority of the voting power of the shares present or represented at a meeting
in which directors are to be elected have the power to elect all the directors
to be elected at such meeting, and no person may be elected without the support
of holders of shares representing a majority of the voting power of the shares
present or represented at such meeting.
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the certificate
of incorporation or the bylaws. Our bylaws authorize the Chairman of the Board,
the Chief Executive Officer, the President, the board of directors, or
stockholders holding in the aggregate not less than 10% of the voting power of
the company to call a special meeting of stockholders.
94
Under Delaware law and our bylaws, stockholders may execute an action by
written consent in lieu of a stockholder meeting. Delaware law permits a
corporation to eliminate such actions by written consent. Elimination of
written consents of stockholders may lengthen the amount of time required to
take stockholder actions since certain actions by written consent are not
subject to the minimum notice requirement of a stockholders' meeting. The
elimination of stockholders' written consents, however, deters hostile takeover
attempts. Without the availability of stockholders' actions by written consent,
a holder or group of holders controlling a majority in interest of our capital
stock would not be able to amend our bylaws or remove directors pursuant to a
stockholder's written consent. Any such holder or group of holders would have
to call a stockholders' meeting and wait until the notice periods determined by
the board of directors pursuant to our bylaws prior to taking any such action.
Provisions of Delaware law
We do not currently have publicly-traded equity securities. In the future, if
we have publicly-traded equity securities, we would become subject to Section
203 of the Delaware General Corporation Law, a provision that, in general,
prohibits a publicly-held Delaware corporation from engaging in various
"business combination" transactions with any "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder," unless:
. prior to that date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder,
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the number
of shares outstanding, those shares owned by:
(1) persons who are directors and also officers and
(2) employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or
. on or subsequent to such time the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the outstanding
voting stock not owned by the interested stockholder.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge, or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
. subject to certain exceptions, any transaction that results in the issuance
or transfer by the corporation of any stock of the corporation to the
interested stockholder;
. any transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or
. the receipt of the interested stockholder of the benefit of any loans,
advances, guarantees, pledges, or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as an entity or
person who, together with affiliates and associates, beneficially owns (or
within three years did beneficially own) 15% or more of a corporation's voting
95
stock. The statute could prohibit or delay mergers or other takeover or change
in control attempts with respect to us and, accordingly, may discourage attempts
to acquire us, if we have publicly-traded equity securities. No assurance can
be given that we will have publicly-traded equity securities in the future.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material U.S. federal income tax
consequences to U.S. holders (as defined below) resulting from the ownership of
the notes. This summary is based upon the current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), its legislative history, Treasury
regulations, administrative pronouncements and judicial decisions, all of which
are subject to change, possibly with retroactive effect. This summary does not
purport to be a complete discussion of all U.S. federal income tax consequences.
This summary also does not address the tax consequences of the ownership of the
notes under state, local, or non-U.S. tax laws. In addition, this summary does
not address the tax consequences applicable to holders subject to special rules,
such as:
. broker-dealers;
. banks;
. insurance companies;
. tax-exempt entities;
. investors holding the notes as a part of a straddle, hedge, or conversion
transaction; or
. investors whose functional currency is not the U.S. dollar.
This summary applies only to a holder of a note if such holder is a "U.S.
Holder". You are a U.S. Holder if you are:
. an individual who is a citizen or resident of the United States;
. a corporation or partnership created or organized in the United States or
under the laws of the United States or any state thereof (including the
District of Columbia);
. an estate, the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source; or
. a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one of more United
States persons have the authority to control all substantial decisions of
the trust (or, under certain circumstances, a trust the income of which is
includible in gross income for U.S. federal income tax purposes regardless
of its source).
This discussion assumes that the notes are considered debt for U.S. federal
income tax purposes. This discussion also assumes that the notes are or will be
held as capital assets. Finally, a ruling from the IRS with respect to the tax
consequences of the ownership of the notes has not been received. As such,
there can be no assurance that the IRS will not take a different position.
PROSPECTIVE HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE TAX CONSEQUENCES DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX
LAWS.
96
Original issue discount
The notes were issued with original issue discount ("OID"). Except as
described under "Applicable high-yield discount obligations" below, you will be
required to include OID in income as interest periodically over the term of the
note before receipt of cash or other payments attributable to such income.
Since the cash payments of stated interest on the notes will not constitute
"qualified stated interest," you will not separately include such payments in
income upon receipt.
The amount of OID with respect to each note will be equal to the excess of its
"stated redemption price at maturity" over its issue price. Under the OID
Regulations, the "stated redemption price at maturity" of each note will include
all payments to be made in respect thereof, including any stated interest
payments, other than "qualified stated interest." Payments of qualified stated
interest are payments of interest which are unconditionally payable in cash or
property (other than debt instruments of the issuer) at least annually at a
qualifying rate, including a single fixed rate. Since no actual cash payments
will be made in respect of the notes until January 15, 2003, no interest
payments on the notes will constitute "qualified stated interest" and,
accordingly, the stated redemption price at maturity of each note will equal the
sum of all interest and principal payments that are intended to be made with
respect to the note.
A U.S. holder of a debt instrument issued with OID is required to include in
gross income for U.S. federal income tax purposes an amount equal to the sum of
the "daily portions" of OID for all days during the taxable year on which the
holder holds the debt instrument. The daily portions of OID required to be
included in a holder's gross income in a taxable year will be determined upon a
constant-yield to maturity basis by allocating to each day during the taxable
year on which the holder holds the debt instrument a pro-rata portion of the OID
on such debt instrument which is attributable to the "accrual period" in which
such day is included. Accrual periods with respect to a note may be of any
length and may vary in length over the term of the note as long as (i) no
accrual period is longer than one year, and (ii) each scheduled payment of
interest or principal on the note occurs on either the final or first day of an
accrual period. The amount of the OID attributable to each "accrual period"
will be the product of the "adjusted issue price" at the beginning of such
accrual period and the "yield to maturity" of the debt instrument (stated in a
manner appropriately taking into account the length of the accrual period). The
"adjusted issue price" of a debt instrument at the beginning of an accrual
period is defined generally as the issue price of the debt instrument plus the
aggregate amount of OID that accrued in all prior accrual periods, less any cash
payments on the debt instrument. The "yield to maturity" is the discount rate
that, when used in computing the present value of all payments to be made under
the notes, produces an amount equal to the issue price of the notes.
Accordingly, you will be required to include OID in respect of a note in gross
income for U.S. federal income tax purposes in advance of the receipt of cash in
respect of such income. The amount of OID allocable to an initial short accrual
period may be computed using any reasonable method if all other accrual periods,
other than a final short accrual period, are of equal length. The amount of OID
allocable to the final accrual period at maturity of the note is the difference
between (x) the amount payable at the maturity of the note, and (y) the note's
adjusted issue price as of the beginning of the final accrual period.
Under the OID Regulations, an issuer of a debt instrument may be deemed to
redeem such instrument prior to maturity if the exercise of that redemption
right would reduce the instrument's yield to maturity. If we were deemed to
redeem the notes, as a result of these rules, the timing and amount of OID
accrued would be different.
Acquisition premium
A U.S. holder who purchases a note for an amount that is greater than the
adjusted issue price of such note, but that is less than or equal to the sum of
the amounts payable on the note after the purchase date (other than qualified
stated interest) will be considered to have purchased such note at an
"acquisition premium." To the extent a holder has acquisition premium with
respect to a note, the holder will reduce the OID otherwise includable for each
accrual period by an amount equal to the product of (i) the amount of such OID
otherwise includable for such period, and (ii) a fraction, the numerator of
which is the acquisition premium and the denominator of which is the excess of
the amounts payable on the note after the purchase date over the adjusted issue
price.
97
Market discount
Any gain or loss on a disposition of a note would generally be capital gain or
loss. However, a subsequent purchaser of a note who did not acquire the note at
its original issue, and who acquires such note at a price that is less than the
adjusted issue price may be required to treat the note as a "market discount
bond". Any recognized gain on a disposition of the note would then be treated
as ordinary income to the extent that it does not exceed the "accrued market
discount" on the note which has not previously been included in income.
In general, any market discount will be considered to accrue ratably during
the period from the date of acquisition to the maturity date of the note.
However, an election may be made to accrue market discount on the basis of a
constant interest rate in lieu of ratable accrual. In addition, there are rules
deferring the deduction of all or part of the interest expense on indebtedness
incurred or continued to purchase or carry such bond, and permitting a holder to
elect to include accrued market discount in income on a current basis.
Applicable high-yield discount obligations
If the yield on the notes is at least five percentage points above the
applicable federal rate and the notes were issued with "significant original
issue discount," otherwise deductible interest and original issue discount will
not be deductible with respect thereto until such interest is actually paid. In
addition, if the yield of the notes is more than six percentage points above the
applicable federal rate, (i) a portion of such interest corresponding to the
yield in excess of six percentage points above the applicable federal rate will
not be deductible by us at any time, and (ii) a corporate holder may be entitled
to treat the portion of the interest that is not deductible by us as a dividend
for purposes of qualifying for the dividends received deductions provided for by
the tax code, subject to applicable limitations.
Sale, redemption, or retirement
If a note is redeemed, sold, or otherwise disposed of, a U.S. holder generally
will recognize gain or loss equal to the difference between the amount realized
on the sale or other disposition of such note (to the extent such amount does
not represent accrued but unpaid interest) and such holder's tax basis in the
note. A U.S. holder's tax basis in a note equals the initial purchase price of
a note by such holder, increased by the amount of any OID previously included in
income by such holder, and reduced by any payments of amounts on the notes not
constituting "qualified stated interest." Such gain or loss generally will be
capital gain or loss, provided that such holder has held the note as a capital
asset. A capital gain or loss will be a long-term capital gain or loss if the
holder's holding period is more than 12 months. For individual holders, long-
term capital gains are subject to a maximum federal income tax rate of 20
percent. The deduction of capital losses may be subject to limitation. In
addition, a holder will recognize interest income to the extent of any accrued
but unpaid interest on the notes not previously recognized by the holder at the
time of the redemption or sale.
Backup withholding
A holder may be subject, under certain circumstances, to backup withholding at
a 31% rate with respect to "reportable payments" on the notes. This withholding
generally applies only if the holder (i) fails to furnish his or her social
security or other taxpayer identification number ("TIN"), (ii) furnishes an
incorrect TIN, (iii) is notified by the IRS that he or she has failed to report
proper payments of interest and dividends and the IRS has notified us the holder
is subject to backup withholding, or (iv) fails, under certain circumstances, to
provide a certified statement, signed under penalty of perjury, that the TIN
provided is his or her correct number and that he or she is not subject to
backup withholding. Any amount withheld from payment to a holder under the
backup withholding rules is allowable as a credit against such holder's federal
income tax liability, provided that the required information is furnished to the
IRS. Certain holders (including, among others, corporations) are not subject to
backup withholding. Holders should consult their tax advisors as to their
qualifications for exemption from backup withholding and the procedure for
obtaining such an exemption.
98
Information reporting
We are required to furnish certain information to the IRS and will furnish
annually to record holders of the notes information with respect to interest
paid (and OID accrued) on the notes during the calendar year. The OID
information will be based upon the adjusted issue price of the notes as if the
U.S. Holder were the original holder of the notes. No assurance can be given
that the IRS will not challenge the accuracy of the reported information.
Holders who purchase the notes for an amount other than the adjusted issue price
and/or on a date other than the last day of an accrual period will be required
to determine for themselves the amount of OID, if any, they are required to
include in gross income for U.S. federal income tax purposes.
PLAN OF DISTRIBUTION
This prospectus is to be used by Morgan Stanley Dean Witter in connection with
offers and sales of the notes in market-making transactions at negotiated prices
relating to prevailing market prices at the time of sale. Morgan Stanley Dean
Witter may act as principal or agent in such transactions. Morgan Stanley Dean
Witter has no obligation to make a market in the notes, and may discontinue its
market-making activities at any time without notice, at its sole discretion.
There is currently no established public market for the notes. We do not
currently intend to apply for listing of the notes on any securities exchange.
Therefore, any trading that does develop will occur on the over-the-counter
market. We have been advised by Morgan Stanley Dean Witter that it intends to
make a market in the notes but it has no obligation to do so and any market-
making activity, if it occurs, may be discontinued at any time. No assurance
can be given that an active public market for the notes will develop.
Morgan Stanley Dean Witter acted as placement agent in connection with the
original private placement of the notes and received a placement fee in
connection therewith. As of May 15, 2001, Morgan Stanley Dean Witter and its
affiliated entities collectively beneficially own $25.2 million in principal
amount at maturity of the notes, as well as approximately 60% of our Series B
preferred stock, 1.3% of our Series C preferred stock, and one share of our
common stock, which ownership represents approximately 22.8% of our outstanding
common stock on an as-converted basis as of May 15, 2001. On a pro forma basis
giving effect to the expected issuance of shares of Series C preferred stock in
our recapitalization transactions and in connection with our vendor financing as
of May 15, 2001, Morgan Stanley Dean Witter and its affiliated entities
collectively would beneficially own approximately 60% of our Series B preferred
stock, 11% of our Series C preferred stock, and one share of our common stock,
which ownership would represent approximately 27.1% of our outstanding common
stock on an as-converted basis.
Although there are no agreements to do so, Morgan Stanley Dean Witter, as well
as others, may act as broker or dealer in connection with the sale of the notes
contemplated by this prospectus and may receive fees or commissions in
connection therewith.
We have agreed to indemnify Morgan Stanley Dean Witter, and its affiliates,
against certain liabilities under the Securities Act or to contribute to
payments that Morgan Stanley Dean Witter or its affiliates may be required to
make in respect of such liabilities.
LEGAL MATTERS
The validity of the notes offered hereby have been passed upon by Baker &
McKenzie.
EXPERTS
The consolidated financial statements of EarthWatch Incorporated and
subsidiaries as of December 31, 1999 and 2000, and for each of the three years
in the period ended December 31, 2000 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
99
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1/A, relating to the notes
offered by this prospectus, with the Securities and Exchange Commission, or SEC.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. For further
information with respect to us and the notes offered by this prospectus,
reference is made to the registration statement, exhibits, and schedules. A
copy of the registration statement may be inspected by anyone without charge at
the Public Reference Room maintained by the SEC at 450 Fifth Street, NW,
Judiciary Plaza, Washington, D.C. 20549, and copies of all or any part thereof
may be obtained from the SEC upon payment of certain fees prescribed by the SEC.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains a World Wide Web site that
contains reports, proxy and information statements, and other information filed
electronically with the SEC. The address of the site is http://www.sec.gov.
100
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Operations F-4
Consolidated Statement of Cash Flows F-5
Consolidated Statement of Stockholders' Equity (Deficit) F-6
Notes to Consolidated Financial Statements F-7
F-1
EarthWatch Incorporated
(A Development Stage Company)
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
EarthWatch Incorporated:
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 at
December 31, 1999 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, 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 the 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 suffered a recent satellite launch failure
and, in accordance with the terms of its outstanding debt instruments, has
initiated a tender offer for such instruments with the proceeds from the related
launch insurance policies. These events raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters 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 29, 2001
F-2
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Balance Sheet
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, March 31,
------------------------------
1999 2000 2001
------------- ------------- -------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 82,193,314 $ 5,725,779 $ 27,780,718
Accounts receivable, net of allowance for doubtful accounts of $90,646,
zero and $81,148, respectively 768,029 251,408 1,512,061
Insurance proceeds - restricted -- 265,000,000 --
Investment securities 3,026,480 -- --
Investment securities - restricted 28,374,848 6,295,382 236,760,935
Other current assets 968,769 398,101 568,722
------------- ------------- -------------
Total current assets 115,331,440 277,670,670 266,622,436
------------- ------------- -------------
Property, plant, and equipment:
Construction in progress 143,716,962 89,716,474 94,881,022
Computer equipment and software 12,275,986 15,365,444 15,370,977
Machinery and equipment 5,665,918 5,770,640 5,770,640
Furniture and fixtures 1,113,073 1,281,911 1,281,474
------------- ------------- -------------
Total property, plant, and equipment 162,771,939 112,134,469 117,304,113
Accumulated depreciation and amortization (12,031,861) (15,419,714) (16,162,614)
------------- ------------- -------------
Net property, plant, and equipment 150,740,078 96,714,755 101,141,499
------------- ------------- -------------
Debt issuance costs, net 5,069,065 4,682,127 4,504,223
Other assets 328,537 310,664 281,591
------------- ------------- -------------
TOTAL ASSETS $ 271,469,120 $ 379,378,216 $ 372,549,749
============= ============= =============
LIABILITIES, MANDATORY REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Current Liabilities:
Accounts payable $ 12,307,440 $ 11,289,385 $ 3,721,184
Accounts payable to related parties 645,464 982,232 690,149
Accrued expenses 1,503,408 3,988,060 4,070,551
Current portion of long-term debt 92,743 195,484,650 203,591,898
------------- ------------- -------------
Total current liabilities 14,549,055 211,744,327 212,073,782
Long-term debt, net 167,055,390 -- --
------------- ------------- -------------
Total liabilities 181,604,445 211,744,327 212,073,782
------------- ------------- -------------
Mandatorily redeemable preferred stock due 2009
7% Cumulative convertible - Series A; $.001 par value; 10,000,000 shares
authorized; 7,505,765, 8,051,273, and 8,192,170 shares issued and
outstanding as of December 31, 1999 and 2000, and March 31, 2001,
respectively; aggregate liquidation preference of $28,672,595 as of
March 31, 2001 25,478,661 27,473,699 27,987,928
7% Cumulative convertible - Series B; $.001 par value; 10,000,000 shares
authorized; 7,505,765, 8,051,273, and 8,192,170 shares issued and
outstanding as of December 31, 1999 and 200, and March 31, 2001,
respectively; aggregate liquidation preference of $28,672,595
as of March 31, 2001 25,478,661 27,473,699 27,987,928
8% Cumulative convertible - series C; $.001 par value; 25,000,000 shares
authorized 22,987,305, 25,000,000 and 25,000,000 shares issued and
outstanding as of December 31, 1999 and 2000, and March 31, 2001,
respectively; aggregate liquidation preference of $89,440,001 as of
March 31, 2001 79,021,011 86,298,993 88,199,432
------------- ------------- -------------
Total mandatorily redeemable preferred stock 129,978,333 141,246,391 144,175,288
------------- ------------- -------------
Stockholders' equity (deficit)
Common stock; $.001 par value; 100,000,000 shares authorized, 1,
195,420, and 215,438 shares issued and outstanding at December 31, 1999
and 2000, and March 31, 2001, respectively -- 195 215
Additional paid-in capital 71,587,153 61,824,829 58,902,055
Deferred stock compensation -- (534,600) (493,375)
Accumulated other comprehensive loss (115,953) -- --
Deficit accumulated during the development stage (111,584,858) (34,902,926) (42,108,216)
------------- ------------- -------------
Total stockholders' equity (deficit) (40,113,658) 26,387,498 16,300,679
------------- ------------- -------------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' (DEFICIT) $ 271,469,120 $ 379,378,216 $ 372,549,749
============= ============= =============
The accompany notes are an integral part of these consolidated financial
statements.
F-3
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Statement of Operations
- --------------------------------------------------------------------------------
Period from
January 1, 1995
(Inception) to
Year Ended December 31, Three MonthsEnded March 31, March 31,
----------------------------------------- ----------------------------
1998 1999 2000 2000 2001 2001
------------ ------------ ------------ ------------- ------------ -------------
(unaudited) (unaudited) (unaudited)
Revenue $ 1,808,573 $ 5,913,310 $ 3,336,052 $ 2,019,248 $ 3,817,744 $ 20,205,235
Cost of goods sold 1,904,867 5,120,575 2,098,513 1,343,535 2,970,050 16,110,289
------------ ------------ ------------ ------------ ------------ -------------
Gross profit (loss) (96,294) 792,735 1,237,539 675,713 847,694 4,094,946
------------ ------------ ------------ ------------ ------------ -------------
Expenses:
Selling, general, and administrative 4,975,232 12,762,636 15,332,973 3,015,742 2,794,366 52,874,881
Research and development 9,112,745 6,956,244 13,442,214 2,379,624 2,158,457 74,094,239
Loss (gain) from impairment of fixed
assets, net of insurance recoveries 599,015 - (107,607,601) - - (81,489,890)
Gain from arbitration settlement (1,514,776) - - - - (1,514,776)
------------ ------------ ------------ ------------ ------------ -------------
Total expenses 13,172,216 19,718,880 (78,832,414) 5,395,366 4,952,823 43,964,454
------------ ------------ ------------ ------------ ------------ -------------
Gain (loss) from operations (13,268,510) (18,926,145) 80,069,953 (4,719,653) (4,105,129) (39,869,508)
Interest expense (1,339,599) (5,481,820) (4,492,399) (1,984,390) (4,726,377) (16,215,287)
Interest income 1,688,554 4,089,199 4,104,378 1,332,397 1,626,216 16,976,579
Income (loss) before provision ------------ ------------ ------------ ------------ ------------ -------------
for income taxes (12,919,555) (20,318,766) 79,681,932 (5,371,646) (7,205,290) (39,108,216)
Provision for income taxes - - (3,000,000) - - (3,000,000)
------------ ------------ ------------ ------------ ------------ -------------
Net income (loss) (12,919,555) (20,318,766) 76,681,932 (5,371,646) (7,205,290) (42,108,216)
Mandatorily redeemable preferred stock
dividends and accretion - (6,690,537) (11,268,058) (2,809,259) (2,927,755) (20,886,350)
------------ ------------ ------------ ------------ ------------ -------------
Net income (loss) attributable to
common stockholders $(12,919,555) $(27,009,303) $ 65,413,874 $ (8,180,905) $(10,133,045) $ (62,994,566)
============ ============ ============ ============ ============ =============
The accompany notes are an integral part of these consolidated financial
statement.
F-4
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
Year Ended December 31, Three Months Ended March 31,
----------------------------------------- ------------------------------
1998 1999 2000 2000 2001
------------ ------------- ------------- ------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES (unaudited) (unaudited)
Net income (loss) $(12,919,555) $(20,318,766) $ 76,681,932 $ (5,371,646) $ (7,205,290)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation expense 4,383,188 3,885,611 3,775,680 894,225 742,900
Non-cash interest expense 789,298 4,752,339 4,428,974 1,980,668 4,725,976
Non-cash (gain) loss from disposals and
impairments of property plant, and
equipment, net of insurance recoveries 667,358 3,346 (107,607,601) - -
Non-cash stock compensation - - 921,400 - 41,225
Changes in assets and liabilities:
Accounts receivable, net (670,097) (47,995) 516,621 684,691 (1,260,653)
Other assets 1,243,312 (458,088) 588,541 562,068 (141,548)
Accounts payable (2,153,712) 8,001,287 (1,018,055) (4,379,717) (7,568,201)
Accounts payable - related parties (2,484,767) (763,291) 336,768 (489,884) (292,083)
Accrued expenses 280,716 (1,474,643) 2,484,652 49,872 83,633
------------ ------------ ------------- ------------ -------------
Net cash provided (used) by operating
activities (10,864,259) (6,420,200) (18,891,088) (6,069,723) (10,874,041)
------------ ------------ ------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities (882,000) (27,686,994) - - (236,760,935)
Proceeds from maturities of investment securities 5,431,000 5,853,910 25,105,946 2,814,866 6,295,382
Proceeds from sales of property, plant, and
equipment 3,959,280 1,213 - - -
Insurance proceeds from loss of satellites 29,000,000 - - - 265,000,000
Constuction in progress additions (25,912,268) (72,681,412) (78,888,733) (14,207,685) (1,586,106)
Other property, plant, and equipment additions (124,893) (2,557,024) (3,750,845) (1,592,802) (5,096)
------------ ------------ ------------- ------------ -------------
Net cash (used) provided by investing
activities 11,471,119 (97,070,307) (57,533,632) (12,985,621) 32,943,245
------------ ------------ ------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term notes, net - 97,450,086 - - -
Proceeds from issuance of preferred and common
stock, net 50,872 83,512,114 49,929 11,260 5,001
Cash acquired in merger - - - - -
Principal payments on debt (2,023,118) (322,984) (92,744) (30,164) (19,266)
------------ ------------ ------------- ------------ -------------
Net cash provided (used) by financing
activities (1,972,246) 180,639,216 (42,815) (18,904) (14,265)
------------ ------------ ------------- ------------ -------------
Net increase (decrease) in cash and cash
equivalents (1,365,386) 77,148,709 (76,467,535) (19,074,248) 22,054,939
Cash and cash equivalents, beginning of period 6,409,991 5,044,605 82,193,314 82,193,314 5,725,779
------------ ------------ ------------- ------------ -------------
Cash and cash equivalents, end of period $ 5,044,605 $ 82,193,314 $ 5,725,779 $ 63,119,066 $ 27,780,718
============ ============ ============= ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 6,344,475 $ 3,150,575 $ 3,153 $ 3,481 $ 401
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES AND FINANCING
Assets acquired pursuant to capital-lease and
financing obligations $ - $ - $ - $ - $ -
Net book value of assets acquired in merger - - - - -
Liabilities assumed in merger - - - - -
Stockholder advances converted to equity - - - - -
Property in-kind contributed by stockholder - - - - -
Non-cash interest capitalized in construction in
progress 6,056,000 11,340,000 24,328,936 5,295,655 3,578,442
Issuance of mandatorily redeemable preferred
stock - 39,765,364 10,940,902 2,727,967 -
Period from
January 1, 1995
(Inception) to
March 31,
2001
----------------
CASH FLOWS FROM OPERATING ACTIVITIES (unaudited)
Net income (loss) $ (42,108,216)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation expense 17,744,645
Non-cash interest expense 14,823,356
Non-cash (gain) loss from disposals and
impairments of property plant, and equipment,
net of insurance recoveries (79,886,959)
Non-cash stock compensation 962,625
Changes in assets and liabilities:
Accounts receivable, net (512,936)
Other assets (627,939)
Accounts payable 3,208,575
Accounts payable - related parties 690,149
Accrued expenses 1,944,903
--------------
Net cash provided (used) by operating
activities (83,761,797)
--------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities (281,909,267)
Proceeds from maturities of investment securities 44,990,238
Proceeds from sales of property, plant, and
equipment 4,216,978
Insurance proceeds from loss of satellites 294,000,000
Constuction in progress additions (267,440,060)
Other property, plant, and equipment additions (15,566,564)
--------------
Net cash provided (used) by investing
activities (221,708,675)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term notes, net 145,718,374
Proceeds from issuance of preferred and common
stock, net 191,177,335
Cash acquired in merger 916,457
Principal payments on debt (4,560,976)
--------------
Net cash provided (used) by financing
activities 333,251,190
--------------
Net increase (decrease) in cash and cash 27,780,718
equivalents
Cash and cash equivalents, beginning of period -
--------------
Cash and cash equivalents, end of period $ 27,780,718
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 12,672,062
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES AND FINANCING
Assets acquired pursuant to capital-lease and
financing obligations $ 4,599,935
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 51,118,378
Issuance of mandatorily redeemable preferred
stock 50,706,266
F-5
EarthWatch Incorporated
(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 (unaudited) - - - - - -
Amortization of deferred stock
compensation (unaudited) - - - - - -
Mandatorily redeemable preferred
stock dividends and
accretion (unaudited) - - - - - -
Net and comprehensive
income (loss) (unaudited) - - - - - -
----------- ------------ ---------- ----------- ---------- ----------
Balance at March 31, 2001
(unaudited) - $ - - $ - - $ -
=========== ============ ========== =========== ========== ==========
Convertible
Series D Additional
Preferred Stock Common Stock Paid-in
------------------------ ------------------------
Shares Amount Shares Amount Capital Other
---------- ---------- ---------- ---------- ------------ ------------
Balance at January 1, 1995
(inception) - $ - - $ - $ - $ -
Issuance of stock in exchange
for future cash contributions
and contributions of property
in-kind - - 1 - - (14,400,000)
Contribution of net assets
in merger - - - - - -
Issuance of common stock for
services and for stock
options exercised - - 79,500 63,600 - -
Issuance of preferred stock - - - - - -
Property in-kind, conversion
of debt, and cash
contributions from
stockholder - - - - - 13,381,523
Net and comprehensive income
(loss) - - - - - -
---------- ---------- ---------- ---------- ------------ ------------
Balance at December 31, 1995 - - 79,501 63,600 - (1,018,477)
Restatement of capital stock
and additional paid-in
capital for reincorporation
as of January 1, 1996 - - - (63,521) 38,599,438 -
Issuance of stock in exchange
for property in-kind and
other, net - - - - 2,288,561 -
Issuance of preferred stock 400,000 400 - - 69,833,305 -
Property in-kind contributed
by stockholder - - - - (25,944) 1,018,477
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 (1,456,000)
Amortization of deferred stock
compensation - - - - - 921,400
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 (534,600)
Issuance of preferred and common
stock for stock options
exercised (unaudited) - - 20,018 20 4,981 -
Amortization of deferred stock
compensation (unaudited) - - - - - 41,225
Mandatorily redeemable preferred
stock dividends and
accretion (unaudited) - - - - (2,927,755) -
Net and comprehensive
income (loss) (unaudited) - - - - - -
---------- ---------- ---------- ---------- ------------ ------------
Balance at March 31, 2001
(unaudited) - $ - 215,438 $ 215 $ 58,902,055 $ (493,375)
========== ========== ========== ========== ============ ============
Deficit Accumulated
Accumulated Total
Other During the Stockholders'
Comprehensive Development Equity
Income (Loss) Stage (Deficit)
------------- ------------- -------------
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 - - 551,908
Issuance of common stock for
services and stock 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
Net and comprehensive income
(loss) - (3,909,208) (3,909,208)
------------- ------------- -------------
Balance at December 31, 1995 - (3,909,208) 33,690,858
Restatement of capital stock
and additional paid-in
capital for reincorporation
as of January 1, 1996 - - -
Issuance of stock in exchange
for property in-kind and
other, net - - 2,289,096
Issuance of preferred stock - - 69,840,805
Property in-kind contributed
by stockholder - - 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 - - -
Amortization of deferred stock
compensation - - 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 - (34,902,926) 26,387,498
Issuance of preferred and common
stock for stock options
exercised (unaudited) - - 5,001
Amortization of deferred stock
compensation (unaudited) - - 41,225
Mandatorily redeemable preferred
stock dividends and
accretion (unaudited) - - (2,927,755)
Net and comprehensive
income (loss) (unaudited) (7,205,290) (7,205,290)
------------- ------------- -------------
Balance at March 31, 2001
(unaudited) $ - $ (42,108,216) $ 16,300,679
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. General Information and Financial Condition
EarthWatch Incorporated and its subsidiaries ("EarthWatch" 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") (the "Merger") (See "Note 3--Merger Agreement"). 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 November 20, 2000, the QuickBird 1 satellite was launched from
Plesetsk, Russia. QuickBird 1 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. The Company is currently in the process of
negotiating, with new and existing investors, debt and equity financing
with which it will fund future operations. The Company's ability to
continue as a going concern and to generate positive future operating and
net cash flows is dependent upon its ability to successfully negotiate such
financing, launch, insure and operate QuickBird 2, and to produce and
market digital imagery in commercial quantities.
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.
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 ten
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 fair values or undiscounted cash flows, in the event fair value is
not readily determinable, whenever events or changes in circumstances occur
which indicate the carrying amount of an asset may not be recoverable.
Impairments are recognized as the excess of the carrying amount of the
asset over its fair value as estimated, based on the present value of
expected future cash flows.
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
F-7
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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)
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards
for reporting comprehensive income and its components in financial
statements. 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 ($12,956,526), ($20,478,148), and
$76,797,885 for the years ended December 31, 1998, 1999, and 2000,
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 debt, approximate fair value due to their short-term
maturities. The Company's investment securities were accounted for at fair
value. The fair value of the Company's debt instruments was approximately
$225,889,000 at December 31, 2000.
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. The Company's restricted accounts
receivable balance was with various large insurance institutions, the full
amount of which was received as of March 26, 2001 (see Note 6).
Revenue percentages from each of the Company's significant customers
were as follows for the years ended December 31:
1998 1999 2000
---- ---- ----
Customer A 63.1% 90.1% 38.6%
Customer B 26.4% 9.1% 54.3%
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.
F-8
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 provides specific guidance, among other things, as
to the recognition of revenue related to up-front non-refundable fees and
service charges received in connection with a contractual arrangement. The
adoption of SAB No. 101 did not have a material impact on the financial
condition or results of operations of the Company.
As of July 1, 2000, FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of
Accounting Principles Board Opinion No. 25," which clarifies certain issues
related to the accounting for stock-based compensation, became effective.
The adoption of this standard did not have a material impact on the
financial condition or results of operations of the Company.
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," was issued in June 1998 and requires companies to value
derivative financial instruments, including those used for hedging
purposes, at current market values with the impact of any change in market
value being charged against earnings in each period. In addition, SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," was issued in June 2000 and amends SFAS No. 133 to provide
additional implementation guidance related to SFAS No. 133. The Company
will adopt both pronouncements in the first quarter of 2001 and anticipates
that the adoption will not have a material impact on its consolidated
financial position or results of operations.
3. Merger Agreement
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.
4. Investment Securities
In connection with the issuance of the 12 1/2% senior notes (the
"Senior Notes"), due March 1, 2001, the Company purchased U.S. Treasury
notes to be held in escrow as security for the first six semi-annual
interest payments on the Notes. During the third quarter of 1999, these
securities were released from escrow in connection with the exchange for 12
1/2% notes due March 1, 2005. During the first quarter of 2000, they were
sold and converted to cash.
Gross
Unrealized
Investment Securities Cost Gains (Losses) Fair Value
--------------------- ---- ------------- ----------
U.S. Government securities as of December 31, 1999:
Maturing in one year or less. $3,078,360 ($51,880) $3,026,480
========== ======== ==========
U.S. Government securities as of December 31, 2000:
Maturing in one year or less. (none) (none) (none)
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
Investment Securities - Restricted Cost Gains (Losses) Fair Value
--------------------------------- ---- ------------- ----------
U.S. Government securities as of December 31, 1999:
Maturing in one year or less $28,438,921 ($64,073) $28,374,848
=========== ======== ===========
U.S. Government securities as of December 31, 2000:
Maturing in one year or less $ 6,295,382 (none) $ 6,295,382
=========== ===========
F-9
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Construction In Progress, Losses from 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:
December 31, 1999 December 31, 2000
----------------- -----------------
QuickBird satellites $125,414,700 $55,952,495
Digital Globe software 14,809,982 26,570,191
Ground station equipment 3,492,280 7,193,788
------------ -----------
$143,716,962 $89,716,474
============ ===========
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 QuickBird 1 satellite was launched from
Plesetsk, Russia. QuickBird 1 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.
6. 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 rank pari passu
in right of payment with all existing and future unsubordinated unsecured
indebtedness of the Company.
Recapitalization
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 new senior notes (the "New Senior Notes") replaced the
Senior Notes, extending the maturity from March 1, 2001 to March 1, 2005,
and the indenture trustee for the Senior Notes authorized the release of
all collateral securing the Senior Notes upon the securing of the New
Senior Notes with the proceeds of satellite insurance for QuickBird 1. The
Company is to accrete the next six semi-annual interest payments, which
will result in an increase of the principal of the securities to $72
million. The interest rate remains at 12 1/2%. The Company recorded an
additional discount on the New Senior Notes equal to the 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.
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.
The Company may redeem any of the Senior Discount Notes beginning on
July 15, 2004. 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
F-10
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 Notes and Senior
Discount Notes are secured by the insurance policies covering the launch of
QuickBird 1.
As of February 28, 2001, the trustees for our 12 1/2% notes and our
13% notes had received the majority of the $265 million in proceeds from
our insurance on QuickBird 1, and, accordingly, initiated a tender offer to
purchase these notes at a purchase price equal to their accreted value,
plus any accrued and unpaid interest to the date of purchase. As of March
26, 2001, the full amount of the insurance proceeds had been received.
The Company's debt is comprised of the following at December 31:
1999 2000
---- ----
13% Senior Discount Notes, net of unamortized discount of
$86,681,504, and $64,852,862, respectively, effective rate of 15.9% $112,318,496 $ 134,147,138
12 1/2% Senior Notes, net of unamortized discount of $17,321,394
and $10,731,089, respectively, effective rate of 12.9% 54,678,606 61,268,911
Capital-lease obligations 151,031 68,601
------------ -------------
167,148,133 195,484,650
Less: current portion (92,743) (195,484,650)
------------ -------------
$167,055,390 $ --
============ =============
7. Stockholders' Equity
In conjunction with the Company's reincorporation in Delaware on
August 21, 1995, the Company changed the par value of its outstanding
common stock ("Common Stock") and all convertible preferred stock from no
par value to a par value of $0.001.
Recapitalization
A special meeting of the Company's stockholders was called in April
1999 to discuss a preferred stock financing and recapitalization of the
Company. The stockholders approved and adopted an Amended and Restated
Certificate of Incorporation and a Recapitalization Agreement, which
resulted in three new series of EarthWatch Preferred Stock. At the closing,
shares of the Company's new Series A 7% Cumulative Convertible Redeemable
Preferred Stock ("Series A Convertible Preferred Stock"), Series B 7%
Cumulative Convertible Redeemable Preferred Stock ("Series B Convertible
Preferred Stock"), and new Common Stock were sold and issued for an
aggregate cash payment of $50,000,000. In accordance with the
Recapitalization Agreement, all outstanding shares of Common Stock and
former Series A, B, C, and D preferred stock were exchanged (at a 1 to
.44116 ratio for all outstanding Preferred Stock and at a 1 to .210202
ratio for all outstanding Common Stock) for an aggregate of 11,042,075
shares of new Series C Convertible Preferred Stock.
Additional Funding
As discussed in Note 6-Debt, 199,000 units, each of which consisted of
one Senior Discount Note and 49.095 shares of Series C Convertible
Preferred Stock were issued in July 1999.
Description of EarthWatch Stock
The following description summarizes certain terms of the Company's
capital stock and certain provisions of the Company's amended and restated
certificate of incorporation and bylaws.
Old Series A and B Convertible Preferred Stock
Each share of Series A Convertible Preferred Stock (the "Old Series A
Preferred Stock") and Series B Convertible Preferred Stock (the "Old Series
B Preferred Stock") was, as of December 31, 1998, convertible into one
share of Common Stock, subject to future adjustment in the event of
recapitalizations or dividends of Common Stock. The holders of Old Series A
Preferred Stock had the contractual right to receive additional shares upon
certain issuances of stock for a price less than $4.00 per share. The
conversion ratio of Old Series B Preferred Stock was subject to adjustment
upon certain issuances of stock for a price less than $10.00 per share.
F-11
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
All Old Series A and B Preferred Stock, by their terms, were
convertible at the option of the holder at any time and converted into
Common Stock simultaneously upon an initial public offering with gross
proceeds of at least $5,000,000 or with the written notice to the Company
from holders of a majority of the outstanding shares of either of the two
series of participating preferred stock consenting thereto. Upon
conversion, all accrued and unpaid dividends, whether or not declared, were
canceled.
All Old Series A and B Preferred Stock were voting and had liquidation
preferences (Old Series A Stock and Series B Stock at $4.00 and $10.00 per
share, respectively, plus an amount equal to all declared but unpaid
dividends on each share).
When, and only if, dividends were declared by the Company's Board of
Directors, the Series A Stock and Series B Stock participated pari passu
and had a right to receive dividends of $0.32 per share per annum prior to
any dividends paid to holders of Common Stock. Upon the distribution to
each common stockholder of an amount per share equal to $4.00 divided by
the Old Series A Stock conversion ratio, the Old Series A Stock, Old Series
B Stock, and Common Stock shared in any remaining liquidation distributions
on a pro rata as-converted basis.
Old Series C Senior Convertible Preferred Stock Issuance
On April 30, 1996, the Company issued 7,000,000 shares of 12% Series C
Convertible Senior Preferred Stock (the "Old Series C Preferred Stock") at
a price of $10.00 per share. Holders of the Old Series C Preferred Stock
were entitled to dividends at an annual rate of 12% of the accreted
liquidation preference on a quarterly basis commencing June 30, 1996. All
unpaid dividends compounded quarterly at the annual dividend rate. The
Company did not declare or pay in cash the dividends accrued as of December
31, 1998. Accordingly, the liquidation preference increased from $10.00 to
$13.72 per share as of December 31, 1998.
Each share of Old Series C Preferred Stock was convertible, at the
option of the holder, at any time into one share of Common Stock of the
Company, subject to adjustment in certain events. Accrued and unpaid
dividends may be converted concurrently with the conversion of the Old
Series C Preferred Stock, at the option of the holder only upon certain
events, at a conversion price equal to 85% of the market price of the
Company's Common Stock.
Old Series D Convertible Preferred Stock
The Old Series D Convertible Preferred Stock (the "Old Series D
Preferred Stock") had the same terms as the Old Series B Stock but excluded
anti-dilution protection.
Series A and Series B Convertible Redeemable Preferred Stock
As of December 31, 2000, there were 8,051,273 shares of Series A
Convertible Preferred Stock outstanding held of record by one stockholder
and 8,051,273 shares of Series B Convertible Preferred Stock outstanding
held of record by six stockholders.
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 18, 2002. Such dividends are
payable quarterly on March 31, June 30, September 30, and December 31, and
commenced on June 30, 1999. Such dividends may be paid, subject to certain
limitations, at the Company's option, either in cash or in additional
shares of Series A Convertible Preferred Stock or Series B Convertible
Preferred Stock, as applicable, until June 15, 2002. After June 15, 2002,
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, 2002, 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
F-12
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 2002, 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, 2002, 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, 2002, each share of Series A Preferred Stock
and Series B Preferred Stock shall not be convertible into common stock.
Anti-dilution. The conversion price of the Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock is subject to
adjustment under certain circumstances, including upon any subsequent
issuance of capital stock. The issuance of the Series C Convertible
Preferred Stock resulted in an adjustment in the conversion prices of the
Series A and Series B Convertible Preferred Stock.
Redemption. The Company is required to redeem all of the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock
outstanding on March 31, 2009, at a redemption price equal to 100% of the
then existing applicable liquidation preference, plus accrued and unpaid
dividends to the date of redemption, subject to the legal availability of
funds therefor.
Voting Rights. Each holder of Series A Convertible Preferred Stock is
entitled to .65 (subject to adjustment) votes per share held (on an as-
converted basis) and each holder of Series B Convertible Preferred Stock is
entitled to 1.35 (subject to adjustment) votes per share held (on an as-
converted basis).
Board Representation. The holders of Series A Convertible Preferred
Stock has the right to elect two persons to the board of directors and the
holders of the Series B Convertible Preferred Stock have the right to elect
four persons to the board of directors.
Series C Convertible Redeemable Preferred Stock
As of December 31, 2000, there were 25,000,000 shares of Series C
Convertible Preferred Stock outstanding.
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, 2002.
Such dividends are payable quarterly on March 31, June 30, September 30,
and December 31, and commenced on June 30, 1999. Until June 15, 2002, 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, 2002, 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, 2002, 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.
Conversion. Until June 15, 2002, 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, 2002, 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
F-13
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$35,000,000 and (b) the listing of shares of the Company's Common Stock
under certain circumstances. After June 15, 2002, 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 EarthWatch Series C Convertible
Preferred Stock is entitled to one (subject to adjustment) vote per share
on an "as-converted" basis.
Board Representation. The holders of the Series C Convertible
Preferred Stock are entitled to elect three members of the board of
directors.
Tag-along Rights. If one stockholder or a group of stockholders
proposes to sell any shares of capital stock in one transaction such that,
following such sale, shares of capital stock representing more than 35% of
the then outstanding shares (on a fully-diluted basis) will have been sold
to one holder or a group of related holders, then each holder of Series C
Convertible Preferred Stock shall have the right to receive notice of such
a transaction and shall also have the right to participate in the
transaction and sell a proportionate number of such holders' Series C
Convertible Preferred Stock in such transaction.
Common Stock
Holders of Common Stock are entitled to one vote for each share held
of record at all meetings of the stockholders. Holders of Common Stock are
not entitled to cumulative voting rights with respect to the election of
directors. Subject to preferences that are applicable to outstanding shares
of preferred stock, holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the board of directors out of funds
legally available to be paid.
In the event of a liquidation, dissolution, or winding up, holders of
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of the outstanding
preferred stock. Holders of Common Stock have no preemptive rights and no
right to convert their Common Stock into any other securities. There are no
redemption provisions applicable to the Common Stock. The outstanding
shares of Common Stock are fully paid and nonassessable.
8. 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, 2000, there were 6,565,254 shares available for grant under
the 99 Plan.
F-14
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following is a summary of stock option activity:
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
======= ========== =======
Weighted-average remaining contractual life
9.3 years 6.0 years
Range of exercise prices 0.25 0.05 - 3.81
Outstanding options vested 1,615,250 0.25 250,738 3.69
Weighted-average grant-date fair values were as follows:
1998 1999 2000
---- ---- ----
Exercise price * market value -- -- $0.57
Exercise price = market value $0.17 $0.94 0.07
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:
1998 1999 2000
---- ---- ----
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 0.00% 0.00% 0.00%
Risk free interest rate 5.27% - 5.63% 4.60% - 5.14% 6.50%
Expected life of options (years) 4.42 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 year end close process, the Company recorded approximately $1.5
million of deferred stock compensation expense in accordance with APB No.
25, approximately $0.9 million of which was recognized in fiscal 2000. Had
compensation expense for the Company's stock options been determined based
on the fair values at the grant dates for awards under the plan consistent
with the method of accounting prescribed by SFAS No. 123, Accounting for
Stock-based Compensation, the Company's net loss for the current period
would have been as follows (in thousands):
1998 1999 2000
---- ---- ----
Net income (loss) - as reported $(12,920) $(20,319) $76,682
Net loss - pro forma (13,030) (20,396) 76,402
As of December 31, 2000, the Company had warrants outstanding for the
purchase of 12,463 shares of Series C Preferred Stock, with an exercise
price of $4.53 per share. The warrants are exercisable through May 27,
2001.
F-15
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. Income Taxes
The provision for income taxes consists of the following for the
fiscal years ended December 31:
Current provision: 1998 1999 2000
---- ---- ----
Federal $ -- $ -- $2,500,000
State -- -- 500,000
--------- --------- ----------
Provision for income taxes $ -- $ -- $3,000,000
========= ========= ==========
At December 31, 2000, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $134.5 million. In
addition, the Company has research and development tax credits of
approximately $1.5 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:
Deferred tax assets: 1999 2000
---- ----
Net operating loss carryforwards $ 3,762,887 $ 52,615,023
Fixed assets 4,950,790 --
Other 1,573,977 5,859,826
------------ ------------
Gross deferred tax assets 40,284,654 58,474,849
------------ ------------
Deferred tax liabilities:
Fixed assets -- (41,707,211)
------------ ------------
Net deferred tax assets -- 16,767,638
(40,284,654) (16,767,638)
------------ ------------
Net deferred tax assets (liabilities) $ -- --
============ ============
Net deferred tax assets have been reduced to zero by a valuation
allowance based on current evidence which indicates that it is considered
more likely than not that these benefits will not be realized.
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:
1998 1999 2000
----- ----- -----
Federal income tax rate 34.0% 34.0% 35.0%
State income tax rate, net of federal benefit 5.0 5.0 4.7
Meals and entertainment (0.5) (0.2) (1.0)
Disqualified interest - - 1.2
Effect of change in valuation allowance and other items (38.5) (38.8) (36.1)
----- ----- -----
Effective income tax rate -% -% 3.8%
===== ===== =====
10. 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
15% 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.
F-16
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. Commitments
Operating Leases
The Company leases its facilities under various operating lease
arrangements. Future minimum lease payments under noncancelable operating
leases as of December 31, 2000 are summarized below:
2001 $ 887,956
2002 783,651
2003 742,025
2004 724,527
2005 and thereafter 135,921
----------
Total $3,274,080
==========
Rent expense approximated $988,422, $888,305, and $1,451,324 for the
years ended December 31, 1998, 1999, and 2000, respectively.
Material Relationships and Related Party Transactions
Ball Aerospace & Technologies Corp.
The Company has had various contracts with Ball Aerospace &
Technologies Corp. ("Ball Aerospace"), a stockholder of the Company, since
inception for the design and manufacture of satellites. The Company
currently has a contract with a total fixed cost of approximately $36.0
million for the QuickBird 2 spacecraft. The Company made payments to Ball
Aerospace totaling $9,976,000, $33,455,000, $16,225,217 and $85,294,755
under these contracts for the years ended December 31, 1998, 1999, and
2000, and for the period from January 1, 1995 (inception) through December
31, 2000, respectively. At December 31, 1999 and 2000, amounts totaling
$68,276 and $537,298 are included in accounts payable to Ball Aerospace.
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.
Mr. Kodaira, a director of EarthWatch, 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 and
$3,083,399 under these contracts for the years ended December 31, 1999 and
2000, respectively. At December 31, 1999 and 2000, amounts totaling
$447,034 and $28,020 are included in accounts payable to ITT.
Dr. Sambur, a director of EarthWatch, is the President and General
Manager of ITT Industries' Aerospace/Communications Division. Mr. Foley, a
director of EarthWatch, is the Treasurer of ITT Industries.
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
$322,102, $3,091,653, $2,034,831 and $6,445,811 have been paid to MDA
during the years ended December 31, 1998, 1999, and 2000,
F-17
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
and for the period from January 1, 1995 (inception) through December 31,
2000, respectively. At December 31, 1999 and 2000, amounts totaling
$307,016 and $236,220 are included in accounts payable 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.
As of December 31, 2000, Morgan Stanley, in addition to its equity
investment, held $2.9 and $2.0 million principal amount at maturity of the
12 1/2% Senior Notes and 13% Senior Discount Notes, respectively. In
addition, Morgan Stanley acts as exclusive financial advisor to EarthWatch
under a five-year agreement. Morgan Stanley received $750,000 in connection
with its advisory role in the recapitalization in April 1999.
Mr. Petrick, a director of EarthWatch, is a Managing Director of
Morgan Stanley.
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 $153,559, $3.3 million, and
$5.2 million in 1998, 1999, and 2000, respectively. At December 31, 1999
and 2000, amounts totaling $1,850,000 and $2,240,000 are included in
accounts payable to United Start. In addition, the Company made payments to
Assured Space Access, Inc., which performed services in connection with the
launch of the QuickBird 1 satellite, of approximately $1.1 million in 1999
and $662,781 in 2000.
Mr. Lushtak, a director of EarthWatch, is Co-Chairman and Chief
Executive Officer of United Start, and is Chairman and Chief Executive
Officer of Assured Space Access.
The Company believes 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 the
Company and its executive officers, directors, and their affiliates will be
on terms no less favorable to the Company 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 the
Company's board of directors.
12. Summary of Activity by Geographical Area
Net Sales (in thousands) U.S. Other Consolidated
------------------------ ---- ----- ------------
1998 $ 1,808.6 - $ 1,808.6
1999 5,913.3 - 5,913.3
2000 3,336.1 - 3,336.1
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
13. Subsequent Events (unaudited)
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 value 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
F-18
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
all outstanding 12 1/2% notes on April 3, 2001, resulting in an
extraordinary loss on early extinguishment of debt of approximately $23.0
million. The combined repurchase price totaled $172.9 million.
In connection with the offer, we entered into 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 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. We also
granted registration rights to certain holders of 13% notes and Series C
preferred stock and pledged government securities to secure certain
repurchase rights of the noteholders. Furthermore, we obtained the consent
of these noteholders and amended the indenture governing the notes in
certain respects.
In the Recapitalization Agreement, we also agreed, among other things,
that we would, by no later than June 15, 2001;
. obtain at least $9 million of vendor financing from Ball Aerospace;
. amend 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;
. issue 10,843,297 additional shares of our Series C preferred stock
to the holders of 13% notes that signed the Recapitalization
Agreement;
. purchase at least $155 million of insurance covering the launch and
in-orbit operations of our QuickBird 2 satellite; and
. pledge the QuickBird 2 insurance in favor of The Bank of New York,
as collateral agent for (a) the holders of notes and Ball
Aerospace, 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, one of our stockholders, which we intend to use to fund the
completion of QuickBird 2. This vendor financing facility will accrue
interest at an annual rate of 11%, which will become payable seven months
following the launch of QuickBird 2. Beginning with the eighth month and
ending with the eighteenth month following the launch of QuickBird 2,
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 903,608 shares of Series C preferred stock.
We cannot assure you that the remaining contemplated transactions will
be completed. If we do not, among other things, consummate the transactions
required to be consummated by June 15, 2001, we must complete by August 1,
2001 an offer to purchase all of the then-outstanding notes for a purchase
price equal to their accreted value as of the date of purchase.
Based on our current operating plan and provided we can complete the
other contemplated transactions in the Recapitalization Agreement prior to
June 15, 2001, we believe that existing capital resources will meet our
anticipated cash needs through fiscal 2002. If we face any launch delays,
if our satellite system takes longer to become operational, if technical or
regulatory developments require that we modify the design of our satellite
system, if we are unable to complete the other contemplated transactions by
June 15, 2001, if we are unable to achieve our revenue targets, or if we
incur other additional unforeseen costs, we may require additional capital.
We do not have a revolving credit facility or other source of readily
available capital. Therefore, any shortfall in funds available for our
operations or to service our debt would cause us serious liquidity
problems. In such case, we would need to seek additional financing which we
may not be able to obtain on commercially reasonable terms or at all.
Failure to obtain such additional financing may result in a material
adverse effect on our business and would significantly increase existing
doubt about our ability to continue as a going concern.
We have incurred transaction costs associated with the
Recapitalization Agreement of approximately $1.2 million, $1.0 million of
which was paid to Morgan Stanley.
14. Interim Financial Statements (unaudited)
The accompanying interim consolidated balance sheet as of March 31,
2001 and the consolidated statements of operations, cash flows, and of
stockholders' equity for the three-month periods ended March 31, 2000 and
2001, are unaudited. In the opinion of the Company, the unaudited interim
consolidated financial statements have been prepared on the
F-19
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
same basis as the audited consolidated financial statements and reflect all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the results for the interim periods.
F-20
================================================================================
WE HAVE NOT AUTHORIZED ANY PERSON TO MAKE A STATEMENT THAT DIFFERS FROM WHAT IS
IN THIS PROSPECTUS. IF ANY PERSON DOES MAKE A STATEMENT THAT DIFFERS FROM WHAT
IS IN THIS PROSPECTUS, YOU SHOULD NOT RELY ON IT. THIS PROSPECTUS IS NOT AN
OFFER TO SELL, NOR IS IT SEEKING AN OFFER TO BUY, THESE SECURITIES IN ANY STATE
IN WHICH THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION IN THIS PROSPECTUS
IS COMPLETE AND ACCURATE AS OF ITS DATE, BUT THE INFORMATION MAY CHANGE AFTER
THAT DATE.
EarthWatch Incorporated
13% SENIOR DISCOUNT NOTES DUE 2007
_______________
PROSPECTUS
_______________
____________, 2001
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table shows the costs and expenses to be incurred, other than
underwriting discounts and commissions, in connection with the offering
described in this registration statement, all of which will be paid by the
registrant. All amounts are estimates, other than the SEC registration fee.
SEC registration fee............... $ 40,453
Accounting fees and expenses....... 50,000
Legal fees and expenses............ 75,000
Printing and engraving expenses.... 25,000
Transfer Agent and registrar fees.. --
Miscellaneous expenses............. 9,547
Total.............................. $200,000
Item 14. Indemnification of Directors and Officers.
Article X of our Amended and Restated Certificate of Incorporation
provides for the indemnification of our directors to the fullest extent
permissible under Delaware law.
Article XI of our Bylaws provides that we will indemnify our officers,
directors, and employees against any and all liability and reasonable expenses
incurred in connection with any claim, action, suit, or proceeding in which that
person may become involved by reason of their relationship to us, provided that
the person acted in good faith and in a manner reasonably believed to be in our
best interests. Our bylaws prevent us from indemnifying an officer, director,
or employee to the extent not permitted under Delaware law as well as in the
following circumstances:
. as to amounts paid or payable to us for or based upon the director,
officer, or employee having gained any personal profit or advantage to
which he was not legally entitled; or
. as to amounts paid or payable to us for accounting profits made from
the purchase or sale of our securities within the meaning of Section
16(b) of the Securities Exchange Act of 1934, as amended.
Our bylaws also provide that we will grant indemnification only if our
board of directors, outside legal counsel, or a court of competent jurisdiction
determines that the officer, director, or employee has met the applicable
standard of conduct as described above, or if the officer, director, or employee
has been wholly successful with respect to the claim, action, suit, or
proceeding.
Section 145 of the Delaware General Corporation Law permits us to include
in our charter documents, and in agreements between a corporation and its
directors and officers, provisions expanding the scope of indemnification beyond
that specifically provided by the current law.
We maintain liability insurance coverage for our directors and officers.
Item 15. Recent Sales of Unregistered Securities.
The following is a summary of our transactions since January 1, 1997,
involving sales of our securities that were not registered under the Securities
Act of 1933, as amended:
(1) In March 1997, we sold 50,000 units, each consisting of one note and one
warrant to purchase 31.12 shares of common stock for an aggregate purchase price
of $50 million to accredited investors in reliance on Rule 144A promulgated
under the Securities Act. Morgan Stanley served as the placement agent in
connection with this offering and received a placement fee of approximately $1.5
million.
II-1
(2) In April 1999, as a result of our recapitalization:
. all of our outstanding shares of common stock and preferred stock were
exchanged (at a 1 to .44116 ratio for all outstanding preferred stock
and a 1 to .210202 ratio for all outstanding common stock) for an
aggregate of 11,042,075 shares of newly created Series C preferred
stock;
. all warrants issued in connection with our 1997 units offering were
exercised for an aggregate of 327,074 shares of new Series C preferred
stock for aggregate proceeds to us of $15,600;
. all warrants issued to Odetics, Incorporated to purchase Series A
preferred stock automatically converted by their terms into warrants
to purchase an aggregate of 12,463 shares of new Series C preferred
stock;
. all outstanding options to purchase common stock or preferred stock
were automatically converted by their terms into options to purchase
an aggregate of 306,700 shares of new Series C preferred stock;
. Ball Technologies surrendered 2,761,983 shares of Series A preferred
stock to us (which we cancelled and retired);
. we have included 30,500 shares of common stock issued to the
Waterstone Group in the number of shares that were exchanged for new
Series C preferred stock in the recapitalization;
. ITT Industries invested $25 million in exchange for 7,142,857 shares
of new Series A preferred stock;
. Morgan Stanley invested $15 million in exchange for 4,285,714 shares
of new Series B preferred stock and one share of new common stock;
. Capital Research invested $10 million in exchange for 2,857,143 shares
of new Series B preferred stock; and
. our 12 1/2% Senior Notes due March 1, 2001 were exchanged for new 12
1/2% Senior Notes having a maturity of March 1, 2005.
Each of the purchasers in these transactions were accredited investors.
Accordingly, we relied on the exemptions from registration provided by Rule 144A
promulgated under the Securities Act or Section 4(2) of the Securities Act to
effect these transactions. Morgan Stanley served as our financial advisor in
connection with the recapitalization and received $750,000 in connection with
its advisory role.
(3) In July 1999, we sold 199,000 units, each consisting of one 13% Senior
Discount Note due 2007 and 49.095 shares of Series C preferred stock for $199
million to accredited investors in reliance on Rule 144A promulgated under the
Securities Act. Morgan Stanley served as the placement agent in connection with
this offering and received a placement fee of approximately $1.5 million.
(4) From May 1995 to April 1999, we granted options to purchase 585,349
shares of Series C preferred stock under our 1995 Stock Option/Stock Issuance
Plan; 48,094 shares of Series C preferred stock were issued upon exercise of
these options and 272,629 options are outstanding. All options were granted
under Rule 701 promulgated under the Securities Act or, for those employees who
are our officers or directors or that are accredited investors, Section 4(2) of
the Securities Act.
(5) From February 2000 to April 2001, we have granted options to purchase
3,777,804 shares of common stock under our 1999 Equity Incentive Plan; 217,900
shares of common stock were issued upon exercise of these options and 3,176,375
options are outstanding. All options were granted under Rule 701 promulgated
under the Securities Act or, for those employees who are our officers or
directors or that are accredited investors, Section 4(2) of the Securities Act.
II-2
(6) In April 2001, we agreed to issue 10,843,297 shares of Series C
preferred stock to holders of notes in partial consideration for those holders
refraining from tendering their notes in our then-pending tender offer. Each of
the purchasers in this transaction were accredited investors. Accordingly, we
relied on the exemptions from registration provided by Regulation D promulgated
under the Securities Act or Section 4(2) of the Securities Act to effect this
transaction. Morgan Stanley served as our financial advisor in connection with
these and related transactions and received $1 million in connection with its
advisory role.
(7) In April 2001, we agreed to issue 903,608 shares of Series C preferred
stock to Ball Aerospace, an accredited investor, in connection with its
provision of vendor financing. We relied on the exemption from registration
provided by Regulation D promulgated under the Securities Act or Section 4(2) of
the Securities Act to effect this transaction.
Appropriate legends are affixed to the stock certificates issued in the
transactions listed above. Similar legends were imposed in connection with any
subsequent sales of any such securities. Each of the purchasers that are our
employees or directors had access to information through their employment by us.
Each purchaser was given the opportunity to ask questions of and request
information from EarthWatch. Each investor represented and acknowledged to
EarthWatch in writing that it had this opportunity. Some of the purchasers
asked questions and requested information. EarthWatch complied with all
requests that it deemed reasonable.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibit Number Description
- -------------- -----------
1.1* Placement Agreement dated July 7, 1999 by and between
EarthWatch and Morgan Stanley & Co. Incorporated.
2.1* Recapitalization Agreement dated as of April 8, 1999 among
EarthWatch, Morgan Stanley & Co. Incorporated, Capital Research
and Management Company, for the benefit of American High-Income
Trust, American Variable Insurance Series Asset Allocation
Fund, American Variable Insurance Series Bond Fund, American
Variable Insurance Series High-Yield Bond Fund and Bond Fund of
America, Inc., Ball Technologies Holdings Corp. and ITT
Industries, Inc.
2.2** Recapitalization Agreement and Consent dated as of April 2,
2001 by and among EarthWatch Incorporated, Morgan Stanley & Co.
Incorporated, Post Balanced Fund, Post High Yield LP, Post
Total Return Fund, Opportunity Fund, Dickstein & Co., L.P.,
Dickstein International Limited, Hitachi Software Engineering
Co., Ltd., Sun America High Income Fund and Sun America Series
Trust High Yield Portfolio.
3.1* Amended and Restated Certificate of Incorporation, as amended,
of EarthWatch, as currently in effect.
3.2* Bylaws, as currently in effect.
4.1* Stockholders' Agreement dated as of April 8, 1999 among
EarthWatch, Morgan Stanley & Co. Incorporated, Capital Research
and Management Company, for the benefit of American High Income
Trust, American Variable Insurance Series Asset Yield Bond Fund
and Bond and Bond Fund of America, Inc., ITT Industries, Inc.
and the other persons listed on the signature pages thereto.
4.3* Indenture dated as of July 12, 1999, by and between EarthWatch
and The Bank of New York, including form of 13% Senior Discount
Note Due 2007.
4.6* Series C Preferred Registration Rights Agreement dated as of
July 7, 1999 between EarthWatch and Morgan Stanley & Co.
Incorporated.
4.7* Notes registration rights agreement dated as of July 12, 1999
between EarthWatch and Morgan Stanley & Co. Incorporated.
4.8* Specimen 13% Senior Discount Note Due 2007.
4.10** Notes Registration Rights Agreement dated as of April 3, 2001
by and among EarthWatch, The Bank of New York and Morgan
Stanley & Co. Incorporated.
4.11** Series C Preferred Registration Rights Agreement dated as of
April 3, 2001 by and among EarthWatch, Morgan Stanley & Co.
Incorporated, Post Balanced Fund, Post High Yield LP,
II-3
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.
5.1 * Opinion of Baker & McKenzie.
10.1* EarthWatch Incorporated 1995 Stock Option Stock Issuance Plan.
10.2* EarthWatch Incorporated 1999 Equity Incentive Plan.
10.3* Ball-EarthWatch Agreement dated as of April 8, 1999 by and
between EarthWatch and Ball Technologies Holdings Corp.
10.4* Contract for QuickBird Spacecraft dated as of June 9, 1998, as
amended, by and between EarthWatch and Ball Aerospace &
Technologies Corp.
10.5* Engineering Services Agreement dated as of March 6, 1996, as
amended, by and between EarthWatch and Ball Aerospace &
Technologies Corp.
10.6* Strategic Supplier Agreement dated as of February 26, 1999, by
and between EarthWatch and ITT Industries, Inc.
10.7* Agreement for the EarthWatch QuickBird Sensor Subsystem dated
as of October 15, 1996, as amended, by and between EarthWatch
and Eastman Kodak Company.
10.8* EarthWatch-Hitachi Imaging Distribution Agreement dated as of
June 4, 1995, as amended, by and between EarthWatch and
Hitachi, Ltd.
10.9* Distributor Agreement dated as of August 1, 1997, by and
between Nuovo Telespazio, S.p.A.
10.10* Launch Services Agreement dated as of April 1, 1999, by and
between EarthWatch and United Start Corporation.
10.11* Lease Agreement between EarthWatch and Pratt Land Limited
Liability Company.
10.12*** Delta II Launch Services Agreement between Earthwatch and Delta
Launch Services, Inc. (Confidential treatment has been
requested for portions of this document.)
10.13*** Credit Agreement, dated as of April 20, 2001, by and between
EarthWatch and Ball Aerospace & Technologies Corp.
10.14 Amendment Seven to Contract 9602-0117 (Engineering Services
Agreement), dated January 4, 2001, by and between EarthWatch
and Ball Aerospace & Technologies Corp.
12.1 Statements regarding computation of ratio of earnings to fixed
charges.
21.1 * Subsidiaries of EarthWatch.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 * Consent of Baker & McKenzie.
24.1 Power of Attorney (previously filed and contained on page II-6
hereof).
25.1 * Statement of Eligibility of Trustee.
* Previously filed as an exhibit to this registration statement, then on Form
S-4 (File No. 333-39202).
** 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.
(b) Financial Statement Schedules
Schedules are not listed above because the information to be set forth
therein is not applicable or is shown in the financial statements or the notes
thereto.
Item 17. Undertakings.
We hereby undertake:
II-4
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit, or proceeding, is asserted by the
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
the issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497 (h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, we have
duly caused this Registration Statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in the City of Longmont, State of
Colorado on June 1, 2001.
EARTHWATCH INCORPORATED
By: /s/ Herbert F. Satterlee III
----------------------------------------
Herbert F. Satterlee III
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Herbert F. Satterlee and Henry E. Dubois
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments, exhibits thereto and other documents in connection
therewith) to this Registration Statement and any subsequent registration
statement filed by the registrant pursuant to Rule 462(b) of the Securities Act
of 1933, as amended, which relates to this Registration Statement, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
President and Chief Executive Officer, June 1, 2001
/s/ Herbert F. Satterlee III Director, Chairman
- ------------------------------------ (Principal Executive Officer)
Herbert F. Satterlee III
* Chief Operating Officer, June 1, 2001
- ------------------------------------
Henry E. Dubois Chief Financial Officer,
Executive Vice President
(Principal Financial and
Accounting Officer)
* Chief Technical Officer, June 1, 2001
- ------------------------------------
Walter S. Scott Executive Vice President, Director
* Director June 1, 2001
- ------------------------------------
Paul M. Albert, Jr.
* Director June 1, 2001
- ------------------------------------
Henry J. Driesse
* Director June 1, 2001
- ------------------------------------
Donald E. Foley
II-6
* Director June 1, 2001
- -------------------------------
Anne Karalekas
* Director June 1, 2001
- -------------------------------
Takatoshi Kodaira
* Director June 1, 2001
- -------------------------------
Michael J. Petrick
* Director June 1, 2001
- -------------------------------
Donald W. Vanlandingham
* By: /s/ Herbert F. Satterlee III
----------------------------
Herbert F. Satterlee III
Attorney-in-fact
II-7
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
1.1* Placement Agreement dated July 7, 1999 by and between
EarthWatch and Morgan Stanley & Co. Incorporated.
2.1* Recapitalization Agreement dated as of April 8, 1999 among
EarthWatch, Morgan Stanley & Co. Incorporated, Capital
Research and Management Company, for the benefit of American
High-Income Trust, American Variable Insurance Series Asset
Allocation Fund, American Variable Insurance Series Bond
Fund, American Variable Insurance Series High-Yield Bond
Fund and Bond Fund of America, Inc., Ball Technologies
Holdings Corp. and ITT Industries, Inc.
2.2** Recapitalization Agreement and Consent dated as of April 2,
2001 by and among EarthWatch Incorporated, Morgan Stanley &
Co. Incorporated, Post Balanced Fund, Post High Yield LP,
Post Total Return Fund, Opportunity Fund, Dickstein & Co.,
L.P., Dickstein International Limited, Hitachi Software
Engineering Co., Ltd., Sun America High Income Fund and Sun
America Series Trust High Yield Portfolio.
3.1* Amended and Restated Certificate of Incorporation, as
amended, of EarthWatch, as currently in effect.
3.2* Bylaws, as currently in effect.
4.1* Stockholders' Agreement dated as of April 8, 1999 among
EarthWatch, Morgan Stanley & Co. Incorporated, Capital
Research and Management Company, for the benefit of American
High Income Trust, American Variable Insurance Series Asset
Yield Bond Fund and Bond and Bond Fund of America, Inc., ITT
Industries, Inc. and the other persons listed on the
signature pages thereto.
4.3* Indenture dated as of July 12, 1999, by and between
EarthWatch and The Bank of New York, including form of 13%
Senior Discount Note Due 2007.
4.6* Series C Preferred Registration Rights Agreement dated as of
July 7, 1999 between EarthWatch and Morgan Stanley & Co.
Incorporated.
4.7* Notes registration rights agreement dated as of July 12,
1999 between EarthWatch and Morgan Stanley & Co.
Incorporated.
4.8* Specimen 13% Senior Discount Note Due 2007.
4.10** Notes Registration Rights Agreement dated as of April 3,
2001 by and among EarthWatch, The Bank of New York and
Morgan Stanley & Co. Incorporated.
4.11** Series C Preferred Registration Rights Agreement dated as of
April 3, 2001 by and among EarthWatch, Morgan Stanley & Co.
Incorporated, Post Balanced Fund, Post High Yield LP, Post
Total Return Fund, Opportunity Fund, Dickstein & Co., L.P.,
Dickstein International Limited, Sun America High Income
Fund, Sun America Series Trust High Yield Portfolio, Hitachi
Software Engineering Co., Ltd. and Ball Technologies
Holdings Corp.
4.12** Pledge Agreement dated as of April 3, 2001 by and among
EarthWatch, The Bank of New York, as trustee, and The Bank
of New York, as securities intermediary.
4.13** First Supplemental Indenture dated April 16, 2001, by and
between EarthWatch and The Bank of New York, as trustee.
5.1* Opinion of Baker & McKenzie.
10.1* EarthWatch Incorporated 1995 Stock Option Stock Issuance
Plan.
10.2* EarthWatch Incorporated 1999 Equity Incentive Plan.
10.3* Ball-EarthWatch Agreement dated as of April 8, 1999 by and
between EarthWatch and Ball Technologies Holdings Corp.
10.4* Contract for QuickBird Spacecraft dated as of June 9, 1998,
as amended, by and between EarthWatch and Ball Aerospace &
Technologies Corp.
10.5* Engineering Services Agreement dated as of March 6, 1996, as
amended, by and between EarthWatch and Ball Aerospace &
Technologies Corp.
10.6* Strategic Supplier Agreement dated as of February 26, 1999,
by and between EarthWatch and ITT Industries, Inc.
10.7* Agreement for the EarthWatch QuickBird Sensor Subsystem
dated as of October 15, 1996, as amended, by and between
EarthWatch and Eastman Kodak Company.
10.8* EarthWatch-Hitachi Imaging Distribution Agreement dated as
of June 4, 1995, as amended, by and between EarthWatch and
Hitachi, Ltd.
10.9* Distributor Agreement dated as of August 1, 1997, by and
between Nuovo Telespazio, S.p.A.
10.10* Launch Services Agreement dated as of April 1, 1999, by and
between EarthWatch and United Start Corporation.
10.11* Lease Agreement between EarthWatch and Pratt Land Limited
Liability Company.
10.12*** Delta II Launch Services Agreement between Earthwatch and
Delta Launch Services, Inc. (Confidential treatment has been
requested for portions of this document.)
10.13*** Credit Agreement, dated as of April 20, 2001, by and between
EarthWatch and Ball Aerospace & Technologies Corp.
10.14 Amendment Seven to Contract 9602-0117 (Engineering Services
Agreement), dated January 4, 2001, by and between
EarthWatch and Ball Aerospace & Technologies Corp.
12.1 Statements regarding computation of ratio of earnings to
fixed charges.
21.1* Subsidiaries of EarthWatch.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Baker & McKenzie.
24.1 Power of Attorney (previously filed and contained on page
II-6 hereof).
25.1* Statement of Eligibility of Trustee.
* Previously filed as an exhibit to this registration statement, then on Form
S-4 (File No. 333-39202).
** 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.