<PAGE>
As filed with the Securities and Exchange Commission on July 10, 2000
Registration No. 333-39202
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
AMENDMENT NO. 1 TO FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________
EarthWatch Incorporated
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3663 31-1420852
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
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: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box.[_]
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(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. [_]
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.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains a prospectus relating to the offer for
all outstanding 13% Senior Discount Notes Due 2007 (the "old notes") of
EarthWatch Incorporated in exchange for EarthWatch Incorporated's new 13% Senior
Discount Notes Due 2007 (the "new notes"). In addition, this Registration
Statement contains a prospectus relating to certain market-making activities
with respect to the new notes which may, from time to time, be carried out by
Morgan Stanley & Co. Incorporated. There are certain differences between the two
prospectuses. The front cover page, the information in the prospectus summary
relating to the exchange offer, the "Use of proceeds" section, the "Description
of the new notes" section, the "United States federal income tax consequences"
section and the "Plan of distribution" section will all be different. In
addition, the information under the caption "The exchange offer" will be deleted
from the market-making prospectus and certain conforming changes will be made.
The prospectus for the exchange offer follows immediately after this explanatory
note. Following the exchange offer prospectus is the form of alternative pages
for the market-making prospectus.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 10, 2000
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 and Exchange Commission is effective. This prospectus is not an
offer to sell securities, and we are not soliciting offers to buy securities, in
any state where the offer or sale is not permitted.
EarthWatch Incorporated
offer to exchange
13% Senior Discount Notes due 2007 (Unregistered)
For
13% Senior Discount Notes due 2007 (Registered)
We currently have outstanding 13% Senior Discount Notes due 2007 which have a
principal amount at maturity of $199,000,000. We are offering to exchange new
registered 13% Senior Discount Notes due 2007 for any and all of the old notes.
TO EXCHANGE YOUR UNREGISTERED OLD NOTES FOR REGISTERED NEW NOTES, YOU MUST
TENDER YOUR OLD NOTES NO LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON AUGUST ,
2000 UNLESS EXTENDED.
_________________________
No public market currently exists for the new notes. We do not expect that an
active public market in the new notes will develop. We do not intend to list
the new notes on any securities exchange or on the Nasdaq National Market.
_________________________
See the "Risk factors" section on page 8 for information that you should
consider before you decide to participate in this exchange offer.
_________________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the new notes or determined that this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is July , 2000.
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary............................................................................................ 1
Risk factors....................................................................................... 8
Special note regarding forward-looking statements.................................................. 18
Use of proceeds.................................................................................... 19
Dividend policy.................................................................................... 19
Capitalization..................................................................................... 21
Selected historical financial data................................................................. 22
Management's discussion and analysis of financial condition and results of operations.............. 23
Business........................................................................................... 29
Management......................................................................................... 39
Limitation of liability and indemnification matters................................................ 46
Material relationships and related party transactions.............................................. 47
Principal stockholders............................................................................. 49
Recapitalization................................................................................... 51
Description of material indebtedness............................................................... 53
The exchange offer................................................................................. 54
Description of the new notes....................................................................... 61
Form of new notes.................................................................................. 61
Description of the old notes....................................................................... 62
Description of capital stock....................................................................... 88
United States federal income tax consequences...................................................... 92
Plan of distribution............................................................................... 96
Legal matters...................................................................................... 96
Experts............................................................................................ 96
Where you can find more information................................................................ 96
Index to financial statements...................................................................... F-1
</TABLE>
_________________________
You should rely only on the information provided in this prospectus. We have
authorized no one to provide you with different information. We are not making
an offer of these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or any prospectus
supplement is accurate as of any date other than the date on the front of the
document.
<PAGE>
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 satellites, 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 two
satellites 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 satellites
are designed to collect 1-meter resolution gray scale and 4-meter resolution
color imagery of the earth and will have an ability to revisit most areas almost
daily. We plan to launch the QuickBird 1 satellite in the fall of 2000.
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 database. This will allow us to produce satellite imagery at
negligible marginal cost, facilitating an array of new geographic information,
mapping, and 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.
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 imagery, or panchromatic imagery, high-resolution
satellites can take precise color
<PAGE>
and infrared images, or 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 of the
information value than analog imagery.
Based on publicly announced launch schedules, we expect that QuickBird 1 will
be one of the first 1-meter resolution satellites available to serve the
commercial market. Moreover, we are not aware that any additional competitors
plan to enter this market other than our three announced competitors: Space
Imaging, Inc., which we believe successfully launched its first 1-meter
resolution satellite in September 1999 and has begun serving the commercial
market, Orbital Imaging Corp., or ORBIMAGE, and West Indian Space Ltd. 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 early entrants, will have a
significant early-to-market advantage.
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 and have entered into memoranda of understanding with
several of these prospective customers. We have entered into contracts with
agencies in two countries, have outstanding proposals for contracts with
agencies in nine countries, and are in discussions with many other countries to
provide them with a wide range of images and other products when QuickBird 1 has
been launched. We believe that once QuickBird 1 is operational, we will be able
to quickly convert customer interest into contracts and revenue
opportunities.
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, geological survey, and 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.
2
<PAGE>
Summary of the terms of the exchange offer
Registration rights agreement......... You are entitled under the registration
rights agreement to exchange your
unregistered notes for registered notes
with substantially identical terms. We
are now making this exchange offer to
you, which is intended to satisfy our
obligations under the registration
rights agreement. After the exchange
offer is completed, you will no longer
be entitled to any exchange or
registration rights with respect to your
old notes.
The exchange offer.................... We are offering to exchange our new 13%
Senior Discount Notes due 2007, each
with a principal amount at maturity of
$1,000, which have been registered under
the Securities Act, for our old 13%
Senior Discount Notes due 2007, each
with a principal amount at maturity of
$1,000, which were issued on July 12,
1999 in a private placement. In order to
be exchanged, an old note must be
properly tendered and accepted. All old
notes that are validly tendered and not
validly withdrawn will be exchanged for
new notes.
As of this date, we have old notes
outstanding which have a principal
amount at maturity of $199 million.
We will issue the new notes promptly
after the expiration of the exchange
offer.
Resales of the registered notes....... We believe that the new notes may be
offered for resale, resold, and
otherwise transferred by you without
compliance with the registration and
prospectus delivery provisions of the
Securities Act if you meet the following
conditions:
. the new notes to be acquired by you
in the exchange offer are acquired
by you in the ordinary course of
your business;
. you are not engaging in and do not
intend to engage in a distribution
of the new notes;
. you do not have an arrangement or
understanding with any person to
participate in the distribution of
the registered notes; and
. you do not control us, you are not
controlled by us, and you are not
under common control with us,
either directly or indirectly.
If you do not meet the above conditions,
you may incur liability under the
Securities Act if you transfer any new
note without delivering a prospectus
meeting the requirements of the
Securities Act. We do not assume or
indemnify you against that liability.
Each broker-dealer that receives new
notes in the exchange offer for its own
account in exchange for old notes which
were acquired by that broker-dealer as a
result of market-making activities or
other trading activities must
acknowledge that it will deliver a
prospectus meeting the requirements of
the Securities Act in connection with
any resales of the registered notes. A
broker-dealer may use this prospectus
for an offer to resell or to otherwise
transfer these registered notes.
Expiration date....................... The exchange offer will expire at 5:00
p.m., New York City time, on August,
2000, unless we decide to extend the
exchange offer. We do not intend to
extend the exchange offer, although we
reserve the right to do so.
3
<PAGE>
Conditions to the exchange offer......... The only conditions to completing the
exchange offer are that the exchange
offer not violate applicable law or
any applicable interpretation of the
staff of the Securities and Exchange
Commission and no injunction, order,
or decree has been issued which would
prohibit, prevent, or materially
impair our ability to proceed with
the exchange offer. See "The exchange
offer--Conditions."
Withdrawal............................... You may withdraw the tender of your
old notes at any time prior to 5:00
p.m., New York City time, on the
expiration date. We will return to
you any old notes not accepted for
exchange for any reason without
expense to you as promptly as we can
after the expiration or termination
of the exchange offer.
Exchange agent........................... The Bank of New York is serving as
the exchange agent in connection with
the exchange offer.
Consequences of failure to exchange...... If you do not participate in the
exchange offer, upon completion of
the exchange offer, the liquidity of
the market for your old notes could
be adversely affected. If the
liquidity of the market for your old
notes is adversely affected, you may
be unable to sell or transfer your
old notes and the value of your old
notes may decline. See "Risk
factors--A failure to exchange your
old notes for new notes may result in
a decline in value of your old notes
and your old notes will continue to
be subject to restrictions on
transfer."
Accounting treatment..................... We will not recognize any gain or
loss for accounting purposes upon the
consummation of the exchange offer.
We will amortize the expense of the
exchange offer over the term of the
new notes under generally accepted
accounting principles.
Federal income tax consequences.......... The exchange of the old notes should
not be a taxable event for federal
income tax purposes. See "United
States federal income tax
consequences."
4
<PAGE>
Summary of the terms of the new notes
The new notes.................... 13% Senior Discount Notes due 2007 which have
a principal amount at maturity of $199
million.
Maturity......................... July 15, 2007.
Interest payment dates........... The new notes will not begin to accrue cash
interest until July 15, 2002.
Beginning on January 15, 2003, interest on
the new 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 new 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 new notes will
then decline each year until maturity.
See "Description of the old notes--Optional
redemption."
Change of control................ Upon a change of control of EarthWatch, we
will be required to make an offer to purchase
the new 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
new notes.
Collateral....................... We currently have in effect a $230 million
insurance policy for QuickBird 1 and plan to
obtain an additional policy of up to $35
million to cover risks associated with a
total loss of QuickBird 1 on launch or during
operation. The new notes will be secured
equally with the old notes and our 12 1/2%
Senior Notes due 2005 by any proceeds of
insurance policies covering certain aspects
of our QuickBird 1 satellite.
If the trustees for the new notes, the old
notes, and our 12 1/2% Notes receive proceeds
from the insurance policies covering risks
related to QuickBird 1, EarthWatch will make
an offer to purchase the new notes, the old
notes, and our 12 1/2% 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
new notes, the old notes, and our 12 1/2%
Notes tendered in response to such offer to
purchase exceeds the amount of insurance
proceeds available for such offer, holders of
the new notes, the old notes, and our 12 1/2%
Notes that subscribe to the offer to purchase
will receive a ratable portion of the
insurance proceeds. To the extent the
accreted value and interest on the new notes,
the old notes, and the 12 1/2% Notes tendered
are less than the available proceeds, the
excess will be returned to EarthWatch.
Ranking.......................... The new notes rank equally in right of
payment with all of our unsubordinated and
unsecured indebtedness, including our 12 1/2%
Notes.
At May 31, 2000, we had approximately $178
million of indebtedness outstanding, all of
which ranked equally in right of payment with
the new notes.
5
<PAGE>
Restrictive covenants............ The indenture under which the new notes will
be issued contains covenants that, among
other things, restrict our ability and the
ability of our subsidiaries to:
. incur additional debt;
. create 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 will, among other things, be
permitted to incur additional indebtedness,
including secured debt, under specified
circumstances.
Form of new notes................ The new notes will be issued in fully
registered form, without coupons. The new
notes will be 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 new notes will own book-entry
interests in the global note, and evidence of
these interests will be kept in the records
maintained by The Depository Trust Company.
See "Form of new notes."
Use of proceeds.................. We will not receive any proceeds from the
exchange offer.
6
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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, 1998 and 1999, and
consolidated statement of operations data for each of the three years ended
December 31, 1999, have been derived from our audited consolidated financial
statements and the notes thereto included elsewhere in this prospectus. The
consolidated statement of operations data for the nine months ended December 31,
1995 and the year ended December 31, 1996, and the consolidated balance sheet
data as of December 31, 1995, 1996, and 1997, are derived from our historical
consolidated financial statements not included in this prospectus. The
unaudited consolidated statement of operations data for the three-month periods
ended March 31, 1999 and 2000, and the consolidated balance sheet data as of
March 31, 1999 and 2000, are derived from unaudited consolidated financial
statements 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.
<TABLE>
<CAPTION>
Nine Months
from March
31, 1995 to Year Ended December 31,
December 31, ---------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue.............................................. $ 2,993 $ 1,900 $ 437 $ 1,809 $ 5,913
------- -------- -------- -------- --------
Cost of goods sold................................... 1,712 1,922 382 1,905 5,120
Selling, general and administrative.................. 2,430 5,992 8,588 4,975 2,763
Research and development............................. 3,126 20,178 19,121 9,113 6,956
Loss from impairment of fixed assets................. -- -- 25,519 599 --
Gain from arbitration settlement..................... -- -- -- (1,515) --
Loss from operations................................. (4,275) (26,192) (53,173) (13,268) (18,926)
Interest expense..................................... (26) (63) (86) (1,340) (5,482)
Interest income...................................... 392 2,549 2,528 1,688 4,089
------- -------- -------- -------- --------
Net loss............................................. $(3,909) $(23,706) $(50,731) $(12,920) $(20,319)
======= ======== ======== ======== ========
Other Financial Data:
Capital expenditures................................. $ 9,208 $ 33,952 $ 54,271 $ 26,037 $ 75,238
Cash provided (used) by operating activities......... (1,623) (20,967) (14,192) 18,136 (6,420)
Cash provided (used) by investing activities......... (9,208) (33,951) (68,290) (17,529) (97,070)
Cash provided (used) by financing activities......... 32,521 68,452 53,668 (1,972) 180,639
Deficiency of earnings to fixed charges.............. (3,909) (23,851) (56,401) (18,976) (31,661)
<CAPTION>
December 31,
-----------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands)
Balance Sheet Data:
Cash and cash equivalents............................ $21,690 $ 35,224 $ 6,410 $ 5,045 $ 82,193
Total assets......................................... 38,186 90,547 104,299 85,328 271,469
Total debt........................................... 597 1,188 51,511 49,804 167,148
Mandatorily redeemable preferred stock............... -- -- -- -- 123,384
Stockholders' equity (deficit)....................... 33,691 83,107 39,737 26,831 (33,519)
<CAPTION>
Period from
Three Months Ended March 31, 1995
---------------------
March 31, March 31, To March 31,
1999 2000 2000
---- ---- ----
<S> <C> <C> <C>
Statement of Operations Data:
Revenue.............................................. $ 167 $ 2,019 $ 15,071
------- -------- ---------
Cost of goods sold................................... 143 1,343 12,385
Selling, general and administrative.................. 2,231 3,016 37,764
Research and development............................. 2,067 2,380 60,874
Loss from impairment of fixed assets................. -- -- 26,118
Gain from arbitration settlement..................... -- -- (1,515)
Loss from operations................................. (4,274) (4,720) (120,554)
Interest expense..................................... (50) (1,984) (8,981)
Interest income...................................... 180 1,332 12,578
------- -------- ---------
Net loss............................................. $(4,144) $ (5,372) $(116,957)
======= ======== =========
Other Financial Data:
Capital expenditures................................. $ 4,433 $ 15,800 $ 214,506
Cash provided (used) by operating activities......... (3,926) (6,070) (31,136)
Cash provided (used) by investing activities......... (717) (12,986) (239,035)
Cash provided (used) by financing activities......... (48) (19) 333,289
Deficiency of earnings to fixed charges.............. (5,894) (10,668) (145,466)
<CAPTION>
March 31, 1999 March 31, 2000
-------------- --------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................ $ 354 $ 63,119
Total assets......................................... 80,479 268,412
Total debt........................................... 49,833 174,216
Mandatorily redeemable preferred stock............... -- 123,432
Stockholders' equity (deficit)....................... 22,628 (38,873)
</TABLE>
7
<PAGE>
RISK FACTORS
The new notes, like the old 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 our ability to pay
principal or interest on the new 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 tender your old notes in exchange for new
notes.
Risks related to our financial history, condition, and requirements.
Our limited operating history makes an evaluation of our prospects difficult
and the new 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 satellites 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. 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 1.
Our business plan depends upon:
. the timely construction and deployment of QuickBird 1 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 lose money 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 $112 million at December 31, 1999 and
approximately $117 million at March 31, 2000.
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 through the third quarter of
2001. 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 our
first 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 1 is
successfully launched and 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 a significant delay in launching EarlyBird 1, a predecessor
satellite to QuickBird 1, and incurred greater than anticipated costs in
building and launching that satellite. We have experienced delays in building
QuickBird 1 and have
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incurred greater than anticipated costs for its design and construction. If we
experience any additional delays or a failure in the launch of QuickBird 1, we
could incur losses for a longer period and we may require significant additional
financing. If we experience a delay and cannot get additional financing, we may
not be able to continue our operations.
Our substantial indebtedness could adversely affect our financial condition
and prevent us from fulfilling our payment obligations under the new notes.
We currently have a significant amount of indebtedness. At March 31, 2000, we
had approximately $174 million of indebtedness. Such indebtedness will have a
fully accreted value of $271 million on July 15, 2002. In addition, the new
notes will begin to accrue cash interest on July 15, 2002 and will be payable
semiannually in cash on January 15 and July 15 of each year, beginning on
January 15, 2003. We may also raise additional financing in the future. The
indenture relating to the new notes limits, but does not prohibit, the
incurrence of additional indebtedness.
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 new notes;
. require us to dedicate a substantial portion of our cash flow from
operations, if any, to repaying indebtedness, thereby reducing the
availability of cash flow to fund operating expenses, working capital,
capital expenditures, and other general corporate purposes;
. limit our flexibility in planning for or reacting to changes in our
business and the satellite imaging industry, placing us at a competitive
disadvantage;
. limit our ability to borrow additional funds for working capital, capital
expenditures, debt service requirements, or other purposes; and
. limit our ability to react to changing market conditions, changes in our
industry, or economic downturns.
Also, our existing 12 1/2% Notes will mature before the new notes. If we are
unable to repay the outstanding principal amount of such 12 1/2% Notes, we will
need to refinance them. Such refinancing will be subject to attendant risks and
an inability to repay or refinance the 12 1/2% Notes could cause a default under
the indenture governing the 12 1/2% Notes. In the event of a default, the
holders of the 12 1/2% Notes would have enforcement rights, including the right
to accelerate payment of the 12 1/2% Notes and the right to commence an
involuntary bankruptcy proceeding against us. Accordingly, upon any default,
insolvency, bankruptcy, or similar situation, we may have only limited assets
remaining after paying the prior claims of other creditors and may be unable to
repay the new notes.
Our current revenues are dependent upon a limited number of customers.
NASA and NIMA accounted for approximately $5.4 million and $550,000, or
approximately 90% and 9%, respectively, of our revenue during the fiscal year
ended December 31, 1999. 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.
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 may 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, seek additional financing,
or sell additional securities on terms that are highly dilutive to our
stockholders.
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We must make significant additional capital expenditures.
We expect to incur significant capital expenditures to construct and launch
the QuickBird satellites and to upgrade both our ground stations and other
operating systems. From March 31, 2000 through launch of QuickBird 1, we expect
to spend approximately $52 million for QuickBird 1 and related systems. The
QuickBird 1 satellite is now in final assembly and testing. We expect to spend
approximately $79 million to construct QuickBird 2, of which approximately $40
million has been spent through March 31, 2000. The QuickBird 2 satellite is
scheduled for launch in 2001. Each QuickBird satellite has a designed useful
life of five years. We have begun to develop plans for the next generation
satellites that will replace QuickBird 1 and 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, seek additional financing, or sell additional
securities on terms that are highly dilutive to our stockholders.
We may need additional financing.
We believe that cash on hand and expected cash flow from operations will be
sufficient to fund our capital expenditures and operations, including the launch
of QuickBird 1 and QuickBird 2 and all insurance premiums. We cannot assure you
that we will have sufficient funds to service our indebtedness or to fund our
other liquidity needs, including our anticipated capital expenditures, or that
these expenditures will fall within our estimates. We may need to raise
additional capital to support the construction and deployment of our next
generation satellites. We may need to refinance all or a portion of our
indebtedness, but we may not be able to do so on commercially reasonable terms,
or at all. We do not have a revolving credit facility or other source of
readily available capital. Without sufficient funds to service our indebtedness
or fund operations, we would have a serious liquidity problem. 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. Consequently, we could be required to
significantly reduce or suspend our operations, seek a merger partner, sell the
business, seek additional financing or sell additional securities on terms that
are highly dilutive to our stockholders. In addition, a significant delay in the
launch of QuickBird 1 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. In addition, we could experience higher costs if we have to
modify our future satellites. If we incur any such additional costs or if our
receipt of revenue is delayed, we could need additional financing. Failure to
obtain such financing may result in a material adverse effect on our business
and could prevent us from continuing as a going concern.
Our cost to insure future launches may increase.
We have in force a $230 million insurance policy for QuickBird 1. This
insurance policy will cover QuickBird 1 in the event of a launch failure or for
full or specified partial operational failures in orbit during the 24 months
following launch. The premium for our $230 million launch policy for QuickBird
1 is approximately $30 million, which has been used as a portion of the
collateral for the new notes, the old notes, and the 12 1/2% Notes. In
addition, we plan to obtain a policy of up to $35 million, subject to market
conditions, to cover risks associated with a total loss of QuickBird 1 during
launch or during operation. We cannot assure you that we will be able to
procure the additional policy.
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. In the recent
past, 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. In addition, if we
fail to successfully launch QuickBird 1, we may not be able to obtain launch
insurance for future satellites on commercially reasonable terms or at all.
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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.
Risks relating to our planned satellite launch and operations.
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. Launch failure rates vary depending on the
particular launch vehicle. We plan to use the Russian Cosmos SL-8 for the
launch of QuickBird 1, which has a relatively low launch failure rate. We
cannot assure you that our planned satellite launches will be successful.
Although we believe that our insurance coverage would be sufficient to cover the
cost of replacing our satellites and repaying the 12 1/2% Notes, the old notes,
and the new notes, the interruption of our business that would result from a
launch failure would materially adversely affect our business, operating
results, and financial condition.
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. We cannot assure you that problems will not 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, and financial condition and our ability to pay interest and principal
on the new notes. See "Business--Products and services."
We cannot assure you that QuickBird 1 or QuickBird 2 will operate successfully
or that they will continue to operate throughout their expected design lives.
Even if these satellites are launched and operated properly, minor technical
flaws in the satellites' sensors, power supply, data recorder, communications
systems, or other components could significantly degrade their 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.
Each of our satellites 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 satellites' performance.
If either QuickBird 1 or 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.
Although any such loss of satellite capacity may be 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 each 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. Moreover,
the expected useful lives of QuickBird 1 and QuickBird 2 are less than the term
of the new notes. Therefore, we will need to spend significant amounts to
develop and launch replacement satellites prior to the maturity of the new
notes. We anticipate using funds 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
satellites at the end of their design lives. This would adversely affect our
ability to pay principal and interest on the new notes.
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A delay in launching the QuickBird satellites will adversely affect us.
Prior to launch, we must fully construct, test, and transport our satellite to
the launch site in Russia 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 any of the QuickBird satellites will
adversely affect our business, operating results, financial condition, and
ability to pay interest and principal on the new notes. We have already delayed
our scheduled launch date for QuickBird 1 from the first quarter of 2000 to the
fall of 2000. Space Imaging successfully launched a satellite in September 1999
and has been distributing imagery to its customers since that time. Any further
delay may put us at a significant competitive disadvantage by allowing our
competitors more time to establish themselves in the market. Our transit
insurance will not be adequate to repay the accreted value of and interest on
the new notes, the old notes, and the 12 1/2% Notes.
Our ability to launch in Russia may be adversely affected by political
factors.
We are subject to evolving governmental, political, social, and legal
structures within Russia, which have been unstable. Changes in policies of the
Russian government or the political leadership of the Russian government may
have a significant adverse impact on the stability of the business environment
in Russia. As a result, uncertainty exists concerning the value and
enforceability of contract rights we have or may acquire in Russia. In
addition, any deterioration in relations between the United States and Russia
could adversely affect our ability to launch in Russia.
Our business is dependent 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 satellites.
Many of the sources for these components are our primary source of supply,
including Ball Aerospace & Technologies Corp., 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 is dependent 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, even
for extended periods. Although we have insurance to cover damage to our data
centers, we do not carry business interruption insurance to cover the loss of
revenue that would result if one of our data centers was damaged or destroyed.
Risks related to government regulation of our industry.
We must comply with technology transfer restrictions during our launch
campaign in Russia and our ability to launch from Russia depends upon the
compliance of the Russian government with a technology safeguards agreement
between the United States and Russia.
We have obtained a license from the Office of Defense Trade Controls of the
United States Department of State that authorizes us to export temporarily the
QuickBird 1 satellite for launch from Russian territory. The license restricts
the type of information that can be provided to our Russian launch contractors.
Furthermore, launches of U.S.-origin satellites from Russia are governed by a
technology safeguards agreement between the United States and Russia. This
agreement protects against the misappropriation of U.S.-origin satellite
technology. If we fail to comply with the requirements of our temporary export
license, if changes in these requirements occur, or if the Russian government
fails to comply with the requirements of the technology safeguards agreement, we
may be denied or may experience a significant delay in obtaining permission to
transport a satellite to Russia for launch. Additionally, we cannot assure you
that the United States Congress will not in the future alter the regulatory
framework for launches outside the United States. Such changes may preclude or
significantly delay our ability to launch a satellite from Russia.
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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 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.
NOAA Licenses. We are required to hold, and have obtained, licenses from the
National Oceanic and Atmospheric Administration of the United States Department
of Commerce ("NOAA") for the operation of our commercial remote sensing
satellite system. These licenses regulate our activities in several areas. For
instance, non-United States persons may not own more than 25% of our stock
without approval of the Department of Commerce, which may limit the persons who
could provide financing to or acquire EarthWatch.
FCC Licenses. We are required to hold, and have obtained, licenses from the
Federal Communications Commission ("FCC") for the operation of radio frequency
devices on board our satellites 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 new notes.
Risks related to the market for our products and services.
Our business will suffer if we do not compete successfully in the collection
and distribution of digital geographic and image data.
We expect to encounter substantial competition in the market for digital
geographic and image data. We expect to face competition from traditional
sources of image-based information, including aerial photography, and from high-
resolution satellite systems developed and operated by other commercial
enterprises or foreign governments. Industry analysts generally expect that
aerial photography will remain the dominant source of imagery because it offers
superior spatial resolution as compared to imagery produced by commercial
satellites.
Aerial photography offers high-resolution imagery, is efficient and
competitively priced, and currently enjoys a majority share of the overhead
imagery market. We expect that aerial photography firms will continue to offer
products that are competitive with ours in many applications.
We also face competition from high-resolution commercial satellite ventures,
including Space Imaging, ORBIMAGE, and West Indian Space. Space Imaging, a joint
venture including Lockheed Martin, E-Systems, and Mitsubishi, has developed a
high-resolution imaging system utilizing two satellites. Space Imaging
successfully launched a satellite in September 1999 and has been distributing
imagery to its customers since that time. Space Imaging also has the right to
distribute imagery for Landsat 4 and 5 and for Indian Remote Sensing System. It
also has access to significant technological and capital resources. ORBIMAGE,
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a wholly-owned subsidiary of Orbital Sciences Corporation, is developing two
high-resolution imaging systems, which are scheduled for launch during the first
quarter of 2001 and by late second quarter of 2001, respectively, as publicly
announced. In addition, West Indian Space has announced plans to launch two
high-resolution satellites for commercial use, one in 2000 and one in 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 new notes.
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 new notes.
Our dependence on third party distributors, sales agents, and value-added
resellers could result in marketing and distribution delays.
We plan to market and sell 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.
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 which 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 new notes.
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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.
Technological Risks.
The EarthWatch system is exposed to the risks inherent in a large scale,
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 of any of its elements could delay the
operation of the EarthWatch system or render it unable to perform to the quality
standards required for success. We believe that, based upon presently available
information, our new satellites will, at the time of launch, be technologically
competitive with other high-resolution satellites. However, because of
substantial and continual technological change, there can be no assurance that
we will maintain our competitive position or that such technological changes
will not adversely affect our business, results of operations, financial
condition, or our ability to pay interest and principal on the new notes.
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, and 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 and Chief Financial Officer. 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 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.
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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 transferred to other persons
without our consent. If we resort to legal proceedings to enforce our
proprietary rights, the proceedings could be burdensome and expensive, and the
outcome could be uncertain.
Claims of intellectual property infringement expose us to costs and potential
losses.
Because we have contracted for a significant portion of our infrastructure,
suppliers often grant us licenses to use their intellectual property embodied in
the hardware and software supplied and indemnification for any infringement of
intellectual property rights in connection with such use. Despite this
indemnification, we may be subject to claims alleging infringement by us of
third party proprietary rights. If any of our products or services infringes
third party rights, we may not be able to obtain permission to use such
intellectual property on commercially reasonable terms. This could require us
to expend significant resources to make our products and services noninfringing
or to discontinue the use of such products and services. Any claim of
infringement also could cause us to incur substantial costs defending against
the claim, even if the claim is without merit. Finally, a party making such a
claim could secure a judgment that requires us to pay substantial damages or
that prevents us from using or selling our products and services. Any of these
events could have a material effect on our business, operating results,
financial condition, and our ability to pay principal and interest on the new
notes.
Claims of invasion of privacy or misappropriation of trade secrets could be
expensive and cause substantial losses.
Because our satellites are 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 new notes.
Risks relating to the new notes.
Our launch insurance coverage may not provide adequate protection against
satellite loss or impairment.
Holders of the new notes have an indirect security interest in proceeds from
insurance policies covering the launch and first two years of operations of
QuickBird 1. Holders' interests in such policies are shared on an equal basis
with holders of our old notes and 12 1/2% Notes through a collateral pledge and
security agreement. We believe the security interest granted in favor of
holders of the new notes has been perfected to the extent feasible under the
governing laws of Colorado 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 new 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 new
notes, the old notes, and the 12 1/2% Notes.
Our launch insurance policies contain customary exclusions, such as war,
insurrection, or willful act, the occurrence of any of which would result in a
lack of insurance coverage, which could have a material adverse effect on our
business, operating results, and financial condition.
16
<PAGE>
We cannot assure you that an active trading market will develop for the new
notes.
We are offering the new notes to the holders of the old notes. Prior to this
exchange offer, there was no existing trading market for the old notes and there
were no existing new notes. We do not intend to apply for listing of the new
notes on any securities exchange or on the Nasdaq National Market. The new
notes may trade at a discount, depending upon prevailing interest rates, the
market for similar securities, our performance, and other factors. Morgan
Stanley & Co. Incorporated, the initial purchaser, has advised us that it
intends to make a market in the new notes following the issuance thereof;
however, Morgan Stanley is not obligated to do so and any such market-making
activities may be discontinued at any time without notice. We cannot be
certain, therefore, that an active market for the new notes will develop or, if
such a market develops, that it will continue. See "Plan of Distribution."
The form and terms of the new notes are substantially identical to the form
and terms of the old notes, except that the new notes:
. will be registered under the Securities Act;
. will not provide for registration rights;
. will not provide for payment of additional interest upon failure to
register or exchange the old notes, which terminates upon completion of the
exchange offer; and
. will not bear legends containing transfer restrictions.
The new notes will be issued solely in exchange for an equal principal amount
of old notes. As of the date hereof, we have old notes outstanding with an
aggregate principal amount at maturity of $199 million.
We may not have the ability to raise the funds necessary to finance the change
of control offer required by the new notes.
Upon the occurrence of certain change of control events, we will be required
to offer to repurchase the new notes, the old notes, and the 12 1/2% Notes at a
price equal to 101% of their accreted value, plus accrued interest. It is
possible that we will not have sufficient funds at the time of the change of
control to make the required repurchases. If we are unable to make the required
repurchases, we would be in default under the new notes, the old notes, and the
12 1/2% Notes.
Purchasers of the new notes will be required to include amounts in gross
income for federal income tax purposes in advance of receipt of cash payments.
The new notes will be 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 new 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 new notes.
The new notes are applicable high-yield discount obligations, as defined in
the Code, and the following rules will apply, if the yield to maturity of the
new 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 new 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 new notes, and the remaining original issue
discount on the notes will not be deductible by us until such original issue
discount is paid by us in cash. See "United States federal income tax
consequences--Applicable high-yield discount obligations."
A failure to exchange your old notes for new notes may result in a decline in
value of your old notes and your old notes will continue to be subject to
restrictions on transfer.
When the exchange offer is completed, the liquidity of any trading market for
old notes that remain outstanding will decrease significantly. You may be
unable to sell or transfer your old notes and the value of your old notes may
decline.
The old notes have not been registered under the Securities Act or any state
securities laws. When the exchange offer has been completed, we will have no
further obligation to register the old notes. Thereafter, if you have not
tendered your old notes in the exchange offer, you will continue to hold
restricted securities. You may not offer to sell or otherwise transfer your old
17
<PAGE>
notes unless the sale complies with the registration requirements of the
Securities Act and any other applicable securities laws, or unless there is an
exemption from the securities laws for your sale. In addition, to sell your old
notes, you must comply with certain other conditions and restrictions, including
our and the trustee's right in certain cases to require you to deliver opinions
of counsel, certifications, and other information prior to any such transfer.
If you do not exchange your old notes in the exchange offer, the old notes will
continue to bear a legend reflecting such restrictions on transfer. In addition,
once the exchange offer has been completed, you will not be entitled to, and we
do not expect to, exchange old notes for notes registered under the Securities
Act.
The new notes and any old notes which remain outstanding after consummation of
the exchange offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding principal
amount thereof have taken certain actions or exercised certain rights under the
indenture.
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 such forward-looking statements. Such 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 such
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
<PAGE>
USE OF PROCEEDS
This exchange offer is intended to satisfy certain of our obligations under
our registration rights agreement. We will not receive any cash proceeds from
the issuance of the new notes offered in the exchange offer. In consideration
for issuing the new notes as contemplated in this prospectus, we will receive in
exchange old notes in like principal amount at maturity, the form and terms of
which are the same in all material respects as the form and terms of the new
notes except that the new notes:
(1) will have been registered under the Securities Act and therefore will
not be subject to certain restrictions on transfer applicable to the
old notes; and
(2) will not be entitled to certain registration or other rights under our
registration rights agreement, including the provision in the
registration rights agreement for additional interest of up to 0.5%
per annum upon our failure to consummate the exchange offer.
The old notes surrendered in exchange for the new notes will be retired and
cancelled and cannot be reissued. Accordingly, issuance of the new notes will
not result in any increase in our indebtedness.
The net proceeds to us from the issuance of the old notes and shares of Series
C preferred stock which we issued in connection with the old notes were
approximately $130.2 million, after deducting the selling discounts and
commissions and expenses. See "Description of the old notes--General." Of the
$130.2 million in net proceeds raised from the issuance of the old notes and
shares of Series C preferred stock, approximately $72.7 million were used for
satellite and ground system development and satellite launch, including escrowed
and paid insurance premiums, approximately $4.5 million were used for product
development, and approximately $2.1 million were used to expand our sales and
marketing efforts. We currently are using the remaining proceeds for working
capital, other operating expenses, and general corporate purposes.
Because of the number and variability of factors that will determine our use
of the net proceeds from the issuance of the old notes and the shares of Series
C preferred stock issued in connection therewith, management will retain a
significant amount of discretion over the application of such net proceeds.
Pending the use of such net proceeds as described above, we intend to invest
such funds in interest-bearing bank accounts or invest the proceeds in United
States government securities or other short-term, interest-bearing investment
grade securities, to the extent permitted by the indenture.
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.
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,
19
<PAGE>
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 will restrict our ability to pay dividends
on, or make distributions in respect to, our capital stock. See "Description of
the old notes--Covenants--Summary."
20
<PAGE>
CAPITALIZATION
The following table sets forth our total cash and cash equivalents and
capitalization as of March 31, 2000. This table should be read in conjunction
with the consolidated financial statements and related notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
(in thousands)
<S> <C>
Cash and cash equivalents.................................................... $ 63,119
=========
Long-term debt:
Old notes.................................................................... $ 117,810
12 1/2% Senior Notes......................................................... 56,329
Other long-term debt, excluding current portion.............................. --
---------
Total long-term debt......................................................... 174,139
---------
Mandatorily redeemable preferred stock/(1)/:
Series A convertible preferred stock......................................... 24,146
Series B convertible preferred stock......................................... 24,146
Series C convertible preferred stock......................................... 75,140
---------
Total mandatorily redeemable preferred stock................................. 123,432
---------
Stockholders' equity (deficit):
Preferred stock.............................................................. --
Common stock................................................................. --
Additional paid-in-capital................................................... 78,289
Accumulated other comprehensive income (loss)................................ (61)
Accumulated deficit.......................................................... (117,101)
---------
Total stockholder's equity (deficit)......................................... (38,873)
---------
Total capitalization......................................................... $ 258,698
=========
</TABLE>
(1) The mandatorily redeemable Series A, Series B, and Series C preferred stock
are required to be redeemed on March 31, 2009 at a redemption price equal to
100% of the then applicable liquidation preference, plus accrued and unpaid
dividends to the date of redemption. The mandatorily redeemable Series A,
Series B, and Series C preferred stock are entitled to cumulative dividends
at annual rates of 7.0%, 7.0%, and 8.5%, respectively, payable quarterly in
cash, additional shares, or an increase in liquidation preference, as
applicable. The indentures governing the new notes and the 12 1/2% Notes
restrict our ability to pay cash dividends.
21
<PAGE>
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, 1998 and 1999, and
consolidated statement of operations data for each of the three years ended
December 31, 1999, have been derived from our audited consolidated financial
statements and the notes thereto included elsewhere in this prospectus. The
consolidated statement of operations data for the nine months ended December 31,
1995 and the year ended December 31, 1996, and the consolidated balance sheet
data as of December 31, 1995, 1996, and 1997, are derived from our historical
consolidated financial statements not included in this prospectus. The
unaudited consolidated statement of operations data for the three-month periods
ended March 31, 1999 and 2000, and the consolidated balance sheet data as of
March 31, 1999 and 2000, are derived from unaudited consolidated financial
statements 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.
<TABLE>
<CAPTION>
Nine Months
from March
31, 1995 to Year Ended December 31, Three Months Ended
------------------------------------------ -----------------------
December 31, March 31, March 31,
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ----- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue...................................... $ 2,993 $ 1,900 $ 437 $ 1,809 $ 5,913 $ 167 $ 2,019
------- -------- -------- -------- -------- ------- --------
Cost of goods sold........................... 1,712 1,922 382 1,905 5,120 143 1,343
Selling, general and administrative.......... 2,430 5,992 8,588 4,975 2,763 2,231 3,016
Research and development..................... 3,126 20,178 19,121 9,113 6,956 2,067 2,380
Loss from impairment of fixed assets......... -- -- 25,519 599 -- -- --
Gain from arbitration settlement............. -- -- -- (1,515) -- -- --
Loss from operations......................... (4,275) (26,192 (53,173) (13,268) (18,926) (4,274) (4,720)
Interest expense............................. (26) (63 (86) (1,340) (5,482) (50) (1,984)
Interest income.............................. 392 2,549 2,528 1,688 4,089 180 1,332
------- -------- -------- -------- -------- ------- --------
Net loss..................................... $(3,909) $(23,706 $(50,731) $(12,920) $(20,319) $(4,144) $ (5,372)
======= ======== ======== ======== ======== ======= ========
Other Financial Data:
Capital expenditures......................... $ 9,208 $ 33,952 $ 54,271 $ 26,037 $ 75,238 $ 4,433 $ 15,800
Cash provided (used) by operating
activities................................. (1,623) (20,967 (14,192) 18,136 (6,420) (3,926) (6,070)
Cash provided (used) by investing
activities................................. (9,208) (33,951 (68,290) (17,529) (97,070) (717) (12,986)
Cash provided (used) by financing
activities................................. 32,521 68,452 53,668 (1,972) 180,639 (48) (19)
Deficiency of earnings to fixed charges...... (3,909) (23,851 (56,401) (18,976) (31,661) (5,894) (10,668)
<CAPTION>
Period from
March 31, 1995
To March 31,
2000
----
<S> <C>
Statement of Operations Data:
Revenue..................................... $ 15,071
---------
Cost of goods sold.......................... 12,385
Selling, general and administrative......... 37,764
Research and development.................... 60,874
Loss from impairment of fixed assets........ 26,118
Gain from arbitration settlement............ (1,515)
Loss from operations........................ (120,554)
Interest expense............................ (8,981)
Interest income............................. 12,578
---------
Net loss.................................... $(116,957)
=========
Other Financial Data:
Capital expenditures........................ $ 214,506
Cash provided (used) by operating
activities................................ (31,136)
Cash provided (used) by investing
activities................................ (239,035)
Cash provided (used) by financing
activities................................ 333,289
Deficiency of earnings to fixed charges..... (145,466)
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31, 1999 March 31, 2000
---------------------------------------------------- -------------- --------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Balance Sheet Data:
Cash and cash equivalents................... $21,690 $35,224 $ 6,410 $ 5,045 $ 82,193 $ 354 $ 63,119
Total assets................................ 38,186 90,547 104,299 85,328 271,469 80,479 268,412
Total debt.................................. 597 1,188 51,511 49,804 167,148 49,833 174,216
Mandatorily redeemable preferred stock...... -- -- -- -- 123,384 -- 123,432
Stockholders' equity (deficit).............. 33,691 83,107 39,737 26,831 (33,519) 22,628 (38,873)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this prospectus.
Digital Globe(R) and Your Planet Online(R) are our registered trademarks and
Seconds on Orbit(TM) is our trademark. See "Special note regarding forward-
looking statements."
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 two
satellites 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 satellites
are designed to collect 1-meter resolution gray scale and 4-meter resolution
color imagery of the earth and will have an ability to revisit most areas almost
daily. We plan to launch the QuickBird 1 satellite in the fall of 2000.
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. 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 1. 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
"Recapitalization." Also, we obtained the consent of holders of our 12 1/2%
Notes to amend the indenture governing the 12 1/2% 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 units consisting of a
promissory note and an equity component. The notes had an accreted value of
$684.61 and a principal value at maturity in 2007 of $1,000. The equity
component of the units consisted of 49.095 shares of our 8.5% Series C
convertible preferred stock. The offering resulted in aggregate gross proceeds
of approximately $136 million.
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 satellites 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 2001 due to anticipated substantial
operating expenses, including additional research and development expenses,
launch insurance costs, 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 1 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.
23
<PAGE>
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 1 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 1 is
launched. We will use this initial period to test the system. Most of our
first year revenues will come from government customers that enter into pre-
launch contracts. We anticipate that many customers will wait to enter into
imagery contracts until after QuickBird 1 is successfully launched and fully
operational.
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.
We believe that QuickBird 2, which is scheduled for launch in 2001, will
enable us to sell considerably more Seconds on Orbit and direct downlinks,
especially to three major markets--Asia, Europe, and the Middle East--where
customers are closely spaced. Our Seconds on Orbit product is designed to allow
customers to purchase imaging time on our satellites directly. We believe the
planned sun synchronous orbit of QuickBird 2 will produce imagery complementary
to our QuickBird 1 capabilities, given that QuickBird 1 is on an inclined orbit.
Revenue
Our revenues have been generated 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 sale 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 sales 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 satellites (once they are placed in
service), including launch insurance, capitalized interest, and ground system
construction. Since the designed useful life of the satellites is five years,
we expect to depreciate them 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 1 and we expect
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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.
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 remain fairly constant with some variable spending for
software and equipment upgrades. 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.
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 launch the QuickBird
1 satellite, 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 $163.2 million for both QuickBird 1 and QuickBird 2 and related
systems. The QuickBird 1 satellite is now in final assembly and testing. Each
QuickBird satellite has a designed useful life of five years. We expect to spend
an additional $106 million to complete both QuickBirds and their related
systems. We have begun to develop plans for the satellites that will replace
QuickBird 1 and 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 these next generation
satellites. We believe these satellites will provide significant additional
capacity and significantly increase our revenue opportunities compared to the
QuickBird system.
Results of operations
Three months ended March 31, 2000 compared with three months ended March 31,
1999
Revenue. Our revenue has been generated primarily from the processing and
licensing of geographic imagery purchased from third-party suppliers. Our total
revenue increased from $167,000 in the first quarter of 1999 to $2.0 million in
the first quarter of 2000.
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Cost of goods sold. Our cost of goods sold increased from $143,000 in the
first quarter of 1999 to $1.3 million for the first quarter of 2000. This
increase resulted from the purchase and licensing of third party products.
These costs are not indicative of 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 $2.2 million in the first quarter of 1999
to $3.0 million in the first quarter of 2000. General and administrative
expenses increased from $1.7 million in the first quarter of 1999 to $2.1
million in the first quarter of 2000 and selling and marketing expenses
increased from $541,000 in the first quarter of 1999 to $900,000 in the first
quarter of 2000. The increase from 1999 to 2000 resulted primarily from changes
in staffing levels.
Research and development. Our research and development costs increased from
$2.1 million in the first quarter of 1999 to $2.4 million in the first quarter
of 2000. This increase was attributable to the fact that as the launch of the
QuickBird 1 satellite nears, work on other components of the Digital Globe
system has increased.
Provision for income taxes. Due to losses incurred in the first quarter of
1999 and the first quarter of 2000, we recorded no provision for income taxes in
either quarter. We calculate our net operating loss carryforwards on an annual,
rather than a quarterly, basis. 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 loss. We had net losses of $4.1 million and $5.4 million in the first
quarter of 1999 and the first quarter of 2000, respectively.
Year ended December 31, 1999 compared with year ended December 31, 1998
Revenue. Our revenue has been generated primarily from the processing and
licensing of geographic imagery purchased from third-party suppliers. Our
revenue from these activities increased from $1.4 million in 1998 to $5.5
million in 1999. Our revenue generated from service contracts and sales from
archives for 1998 and 1999 was $400,000.
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 $0 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. We record as research and development expense all
engineering costs associated with the preliminary design of our satellites as we
maintain the risk associated with design failure. Once the design of the
satellite is stable and not subject to significant additional modification,
costs will be capitalized as investments in satellite equipment. Research and
development costs decreased from $9.1 million in 1998 to $7.0 million in 1999.
Costs associated with the design of the satellites decreased from $3.3 million
in 1998 to $2.5 million in 1999. The remaining research and development costs
were associated with the design of the archival and value-added production
facilities for image data, ground stations, and satellite control operations.
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 loss. We had net losses of $12.9 million and $20.3 million in 1998 and
1999, respectively.
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Year ended December 31, 1998 compared with year ended December 31, 1997
Revenue. We did not generate any significant revenue in 1998 or 1997 from
our primary business, the sale of licenses for the use of overhead geographic
imagery. Our total revenue increased from $437,000 in 1997 to $1.8 million in
1998. Of these amounts, we generated $402,000 and $1.4 million in 1997 and 1998,
respectively, from sales of third party geographic imagery. In 1998, we also
derived revenue of $358,000 from sales of aerial imagery and production
services. In 1997, we received $35,000 in revenue under a service contract with
CTA Incorporated for assisting in the construction of a satellite for NASA.
Cost of goods sold. Our cost of goods sold increased from $382,000 in 1997
to $1.9 million in 1998. A substantial portion of this increase in 1998 resulted
from costs of $1.3 million incurred in connection with processing third party
geographic imagery. In 1997 and 1998, we incurred costs of $326,000 and
$651,000, respectively, that were attributable to services provided under
services contracts. In 1997, we incurred costs of $56,000 under our CTA service
contract.
Selling, general, and administrative expenses. Our selling, general, and
administrative expenses decreased from $8.6 million in 1997 to $5.0 million in
1998. General and administrative expenses declined from $4.5 million in 1997 to
$3.2 million in 1998, while selling and marketing expenses declined from $4.1
million in 1997 to $1.8 million in 1998. Substantially all of this decrease was
attributable to reduced business activity and staffing after the failure of
EarlyBird 1.
Research and development. Our research and development costs declined from
$19.1 million in 1997 to $9.1 million in 1998. A decrease in satellite design
expenses from $10.9 million in 1997 to $3.3 million in 1998 accounted for a
significant portion of this decrease. Other research and development expenses,
including design costs related to imagery processing and archival facilities,
ground stations, and satellite control operations also decreased, largely as a
result of deferred development projects in 1998.
Loss from impairment of fixed assets. In 1997 and 1998, we recorded losses
from the impairment of fixed assets of $25.5 million and $599,000, respectively,
in connection with the loss of EarlyBird 1 and our decision not to continue with
the EarlyBird program. The loss from impairment of fixed assets that we
recorded in 1997 represented the total accumulated construction costs of
EarlyBird 1, EarlyBird 2, and related ground equipment, net of $29.0 million in
insurance proceeds received in connection with the failure of EarlyBird 1. We
subsequently determined that some of the imagery processing software developed
for EarlyBird was not usable for QuickBird imagery. Accordingly, in 1998 we
recorded an additional loss from impairment of fixed assets of $599,000, equal
to the total accumulated development costs of such software.
Gain from arbitration settlement. In 1998, we recorded a gain of $1.5
million as a result of the reversal of certain accrued construction in progress
expenses in connection with an arbitration settlement with Orbital Sciences
Corporation, the builder of the EarlyBird 1 satellite. This settlement offset,
in part, $3.3 million in expenses related to certain unpaid invoices previously
included in loss from impairment of fixed assets in 1997.
Provision for income taxes. Due to losses incurred in 1997 and 1998, we
recorded no provision for income taxes in either year. As of December 31, 1997
and 1998, we had $67.3 million and $79.6 million, respectively, in net operating
loss carryforwards. We have not recorded such deferred tax benefits as assets
because we have had no history of profitability.
Net loss. We had net losses of $50.7 million and $12.9 million in 1997 and
1998, respectively. Of the 1997 net loss, $25.5 million was associated with the
failure of the EarlyBird 1 satellite.
Liquidity and capital resources
Since our recapitalization, our primary sources of liquidity have been
private sales of equity and debt securities to our strategic partners, including
Ball Corporation, Capital Research and Management, Hitachi, ITT Industries, and
Morgan Stanley, and other investors, as described in the overview.
We have used this liquidity for general corporate purposes, including
primarily developing and launching satellites, constructing ground stations, and
developing imagery processing and storage facilities. Pending the use of such
proceeds, we invest such funds in short-term, interest-bearing, investment grade
securities. As of March 31, 2000 and December 31, 1999, we had $63.1 and $82.2,
respectively, in cash and cash equivalents. In April 1999, we received net
proceeds of $48.3 million from the sale of preferred stock in connection with
our recapitalization. In July 1999, we received net proceeds of $130.2 million
from our debt and equity offering. See our consolidated financial statements
for the fiscal year ended December 31, 1999 and our interim consolidated
financial statements for the three months ended March 31, 2000 and the notes
thereto.
We used net cash in our operating activities of $6.1 million in the three
months ended March 31, 2000, primarily to fund selling, general, and
administrative expenses and research and development activities in support of
the QuickBird programs. In
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1999, we used net cash in our operating activities of $6.4 million, primarily to
fund selling, general, and administrative expenses and research and development
activities in support of the QuickBird programs.
In the three months ended March 31, 2000 and the year ended December 31,
1999, we used $13.0 million and $97.1 million, respectively, in investing
activities. In these periods, we invested capital for satellite construction,
imagery processing and archiving facilities, ground stations, and satellite
control operations. We also purchased equipment for our general and
administrative activities and for continuing research and development activities
related to the QuickBird program. In addition, we used a portion of the proceeds
of the debt and equity financing to purchase securities to be held in escrow for
use in paying the premiums on the launch insurance. We anticipate that we will
invest approximately $60 million in capital in the remaining nine months of 2000
primarily for these same purposes.
In the three months ended March 31, 2000, we used approximately $19.0
million in financing activities as a result of principal payments on debt. In
the year ended December 31, 1999, we derived $180.6 million from various
financing activities. Of this amount, $48.3 million was derived from the
recapitalization and $130.2 million was derived from the unit offering closed in
July, offset by $0.3 million in principal payments on capital-lease
obligations.
At March 31, 2000, we had approximately $174 million of indebtedness. Such
indebtedness will have a fully accreted value of $271 million on July 15, 2002.
In addition, the new notes will begin to accrue cash interest on July 15, 2002
and will be payable semiannually in cash on January 15 and July 15 of each year,
beginning on January 15, 2003.
Based on our current operating plan, we believe that existing capital
resources will meet our anticipated cash needs for the foreseeable future. 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 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. A significant delay in the launch of
QuickBird 1 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. In addition, we could experience higher costs if we have to
modify our future satellites. If we incur any such additional costs or if our
receipt of revenue is delayed, we could need additional financing. 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 in short-term, interest-bearing,
investment grade securities. 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.
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BUSINESS
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 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 two satellites 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 satellites
are designed to collect 1-meter resolution gray scale and 4-meter resolution
color imagery of the earth and will have an ability to revisit most areas almost
daily. We plan to launch our first 1-meter QuickBird satellite, QuickBird 1, in
the fall of 2000.
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 archive database. This will allow us to produce satellite imagery
at negligible marginal cost, facilitating an array of new geographic
information, mapping, and 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 ("GIS") market. Users have few alternative sources from which to obtain
data and we believe that high-resolution satellite imagery provided by the
QuickBird system will provide an important alternative source to aerial
photography and low-resolution satellite imagery, such as Landsat and SPOT. One-
meter spatial resolution imagery can detect and locate many objects that
previously could not be identified using the 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.
Based on publicly announced launch schedules, we expect that QuickBird 1
will be one of the first 1-meter resolution satellites available to serve the
commercial market. Moreover, we are not aware that any additional competitors
plan to enter this market other than our three announced competitors: Space
Imaging, which we believe successfully launched its first 1-meter resolution
satellite in September 1999 and has begun serving the commercial market,
ORBIMAGE, and West Indian Space. 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 early
entrants, will have a significant early-to-market advantage.
We also believe that the emergence of high-resolution commercial remote
sensing satellites will stimulate new spending to create and update GIS
databases, especially in emerging markets in Asia, Australia, the Middle East,
and South America.
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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 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 & Technologies Corp., 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.
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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
. the best satellite pointing, or geolocation accuracy.
We believe these technical advantages will allow us to collect three to
nine times 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
satellites in orbits that will provide frequent revisit capability, so that once
our satellites are operational, we will be able to collect imagery on virtually
every location on the earth's surface on an almost daily basis. Applications
that require near real-time high-resolution imagery, such as monitoring natural
disasters, civil emergencies, and regional security, will benefit from this
frequent revisit capability.
Build direct relationships with key customers and market influencers
To build market presence and demonstrate new product applications quickly,
we will seek to identify key early adopters and influencers in each target
market and develop close customer relationships. We will seek to expand our
reach to potential customers through partnerships with leading information
technology companies, distributors, agents, value-added resellers, and
customers. For example, in addition to contributing to our systems development
program, Hitachi and Eurimage, a majority-owned unit of Nuova Telespazio, will
serve as master international distributors of our products and services in Asia
and Europe, respectively. We also plan to license our products through value-
added resellers in North America and in those regions of the world not covered
by exclusive reseller distribution agreements.
In contrast to our competitors, we intend to create an open system to
support purchasers of raw imagery data who desire to process such data using
their own facilities. We plan to provide to purchasers the detailed support
data, including our satellite camera model and downlink formats, necessary to
enable them to perform their own image processing. By supporting open systems
interoperability, we believe we can stimulate third party software developers
and value-added resellers to develop innovative products and applications that
use our imagery data. We also intend to establish relationships with one or more
leading retail Web sites 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 satellites 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 within three years of our first
QuickBird launch, we will be able to archive most key urban areas and other
areas of interest worldwide, and can continually update this imagery.
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.
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Target markets and applications
Within the overhead imagery market, we will initially target worldwide
commercial and government applications for surveillance, GIS, and mapping.
Within the market for federal, state, and local government users, we 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 satellites, 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 satellites 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.
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 satellites 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.
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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, satellites, and days.
QuickBird satellites and ground system operations
QuickBird satellites
We intend to launch and operate two QuickBird satellites. Ball Aerospace &
Technologies Corp. is currently constructing and integrating these satellites at
its facility in Boulder, Colorado. Ball Aerospace is currently performing
environmental testing on the QuickBird 1 spacecraft. Most of the components for
the QuickBird 2 spacecraft have been delivered and the satellite is currently in
assembly.
Ground stations and satellite control
Our QuickBird satellites will be supported by two ground stations, located
in Fairbanks, Alaska and Troms0, Norway. We will control our satellites 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 our
first QuickBird launch, we will be able to archive most key urban areas and
other areas of interest worldwide, and can continually update this imagery.
MacDonald Dettwiler, Interlink Group Corporation, and InfoFusion, LLC are
upgrading this system to support the QuickBird spacecraft. 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.
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Satellite launch arrangements
QuickBird 1 is scheduled to be launched on a Russian Cosmos SL-8 rocket.
Cosmos rockets have had 713 successful launches, the highest number of
successful launches of any launch vehicle, with a success rate of approximately
99.2% since 1986.
We have entered into a launch services agreement with United Start. United
Start is a United States company jointly owned by the Russian company ZAO
Puskovie Uslugi and Assured Space Access, Incorporated. Puskovie Uslugi will
perform the launch with assistance from Russian authorities and subcontractors.
We have not yet selected a launch vehicle for QuickBird 2. We are currently
considering three launch vehicles: the Rockot, Athena-2, and the Cosmos.
The launch of our satellites on a Russian rocket requires the
transportation of the satellites to a launch facility in Plesetsk that is owned
and operated by the Russian military. We have received all required licenses and
authorizations from the United States and Russian governments to launch
QuickBird 1. We will apply for the QuickBird 2 license after we choose a launch
vehicle.
Insurance
We have contracted with Ball Aerospace to construct and deliver the
QuickBird 1 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 will 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.
We have in force an insurance policy covering the launch of QuickBird 1 and
its operation for two years from the launch date. The proceeds from the policy
should cover the cost of construction, launch, and launch insurance of QuickBird
2. The launch insurance will not only cover total failure, but also partial
failure by QuickBird 1 to achieve proper orbit or to perform in accordance with
specifications for a period of two years after launch.
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.
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 West Indian Space
(Israel). Space Imaging successfully launched a satellite in September 1999 and
has been distributing imagery to its customers since that time. 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.
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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. Based on reported scheduled launches, we believe
that other entrants, including ORBIMAGE and West Indian Space, will launch
satellites shortly after QuickBird 1.
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 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.
West Indian Space. West Indian Space is a joint venture composed of
government-owned Israel Aircraft Industries, Electro-Optics Industries, and Core
Software Technology Inc. West Indian Space has announced plans to launch and
operate a constellation of 1.8-meter and 1-meter resolution commercial imaging
satellites named EROS. Based on the announced specification for EROS
satellites, we believe that they will offer lower performance than our QuickBird
satellites. However, West Indian Space is associated with the Israeli
government and, if subsidized, could be able to compete aggressively on price.
West Indian Space's first customer, the Israeli government, has announced that
it has reserved the full capacity of West Indian Space's first and third
satellites.
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 constellation will offer
significant technical advantages over the competition.
We believe that the ORBIMAGE and West Indian Space 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
22-kilometer swath width, 128 gigabytes of on-board storage, and geolocation
accuracy as good as two meters with ground control. We believe we will be able
to collect between three to nine times as much imagery per day as 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.
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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 1 and 2 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 & Technologies Corp. is a leading supplier of remote
sensing, military, and space technology. Ball Aerospace has developed and
successfully executed 37 satellite-related projects. Additionally, Ball
Aerospace has developed and implemented the in-orbit solution for problems faced
by the Hubble Space Telescope's optical system. As the prime contractor for the
QuickBird system, Ball Aerospace provides design, construction, and integration
for the imaging payload and spacecraft bus of both the QuickBird 1 and QuickBird
2 satellites.
Hitachi Software
Hitachi Software Engineering Company, Ltd. is a leading manufacturer of
high technology products and is a major Japanese supplier of GIS software and
hardware. Hitachi Software has established relationships in both the military
and commercial GIS markets in Asia, which, we believe, are currently the fastest
growing GIS markets in the world. Hitachi Software will serve as our master
international distributor in Asia.
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 GIS and mapping
capabilities. It is also a part owner of Eurimage, a company that manages the
largest European satellite imagery sales and distribution network. Eurimage is
our master international distributor 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 the recent announcement of MacDonald Dettwiler's
planned 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 the QuickBird satellites. 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
Troms0, Norway.
Customers
NASA and NIMA accounted for approximately $5.4 million and $550,000, or
approximately 90% and 9%, respectively, of our revenue during the fiscal year
ended December 31, 1999. 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.
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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 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, and "Your Planet Online." We have
submitted, and will continue to submit, trademark applications for our
operations.
Government regulation
Our business is subject to regulation in the United States and abroad.
Commercial remote sensing license
We have received our licenses from the National Oceanic and Atmospheric
Administration ("NOAA") for QuickBird satellite operations. The licenses
contain restrictions to protect the foreign and national security policies of
the United States and to implement United States obligations under various
international agreements. Under such licenses, we must also provide the United
States government with access to, and the use of, our data at commercial market
prices. The United States government may limit the commercial distribution of
such data in certain circumstances.
Communications frequency license
We have the licenses issued by the Federal Communications Commission
("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 1 and QuickBird 2. 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 FCC followed with an amendment to the license
requiring construction of QuickBird 1 to be completed by June 2000 (followed by
launch no later than August 2000), and construction of QuickBird 2 to be
completed by December 2000 (followed by launch no later than February 2001). In
May 2000, we filed a request with the FCC to extend further the construction
completion and launch dates for both satellites to November 2000 and April 2001,
respectively, for QuickBird 1; and to May 2001 and December 2001, respectively,
for QuickBird 2. The FCC has indicated verbally to us that this modification to
our license will receive the FCC's approval before the end of July 2000, but
written approvals have not yet been received.
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.
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Launch license
The Office of Defense Trade Controls has issued all of the required
licenses for QuickBird 1.
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 May 31, 2000, we employed 169 full-time employees. Of these
employees, 34 are in data systems, 61 are in ground, product, and space
operations, 28 are in marketing, sales, and customer service, and 46 are in
executive, finance, and administration. Since year-end 1999, we have increased
staffing by 39%. None of our employees are represented by a labor union or are
covered by a collective bargaining agreement. We consider our employee relations
to be good.
Properties
Our principal executive offices consist of approximately 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
$52,000. We also lease approximately ten acres and 400 square feet of space,
respectively, for the sites of two ground stations located in Fairbanks, Alaska
and Troms0, Norway. The terms for these leases run through July 10, 2005 and
until six months following the cessation of QuickBird operations, respectively.
Our monthly payments under these leases are approximately $4,000 payable semi-
annually, and approximately $15,000 (based on current exchange rates) payable
annually, respectively.
Legal proceedings
We are not currently a party to any material pending legal proceedings.
Reports to security holders
For as long as this registration statement is effective, we will send,
without charge, to each of our security holders complete and accurate
information in reports on Forms 10-K, on an annual basis, 10-Q, on a quarterly
basis, and 8-K, on a periodic basis, under the Securities Exchange Act of 1934.
The reports on Form 10-K will contain financial information that has been
examined and reported on, with an opinion expressed, by our independent
auditors.
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MANAGEMENT
Directors, executive officers and key employees
The following table provides information concerning our directors,
executive officers and certain key employees as of June 30, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Herbert F. Satterlee III.......................... 45 Chief Executive Officer, President, and Director
Henry E. Dubois................................... 38 Chief Operating Officer, Chief Financial Officer, and
Executive Vice President
Walter S. Scott................................... 42 Chief Technical Officer, Executive Vice President, and
Director
Neal T. Anderson.................................. 56 Vice President Space Segment
Kenneth C. Foley.................................. 51 Vice President Operations
Howard J. Gannes.................................. 56 Vice President Strategy
Mark A. Hargrove.................................. 43 Chief Information Officer and Vice President
John Jasper....................................... 35 Vice President Data Systems
Edwin J. Katzman.................................. 44 Vice President Marketing
Jeffrey S. Kerridge............................... 38 Vice President Sales
Shawn R. Thompson................................. 45 Secretary of the Board
Paul M. Albert, Jr................................ 57 Director
Donald E. Foley................................... 48 Director
Anne Karalekas.................................... 53 Director
Takatoshi Kodaira................................. 52 Director
Alexander S. Lushtak.............................. 61 Director
Michael J. Petrick................................ 38 Director
Marvin R. Sambur.................................. 54 Director
Donald W. Vanlandingham........................... 60 Director
</TABLE>
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 our predecessor 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 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.
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Kenneth C. Foley has served as Vice President Operations since September
1999. From September 1995 to September 1999, Mr. Foley served as Director of
Product Generation, responsible for developing value-added products in the
Company's Geospatial Operations facility. From November 1993 to August 1995, Mr.
Foley served as Product Manager of Trifid Corporation, a satellite and aircraft
image processing company. From June 1983 to November 1993, Mr. Foley served as
Marketing Manager, Photogrammetry and Image Processing with Intergraph
Corporation, a computer graphics company.
Howard J. Gannes has served as our Vice President Strategy since April
1999. From March 1993 to April 1999, Mr. Gannes served as Vice President Ground
Segment Operations of EarthWatch and of WorldView, where he was responsible for
the satellite communications and tasking infrastructure. From September 1992 to
January 1995, Mr. Gannes acted as an independent consultant, providing technical
and management guidance to several startup companies in areas relating to
wireless and satellite communications, navigation systems, and image processing
enhancement systems. From November 1976 to September 1992, he served in a
variety of executive and management positions at Stanford Telecommunications,
Inc., a communications company.
Mark A. Hargrove has served as Vice President 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.
John Jasper has served as Vice President of Data Systems since September
1999. Mr. Jasper is responsible for overall management of the development, test,
and integration of the EarthWatch data systems. From October 1996 to August
1999, Mr. Jasper served as Vice President Software Engineering and Chief
Architect of Navigation Technologies, a developer of vector map databases for
the in-vehicle navigation marketplace. From July 1994 to October 1996, Mr.
Jasper served as Director of Customer Tools Development and Chief Architect for
Navigation Technologies. From 1983 to 1994, Mr. Jasper served as a software
engineering consultant with Shields Enterprise Inc.
Edwin J. Katzman has served as our Vice President Marketing since April
2000. Mr. Katzman is responsible for managing our marketing efforts. From
September 1987 to March 1995 and from January 1997 to March 2000, he served as
President of The Discovery Group, a strategic marketing consulting firm, which
he co-founded. From April 1995 through December 1996, Mr. Katzman served as
General Manager of Geodesic Systems, a software development and marketing
company. He has also held various managerial marketing positions at the Quaker
Oats Company.
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.
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
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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
Department of Hitachi, where he established a military tactical trainer business
and commercial satellite-based image exploitation systems for the Japanese
government.
Alexander S. Lushtak served as a director of EarthWatch from March 1995 to
April 1999, and since June 1999. Mr. Lushtak serves as director of Genesis
Microchip Corp., a microelectronics company. In addition, Mr. Lushtak has
served as Chairman of the Board of Paradise Electronics (which was acquired by
Genesis Microchip in May 1999) since January 1993. From January 1993 until
August 1998, Mr. Lushtak served as Chief Executive Officer for Paradise
Electronics. Between 1992 and 1993, he was employed by Cirrus Logic, Inc., a
computer circuit and chip supplier, as a consultant. From 1988 to 1992, Mr.
Lushtak served as Chairman of the Board and Chief Technical Officer of Acumos
Incorporated, a microelectronics company. Mr. Lushtak is also a founder and
Chairman of the Board of Assured Space Access, an aerospace company, and Co-
Chairman and Chief Executive Officer of United Start Corporation, an aerospace
company.
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.
Dr. Marvin R. Sambur has served as a director of EarthWatch since June
1999. Dr. Sambur has served as President of ITT Defense and Vice President of
ITT Industries since October 1998, where he is responsible for the management of
ITT Industries' global defense operations. From 1991 to 1998, Dr. Sambur served
as President and General Manager of ITT Industries' Aerospace/Communications
Division. From 1986 to 1991, he served as Division President for ITT Electron
Technology. From 1977 to 1986, Dr. Sambur served in the ITT Defense
Communications Division as the Vice-President of Engineering, then Vice
President and Director of Total Operations.
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 holders of the Series A preferred stock are 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 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 Messrs. D. Foley
and Sambur 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,
Lushtak, and Vanlandingham as their representatives. Our Chief Executive Officer
has designated Messrs. Satterlee and Scott to serve on the board of directors.
During fiscal year 1999, our board of directors held 14 meetings and its
committees held a total of 7 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
41
<PAGE>
all committees of the board of directors of which each respective director was a
member during the time he was serving as such during fiscal year 1999.
Committees of the board of directors
The Compensation Committee consists of Messrs. Petrick, Vanlandingham, and
Lushtak, Dr. Sambur 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 Dr. Scott, Ms. Karalekas, and Messrs.
Albert, and Kodaira, and Dr. Sambur. 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. Don Foley, and consists of Messrs.
Albert, Foley, Petrick, and Satterlee. The Finance Committee is responsible for
oversight of our company's financial policies.
Director compensation
The majority of the directors on the board 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 and committee attendance fees of $2,500 per meeting, to be
paid to such outside directors for their service on the board. Mr. Albert and
Ms. Karalekas, as outside and unaffiliated directors, will each receive 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 pro rated for
their period of service as a director during the first year in which they served
as a director.
Executive compensation
Summary of cash and certain other compensation
The following table sets forth information concerning the compensation
received for services rendered to us during fiscal 1999 by our Chief Executive
Officer and our four next most highly compensated executive officers whose total
compensation in fiscal 1999 equaled or exceeded $100,000 (collectively, the
"named executive officers"):
Summary compensation table
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation ------------
------------------- Securities
Name and Principal Position Year Salary ($) Bonus ($) Underlying Options/(1)/
--------------------------- ---- --------- --------- -----------------------
<S> <C> <C> <C> <C>
Herbert F. Satterlee III,
Chief Executive Officer, President and
Director................................... 1999 203,333 40,000 0
1998 101,591 0 84,081
1997 -- -- --
Walter S. Scott,
Chief Technical Officer and Director....... 1999 165,000 45,000 0
1998 138,546 0 5,255
1997 121,020 0 0
Neal T. Anderson,
Vice President Space Segment............... 1999 130,000 17,500 0
1998 126,875 0 2,102
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
1997 108,333 0 1,577
Howard J. Gannes,
Vice President Strategy.................... 1999 156,250 17,500 0
1998 131,042 0 2,102
1997 115,000 0 0
Jeffrey S. Kerridge,
Vice President Sales....................... 1999 198,690/(2)/ 30,000 0
1998 118,119 0 9,459
1997 83,192 0 473
</TABLE>
(1) The options granted to each of the named executive officers are incentive
stock options to purchase shares of Series C preferred stock at an initial
exercise price of $3.81 that were issued under our 1995 Stock Option/Stock
Issuance Plan.
(2) The compensation paid to Mr. Kerridge for his services during 1999 includes
sales commissions in an amount of $57,205.
Option grants in 1999
During the year ended December 31, 1999, we did not grant any stock options
to the named executive officers.
1999 option exercises and year end option values
The following table sets forth information concerning the value realized
upon exercise of options during 1999 and the number and value of unexercised
options held by each of the named executive officers at December 31, 1999.
<TABLE>
<CAPTION>
Number of Value of Unexercised In
Unexercised Options at the Money Options at
Shares December 31, 1999 December 31, 1999
------------------------------- --------------------------
Acquired Value
on Exercise Realized Exercisable/(1)/ Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Herbert F. Satterlee III -- -- 84,081 -- -- --
Walter S. Scott -- -- 5,255 -- -- --
Neal T. Anderson/(2) 210.202 -- 9,775 -- -- --
Howard J. Gannes -- -- 3,363 -- -- --
Jeffrey S. Kerridge -- -- 12,034 -- -- --
</TABLE>
(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. Anderson exercised options to acquire 210.202 shares of Series C
preferred stock in January 1999 at an exercise price of $3.81 per share,
which our board of directors determined to be greater than the fair market
value of such shares at that time.
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 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 June 30, 2000 and on an as-converted basis, we had granted options
under the 1995 Plan to purchase approximately 585,349 shares of Series C
preferred stock, of which options to purchase approximately 48,094 shares had
been exercised, options to purchase approximately 255,544 shares had been
cancelled (due to expiration or otherwise) and options to purchase approximately
281,711 shares at a weighted average exercise price of $3.805 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
43
<PAGE>
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 recapitalization, all outstanding options under the
WorldView Plan were automatically converted into options to purchase shares of
our Series C preferred stock.
As of June 30, 2000 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 $.105 per share, remained outstanding under
the WorldView Plan.
The maximum term of options granted under the WorldView Plan is ten years.
Options granted under the WorldView Plan are nontransferable. An optionee
whose relationship with us ceases for any reason, other than by death or
disability, may exercise vested options in the three month period following such
cessation, unless such options terminate or expire sooner by their terms.
Holders may exercise vested options for up to 12 months after an optionee's
relationship with us ceases due to death or disability.
1999 Equity Incentive Plan
On February 15, 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. 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 June 30, 2000, options to purchase an aggregate of 2,734,944 shares
of common stock had been issued to certain employees with an exercise price of
$0.25 per share.
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
44
<PAGE>
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 such options shall
terminate.
The board of directors determines the exercise price of options granted
under the plan at the time of grant, provided that the exercise price of all
incentive stock options generally must be at least equal to the fair market
value of the shares on the date of grant. The exercise price of a nonstatutory
stock option cannot be less than 85% of the fair market value of the shares on
the date of grant. With respect to any participant who is a 10% holder of the
combined voting rights of our outstanding capital stock, the exercise price of
any incentive stock option or any nonstatutory stock option granted must equal
at least 110% of the fair market value on the grant date and the exercise price
of any stock bonus or restricted stock award must be at least equal to the fair
market value of the shares on the date of grant. The consideration for
exercising any incentive stock option or any nonstatutory stock option may
consist of cash, promissory note, delivery of already-owned shares of our common
stock, or such other 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.
45
<PAGE>
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.
46
<PAGE>
MATERIAL RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transactions with Ball Corporation
In March 1996, we entered into a contract with Ball Aerospace &
Technologies Corp., 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 1 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. During 1999, we made payments of
approximately $34 million to Ball Aerospace under the Ball Aerospace agreements.
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.
Mr. Vanlandingham, a director of EarthWatch, is the President and Chief
Executive Officer of Ball Aerospace.
Transaction with Hitachi Software
Hitachi, Ltd., which holds in excess of 5% 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.
Mr. Kodaira, a director of EarthWatch, is the General Manager, Geospatial
Information Division of Hitachi Software.
Transactions with ITT Industries
In December 1998 and January 1999, we entered into agreements with ITT
Industries, Inc., which holds in excess of 10% of our outstanding capital stock,
for system engineering and development of a scheduling and tasking model of the
QuickBird 1 and QuickBird 2 satellites and the development of a satellite
simulator. During 1999, we made payments of approximately $2.9 million to ITT
Industries under these agreements.
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.
Dr. Sambur, a director of EarthWatch, is the President of ITT Defense and
Vice President of ITT Industries. Mr. D. Foley, a director of EarthWatch, is the
Treasurer of ITT Industries.
47
<PAGE>
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 1996 of 7,000,000 shares of our former Series C preferred stock and
our offering in 1997 of 50,000 units, each consisting of one 12 1/2% 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 old 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 June 30, 2000, Morgan Stanley held 4,666,024 shares of
Series B preferred stock, had beneficial ownership of 307,931 shares of Series C
preferred stock, and one share of common stock, as well as $2.9 million
principal amount at maturity of the 12 1/2% Notes. In addition, Morgan Stanley
will act as exclusive financial advisor to EarthWatch under a five-year
agreement.
Mr. Petrick, a director of EarthWatch, is a Managing Director of Morgan
Stanley.
United Start Corporation
We have an agreement with United Start Corporation pursuant to which United
Start will provide launch and associated services for the QuickBird 1 satellite
launch before November 30, 2001. In 1999, we made payments of approximately $3.3
million to United Start under this agreement. We expect to provide a
combination of archival data and cash to United Start valued at approximately
$14 million over the term of the contract. In addition, we made payments of
approximately $1.1 million to Assured Space Access, Inc., which performed
services in connection with the future launch of our QuickBird 1 satellite.
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.
Nuova Telespazio/Eurimage
In August 1997, we entered into a distributor agreement with Nuova
Telespazio pursuant to which their affiliate, Eurimage, will serve as master
international distributor of our products and services in Europe. Under this
agreement, Eurimage will be entitled to purchase our products at discounts of up
to 50% of our retail price for end-distribution in Europe.
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.
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our voting capital stock as of June 30, 2000 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.
<TABLE>
<CAPTION>
Number of Shares Beneficially Owned
-----------------------------------------------
as of June 30, 2000 and Percent of Class(1)
-----------------------------------------------
Series A Series B Series C
Directors, Named Executive Convertible Percent Convertible Percent Convertible Percent % of
Officers, and Preferred of Preferred of Preferred of Common Common
5% stockholders Stock Series(%) Stock Series(%) Stock Series(%) Stock Stock
--------------- ----- --------- ----- --------- ----- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ITT Industries, Inc./(2)/........ 7,776,706 100.0 -- -- -- -- -- --
Morgan Stanley & Co.
Incorporated/(3)/................ -- -- 4,666,024 60.0 307,931 1.3 1 *
Capital Research and
Management Company/(4)/.......... -- -- 3,110,682 40.0 890,828 3.7 -- --
Ball Technologies Holdings
Corp./(5)/....................... -- -- -- -- 4,254,125 17.7 -- --
Hitachi, Ltd/(6)/................ -- -- -- -- 2,341,604 9.8 -- --
Walter S. Scott/(7)/............. -- -- -- -- 598,658 2.5 498,595 19.0
Howard J. Gannes/(8)/............ -- -- -- -- 66,938 * 56,108 2.1
Herbert F. Satterlee III/(9)/.... -- -- -- -- 84,081 * 315,919 12.1
Jeffrey S. Kerridge/(10)/........ -- -- -- -- 12,034 * 87,966 3.4
Neal T. Anderson/(11)/........... -- -- -- -- 10,008 * 40,018 1.5
Paul M. Albert, Jr./(12)/........ -- -- -- -- -- -- -- --
Donald E. Foley/(13)/............ -- -- -- -- -- -- -- --
Anne Karalekas/(14)/............. -- -- -- -- -- -- -- --
Takatoshi Kodaira/(15)/.......... -- -- -- -- 2,341,604 9.8 -- --
Alexander Lushtak/(16)/.......... -- -- -- -- 152,912 * 125,000 4.8
Michael J. Petrick/(17)/......... -- -- -- -- -- -- -- --
Marvin R. Sambur/(18)/........... -- -- -- -- -- -- -- --
Donald W. Vanlandingham/(19)/ -- -- -- -- -- -- -- --
All non-named
executive officers............... -- -- -- -- 18,077 * 566,924 21.6
All executive officers and
directors as a group
(17 persons)..................... -- -- -- -- 942,708 3.9 1,735,513 66.2
<CAPTION>
Directors, Named Executive % of Total
Officers, and voting
5% stockholders power
--------------- ----
<S> <C>
ITT Industries, Inc./(2)/........ 17.7
Morgan Stanley & Co.
Incorporated/(3)/................ 22.6
Affiliated Entities of
Capital Research and
Management Company/(4)/.......... 16.2
Ball Technologies Holdings
Corp./(5)/....................... 7.3
Hitachi, Ltd/(6)/................ 4.0
Walter S. Scott/(7)/............. 1.9
Howard J. Gannes/(8)/............ *
Herbert F. Satterlee III/(9)/.... *
Jeffrey S. Kerridge/(10)/........ *
Neal T. Anderson/(11)/........... *
Paul M. Albert, Jr./(12)/........ --
Donald E. Foley/(13)/............ --
Anne Karalekas/14/............... --
Takentoshi Kodaira/15/........... 4.0
Alexander Lushtak/(16)/.......... *
Michael J. Petrick/(17)/......... --
Marvin R. Sambur/(18)/........... --
Donald W. Vanlandingham/(19)/ --
All non-named
executive officers............... 1.0
All executive officers and
directors as a group
(17 persons)..................... 4.5
</TABLE>
______________
* 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 June 30, 2000, 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., 1,010,971 shares;
American Variable Insurance Funds, 1,322,040 shares; and American High
Income Trust, 777,671 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.
49
<PAGE>
(6) The address of Hitachi, Ltd., is 5-79 Onoe-cho, Nakaku, Yokohama, Japan
231-0015.
(7) Includes 5,255 shares of Series C convertible preferred stock issuable
upon exercise of an option granted pursuant to our 1995 Stock Option/Stock
Issuance Plan. 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 3,363 shares of Series C convertible preferred stock
issuable upon exercise of options granted pursuant to our 1995 Stock
Option/Stock Issuance Plan and 63,575 shares of Series C preferred stock
held jointly with his spouse.
(9) Consists of 84,081 shares of Series C convertible preferred stock issuable
upon exercise of an option granted pursuant to our 1995 Stock Option/Stock
Issuance Plan, of which 42,041 shares are subject to repurchase until fully
vested.
(10) Consists of 12,034 shares of Series C convertible preferred stock issuable
upon the exercise of options granted pursuant to our 1995 Stock
Option/Stock Issuance Plan, of which 239 shares are subject to repurchase
until fully vested.
(11) Includes 9,775 shares of Series C convertible preferred stock issuable upon
the exercise of options granted pursuant to our 1995 Stock Option/Stock
Issuance Plan, of which 361 shares are subject to repurchase until fully
vested.
(12) The address of Mr. Albert is 135 Main Street, South Salem, Massachusetts
10590.
(13) The address of Mr. Foley is c/o ITT Industries, Inc., 4 West Red Oak
Lane, White Plains, New York 10604.
(14) The address of Ms. Karalekas is 2126 Connecticut Avenue, N.W., Suite 25,
Washington, D.C. 20008.
(15) Includes 2,341,604 shares of Series C convertible preferred stock held by
Hitachi, Ltd. The address of Mr. Kodaira is c/o Hitachi, Ltd.
5-79 Onoe-cho, Nakaku, Yokohama, Japan 231-0015.
(16) The address of Mr. Lushtak is 4 Upper Road, P.O. Box 1511, Ross, California
94957.
(17) The address of Mr. Petrick is c/o Morgan Stanley & Co. Incorporated, 1585
Broadway, New York, New York 10036.
(18) The address of Dr. Sambur is c/o ITT Industries, Inc., 4 West Red Oak
Lane, White Plains, New York 10604. Dr. Sambur is a Vice President of ITT
Industries and may be viewed as the beneficial owner of the shares of
Series A preferred stock held by ITT Industries. Dr. Sambur disclaims
beneficial ownership of shares held by ITT Industries.
(19) The address of Mr. Vanlandingham is c/o Ball Technologies Holding 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.
50
<PAGE>
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% Notes due March 1, 2001 were exchanged for new 12 1/2%
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 12
1/2% Notes. The new 12 1/2% Notes provide for payment of interest in
kind through March 2002, and are collateralized by the same launch
insurance policy as the new notes; 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.
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<PAGE>
The following table shows the impact of the recapitalization on our capital
stock:
Number of shares issued and outstanding
before and after recapitalization
<TABLE>
<CAPTION>
Before % After %
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
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%
</TABLE>
_____________
(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 the recapitalization. ITT Industries, Morgan Stanley, and
Capital Research may be deemed to have acquired control of EarthWatch through
the acquisition by such entities of 7,142,857 shares of Series A preferred
stock, 4,285,714 shares of Series B preferred stock and one share of common
stock, and 2,857,143 shares of Series C preferred stock, respectively, in
exchange for $25 million, $15 million, and $10 million, respectively. As of June
30, 2000, ITT Industries, Morgan Stanley, and Capital Research held 17.7%,
22.6%, and 16.2%, respectively, of our total voting power.
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
recapitalization and for a description of the stockholders' agreement. See
"Description of material indebtedness" for a description of the terms of our 12
1/2% Notes.
52
<PAGE>
DESCRIPTION OF MATERIAL INDEBTEDNESS
Following the recapitalization, we had 12 1/2% Notes, which have a
principal amount of $72 million at maturity. The 12 1/2% Notes were originally
issued in March 1997. As part of the recapitalization, the existing 12 1/2%
Notes were exchanged for new 12 1/2% Notes with revised terms. The principal
terms of the new 12 1/2% Notes issued in the recapitalization are summarized
below. Except as described below, the terms and covenants set forth in the
indenture relating to the 12 1/2% Notes are substantially identical to the terms
and covenants set forth in the indenture relating to the new notes.
. Maturity: The 12 1/2% Notes become due on March 1, 2005.
. Interest: The 12 1/2% Notes bear interest at a fixed annual rate of 12
1/2%. Interest on the 12 1/2% Notes will accrete through March 1, 2002.
At maturity, the aggregate principal amount of the 12 1/2% Notes,
including accreted interest, will be $72 million. Beginning on March 1,
2002, interest on the 12 1/2% Notes will be payable semiannually in cash
on each March 1 and September 1, with the first interest payment on
September 1, 2002.
. Security: The 12 1/2% Notes will be secured by the same launch insurance
policies as will secure the new notes.
. Ranking: The 12 1/2% Notes rank equally with the new notes and with any
other existing or future unsecured senior debt of EarthWatch. The 12
1/2% Notes rank senior to any future indebtedness expressly subordinated
to the 12 1/2% Notes.
. Redemption: We may redeem the 12 1/2% Notes beginning March 1, 2002 at
the following prices, expressed as a percentage of principal amount at
maturity:
<TABLE>
<CAPTION>
12 Month Period Beginning Redemption Price
------------------------- ----------------
<S> <C>
March 1, 2002..................................................................................... 106.2500%
March 1, 2003..................................................................................... 103.1250%
March 1, 2004..................................................................................... 101.5625%
March 1, 2005..................................................................................... 100.0000%
</TABLE>
53
<PAGE>
THE EXCHANGE OFFER
Purpose and effect
We issued the old notes on July 12, 1999 in a private placement. In
connection with this issuance, we entered into the indenture and the
registration rights agreement. These agreements require that we file a
registration statement under the Securities Act for the new notes, the
registered notes to be issued in the exchange offer and, upon the effectiveness
of the registration statement, offer to you the opportunity to exchange your old
notes for a like principal amount of the new notes. The new notes will be issued
without a restrictive legend and, except as set forth below, may be reoffered
and resold by you without registration under the Securities Act. After we
complete the exchange offer, our obligations with respect to the registration of
the old notes will terminate. A copy of the indenture and the registration
rights agreement has been filed as exhibits to the registration statement of
which this prospectus is a part. If we do not complete the exchange offer by
August 15, 2000, interest on the old notes will accrue at the rate of 0.5% per
annum (in addition to interest otherwise accruing on the old notes) and be
payable in cash, until the consummation of the exchange offer or until a shelf
registration statement permitting the resale of the old notes is declared
effective (the "Shelf Registration Statement").
Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third parties, if you are not our "affiliate" within
the meaning of Rule 405 under the Securities Act or a broker-dealer referred to
in the next paragraph, we believe that the new notes to be issued to you in the
exchange offer may be offered for resale, resold, and otherwise transferred by
you, without compliance with the registration and prospectus delivery provisions
of the Securities Act. We have not received our own no-action letter as to this
interpretation. This interpretation, however, is based on your representation
to us that:
. the new notes to be issued to you in the exchange offer are acquired in
the ordinary course of your business; and
. you are not engaging in and do not intend to engage in a distribution of
the new notes to be issued to you in the exchange offer; and
. you have no arrangement or understanding with any person to participate
in the distribution of the new notes to be issued to you in the exchange
offer.
If you tender in the exchange offer for the purpose of participating in a
distribution of the new notes to be issued to you in the exchange offer, you
cannot rely on this interpretation by the staff of the Commission. Under those
circumstances, you must comply with the registration and prospectus delivery
requirements of the Securities Act, or an exemption from such requirements, in
connection with a secondary resale transaction. You will not have the right to
require us to register your notes under the Securities Act. See "--Procedures
for tendering." Each broker-dealer that receives new notes in the exchange offer
for its own account, in exchange for old notes that were acquired by the broker-
dealer as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of those new notes. See "Plan of
distribution."
Consequences of failure to exchange
After we complete the exchange offer, if you have not tendered your old
notes, you will not have any further registration rights. Your old notes will
continue to be subject to certain restrictions on transfer. Therefore, the
liquidity of the market for your old notes could be adversely affected upon
completion of the exchange offer if you do not participate in the exchange
offer. If the liquidity of the trading market for the old notes is adversely
affected, you may be unable to sell or transfer your old notes and the value of
your old notes may decline.
Terms of the exchange offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date of the exchange offer. In connection with the exchange offer, we
will issue new notes, each of which has a principal amount of $1,000 at
maturity, in exchange for old notes, each of which has a principal amount of
$1,000 at maturity. You may tender some or all of your old notes in the exchange
offer. However, old notes may be tendered only in integral multiples of $1,000
in principal amount at maturity.
The form and terms of the new notes are substantially the same as the form
and terms of the old notes, except that the new notes to be issued in the
exchange offer will have been registered under the Securities Act and will not
bear legends restricting their transfer. The new notes will be issued pursuant
to, and entitled to the benefits of, the indenture. The indenture also governs
the old notes. The new notes and the old notes will be deemed one issue of notes
under the indenture.
54
<PAGE>
As of the date of this prospectus, old notes were outstanding having a
principal amount at maturity of $199 million. This prospectus, together with the
letter of transmittal, is being sent to all registered holders of old notes as
of ________, 2000 and to others believed to have beneficial interests in the old
notes. You do not have any appraisal or dissenter rights in connection with the
exchange offer under the General Corporation Law of the State of Delaware or the
indenture. We intend to conduct the exchange offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of the
Commission promulgated under the Exchange Act.
We will be deemed to have accepted validly tendered old notes when, as, and
if we have given oral or written notice of our acceptance to the exchange agent.
The exchange agent will act as our agent for the tendering holders for the
purpose of receiving the new notes from us. If we do not accept any tendered
notes because of an invalid tender, the occurrence of certain other events set
forth in this prospectus, or otherwise, we will return certificates for any
unaccepted old notes without expense to the tendering holder as promptly as
practicable after the expiration date.
You will not be required to pay brokerage commissions or fees or, except as
set forth below under "--Transfer taxes," transfer taxes with respect to the
exchange of your old notes in the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offer. See "--Fees and expenses" below.
Expiration date; amendments
The exchange offer will expire at 5:00 p.m., New York City time, on
August , 2000, unless we determine, in our sole discretion, to extend the
exchange offer. If we extend the exchange offer, it will expire at the later
date and time to which it is extended. We do not intend to extend the exchange
offer, although we reserve the right to do so. If we extend the exchange offer,
we will give oral or written notice of the extension to the exchange agent and
give each registered holder notice by means of a press release or other public
announcement of any extension prior to 9:00 a.m., New York City time, on the
next business day after the scheduled expiration date.
We also reserve the right, in our sole discretion,
. to delay accepting any old notes or, if any of the conditions set forth
below under "--Conditions" have not been satisfied or waived, to
terminate the exchange offer; or
. to amend the terms of the exchange offer in any manner, by giving oral
or written notice of such amendment to the exchange agent, and by
complying with Rule 14e-l(d) under the Exchange Act to the extent that
rule applies.
We acknowledge and undertake to comply with the provisions of Rule 14e-l(c)
under the Exchange Act, which requires us to pay the consideration offered, or
return the old notes surrendered for exchange, promptly after the termination or
withdrawal of the exchange offer. We will notify you as promptly as we can of
any extension, termination, or amendment.
Procedures for tendering
Book-entry interests
The old notes were issued as global securities in fully registered form
without interest coupons. Beneficial interests in the global securities, held by
direct or indirect participants in The Depository Trust Company ("DTC"), are
shown on, and transfers of these interests are effected only through, records
maintained in book-entry form by DTC, with respect to its participants, or its
participants, with respect to indirect participants.
If you hold your old notes in the form of book-entry interests and you wish
to tender your old notes for exchange pursuant to the exchange offer, you must
transmit to the exchange agent on or prior to the expiration date either:
(1) a written or facsimile copy of a properly completed and duly
executed letter of transmittal, including all other documents
required by such letter of transmittal, to the exchange agent at
the address set forth on the cover page of the letter of
transmittal; or
(2) a computer-generated message transmitted by means of DTC's
Automated Tender Offer Program system and received by the
exchange agent and forming a part of a confirmation of book-entry
transfer, in which you acknowledge and agree to be bound by the
terms of the letter of transmittal.
55
<PAGE>
In addition, in order to deliver old notes held in the form of book-entry
interests,
(A) a timely confirmation of book-entry transfer of your old notes into
the exchange agent's account at DTC pursuant to the procedure for
book-entry transfers described below under "--Book-entry transfer"
must be received by the exchange agent prior to the expiration date;
or
(B) you must comply with the guaranteed delivery procedures described
below.
The method of delivery of old notes and the letter of transmittal and all
other required documents to the exchange agent is at your election and risk.
Instead of delivery by mail, we recommend that you use an overnight or hand
delivery service. In all cases, sufficient time should be allowed to assure
delivery to the exchange agent before the expiration date. You should not send
the letter of transmittal or old notes to us. You may request your broker,
dealer, commercial bank, trust company, or nominee to effect the above
transactions for you.
Certificated old notes
Only registered holders of certificated old notes may tender those old notes
in the exchange offer. If your old notes are certificated notes and you wish to
tender your old notes for exchange pursuant to the exchange offer, you must
transmit to the exchange agent on or prior to the expiration date, a written or
facsimile copy of a properly completed and duly executed letter of transmittal,
including all other required documents, to the address set forth below under "--
Exchange agent." In addition, in order to validly tender your certificated old
notes:
(1) the certificates representing your old notes must be received by the
exchange agent prior to the expiration date; or
(2) you must comply with the guaranteed delivery procedures described below.
Procedures applicable to all holders
If you tender an old note and you do not withdraw the tender prior to the
expiration date, you will have made an agreement with us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
If your old notes are registered in the name of a broker, dealer, commercial
bank, trust company, or other nominee and you wish to tender your old notes, you
should contact the registered holder promptly and instruct the registered holder
to tender on your behalf. If you wish to tender on your own behalf, you must,
prior to completing and executing the letter of transmittal and delivering your
old notes, either make appropriate arrangements to register ownership of the old
notes in your name or obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible institution unless:
(A) old notes tendered in the exchange offer are tendered either
(1) by a registered holder who has not completed the box entitled
"Special issuance instructions" or "Special delivery
instructions" on the letter of transmittal; or
(2) for the account of an eligible institution; and
(B) the box entitled "Special issuance instructions" on the letter of
transmittal has not been completed.
If signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantee must be by a financial institution,
which includes most banks, savings and loan associations and brokerage houses,
that is a participant in the Securities Transfer Agents Medallion Program, the
New York Stock Exchange ("NYSE") Medallion Program, or the Stock Exchanges
Medallion Program.
If the letter of transmittal is signed by a person other than you, your old
notes must be endorsed or accompanied by a properly completed bond power and
signed by you as your name appears on those old notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. Unless we waive this requirement, in
this instance you must submit with the letter of transmittal proper evidence
satisfactory to us of their authority to act on your behalf.
56
<PAGE>
We will determine, in our sole discretion, all questions regarding the
validity, form, eligibility (including time of receipt), acceptance, and
withdrawal of tendered old notes. This determination will be final and binding.
We reserve the absolute right to reject any and all old notes not properly
tendered or any old notes our acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right to waive any defects,
irregularities, or conditions of tender. As to particular old notes, our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties.
You must cure any defects or irregularities in connection with tenders of
your old notes within the time period we will determine unless we waive that
defect or irregularity. Although we intend to notify you of defects or
irregularities with respect to your tender of old notes, neither we, the
exchange agent, nor any other person will incur any liability for failure to
give this notification. Your tender will not be deemed to have been made and
your notes will be returned to you if:
(1) you improperly tender your old notes;
(2) you have not cured any defects or irregularities in your tender;
and
(3) we have not waived those defects, irregularities, or improper
tender.
In any such case, the exchange agent will return your old notes, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration of the exchange offer.
In addition, we reserve the right in our sole discretion to:
(1) purchase or make offers for, or offer registered notes for, any
old notes that remain outstanding subsequent to the expiration of
the exchange offer;
(2) terminate the exchange offer; and
(3) to the extent permitted by applicable law, purchase old notes or
any other notes in the open market, in privately negotiated
transactions or otherwise.
The terms of any of these purchases or offers could differ from the terms
of the exchange offer.
By tendering, you will represent to us that, among other things:
(1) the new notes to be acquired by you in the exchange offer are
being acquired in the ordinary course of your business;
(2) you are not engaging in and do not intend to engage in a
distribution of the new notes to be acquired by you in the
exchange offer;
(3) you do not have an arrangement or understanding with any person
to participate in the distribution of the new notes to be
acquired by you in the exchange offer; and
(4) you are not our "affiliate," as defined under Rule 405 of the
Securities Act.
In all cases, issuance of new notes for old notes that are accepted for
exchange in the exchange offer will be made only after timely receipt by the
exchange agent of certificates for your old notes or a timely book-entry
confirmation of your old notes into the exchange agent's account at DTC, a
properly completed and duly executed letter of transmittal, or a computer-
generated message instead of the letter of transmittal as described above, and
all other required documents, and if any tendered old notes are not accepted for
any reason set forth in the terms and conditions of the exchange offer or if old
notes are submitted for a greater principal amount than you desire to exchange,
the unaccepted or non-exchanged old notes (or old notes in substitution
therefor) will be returned without expense to you, or, in the case of old notes
tendered by book-entry transfer into the exchange agent's account at DTC
pursuant to the book-entry transfer procedures described below, the non-
exchanged old notes will be credited to your account maintained with DTC, as
promptly as practicable after the expiration or termination of the exchange
offer.
57
<PAGE>
Guaranteed delivery procedures
If you desire to tender your old notes and your old notes are not
immediately available or one of the situations described in the immediately
preceding paragraph occurs, you may tender if:
(1) you tender through an eligible financial institution;
(2) on or prior to 5:00 p.m., New York City time, on the expiration
date, the exchange agent receives from an eligible institution, a
written or facsimile copy of a properly completed and duly
executed letter of transmittal and notice of guaranteed delivery,
substantially in the form provided by us; and
(3) the certificates for all certificated old notes, in proper form
for transfer, or a book-entry confirmation, and all other
documents required by the letter of transmittal, are received by
the exchange agent within three NYSE trading days after the date
of execution of the notice of guaranteed delivery.
The notice of guaranteed delivery may be sent by facsimile transmission,
mail, or hand delivery. The notice of guaranteed delivery must set forth:
(1) your name and address;
(2) the principal amount of old notes you are tendering; and
(3) a statement that your tender is being made by the notice of
guaranteed delivery and that guarantees that within three NYSE
trading days after the execution of the notice of guaranteed
delivery, the eligible institution will deliver the following
document to the exchange agent:
(A) the certificates for all certificated old notes being
tendered, in proper form for transfer, or a book-entry
confirmation of tender;
(B) a written or facsimile copy of the letter of transmittal, or
a book-entry confirmation instead of the letter of
transmittal; and
(C) any other documents required by the letter of transmittal.
Book-entry transfer
The exchange agent will establish an account with respect to the book-entry
interests at DTC for purposes of the exchange offer promptly after the date of
this prospectus. You must deliver your book-entry interest by book-entry
transfer to the account maintained by the exchange agent at DTC. Any financial
institution that is a participant in DTC may make book-entry delivery of book-
entry interests by causing DTC to transfer the book-entry interests into the
exchange agent's account at DTC in accordance with DTC's procedures for
transfer.
If one of the following situations occur:
(1) you cannot deliver a book-entry confirmation of book-entry
delivery of your book-entry interests into the exchange agent's
account at DTC; or
(2) you cannot deliver all other documents required by the letter of
transmittal to the exchange agent prior to the expiration date,
then you must tender your book-entry interests according to the
guaranteed delivery procedures discussed above.
Withdrawal rights
You may withdraw tenders of your old notes at any time prior to 5:00 p.m.,
New York City time, on the expiration date. For your withdrawal to be
effective, the exchange agent must receive a written or facsimile transmission
notice of withdrawal at its address set forth below under "--Exchange agent"
prior to 5:00 p.m., New York City time, on the expiration date.
58
<PAGE>
The notice of withdrawal must:
(1) state your name;
(2) identify the specific old notes to be withdrawn, including the
certificate number or numbers and the principal amount of
withdrawn old notes;
(3) be signed by you in the same manner as you signed the letter of
transmittal when you tendered your old notes, including any
required signature guarantees, or be accompanied by documents of
transfer sufficient for the exchange agent to register the
transfer of the old notes into your name; and
(4) specify the name in which the old notes are to be registered, if
different from yours.
We will determine all questions regarding the validity, form, and
eligibility, including time of receipt, of withdrawal notices, and our
determination will be final and binding on all parties. Any old notes withdrawn
will be deemed not to have been validly tendered for exchange for purposes of
the exchange offer. Any old notes which have been tendered for exchange but
which are not exchanged for any reason will be returned to you without cost as
soon as practicable after withdrawal, rejection of tender, or termination of the
exchange offer. Properly withdrawn old notes may be retendered by following one
of the procedures described under "--Procedures for tendering" above at any time
on or prior to 5:00 p.m., New York City time, on the expiration date.
Conditions
Notwithstanding any other provision of the exchange offer and subject to
our obligations under the registration rights agreement, we will not be required
to accept for exchange, or to issue new notes in exchange for, any old notes and
may terminate or amend the exchange offer, if at any time before the acceptance
of any old notes for exchange any of the following events shall occur:
(1) any injunction, order, or decree shall have been issued by any
court or any governmental agency that would prohibit, prevent, or
otherwise materially impair our ability to proceed with the
exchange offer; or
(2) the exchange offer shall violate any applicable law or any
applicable interpretation of the staff of the Commission.
These conditions are for our sole benefit and we may assert them regardless
of the circumstances giving rise to any condition, subject to applicable law. We
also may waive in whole or in part at any time and from time to time any
particular condition in our reasonable discretion. If we waive a condition, we
may be required in order to comply with applicable securities laws, to extend
the expiration date of the exchange offer. Our failure at any time to exercise
any of the foregoing rights will not be deemed a waiver of these rights and
these rights will be deemed ongoing rights which may be asserted at any time and
from time to time.
In addition, we will not accept for exchange any old notes tendered, and no
new notes will be issued in exchange for any of those old notes, if at the time
the old notes are tendered any stop order shall be threatened by the Commission
or be in effect with respect to the registration statement of which this
prospectus is a part or the qualification of the indenture under the Trust
Indenture Act of 1939, as amended.
The exchange offer is not conditioned on any minimum principal amount of
old notes being tendered for exchange.
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Exchange agent
We have appointed The Bank of New York as exchange agent for the exchange
offer. Questions, requests for assistance, and requests for additional copies
of this prospectus, the letter of transmittal, and other related documents
should be directed to the exchange agent addressed as follows:
By Registered or Certified mail, by Hand or by overnight Courier:
The Bank of New York
101 Barclay Street
Corporate Trust Services Window
Ground Level
New York, New York 10286
Attn: Kin Lau
By Facsimile: By Telephone:
(212) 815-6339 (212) 815-3750
The exchange agent also acts as trustee under the indenture.
Fees and expenses
We will not pay brokers, dealers, or others soliciting acceptances of the
exchange offer. The principal solicitation is being made by mail. Additional
solicitations, however, may be made in person or by telephone by our officers
and employees.
We will pay the cash expenses to be incurred in connection with the
exchange offer. These are estimated in the aggregate to be approximately
$300,000, which includes fees and expenses of the exchange agent, and
accounting, legal, printing, and related fees and expenses.
Transfer taxes
You will not be obligated to pay any transfer taxes in connection with a
tender of your old notes for exchange unless you instruct us to register new
notes in the name of, or request that old notes not tendered or not accepted in
the exchange offer be returned to, a person other than the registered tendering
holder, in which event the registered tendering holder will be responsible for
the payment of any applicable transfer tax.
Accounting treatment
We will not recognize any gain or loss for accounting purposes upon the
consummation of the exchange offer. We will amortize the expense of the
exchange offer over the term of the new notes under generally accepted
accounting principles.
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DESCRIPTION OF THE NEW NOTES
The terms of the new notes will be identical in all material respects to
those of the old notes described below, except that the new notes (i) will have
been registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the old notes and (ii) will not
be entitled to certain registration rights under the registration rights
agreement, including the provision for additional interest of up to 0.5% on the
old notes. Holders of old notes should review the information set forth under
"Description of the old notes."
Upon consummation of the exchange offer, we will have no further obligation
to register the old notes. Thereafter, any holder of old notes who did not
tender its old notes in the exchange offer, including any holder which is our
"affiliate" (as that term is defined in Rule 405 of the Securities Act) which
cannot tender its old notes in the exchange offer, will continue to hold
restricted securities which may not be offered, sold, or otherwise transferred,
pledged, or hypothecated except pursuant to Rule 144 and Rule 144A under the
Securities Act or pursuant to any other exemption from registration under the
Securities Act relating to the disposition of securities, provided that an
opinion of counsel is furnished to us that such an exemption is available.
The new notes are 13% Senior Discount Notes and have a principal amount at
maturity of $199 million. The new notes will mature on July 15, 2007. Interest
on the new 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. 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 new notes will be secured equally with the old notes and our 12 1/2%
Notes by any proceeds of insurance policies covering certain aspects of our
QuickBird 1 satellite. If the trustees for the new notes, the old notes, and our
12 1/2% Notes receive proceeds from the insurance policies covering risks
related to QuickBird 1, we will make an offer to purchase the new notes, the old
notes, and our 12 1/2% 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 new notes, the old
notes, and our 12 1/2% Notes tendered in response to such offer to purchase
exceeds the amount of insurance proceeds available for such offer, holders of
the new notes, the old notes, and 12 1/2% Notes that subscribe to the offer to
purchase will receive a ratable portion of the insurance proceeds. To the extent
the accreted value and interest on the new notes, the old notes, and the 12 1/2%
Notes tendered are less than the available proceeds, the excess will be returned
to us.
FORM OF NEW NOTES
The certificates representing the new notes will be issued in fully
registered form, without coupons. Except as described in the next paragraph, the
new notes will be 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 new notes will 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.
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DESCRIPTION OF THE OLD NOTES
We issued the old 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 old 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 $199 million, and will mature on July
15, 2007. Interest on the old 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 old 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 old notes is payable,
and the old 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 old 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. See "The Exchange Offer--Book-entry transfer." No service
charge will be made for any registration of transfer or exchange of old notes,
but we may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
If by August 15, 2000, we have not consummated the exchange offer or any
other registered exchange offer for the old notes or caused a shelf registration
statement with respect to resales of the old notes to be declared effective,
interest on the old notes (in addition to interest otherwise accruing on the old
notes) will accrue at the rate of 0.5% per annum and be payable in cash
semiannually in arrears on January 15 and July 15 of each year, commencing
January 15, 2001, until the consummation of a registered exchange offer or the
effectiveness of a shelf registration statement. See "--Registration rights"
below.
The old notes were issued as a part of a unit, consisting one old 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 old note and 49.095 shares of Series C preferred
stock included in each unit automatically became separately transferable on
January 12, 2000.
Optional redemption
We can redeem the old 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 old
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.
<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2004....................................................... 106.500%
2005....................................................... 104.333%
2006....................................................... 102.167%
2007....................................................... 100.000%
</TABLE>
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Selection and notice of redemption
To redeem the old notes, we must give the holder not less than 30 nor more
than 60 days' prior notice, which we must mail to the holder by first class mail
to the holder's last address as it appears in the security register.
In the case of any partial redemption, the Trustee will select the old
notes for redemption:
. in compliance with the requirements of the principal national
securities exchange, if any, on which the old notes are listed, or
. if the old 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 old note of $1,000 in principal amount at maturity or less will be redeemed
in part. If any old 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 new note in principal amount equal to the
unredeemed portion of an old note will be issued in the name of the holder
thereof upon cancellation of the old note.
Sinking fund
There are no sinking fund payments for the old notes.
Registration rights
In this exchange offer, we will exchange the old notes for an issue of
unsubordinated notes of our company (the "new notes") with terms identical to
the old notes (except that the new notes will not bear legends restricting the
transfer thereof or provide for registration rights or additional interest).
Upon such registration statement being declared effective, our company shall
offer the new notes in return for surrender of the old notes. This exchange
offer will remain open for at least 20 business days after the date on which we
mail notice of the exchange offer, or otherwise provide notice, to holders of
the old notes. The Accreted Value of each new note will be identical to, and
will be determined in the same manner as, the Accreted Value of the old notes so
surrendered or exchanged therefor. Interest on each new note will be calculated
and paid in the same manner as interest on the old notes so surrendered and
exchanged therefor. When the exchange offer is completed, we will have no
further obligation to register or exchange old notes.
Ranking
The Indebtedness evidenced by the old notes ranks equally in priority of
payment with all present and future unsubordinated indebtedness of our company,
including the 12 1/2% Notes, and senior in right of payment to all existing and
future subordinated indebtedness of our company. As of May 31, 2000, we had
approximately $178 million of indebtedness outstanding, including the old notes.
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 old notes. We
and our subsidiaries may incur substantial additional Indebtedness, including
secured Indebtedness, under the indenture.
Security
Under the terms of the indenture, on the Closing Date the Trustee became a
beneficiary, through the collateral agent, of an interest under the Amended and
Restated Collateral Pledge and Security Agreement dated as of July 12, 1999 and
the Pledge Agreement dated as of the Closing Date, in each case between
EarthWatch and the collateral agent. We refer in this "Description of the old
notes" to the Collateral Pledge and Security Agreement, the Pledge Agreement,
and several other related documents as the "Security Documents." The Security
Documents provide the Trustee with an interest in the First QuickBird Launch
Insurance, including escrowed premiums for such policy, and any and all proceeds
of such insurance. Under the terms of the Security Documents, holders of the
old notes will share such proceeds, if any, equally with holders of the new
notes and the 12 1/2% Notes. It is the intent of the Security Documents
that:
(1) the interest of the Trustee, acting through the collateral agent,
in the First QuickBird Launch Insurance should provide proceeds
in an amount at least equal to the aggregate Accreted Value of,
and any premium and accrued interest on, the old notes from
Closing Date through June 30, 2000, and
(2) the aggregate interest of the collateral agent in the First
QuickBird Launch Insurance should be not less than the sum of:
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(a) the amount provided in clause (1) of this sentence plus
(b) $56.0 million (the estimated accreted value of the 12 1/2% Notes
through June 30, 2000).
Under the indenture and the Security Documents, the Trustee, the trustee
with respect to the 12 1/2% Notes, and the collateral agent are authorized to
modify, amend, and supplement the Security Documents as necessary to effectively
secure the old notes and the 12 1/2% Notes on an equal basis.
By exchanging your old notes for new notes or otherwise acquiring new
notes, you will be deemed to consent to the terms of the Security Documents as
they presently exist and as they may be amended from time to time and to
authorize the collateral agent to perform its obligations and exercise its
rights under such documents. 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 new notes to the extent of such
distribution, and the principal amount of the new notes as of such date, and any
accrued interest on the new notes, will be deemed reduced by the aggregate
amount of any such distribution in respect of the new notes.
We will do, or cause to be done, anything necessary or required under the
Security Documents to confirm the interest of the collateral agent in the
Collateral, so as to render such Collateral available for the security and
benefit of the indenture and the new notes according to the expressed intent of
the Security Documents, the indenture, and the new notes. We will also take, or
cause to be taken, upon the Trustee's request, any actions reasonably required
to cause the Security Documents to create and maintain, as security for our
obligations under the indenture and the new notes, valid and enforceable first
priority liens on the Collateral in favor of the collateral agent prior to the
rights of all third persons and free from other Liens.
The release of any Collateral under the Security Documents 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, TIA Section 314(d) relating to the release of property or
securities from the Lien and security interest of the Security Documents and the
substitution for such property or securities of other property or securities.
Any certificate or opinion required by TIA Section 314(d) may be made by an
officer of EarthWatch, other than in cases where TIA 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, TIA Section 314(b)
relating to opinions of counsel regarding the Lien under the Security Documents.
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.
Under the indenture, the Trustee may take all action on behalf of holders
of the old notes that it deems necessary or appropriate to (1) enforce or cause
the enforcement of the terms of the Security Documents and (2) collect and
receive amounts payable in respect of our obligations under the Security
Documents. The Trustee also has power to institute suits or proceedings as it
may deem expedient to protect its interests and the interests of holders of the
old notes in the Collateral. This includes the power to institute and maintain
suits or proceedings to restrain enforcement of or compliance with any
legislative or other governmental enactment, rule, or order that may be
unconstitutional or otherwise invalid if the enforcement of, or compliance with,
such enactment, rule, or order would impair such security interest or be
prejudicial to the interests of holders of the new notes or of the Trustee.
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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 old 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:
<TABLE>
<CAPTION>
Semiannual Accrual Date Accreted Value
----------------------- --------------
<S> <C>
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
</TABLE>
(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 date less
$684.61 multiplied by
(2) a fraction, the numerator of which is the number of
days from the Closing Date to the Specified Date, using
a 360-day year of twelve 30-day months, and the
denominator of which is the number of days from the
Closing Date to the first semiannual accrual date,
using a 360-day year of twelve 30-day months;
(3) if the Specified Date occurs between two semiannual accrual
dates, the Accreted Value will equal the sum of:
(a) the Accreted Value for the semiannual accrual date
immediately preceding such Specified Date, and
(b) an amount equal to the product of:
(1) the Accreted Value for the immediately following
semiannual accrual date less the Accreted Value for the immediately
preceding semiannual accrual date multiplied by
(2) a fraction, the numerator of which is the number of days
from the immediately preceding semiannual accrual date to the
Specified Date, using a 360-day year of twelve 30-day months, and
the denominator of which is 180; or
(4) if the Specified Date occurs after the last semiannual accrual
date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary of 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;
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(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 old 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 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:
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(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.
"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.
"Closing Date" means July 12, 1999, the actual date on which the old notes
were issued under the indenture.
"Collateral" means the First QuickBird Launch Insurance and the other
collateral described in the Security Documents.
"Collateral agent" means The Bank of New York or any successor or
substitute collateral agent for the Collateral with respect to the old notes and
the 12 1/2% Notes under the Security Documents.
"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
(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
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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 old 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 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
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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 Launch Insurance" means launch and in-orbit operations
insurance in respect of the First QuickBird Satellite with the terms and
provisions described under the "Maintenance of Properties and Insurance"
covenant and in form and substance acceptable to the collateral agent.
"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;
(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;
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(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.
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;
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(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 old notes by EarthWatch from
the holders of the old notes commenced by mailing a notice to the Trustee and
each such holder, stating that:
(1) all old notes validly tendered will be accepted for payment;
(2) the purchase price and the applicable payment date;
(3) any old 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
old note accepted for payment pursuant to the Offer to Purchase will
cease to accrue interest, or original issue discount, on and after the
applicable payment date;
(5) holders of old notes electing to have an old note purchased pursuant
to the Offer to Purchase will be required to surrender the old note,
together with the form entitled "Option of the Holder to Elect
Purchase" on the reverse side of such old 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 old 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 old notes delivered for purchase and a
statement that such holder is withdrawing his election to have such
old notes purchased; and
(7) holders of old notes whose old notes are being purchased only in part
will be issued new notes equal in principal amount to the unpurchased
portion of the old notes surrendered. For this purpose, each old note
purchased and each new 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 old notes or portions of old
notes tendered in response to an Offer to Purchase;
(2) deposit with the paying agent money sufficient to pay the purchase
price of all old notes or portions of old notes accepted; and
(3) deliver, or cause to be delivered, to the Trustee all old notes or
portions of old notes accepted, together with an officers' certificate
specifying the old notes or portions thereof accepted for payment by
EarthWatch.
The paying agent will promptly mail to the holders of old notes so accepted
payment in an amount equal to the purchase price, and the Trustee will promptly
authenticate and mail to such holders a new note equal in principal amount to
any unpurchased portion of the old note surrendered. However, each old note
purchased and each new 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
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Exchange Act to the extent such laws and regulations are applicable, in the
event that EarthWatch is required to repurchase old 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 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
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(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 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 old 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 do not include any Liens on the First QuickBird
Satellite or the First QuickBird Launch Insurance except, in the case of Liens
on the First QuickBird Launch Insurance, Liens on the First QuickBird Satellite
or the First QuickBird Launch Insurance in favor of the collateral agent or
otherwise securing the old and new notes and the 12 1/2% Notes.
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"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.
"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 old
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 old
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 old 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 old 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 old 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' 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 old 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.
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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 (1) the Pledge Agreement, dated as of July 12,
1999, among EarthWatch, the collateral agent, and the Bank of New York, as
securities intermediary under which EarthWatch pledged to the collateral agent
certain United States treasury securities purchased with a portion of the net
proceeds of the issuance of the Permitted Specified Indebtedness to secure
payment from time to time of premiums in respect of the First QuickBird Launch
Insurance, and (2) the Amended and Restated Collateral Pledge and Security
Agreement dated as of July 12, 1999, as amended, made by EarthWatch in favor of
the collateral agent, under which EarthWatch granted to the collateral agent a
Lien in the Collateral and pursuant to which any proceeds of the Collateral will
be allocated in order to:
(A) provide on an equal basis for (i) up to $56 million with respect to
the 12 1/2% Notes, all as more specifically provided in the Amended
and Restated Collateral Pledge and Security Agreement, and (ii) the
Accreted Value of the old notes and the new notes through the earlier
of June 30, 2000 and the date that the First QuickBird Satellite is
launched, all as more specifically provided in the Amended and
Restated Collateral Pledge and Security Agreement, and
(B) provide for the residual payment to EarthWatch after the required
priority payments in respect of the old notes, the new notes, and the
12 1/2% Notes, all as more specifically provided in the Amended and
Restated Collateral Pledge and Security Agreement, as such agreement
may be amended, restated, supplemented, or otherwise modified from
time to time.
"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 old 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 old notes, or (4)
any date on which the old 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:
(1) is expressly made subordinate in right of payment to the old 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 old
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.
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"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.
"12 1/2% Notes" means the 12 1/2% Senior Notes due 2005 of EarthWatch
issued under an indenture dated as of March 19, 1997, as amended and restated as
of April 8, 1999, and as supplemented as of July 7, 1999 between EarthWatch and
The Bank of New York, trustee.
"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.
"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;
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. 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 old notes and new notes at a price
equal to 101% of the Accreted Value of those notes on the date of purchase, plus
accrued interest, if any, to the date of purchase.
In addition, in the event and to the extent that the Trustee receives
insurance proceeds on the First QuickBird Launch Insurance, EarthWatch must
commence, within 30 days, and consummate an Offer to Repurchase all old notes,
new notes and 12 1/2% Notes, up to such holder's (and the holders' of the new
notes and the 12 1/2% Notes) ratable portion of the insurance proceeds, at a
price equal to 100% of the Accreted Value of the old notes on the date of
purchase, plus any accrued interest to the date of purchase.
Limitation on Indebtedness
(a) EarthWatch will not, and will not permit any of its Subsidiaries to,
Incur any Indebtedness (other than the old notes and new 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);
(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 old notes, or
Indebtedness that ranks equally with, or is subordinated in right of
payment to, the old notes shall only be permitted under this clause
(3) if:
(A) in case the old notes are refinanced in part or the Indebtedness
to be refinanced ranks equally with the old 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 old notes,
(B) in case the Indebtedness to be refinanced is subordinated in
right of payment to the old 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 old notes
at least to the same extent that the Indebtedness to be
refinanced is subordinated to the old 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,
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(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 old notes tendered in an
Offer to Purchase made as a result of a Change in Control or (B)
deposited to defease the old notes as described below under "Defeasance";
(6) Guarantees of the old notes and Guarantees of Indebtedness of EarthWatch
by any of its Subsidiaries; provided any such Subsidiary Guarantees the
old 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 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 old notes and has an
Average Life longer than the old 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.
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(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:
(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 old
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 old 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 old 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;
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(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.
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 old 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 old 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 First QuickBird Satellite or the
First QuickBird Launch Insurance except, in the case of the First QuickBird
Launch Insurance, Liens on such insurance in favor of the collateral agent or
otherwise securing the old notes, the new notes, and the 12 1/2% Notes.
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.
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 old notes then outstanding, at a purchase price equal to 101%
of the Accreted Value of such old 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 old 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 old note
repurchase, either prior to or concurrently with such note repurchase.
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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 First
QuickBird 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.
With respect to the intentional ignition of the launch vehicle for, and any
operation following such ignition of, the First QuickBird Satellite, EarthWatch
has obtained and will maintain in full force and effect after the Closing Date
with respect to the First QuickBird Satellite, launch insurance with respect to
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 of less than two years commencing on the date of intentional ignition of
the launch vehicle. Such insurance names the collateral agent as sole loss payee
thereof and is 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.
However, in no event will the amount of such launch insurance at any time
after the Closing Date for which the premium has been fully paid be less than
the sum of (1) $56.0 million and (2) $130.0 million after any amounts paid in
respect of any discounts and commissions to the placement agent, fees, expenses,
and other costs payable by EarthWatch and associated with the issuance of the
old notes and original issue discount of interest accrued on the old notes for
the period from the Closing Date through the
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earlier of June 30, 2000 and the date the First QuickBird Satellite is launched.
If premiums are not at any time fully paid in respect of such 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 obligations under this sentence so long as all such returned premiums have
been distributed to the collateral agent as provided in the Security Documents
and any amounts subsequently made available to EarthWatch by the collateral
agent in accordance with the Security Documents are immediately used for the
purchase of launch insurance complying with this sentence. The insurance policy
entered into on March 15, 1999 with respect to the First QuickBird Satellite
provides for the same percentage payments to become due and payable in the event
that such satellite is lost or maintains less than all of its capacity as are
required under the first paragraph of this "Maintenance of Properties and
Insurance" covenant.
The collateral agent will be the sole loss payee on the First QuickBird
Launch Insurance and all proceeds, if any, from any First QuickBird Launch
Insurance will be paid directly to the collateral agent for application to the
old notes, the new notes and the 12 1/2% Notes in accordance with the provisions
of the Security Documents and the "Repurchase of Notes upon an Insurance
Proceeds Payment" covenant. If, notwithstanding the fact that the collateral
agent will be the sole loss payee with respect to the First QuickBird Launch
Insurance, EarthWatch or any of its Subsidiaries at any time receives any
proceeds relating to the First QuickBird Launch Insurance from the relevant
insurance company or from any source, other than the collateral agent in
accordance with the Security Documents, EarthWatch will cause such proceeds to
be held in trust for the benefit of the collateral agent and immediately turned
over to the collateral agent 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 agent
of any proceeds under the First QuickBird Launch Insurance, and consummate, an
Offer to Purchase the old notes, an offer to purchase the new notes and an offer
to purchase the 12 1/2% Notes on a pro rata basis in an aggregate amount equal
to the insurance proceeds not previously subject to an Offer to Purchase under
this covenant. The purchase price for the old notes, the new notes, and the 12
1/2% Notes in connection with such Offer to Purchase will equal 100% of the
accreted value of such Indebtedness on the relevant payment date plus accrued
and unpaid interest, if any, to such date. If the aggregate purchase price of
the old notes, the new notes, and the 12 1/2% Notes tendered in connection with
such Offer to Purchase is less than the insurance proceeds, the remaining
insurance proceeds will be paid over to EarthWatch and may be used for general
corporate purposes.
Rating of notes
EarthWatch will use its best efforts to obtain a rating for the old 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 1, and
to keep a rating with respect to the old notes continuously in effect through
the maturity or redemption of the old 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) under the
Securities Exchange Act of 1934 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 old 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 old
note when the same becomes due and payable at maturity, upon
acceleration, redemption, or otherwise;
(2) default in the payment of interest on any old note when the same
becomes due and payable, and such default continues for a period of 30
days;
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(3) the failure to make or consummate an Offer to Purchase in accordance
with the "Repurchase of notes upon a Change of Control" or the
"Repurchase of notes upon an insurance proceeds payment" covenants;
(4) EarthWatch defaults in the performance of or breaches any other
covenant or agreement of EarthWatch in the indenture or under the old
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 old 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 12 1/2% Notes 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; or
(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.
(9) there occurs with respect to the First QuickBird Satellite (a) the
loss of 15% or more of such satellite's capacity or (b) any other
event that permits or requires the payment of any proceeds of the
First QuickBird Launch Insurance by the
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insurance company under such policy and, in either such case, such
proceeds are not paid over to the collateral agent within 90 days of
the demand being made under the applicable First QuickBird Launch
Insurance policy.
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 old 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 old 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 old 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 old 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 old 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 old 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 old notes.
A holder may not pursue any remedy with respect to the indenture or the old
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 old notes make a written request to the Trustee to pursue
the remedy;
(3) such holder or holders offer(s) the Trustee indemnity satisfactory to
the Trustee against any costs, liability, or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period, the holders of a majority in aggregate
principal amount at maturity of the outstanding old 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 an old
note to receive payment of the Accreted Value of, premium (if any), or interest
on, such old note or to bring suit for the enforcement of any such payment, on
or after the due date expressed in the old notes, which right will not be
impaired or affected without the consent of the holder.
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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 agent, all of the
obligations of EarthWatch on all of the old 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 old
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 old notes;
. replace stolen, lost, or mutilated old notes;
. maintain paying agencies; and
. hold monies in trust for payment of the obligations under the old 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 old
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 old notes on the Stated Maturity of such
payments in accordance with the terms of the indenture and the Notes;
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(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 old notes are listed on a national securities
exchange, EarthWatch has delivered to the Trustee an opinion of
counsel to the effect that the old 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 old notes on the Stated Maturity of such payments in
accordance with the terms of the indenture and the old 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 old notes as
described in the immediately preceding paragraph and the old 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 old notes at the
time of their Stated Maturity but may not be sufficient to pay amounts due on
the old 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 old 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 old note;
(2) reduce the Accreted Value of, or premium, if any, or interest on, any
old note;
(3) change the place or currency of payment of principal of, or premium,
if any, or interest on, any old note;
(4) impair the right to institute suit for the enforcement of any payment
of any old note on or after the Stated Maturity, or, in the case of a
redemption, on or after the Redemption Date, of any old note;
(5) reduce the above-stated percentage of outstanding old 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 old notes;
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(7) alter the obligation of EarthWatch to offer to purchase the old notes
in accordance with the indenture following the occurrence of a Change
of Control or waive any default in the performance of such obligation;
or
(8) reduce the percentage or aggregate principal amount at maturity of
outstanding old notes, the consent of whose holders is necessary for
waiver of compliance with certain provisions of the indenture or for
waiver of certain defaults.
In addition, without the consent of 66 2/3% of the holders affected
thereby, the Trustee may not direct the collateral agent 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 old notes or the indenture, or for any claim
based on, or in respect of, such obligations or their creation. Each holder, by
accepting the old 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 any such claims, as security or
otherwise. The Trustee is permitted to engage in other transactions but if it
acquires any conflicting inter est, it must eliminate such conflict or resign.
The Trustee is also the trustee under the 12 1/2% Notes indenture and the
collateral agent.
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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.
As of June 30, 2000: 169,986 shares of common stock were outstanding;
7,776,706 shares of Series A preferred stock were outstanding; 7,642,955 shares
of Series B preferred stock were outstanding; and 23,997,112 shares of Series C
preferred stock were outstanding.
Common stock
The holders of common stock are entitled to one vote for each share held of
record at all meetings of the stockholders. The 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, 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 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, 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,
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,
each share of Series A preferred stock and Series B preferred stock shall not be
convertible into common stock.
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Antidilution. The conversion price of the Series A preferred stock and
Series B preferred stock is subject to adjustment under certain circumstances,
including upon any subsequent issuance of capital stock. The issuance of the
Series C preferred stock resulted in an adjustment in the conversion prices of
the Series A preferred stock and Series B preferred stock. See "Principal
stockholders".
Redemption. We are required to redeem all of the Series A preferred stock
and Series B preferred stock outstanding on March 31, 2009, at a redemption
price equal to 100% of the then existing applicable liquidation preference, plus
accrued and unpaid dividends to the date of redemption, subject to the legal
availability of funds.
Voting rights. Each holder of Series A preferred stock is entitled to .65
(subject to adjustment) votes per share held (on an as-converted basis) and each
holder of Series B preferred stock is entitled to 1.35 (subject to adjustment)
votes per share held (on an as-converted basis).
Board representation. The holders of Series A preferred stock have the
right to elect two persons to our board of directors and the holders of the
Series B preferred stock have the right to elect four persons to our board of
directors.
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 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, 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, 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,
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 elect 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
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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.
Warrants
Odetics, Incorporated holds a warrant to purchase 12,463 shares of Series C
preferred stock at an exercise price of $4.53 per share. Such warrant contains
provisions for the adjustment of the exercise price and number of shares
underlying the warrant upon the occurrence of certain events.
Stockholders' agreement
In connection with our recapitalization, we entered into a stockholders'
agreement which provides for voting agreements with respect to election of
directors, agreements requiring board approval for major transactions, and
registration rights for holders of our Series C preferred stock.
Election of additional directors
The stockholders' agreement provides for a board of 11 members. The holders
of the Series A preferred stock are entitled to designate two directors, the
holders of the Series B preferred stock are entitled to designate four
directors, EarthWatch's 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. The numbers of directors that the
holders of Series A preferred stock and Series B preferred stock are entitled to
designate may be adjusted if such holders' percentage ownership changes.
Approval requirements
The stockholders' agreement provides that a majority of the Board, a
majority of the directors designated by the Series A preferred stock, and a
majority of the directors designated by 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.
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.
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Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the certificate
of incorporation or the bylaws. Our bylaws authorize the Chairman of the Board,
the Chief Executive Officer, the President, the board of directors, or
stockholders holding in the aggregate not less than 10% of the voting power of
the company to call a special meeting of stockholders.
Under Delaware law and our bylaws, stockholders may execute an action by
written consent in lieu of a stockholder meeting. Delaware law permits a
corporation to eliminate such actions by written consent. Elimination of written
consents of stockholders may lengthen the amount of time required to take
stockholder actions since certain actions by written consent are not subject to
the minimum notice requirement of a stockholders' meeting. The elimination of
stockholders' written consents, however, deters hostile takeover attempts.
Without the availability of stockholders' actions by written consent, a holder
or group of holders controlling a majority in interest of our capital stock
would not be able to amend our bylaws or remove directors pursuant to a
stockholder's written consent. Any such holder or group of holders would have to
call a stockholders' meeting and wait until the notice periods determined by the
board of directors pursuant to our bylaws prior to taking any such action.
Provisions of Delaware law
We do not currently have publicly-traded equity securities. In the future,
if we have publicly-traded equity securities, we would become subject to Section
203 of the Delaware General Corporation Law, a provision that, in general,
prohibits a publicly-held Delaware corporation from engaging in various
"business combination" transactions with any "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder," unless:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder,
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining
the number of shares outstanding, those shares owned by:
(1) persons who are directors and also officers and
(2) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or
exchange offer, or
. on or subsequent to such time the business combination is approved by
the board of directors and authorized at an annual or special meeting
of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock not owned by the interested stockholder.
Section 203 defines business combination to include:
. any merger or consolidation involving the corporation and the
interested stockholder;
. any sale, transfer, pledge, or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder;
or
. the receipt of the interested stockholder of the benefit of any loans,
advances, guarantees, pledges, or other financial benefits provided by
or through the corporation.
In general, Section 203 defines an interested stockholder as an entity or
person who, together with affiliates and associates, beneficially owns (or
within three years did beneficially own) 15% or more of a corporation's voting
stock. The statute could prohibit or delay mergers or other takeover or change
in control attempts with respect to us and, accordingly, may discourage attempts
to acquire us, if we have publicly-traded equity securities. No assurance can be
given that we will have publicly-traded equity securities in the future.
91
<PAGE>
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 exchange of
old notes for new notes and relating to the ownership and disposition of the new
notes by such U.S. holders. 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 exchange offer and the ownership and disposition of the new 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 new 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).
Finally, a ruling from the IRS with respect to the tax consequences of the
exchange offer and the ownership and disposition of the new 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.
The exchange offer
The exchange of an old note for a new note pursuant to the exchange offer
should not be taxable to any exchanging U.S. holder for U.S. federal income tax
purposes. As a result, an exchanging U.S. holder should not recognize any gain
or loss on the exchange, the holding period for the new note should include the
holding period for the old note, and the basis of the new note should be the
same as the basis for the old note.
The exchange offer will result in no U.S. federal income tax consequences
to a nonexchanging U.S. holder of old notes.
92
<PAGE>
Allocation of purchase price
Since the old notes were issued as part of an investment unit with the
Series C preferred stock, we allocated the issue price between the old note and
the Series C preferred stock based on our best judgment of their relative fair
market values on the issue date. We allocated $512.78 to each note and $171.83
to the shares of Series C preferred stock that comprise each unit. Pursuant to
Treasury Regulations issued under provisions of the Code relating to original
issue discount (the "OID Regulations"), you are bound by such allocation for
U.S. federal income tax purposes unless you disclosed on a statement attached to
your tax return for the taxable year that includes the acquisition date of such
unit that your allocation differs from ours. No assurance can be given that the
IRS will accept our allocation. If our allocation were successfully challenged
by the IRS, the issue price, original issue discount accrual on the new note,
and gain or loss on the sale or disposition of a new note or Series C preferred
stock would be different from that resulting under the allocation determined by
us.
Interest penalty
The treatment of interest described below with respect to the new notes is
based in part upon our determination that, as of the date of issuance of the old
notes, there is only a remote possibility that the interest penalty would be
paid to U.S. holders of the old notes. See "Description of the old notes--
Registration rights". The IRS may take a different position, which could affect
the timing and character of interest income reported by U.S. holders of the new
notes.
Original issue discount
The old notes were issued with original issue discount ("OID") and thus the
new notes will also have 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 new note before receipt of cash or
other payments attributable to such income. Since the cash payments of stated
interest on the new 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 new 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 new 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 new notes until January 15, 2003, no
interest payments on the new notes will constitute "qualified stated interest"
and, accordingly, the stated redemption price at maturity of each new note will
equal the sum of all interest and principal payments that will be made on the
new note. The "issue price" of a new note is the portion of the issue price of
the unit allocated to the new note as determined in the manner described under
"Allocation of purchase price" above.
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 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 "yield to maturity"
is the discount rate that, when used in computing the present value of all
payments to be made under the new notes, produces an amount equal to the issue
price of the new notes. 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. 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
call such instrument prior to maturity if the exercise of that call would reduce
the instrument's yield to maturity. If we were deemed to call the new notes, as
a result of these rules, the timing and amount of OID accrued would be
different.
93
<PAGE>
Acquisition premium
To the extent a holder had acquisition premium with respect to an old note,
the holder generally will have acquisition premium with respect to a new note. A
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
new note after the purchase date over the adjusted issue price.
Market discount
Any gain or loss on a disposition of a new note would generally be capital
gain or loss. However, a subsequent purchaser of a new note who did not acquire
the new note (or an old note exchanged for a new note) at its original issue,
and who acquires such new note (or such old note, as the case may be) at a price
that is less than the adjusted issue price (as determined under the OID rules
described above), may be required to treat the new note as a "market discount
bond". Any recognized gain on a disposition of the new note would then be
treated as ordinary income to the extent that it does not exceed the "accrued
market discount" on the new 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 new note. 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
The new notes will be subject to the "applicable high yield discount
obligation" provisions of the Code. Because the yield on the new notes is at
least five percentage points above the applicable federal rate and the new notes
are 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, because the yield of the new
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 new 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 new note (to the extent such
amount does not represent accrued but unpaid interest) and such holder's tax
basis in the new note. A U.S. holder's tax basis in a new note will equal the
initial purchase price of an old 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 new 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 new 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 new 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.
94
<PAGE>
Information reporting
We are required to furnish certain information to the IRS and will furnish
annually to record holders of the new notes information with respect to interest
paid (and OID accrued) on the new notes during the calendar year.
95
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes in the exchange offer for its
own account must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such notes.
We reserve the right at our sole discretion to purchase or make offers for, or
to offer new notes for, any old notes or any other notes that remain outstanding
subsequent to the expiration of the exchange offer pursuant to this prospectus
or otherwise and, to the extent permitted by applicable law, purchase old notes
or any other notes in the open market, in privately negotiated transactions or
otherwise. This prospectus, as it may be amended or supplemented from time to
time, may be used by all persons subject to the prospectus delivery requirements
of the Securities Act, including broker-dealers in connection with resales of
new notes received in the exchange offer, where such notes were acquired as a
result of market-making activities or other trading activities and may be used
by us to purchase any notes outstanding after expiration of the exchange offer.
We have agreed that, for a period of 180 days after the expiration of the
exchange offer, we will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of new notes by broker-
dealers. New notes received by broker-dealers in the exchange offer for their
own account may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the new notes, or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such new notes. Any broker-dealer that resells new notes
received by it in the exchange offer for its own account and any broker or
dealer that participates in a distribution of any such new notes may be deemed
to be an "underwriter" within the meaning of the Securities Act, and any profit
on any such resale of such new notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that, by acknowledging that it
will deliver and by delivering a prospectus meeting the requirements of the
Securities Act, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer, other than commissions or concessions of any brokers or
dealers.
LEGAL MATTERS
The validity of the new notes offered hereby will be passed upon for us by
Baker & McKenzie.
EXPERTS
The consolidated financial statements of EarthWatch Incorporated and
subsidiaries as of December 31, 1998 and 1999, and for each of the three years
in the period ended December 31, 1999 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.
WHERE YOU CAN FIND MORE INFORMATION
A registration statement on Form S-4, including amendments thereto,
relating to the new notes offered by this prospectus has been filed by us with
the Securities and Exchange Commission. This prospectus, which constitutes a
part of the Registration Statement, 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 new 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 Securities and
Exchange Commission at 450 Fifth Street, NW, Judiciary Plaza, Washington, D.C.
20549, and copies of all or any part thereof may be obtained from the Securities
and Exchange Commission upon payment of certain fees prescribed by the
Securities and Exchange Commission. You may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission maintains a World Wide
Web site that contains reports, proxy and information statements, and other
information filed electronically with the Securities and Exchange Commission.
The address of the site is http://www.sec.gov.
96
<PAGE>
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 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Balance Statement
--------------------------------------------------------------------------------
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 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 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 for the consolidated
statement of operations and cash flows, and for each of the five years in the
period ended December 31, 1999 for the consolidated statement of stockholders'
equity (deficit), in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audits 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 expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Denver, Colorado
March 31, 2000
F-2
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Balance Sheet
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1998 1999 2000
------------ ------------- -------------
(Unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 5,044,605 $ 82,193,314 $ 63,119,066
Accounts receivable, net of allowance of $0, $90,646, and $43,118, at
December 31, 1998 and 1999, and March 31, 2000, respectively 720,034 768,029 83,338
Investment securities -- 3,026,480 --
Investment securities - restricted 6,664,347 28,374,848 28,641,042
Other assets 474,092 968,769 415,665
------------ ------------- -------------
Total current assets 12,903,078 115,331,440 92,259,111
------------ ------------- -------------
Property, plant, and equipment:
Construction in progress 59,696,137 143,716,962 163,220,303
Computer equipment and software 10,287,166 12,275,986 13,687,733
Machinery and equipment 5,406,435 5,665,918 5,748,545
Furniture and fixtures 913,837 1,113,073 1,187,586
------------ ------------- -------------
76,303,575 162,771,939 183,844,167
Accumulated depreciation (8,251,176) (12,031,861) (12,902,171)
------------ ------------- -------------
Property, plant, and equipment, net 68,052,399 150,740,078 170,941,996
------------ ------------- -------------
Investment securities - restricted 3,063,279 -- --
Debt issuance costs, net 943,795 5,069,065 4,891,265
Other assets 365,126 328,537 319,573
------------ ------------- -------------
TOTAL ASSETS $ 85,327,677 $ 271,469,120 $ 268,411,945
============ ============= =============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS'
EQUITY (DEFICIT)
Liabilities
Current liabilities:
Accounts payable $ 4,306,153 $ 12,307,440 $ 7,927,723
Accounts payable to related parties 1,408,755 645,464 155,580
Accrued interest payable 2,489,986 -- --
Accrued expenses 488,065 1,103,408 1,153,282
Deferred revenue -- 400,000 400,000
Current portion of long-term debt 242,189 92,743 77,011
------------ ------------- -------------
Total current liabilities 8,935,148 14,549,055 9,713,596
Long-term debt, net 49,561,820 167,055,390 174,139,481
------------ ------------- -------------
Total liabilities 58,496,968 181,604,445 183,853,077
------------ ------------- -------------
Commitments (Note 11)
Mandatorily redeemable preferred stock due 2009
7% Cumulative convertible - Series A; $.001 par value, 0 shares
authorized, issued, and outstanding as of December 31, 1998;
10,000,000 shares authorized, 7,505,765 shares issued and
outstanding as of December 31, 1999; 10,000,000 shares
authorized, 7,642,955 shares issued and outstanding as of March
31, 2000, aggregate liquidation preference of $14,567,000 -- 24,146,264 24,146,401
7% Cumulative convertible - Series B; $.001 par value, 0 shares
authorized, issued, and outstanding as of December 31, 1998;
10,000,000 shares authorized, 7,505,765 shares issued and
outstanding as of December 31, 1999; 10,000,000 shares
authorized, 7,642,955 shares issued and outstanding as of March
31, 2000, aggregate liquidation preference of $14,567,001 -- 24,146,264 24,146,401
8.5% Cumulative convertible - Series C; $.001 par value, 0 shares
authorized, issued, and outstanding as of December 31, 1998;
25,000,000 shares authorized, 22,987,305 shares issued and
outstanding as of December 31, 1999; 10,000,000 shares
authorized, 23,492,344 shares issued and outstanding as of
March 31, 2000, aggregate liquidation preference of $82,223,000 -- 75,091,442 75,139,119
------------ ------------- -------------
Total mandatorily redeemable preferred stock -- 123,383,970 123,431,921
------------ ------------- -------------
Stockholders' Equity (Deficit)
Series A Convertible preferred stock, $0.001 par value, 21,500,000
shares authorized, 19,368,326 shares issued and outstanding as
of December 31, 1998; none authorized, issued, or outstanding
as of December 31, 1999 and as of March 31, 2000 19,368 -- --
Series B Convertible preferred stock, $0.001 par value, 5,000,000
shares authorized, 311,300 shares issued and outstanding as of
December 31, 1998; none authorized, issued, or outstanding as
of December 31, 1999 and as of March 31, 2000 311 -- --
Series C Senior Convertible preferred stock, $0.001 par value,
7,000,000 shares authorized, issued, and outstanding as of
December 31, 1998; none authorized, issued, or outstanding as
of December 31, 1999 and as of March 31, 2000 7,000 -- --
Series D Convertible preferred stock, $0.001 par value, 1,000,000
shares authorized,issued, and outstanding as of December 31,
1998; none authorized, issued, or outstanding as of December
31, 1999 and as of March 31, 2000 1,000 -- --
Common stock, $.001 par value, 65,000,000 shares authorized, 203,548
shares issued and outstanding as of December 31,1998;
100,000,000 shares authorized, one share issued and outstanding
as of December 31, 1999; 100,000,000 shares authorized, 44,985
issued and outstanding as of March 31, 2000 204 -- 45
Additional paid-in capital 118,025,489 78,277,690 78,288,891
Accumulated Other Comprehensive Income (Loss) 43,429 (115,953) (61,373)
Accumulated deficit (91,266,092) (111,681,032) (117,100,616)
------------ ------------- -------------
Total stockholders' equity (deficit) 26,830,709 (33,519,295) (38,873,053)
------------ ------------- -------------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT) $ 85,327,677 $ 271,469,120 $ 268,411,945
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Statement of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 Three Months Ended March 31,
---------------------- ----------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue $ 436,912 $ 1,808,573 $ 5,913,310 $ 167,247 $ 2,019,248
Cost of Goods Sold 381,997 1,904,867 5,120,575 142,770 1,343,535
------------ ------------ ------------ ----------- -----------
Gross profit (loss) 54,915 (96,294) 792,735 24,477 675,713
------------ ------------ ------------ ----------- -----------
Expenses:
Selling, general and administrative 8,587,856 4,975,232 12,762,636 2,231,113 3,015,742
Research and development 19,121,233 9,112,745 6,956,244 2,067,030 2,379,624
Loss from impairment of fixed assets 25,518,696 599,015 -- -- --
Gain from arbitration settlement -- (1,514,776) -- -- --
------------ ------------ ------------ ----------- -----------
Total expenses 53,227,785 13,172,216 19,718,880 4,298,143 5,395,366
------------ ------------ ------------ ----------- -----------
Loss from operations (53,172,870) (13,268,510) (18,926,145) (4,273,666) (4,719,653)
Interest income (expense), net 2,441,885 348,955 (1,392,621) 129,795 (651,993)
------------ ------------ ------------ ----------- -----------
Net loss (50,730,985) (12,919,555) (20,318,766) (4,143,871) (5,371,646)
Mandatorily redeemable preferred stock
dividends and accretion -- -- (96,174) -- (47,938)
------------ ------------ ------------ ----------- -----------
Net loss attributable to
common stockholders $(50,730,985) $(12,919,555) $(20,414,940) $(4,143,871) $(5,419,584)
============ ============ ============ =========== ===========
<CAPTION>
Period from
March 31, 1995
(Inception)
To
March 31, 2000
--------------
(unaudited)
<S> <C>
Revenue $ 15,070,687
Cost of Goods Sold 12,385,261
-------------
Gross profit (loss) 2,685,426
-------------
Expenses:
Selling, general and administrative 37,763,284
Research and development 60,873,192
Loss from impairment of fixed assets 26,117,711
Gain from arbitration settlement (1,514,776)
-------------
Total expenses 123,239,411
-------------
Loss from operations (120,553,985)
Interest income (expense), net 3,597,481
-------------
Net loss (116,956,504)
Mandatorily redeemable preferred stock
dividends and accretion (144,112)
-------------
Net loss attributable to
common stockholders $(117,100,616)
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Statement of Cash Flows
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
----------------------- ----------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
Cash Flows From Operating Activities (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net loss $(50,730,985) $(12,919,555) $(20,318,766) $(4,143,871) $ (5,371,646)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation expense 3,138,931 4,383,188 3,885,611 1,182,628 894,225
Non-cash interest expense, net of
amounts capitalized -- 760,019 4,752,339 -- 1,980,668
Other non-cash charges 61,419 29,279 -- 7,989 --
Loss on disposal of property, plant
and equipment 55,974,018 667,358 3,346 -- --
Changes in assets and liabilities: -
Accounts receivable, net (28,495,851) 28,329,903 (47,995) 436,256 684,691
Other assets (937,094) 1,243,312 (458,088) (733,847) 562,068
Accounts payable 2,594,384 (2,153,712) 8,001,287 1,960,114 (4,379,717)
Accounts payable to related parties 1,969,383 (2,484,767) (763,291) (1,075,860) (489,884)
Accrued expenses 2,233,546 282,383 (1,874,643) (1,559,681) 49,872
Deferred revenue 621 (1,667) 400,000 -- --
------------ ------------ ------------ ----------- ------------
Net cash provided (used) by
operating activities (14,191,628) 18,135,741 (6,420,200) (3,926,272) (6,069,723)
------------ ------------ ------------ ----------- ------------
Cash Flows From Investing Activities
Purchase of investment securities (16,579,338) (882,000) (27,686,994) -- --
Proceeds from maturities of investment
securities 2,304,000 5,431,000 5,853,910 3,716,000 2,814,866
Proceeds from sale of property, plant
and equipment 256,485 3,959,280 1,213 --
Construction in progress additions (53,156,096) (25,912,268) (72,681,412) (4,167,903) (14,207,685)
Other property, plant and equipment additions (1,115,314) (124,893) (2,557,024) (264,611) (1,592,802)
------------ ------------ ------------ ----------- ------------
Net cash used in investing activities (68,290,263) (17,528,881) (97,070,307) (716,514) (12,985,621)
------------ ------------ ------------ ----------- ------------
Cash Flows From Financing Activities
Proceeds from issuance of long-term notes, net 48,268,288 -- 97,450,086 -- --
Proceeds from issuance of preferred and
common stock, net 6,006,977 50,872 83,512,114 800 11,260
Proceeds from issuance of units, net -- -- -- -- --
Cash acquired in merger -- -- -- -- --
Principal payments on debt (607,595) (2,023,118) (322,984) (48,955) (30,164)
------------ ------------ ------------ ----------- ------------
Net cash provided (used) by
financing activities 53,667,670 (1,972,246) 180,639,216 (48,155) (18,904)
------------ ------------ ------------ ----------- ------------
Net increase in cash and
cash equivalents (28,814,221) (1,365,386) 77,148,709 (4,690,941) (19,074,248)
Cash and Cash Equivalents
Beginning of period 35,224,212 6,409,991 5,044,605 5,044,605 82,193,314
------------ ------------ ------------ ----------- ------------
End of period $ 6,409,991 $ 5,044,605 $ 82,193,314 $ 353,664 $ 63,119,066
============ ============ ============ =========== ============
Supplemental Disclosure of Cash Flow Information
Interest paid $ 2,939,864 $ 6,344,475 $ 3,150,575 $ 3,133,245 $ 3,481
Supplemental Disclosure of Non-Cash
Investing and Financing Activities
New capital lease obligations $ 304,730 $ -- $ -- $ -- $ --
Net book value of assets received
in merger -- -- -- -- --
Liabilities assumed in merger -- -- -- -- --
Stockholder advances converted to equity -- -- -- -- --
Property in-kind contributed by stockholder (3,524) -- -- -- --
Non-cash interest capitalized in construction
in progress 5,670,000 6,056,000 11,340,000 1,749,902 5,295,655
Capital equipment financed through note payable 1,612,347 -- -- -- --
Issuance of mandatorily redeemable cumulative
preferred stock -- -- 39,765,364 -- --
<CAPTION>
Period from
March 31, 1995
(inception)
To
March 31, 2000
--------------
Cash Flows From Operating Activities (unaudited)
<S> <C>
Net loss $(116,956,504)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation expense 14,120,290
Non-cash interest expense, net of
amounts capitalized 7,493,026
Other non-cash charges 156,048
Loss on disposal of property, plant
and equipment 56,720,642
Changes in assets and liabilities: -
Accounts receivable, net 915,787
Other assets (512,864)
Accounts payable 7,415,114
Accounts payable to related parties 155,580
Accrued expenses 1,113,101
Deferred revenue (1,755,800)
-------------
Net cash provided (used) by
operating activities (31,135,580)
-------------
Cash Flows From Investing Activities
Purchase of investment securities (45,148,332)
Proceeds from maturities of investment
securities 16,403,776
Proceeds from sale of property, plant
and equipment 4,216,978
Construction in progress additions (201,103,717)
Other property, plant and equipment additions (13,403,425)
-------------
Net cash used in investing activities (239,034,720)
-------------
Cash Flows From Financing Activities
Proceeds from issuance of long-term notes, net 145,781,374
Proceeds from issuance of preferred and
common stock, net 191,133,665
Proceeds from issuance of units, net
Cash acquired in merger 916,457
Principal payments on debt (4,479,130)
-------------
Net cash provided (used) by
financing activities 333,289,366
-------------
Net increase in cash and
cash equivalents 63,119,066
Cash and Cash Equivalents
Beginning of period --
-------------
End of period $ 63,119,066
=============
Supplemental Disclosure of Cash Flow Information
Interest paid $ 12,671,989
Supplemental Disclosure of Non-Cash
Investing and Financing Activities
New capital lease obligations $ 1,397,803
Net book value of assets received
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 28,506,656
Capital equipment financed through note payable 3,202,132
Issuance of mandatorily redeemable cumulative
preferred stock 39,765,364
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Convertible Convertible Convertible Senior
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 -- $ -- -- $ -- -- --
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 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 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 gain (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 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 loss -- -- -- -- -- --
----------- ------------ -------- ----------- ----------- -------
Balance at December 31, 1999 -- -- -- -- -- --
Issuance of preferred and common stock for
stock options exercised (unaudited) -- -- -- -- -- --
Mandatorily redeemable preferred stock dividends
and accretion (unaudited) -- -- -- -- -- --
Net loss (unaudited) -- -- -- -- -- --
----------- ------------ -------- ----------- ----------- -------
Balance at March 31, 2000 (unaudited) -- $ -- -- $ -- -- $ ---
=========== ============ ======== =========== =========== =======
Convertible Senior
Series D Additional Stock
Preferred Stock Common Stock Paid-in Subscription
Shares Amount Shares Amount Capital Receivable
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 -- $ -- -- $ -- $ -- $ --
Issuance of stock in exchange for future
cash contributions and contributions
of property in-kind -- -- 1 -- -- (14,000,000)
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 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 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 gain (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 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 -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ------- ---------- -------- ------------ ------------
Balance at December 31, 1999 -- -- 1 -- 78,277,690 --
Issuance of preferred and common stock for
stock options exercised (unaudited) -- -- 44,985 45 11,201 --
Mandatorily redeemable preferred stock dividends
and accretion (unaudited) -- -- -- -- -- --
Net loss (unaudited) -- -- -- -- -- --
----------- ------- ---------- -------- ------------ ------------
Balance at March 31, 2000 (unaudited) -- $ -- 44,986 $ 45 $ 78,288,891 $ --
=========== ======= ========== ======== ============ ============
<CAPTION> Accumulated
Other
Comprehensive Accumulated Stockholders'
Income (Loss) (Deficit) Equity (Deficit)
<S> <C> <C> <C>
Balance at January 1, 1995 $ -- $ -- $ --
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 for stock options exercised -- -- 63,000
Issuance of preferred stock -- -- 23,603,035
Property in-kind, conversion of debt, and
cash contributions from stockholder -- -- 13,381,523
Net 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 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 gain (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 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 -- (96,174) (96,174)
Net loss (159,382) (20,318,766) (20,478,148)
--------- ------------- ------------
Balance at December 31, 1999 (115,953) (111,681,032) (33,519,295)
Issuance of preferred and common stock for
stock options exercised (unaudited) -- -- 11,246
Mandatorily redeemable preferred stock dividends
and accretion (unaudited) -- (47,938) (47,938)
Net loss (unaudited) 54,580 (5,371,646) (5,317,066)
--------- ------------- ------------
Balance at March 31, 2000 (unaudited) $ (61,373) $(117,100,616) $(38,873,053)
========= ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. General Information
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.
Since inception, the Company has incurred considerable losses and is
expected to incur additional losses subsequent to March 31, 2000. The
Company has not yet generated any significant revenues from its imaging
business. Therefore, the Company is considered to be in the development
stage.
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. Depreciation is computed using the straight-line method over the
estimated useful lives of the respective assets (three to seven years).
Leasehold improvements and assets acquired pursuant to capital-lease
obligations are amortized on a straight-line basis over the shorter of
their useful lives or lease terms; such amortization is included in
depreciation expense. Repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets based on
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 measured using discounted cash flows.
Revenue Recognition
Revenue is primarily derived from the sale of third-party imagery under
contracts to customers. Revenue is also earned processing third-party data,
such as aerial photography, into usable digital imagery. Revenue from these
sales is recognized when the product has been delivered to the customer.
F-7
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
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
design is stable and not subject to significant modification, 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
The Company uses the intrinsic value method of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees to account
for all of its employee stock-based compensation plans. Stock-based
compensation for nonemployees is computed using the fair value method under
SFAS 123, Accounting for Stock-Based Compensation.
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.
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 carrying amount of debt approximates its fair value based upon
rates currently available for similar instruments.
Concentration of Credit Risk
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.
Significant 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.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and hedging activities. SFAS No. 133 requires
the recognition of all derivative instruments as either assets or
liabilities in the statements of financial position and measurement of
those derivative instruments at fair value. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
Currently (and historically), the Company does not hold derivative
instruments or engage in hedging activities. The adoption of this standard
is not expected to have a material effect on the Company's financial
statements.
F-8
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 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
Company does not anticipate that the adoption of SAB 101 will have a
material impact on its financial condition or results of operations.
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, will apply to the Company. The
adoption of this standard is not expected to have a material effect on the
Company's financial statements.
Unaudited Interim Financial Statements
The accompanying interim consolidated financial statements as of March 31,
2000, the consolidated statements of operations, of cash flows, and of
stockholders' equity for the three-month periods ended March 31, 2000 and
1999, are unaudited. In the opinion of the Company, the unaudited interim
consolidated financial statements have been prepared on the 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.
Comprehensive Income
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 includes all changes in equity during a
period from non-owner sources. Total comprehensive loss was $50,650,585,
$12,876,126, and $20,434,719 for the years ended December 31, 1997, 1998,
and 1999, respectively.
Reclassification
Certain items previously reported in specific financial statement captions
have been reclassified to conform to the current presentation.
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 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.
F-9
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross
Unrealized
Investment Securities Cost Gains (Losses) Fair Value
--------------------- ---- -------------- ----------
<S> <C> <C> <C>
U.S. Government securities as of December 31, 1998:
Maturing in one year or less..................................... (none) (none) (none)
========== ============= ==========
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 March 31, 2000:
Maturing in one year or less..................................... (none) (none) (none)
========== ============= ==========
</TABLE>
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.
<TABLE>
<CAPTION>
Gross
Unrealized
Investment Securities - Restricted Cost Gains (Losses) Fair Value
---------------------------------- ---- -------------- -----------
<S> <C> <C> <C>
U.S. Government securities as of December 31, 1998:
Maturing in one year or less........................................... $ 6,642,610 $ 21,737 $ 6,664,347
Maturing in more than one year......................................... 3,041,587 21,692 3,063,279
----------- --------- -----------
$ 9,684,197 $ 43,429 $ 9,727,626
=========== ========= ===========
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 March 31, 2000:
Maturing in one year or less........................................... $28,702,415 ($61,373) $28,641,042
=========== ========= ===========
</TABLE>
5. Construction In Progress and Loss from Impairment of Fixed Assets
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:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999 March 31, 2000
----------------- ----------------- --------------
<S> <C> <C> <C>
QuickBird satellites $58,063,457 $125,414,700 $139,798,406
Digital Globe software 477,315 14,809,982 19,653,719
Ground station equipment 1,155,365 3,492,280 3,768,178
----------- ------------ ------------
$59,696,137 $143,716,962 $163,220,303
=========== ============ ============
</TABLE>
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.
F-10
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
On December 24, 1997, the EarlyBird 1 satellite was successfully launched
from the Svobodny Cosmodrome. Four days later, on December 28, 1997, the
Company's mission operations center lost contact with the satellite. After
several weeks of continued unsuccessful efforts to contact EarlyBird 1,
management determined that the satellite was lost and filed a proof of loss
claim with the Company's insurance carriers. Due to the uncertainty related
to the performance of EarlyBird 2 and the costs necessary to complete and
launch this second satellite, the Company determined that it would not plan
a future launch of EarlyBird 2. Accordingly, as of December 31, 1997, the
total accumulated construction costs for the EarlyBird satellite program,
including EarlyBird 1, EarlyBird 2, and related ground equipment were
included in the Statement of Operations as a $25.5 million loss from
impairment of fixed assets, net of the expected insurance proceeds
receivable of $29 million.
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 notes equal to the difference between the
current principal balance and the principal balance at maturity.
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 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 Company is obligated to use its best efforts to consummate an exchange
offer for the Senior Discount Notes by August 15, 2000 or to cause a
registration statement with respect to the resales of the Senior Discount
Notes to be declared effective as soon as practicable after that time.
Prior to that time, the Senior Discount Notes are designated as eligible
for trading in private offerings, resales, and trading through automated
linkages, or the PORTAL market.
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 notes will be secured by
an interest in insurance proceeds that the Company receives in the event of
a loss or substantial impairment of its planned QuickBird 1 satellite.
F-11
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
The Company's long-term debt and capital-lease obligations are comprised of
the following:
<TABLE>
<CAPTION>
December 31, December 31, March 31,
------------- ------------- -------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
13% Senior Discount Notes, net of unamortized discount of $0,
$86,681,504, and $81,189,953, respectively, effective rate of 15.9%.... $ -- $112,318,496 $117,810,047
12 1/2% Senior Notes, net of unamortized discount of $669,944,
$17,321,394, and $15,714,423, respectively............................. 49,330,056 54,678,606 56,285,577
Capital-lease obligations.............................................. 473,953 151,031 120,868
----------- ------------ ------------
49,804,009 167,148,133 174,216,492
Less: current portion.................................................. (242,189) (92,743) (77,011)
----------- ------------ ------------
$49,561,820 $167,055,390 $174,139,481
=========== ============ ============
</TABLE>
Future payments under debt and capital-lease obligations are summarized
below:
<TABLE>
<S> <C>
2000 $ 103,120
2001 59,001
2002 - 2004 74,240,000
Thereafter 353,110,000
-------------
Total minimum debt and lease payments 427,512,121
Less: amounts representing interest (156,361,090)
-------------
Present value of minimum debt and lease payments 271,151,031
Less: current portion (92,743)
-------------
Long-term portion $ 271,058,288
=============
</TABLE>
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") and 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 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.
F-12
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Old Series A and B Convertible Preferred Stock
Each share of Series A Convertible Preferred Stock (the "Old Series A
Preferred Stock") and Series B Convertible Preferred Stock (the "Old Series
B Preferred Stock") was, as of December 31, 1998, convertible into one
share of Common Stock, subject to future adjustment in the event of
recapitalizations or dividends of Common Stock. The holders of Old Series A
Preferred Stock had the contractual right to receive additional shares upon
certain issuances of stock for a price less than $4.00 per share. The
conversion ratio of Old Series B Preferred Stock was subject to adjustment
upon certain issuances of stock for a price less than $10.00 per share.
All Old Series A and B Preferred Stock, by their terms, were convertible at
the option of the holder at any time and converted into Common Stock
simultaneously upon an initial public offering with gross proceeds of at
least $5,000,000 or with the written notice to the Company from holders of
a majority of the outstanding shares of either of the two series of
participating preferred stock consenting thereto. Upon conversion, all
accrued and unpaid dividends, whether or not declared, were canceled.
All Old Series A and B Preferred Stock were voting and had liquidation
preferences (Old Series A Stock and Series B Stock at $4.00 and $10.00 per
share, respectively, plus an amount equal to all declared but unpaid
dividends on each share).
When, and only if, dividends were declared by the Company's Board of
Directors, the Series A Stock and Series B Stock participated pari passu
and had a right to receive dividends of $0.32 per share per annum prior to
any dividends paid to holders of 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 Preferred Stock
As of March 31, 2000, there were 7,642,955 shares of Series A Convertible
Preferred Stock outstanding held of record by one stockholder and 7,642,955
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.
F-13
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Rank. Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock are pari passu and rank senior to Series C Convertible
Preferred Stock and Common Stock with respect to dividends, liquidation
preference, and redemption.
Dividends. The holders of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock are entitled to receive cumulative dividends,
whether or not declared by the Company's board of directors, at an annual
rate of 7% until no later than June 15, 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 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.
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
have 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 Preferred Stock
Rank. The Series C Convertible Preferred Stock is junior to the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock, but
senior to the Common Stock, with respect to dividends, liquidation
preference, and redemption.
F-14
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
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 $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.
F-15
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
8. Stock Options
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 may be issued to
employees, officers, directors, and consultants. Under the 95 Plan,
incentive stock options are granted at an exercise price not less than the
fair value of the stock on the date 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,
generally vest over a four-year period, and are immediately exercisable.
Upon termination of services to the Company by the optionee, any exercised
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.
In conjunction with the Recapitalization Agreement in 1999, all outstanding
options were exchanged for new replacement options for the purchase of
Series C Convertible Preferred Stock. The replacement options were granted
with terms substantially equivalent to the options they were replacing,
except that the exercise prices and number of shares were converted using
the same exchange ratios used in the Recapitalization Agreement for
outstanding shares.
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:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $(50,730,985) $(12,919,555) $(20,318,766)
Net loss - pro forma (50,813,468) (13,029,611) (20,396,318)
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 0.00% 0.00% 0.00%
Risk free interest rate 5.80% - 6.76% 5.27% - 5.63% 4.60% - 5.14%
Expected life of options (years) 5.00 4.42 5.00
</TABLE>
The weighted-average fair values of options granted during 1997, 1998, and
1999 were $0.21, $0.17, and $0.94 per share, respectively. The weighted-
average remaining contractual life of outstanding options is approximately
seven years.
F-16
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Changes during 1997, 1998, and 1999 in options outstanding were as follows:
<TABLE>
<CAPTION>
Number Weighted- Number Weighted- Number Weighted-
of Series A Average of Common Average of Series C Average
Preferred Exercise Stock Exercise Preferred Exercise
Shares (1) Price Shares (1) Price Shares (1) Prices
---------- ----- ---------- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1997 37,800 $0.05 1,158,300 $0.80
Options granted - 620,295 0.80
Exercised - (10,282) 0.80
Expire - (117,571) 0.80
---------- -----
Outstanding at December 31, 1997 37,800 0.05 1,650,742 0.80
Options 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
Options 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
======= =====
Outstanding options vested 192,716
Available for grant at December 31, 1999 0
</TABLE>
(1) As converted to Series C Convertible Preferred in April 1999.
On February 15, 2000, the Board of Directors approved the written 1999
Equity Incentive Plan. Options for 2,352,388 shares of Common Stock were
issued to EarthWatch employees shortly thereafter with an exercise price of
$0.25 per share.
Stock Warrants
As of December 31, 1999, the Company had outstanding warrants exercisable
for the purchase of 12,462.8 shares of new Series C Convertible Preferred
Stock, as converted from 28,250 shares of Series A Stock. The warrants are
exercisable at $1.00 per share through May 27, 2001. In addition, warrants
were issued in connection with the 12 1/2% Senior Notes and were exercised
for the purchase of 1,556,000 shares of Common Stock in connection with the
recapitalization and restructuring of the debt (See "Note 6--Debt").
9. Income Taxes
At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $89,027,000. If unused, the
carryforwards will expire beginning 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. Changes in the Company's ownership may limit the use of
such carryforward benefits.
F-17
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
The Company's deferred tax assets are comprised of the following as of
December 31:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 31,039,655 $ 33,762,887
Satellite asset write-off 4,827,914 4,827,914
Research credit carryforward 988,788 988,788
Accrued vacation benefits 108,142 207,098
Accelerated depreciation 112,876 42,858
Other 255,883 445,109
------------ ------------
Gross deferred tax assets 37,333,258 40,284,654
Valuation allowance (37,333,258) (40,284,654)
------------ ------------
Net deferred tax assets $ -0- $ -0-
============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate 34.0% 34.0% 34.0%
State income tax rate, net of federal benefit 5.0 5.0 5.0
Meals and entertainment (0.2) (0.5) (0.2)
Disqualified interest (17.1) - -
Effect of change in valuation allowance and other items (21.7) (38.5) (38.8)
------ ------ ------
Effective income tax rate -% - % -%
====== ====== ======
Additions to valuation allowance $(20.6) $ (5.2) $ (3.0)
------ ------ ------
</TABLE>
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 did not
make any contributions to the 401k Plan in 1997, 1998, or 1999, or during
the first quarter of 2000.
11. Commitments
Operating Leases
The Company leases its facilities under various operating lease
arrangements. Future minimum lease payments under noncancelable leases as
of December 31, 1999 are summarized below:
F-18
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
2000 $ 617,897
2001 146,220
2002 133,278
2003 120,336
2004 and thereafter 120,792
----------
Total minimum lease payments $1,138,523
==========
Rent expense relating to the operating leases approximated $1,230,000,
$988,422, and $888,305 for the years ended December 31, 1997, 1998, and
1999, respectively.
Major Contracts
Ball Aerospace & Technologies Corp. Contract
In March 1996, the Company entered into a labor hour contract with Ball
Aerospace & Technologies Corp. ("Ball Aerospace"), for the provision of
engineering services in support of the various tasks associated with the
spacecraft as identified and authorized by the Company. This contract is
currently in full force and effect. During the year ended December 31,
1997, the Company made payments to Ball Aerospace totaling $22,287,707
under this contract.
Effective October 14, 1997 in conjunction with the settlement of a letter
contract for the design and manufacture of QuickBird 1 & 2, the Company
entered into an agreement with Ball Aerospace granting the Company an
option to purchase either one or two 1-meter QuickBird spacecraft at
varying contract amounts, depending on the timing of the Company's exercise
of that option. Under the agreement, Ball Aerospace is permitted to sell
spacecraft based on the QuickBird design to third parties under certain
circumstances. Ball Aerospace did not perform any work under the agreement
from October 1997 through May 1998, and the Company did not make any
payments to Ball Aerospace during that time. Pursuant to the terms of the
agreement, the Company issued to Ball Aerospace a promissory note in the
principal amount of approximately $1.6 million; the Company repaid all
obligations outstanding under the note in full on May 15, 1998.
Effective June 9, 1998, upon the expiration of the Ball Aerospace
agreement, the Company entered into a new agreement with Ball Aerospace,
which was amended on February 16, 1999. This agreement restarted work on
the QuickBird 1, with a total fixed cost of $33.8 million and allowed the
Company to exercise an option until March 15, 1999 to purchase a second
QuickBird satellite at a cost of $31.1 million. During the years ended
December 31, 1998 and 1999, the Company made payments to Ball Aerospace
totaling $9,976,000 and $33,455,000 under this contract.
Eastman Kodak Company Agreement
During October 1996, the Company and Eastman Kodak Company ("Kodak")
entered into an agreement for the QuickBird Sensor Subsystem. Under this
agreement, Kodak will provide the necessary resources for the definition,
design, production, integration, test, and verification of one Sensor
Subsystem and critical parts required for a second Sensor Subsystem. The
contract also includes an option for completion of the second Sensor
Subsystem. In return, the Company will pay Kodak amounts totaling
approximately $18,215,950 based upon the accomplishment of specific program
milestones.
In April 1997, the Company exercised an option with Kodak to begin work on
the second Sensor Subsystem, increasing the total contractual value to
$24,840,950. During the third quarter of 1997, this agreement was amended
to significantly reduce the scheduled level of effort for the period from
August 1997 to February 1998.
In March 1998, the Company and Kodak agreed to a restart of the first
Sensor Subsystem with a total value of $21,700,000 and an option for the
second. In December 1998, the Company exercised the option for the second
subsystem.
F-19
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
This increased the total contract value to $26,900,000, of which
$5,456,580, $4,325,000, and $5,994,891 have been paid during the years
ending December 31, 1997, 1998, and 1999, respectively.
The first sensor subsystem was delivered in July 1999. The second sensor
subsystem was delivered in June 2000.
Fokker Contract
In September 1997, the Company signed an agreement with Fokker Space B.V.
("Fokker") for two solar array assemblies in connection with the QuickBird
satellite program. The fixed price for this contract is $7,651,000 plus
financing charges. During 1998, the Company sold the first assembly to Ball
Aerospace at a price equal to the Company's cost in the assembly. The
Company has included $712,700 in accounts payable as of December 31, 1999
relating to the services performed by Fokker.
In February 1999, the Company and Fokker signed a contract for the
fabrication of a third solar array, which will be used for QuickBird 2. The
contract price is $3,300,000. The array is scheduled for delivery in
September 2000. Amounts totaling $500,000, $3,746,578, and $4,415,459 have
been paid during the years ending December 31, 1997, 1998, and 1999,
respectively.
ITT Industries, Inc. Transactions
In December 1998, the Company entered into various contracts with the ITT
Systems division of ITT Industries, Inc. for system engineering and other
efforts associated with the scheduling and tasking module of the QuickBird
satellite and the development of a satellite simulator. The current value
of these contracts is $4,099,867 and $441,471.
In June 1999, EarthWatch entered into a contract relating to a study of a
sensor to determine, among other things, the current state of the art of
sensor technology, the advantages and disadvantages possessed by the
various technologies, and the feasibility of the various sensor
technologies. The value of this effort is $204,911.
Kearfott Guidance & Navigation Corporation
In March 2000, the Company entered into an incentive agreement with the
Kearfott Guidance & Navigation Corporation relating to the purchase order
00RDK00188 with Ball Aerospace and Technologies Corporation to deliver
three Two Axis Rate Assemblies ("TARAs") on or before July 31, 2000. These
TARAs were received on June 18, 2000 and the Company paid Kearfott one
million dollars for early delivery.
MDA Contract
During June 1996, the Company and MacDonald Dettwiler and Associates
("MDA") entered into an agreement whereby the Company agreed to purchase a
total of $6,800,000 in goods and services from MDA. As of December 31,
1999, the Company has included $307,016 in accounts payable for goods and
services from MDA. Amounts totaling $997,225, $322,102, and $3,091,653 have
been paid during the years ending December 31, 1997, 1998, and 1999,
respectively.
NASA - Earth Science Enterprise Contract
In September 1998, the Company entered into a contract with National
Aeronautics and Space Administration ("NASA") for the supply of data sets
through delivery orders. Contract maximum value is $9,900,000. A formal
Delivery Order was received from NASA with a value of $6,202,900. The
Company recognized $557,700 and $5,120,286 in revenue under this contract
during the years ended December 31, 1998 and 1999, respectively.
NIMA - Commercial Imagery Infrastructure/Data Buy
The Company entered into a contract with National Imagery Mapping Agency
("NIMA") for the development and/or enhancement of the Company's
infrastructure to facilitate delivery of metadata, imagery products, and
wideband imagery data to NIMA, and to provide, upon receipt of a delivery
order, metadata, imagery, and wideband imagery products. The current
minimum value of the contract is $2,353,500 with a maximum not to exceed
value of $100,000,000. The Company recognized $546,675 in revenue under
this contract for the year ended December 31, 1999.
F-20
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
STC Contract
In July 1997, the Company and Scientific and Technological Center ("STC
Complex") entered into a contract whereby STC will provide launch and
associated services for the dormant EarlyBird 2 satellite. The Company can
terminate this contract without any additional liability at any time.
United Start Contract
The Company has an agreement with United Start Corporation ("United
Start"), whereby United Start would provide launch and associated services
for the QuickBird 1 satellite launch before November 30, 2001. The Company
is to provide a combination of archival data and cash totaling $14,000,000
over the term of the contract. The Company has included $1,850,000 in
accounts payable as of December 31, 1999. The Company has paid $153,559 and
$3,335,334 during the years ending December 31, 1998 and 1999,
respectively.
12. Summary of Activity by Geographical Area
($ in Millions)
Net Sales U.S. Other Consolidated
--------- ---- ----- ------------
Cumulative since inception $ 15,070.6 $ - $ 15,070.6
1997 436.9 - 436.9
1998 1,808.6 - 1,808.6
1999 5,913.3 - 5,913.3
Long-Lived Assets U.S. Other Consolidated
----------------- ---- ----- ------------
1998 $ 74,625.3 $1,678.3 $ 76,303.6
1999 161,093.6 1,678.3 162,771.9
F-21
<PAGE>
================================================================================
Until , 2000, all dealers effecting transactions
in the new notes, whether or not participating in this exchange offer, may be
required to deliver a prospectus.
EarthWatch Incorporated
offer to exchange
13% Senior Discount Notes due 2007 (Unregistered)
For
13% Senior Discount Notes due 2007 (Registered)
------------
PROSPECTUS
-------------
, 2000
================================================================================
<PAGE>
[Alternate cover page]
SUBJECT TO COMPLETION, DATED JULY 10, 2000
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 and Exchange Commission is effective. This prospectus is not an
offer to sell securities, and we are not soliciting offers to buy securities, in
any state where the offer or sale is not permitted.
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 $199,000,000. The 13% Senior Discount Notes
due 2007 (the "new notes") were issued on ___________, 2000, and were registered
under the Securities Act. The new notes were issued in exchange for our 13%
Senior Discount Notes due 2007 (the "old notes") which had substantially similar
terms to the new notes but had not been registered.
The new notes rank equally in right of payment with all existing and future
unsubordinated and unsecured indebtedness.
________________
Investing in the new notes involves risks. See "Risk factors" beginning on
page 7.
________________
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
________________
Morgan Stanley & Co. Incorporated and Dean Witter Reynolds Inc.
(collectively, "Morgan Stanley Dean Witter") will use this prospectus in
connection with offers and sales of the new 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 new notes
and will bear the expenses incident to the registration of the new 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 new 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 new notes may be dependent, in part, on the ability of EarthWatch
to maintain a current market-making prospectus.
__________, 2000
<PAGE>
TABLE OF CONTENTS [Alternate table of contents]
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................................... 1
Risk factors.............................................................................. 7
Special note regarding forward-looking statements......................................... 17
Use of proceeds........................................................................... 18
Dividend policy........................................................................... 18
Capitalization............................................................................ 19
Selected historical financial data........................................................ 20
Management's discussion and analysis of financial condition and results of operations..... 21
Business.................................................................................. 27
Management................................................................................ 37
Limitation of liability and indemnification matters....................................... 49
Material relationships and related party transactions..................................... 45
Principal stockholders.................................................................... 47
Recapitalization.......................................................................... 49
Description of material indebtedness...................................................... 51
The exchange offer........................................................................ 52
Description of the new notes.............................................................. 59
Form of new notes......................................................................... 59
Description of the old notes.............................................................. 60
Description of capital stock.............................................................. 86
United States federal income tax consequences............................................. 90
Plan of distribution...................................................................... 93
Legal matters............................................................................. 93
Experts................................................................................... 93
Where you can find more information....................................................... 93
Index to financial statements............................................................. F-1
</TABLE>
________________
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.
<PAGE>
[Alternate page]
The exchange offer
We issued the old notes on July 12, 1999. In connection with the issuance
of the old notes, we entered into an indenture and a registration rights
agreement. These agreements required us to offer to holders of the old notes the
opportunity to exchange their old notes for a like principal amount of new notes
and to file a registration statement under the Securities Act for registration
of the new notes in connection therewith. The exchange offer was commenced on
______________, 2000.
The form and terms of the new notes are substantially identical to the form
and terms of the old notes, except that the new notes:
. are registered under the Securities Act;
. do not provide for registration rights;
. do not provide for payment of additional interest upon failure to
register or exchange the old notes, which terminates upon completion of
the exchange offer; and
. do not bear legends containing transfer restrictions.
See "Description of the new notes."
<PAGE>
[Alternate page]
Summary of the terms of the new notes
The new notes............. 13% Senior Discount Notes due 2007 which have a
principal amount at maturity of $199 million.
Maturity.................. July 15, 2007.
Interest payment dates.... The new notes will not begin to accrue cash interest
until July 15, 2002.
Beginning on January 15, 2003, interest on the new
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 new 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
new notes will then decline each year until
maturity.
See "Description of the old notes--Optional
redemption."
Change of control......... Upon a change of control of EarthWatch, we will be
required to make an offer to purchase the new 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 new notes.
Collateral................ We currently have in effect a $230 million insurance
policy for QuickBird 1 and plan to obtain an
additional policy of up to $35 million to cover
risks associated with a total loss of QuickBird 1 on
launch or during operation. The new notes will be
secured equally with the old notes and our 12 1/2%
Senior Notes due 2005 by any proceeds of insurance
policies covering certain aspects of our QuickBird 1
satellite.
If the trustees for the new notes, the old notes,
and our 12 1/2% Notes receive proceeds from the
insurance policies covering risks related to
QuickBird 1, EarthWatch will make an offer to
purchase the new notes, the old notes, and our 12
1/2% 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
new notes, the old notes, and our 12 1/2% Notes
tendered in response to such offer to purchase
exceeds the amount of insurance proceeds available
for such offer, holders of the new notes, the old
notes, and our 12 1/2% Notes that subscribe to the
offer to purchase will receive a ratable portion of
the insurance proceeds. To the extent the accreted
value and interest on the new notes, the old notes,
and the 12 1/2% Notes tendered are less than the
available proceeds, the excess will be returned to
EarthWatch.
Ranking................... The new notes rank equally in right of payment with
all of our unsubordinated and unsecured
indebtedness, including our 12 1/2% Notes.
At May 31, 2000, we had approximately $178 million
of indebtedness outstanding, all of which ranked
equally in right of payment with the new notes.
<PAGE>
[Alternate page]
Restrictive covenants...... The indenture under which the new notes have been
issued contains covenants that, among other things,
restrict our ability and the ability of our
subsidiaries to:
. incur additional debt;
. create 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 new notes.......... The new notes have been issued in fully registered
form, without coupons. The new 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 new notes will own
book-entry interests in the global note, and
evidence of these interests will be kept in the
records maintained by The Depository Trust Company.
See "Form of new notes."
Use of proceeds............ We will not receive any proceeds from this offering.
<PAGE>
[Alternate page]
We cannot assure you that an active trading market will develop for the new
notes.
We do not intend to apply for listing of the new notes on any securities
exchange or on the Nasdaq National Market. The new notes may trade at a
discount, depending upon prevailing interest rates, the market for similar
securities, our performance, and other factors. Morgan Stanley & Co.
Incorporated, the initial purchaser, has advised us that it intends to make a
market in the new notes following the issuance thereof; however, Morgan Stanley
is not obligated to do so and any such market-making activities may be
discontinued at any time without notice. We cannot be certain, therefore, that
an active market for the new notes will develop or, if such a market develops,
that it will continue. See "Plan of Distribution."
The form and terms of the new notes are substantially identical to the form
and terms of the old notes, except that the new notes:
. have been registered under the Securities Act;
. do not provide for registration rights;
. do not provide for payment of additional interest upon failure to
register or exchange the old notes, which terminates upon completion
of the exchange offer; and
. do not bear legends containing transfer restrictions.
The new notes have been issued solely in exchange for an equal principal
amount of old notes. As of the date hereof, we have old notes outstanding with
an aggregate principal amount at maturity of $199 million.
We may not have the ability to raise the funds necessary to finance the
change of control offer required by the new notes.
Upon the occurrence of certain change of control events, we will be
required to offer to repurchase the new notes, the old notes, and the 12 1/2%
Notes at a price equal to 101% of their accreted value, plus accrued interest.
It is possible that we will not have sufficient funds at the time of the change
of control to make the required repurchases. If we are unable to make the
required repurchases, we would be in default under the new notes, the old notes,
and the 12 1/2% Notes.
Purchasers of the new notes will be required to include amounts in gross
income for federal income tax purposes in advance of receipt of cash payments.
The new 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 new 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 new notes.
The new notes are applicable high-yield discount obligations, as defined in
the Code, and the following rules will apply, if the yield to maturity of the
new 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 new 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 new notes, and the remaining original issue
discount on the notes will not be deductible by us until such original issue
discount is paid by us in cash. See "United States federal income tax
consequences--Applicable high-yield discount obligations."
<PAGE>
[Alternate page]
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 such forward-looking statements. Such 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 such
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.
<PAGE>
[Alternate page]
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 resale of the new notes by Morgan Stanley Dean
Witter, and we did not receive any cash proceeds from the issuance of the new
notes in exchange for old notes.
The net proceeds to us from the issuance of the old notes and shares of
Series C preferred stock which we issued in connection with the old notes were
approximately $130.2 million, after deducting the selling discounts and
commissions and expenses. See "Description of the old notes--General." Of the
$130.2 million in net proceeds raised from the issuance of the old notes and
shares of Series C preferred stock, approximately $72.7 million were used for
satellite and ground system development and satellite launch, including escrowed
and paid insurance premiums, approximately $4.5 million were used for product
development, and approximately $2.1 million were used to expand our sales and
marketing efforts. We currently are using the remaining proceeds for working
capital, other operating expenses, and general corporate purposes.
Because of the number and variability of factors that will determine our
use of the net proceeds from the issuance of the old notes and the shares of
Series C preferred stock issued in connection therewith, management will retain
a significant amount of discretion over the application of such net proceeds.
Pending the use of such net proceeds as described above, we intend to invest
such funds in interest-bearing bank accounts or invest the proceeds in United
States government securities or other short-term, interest-bearing investment
grade securities, to the extent permitted by the indenture.
<PAGE>
[Alternate page]
DESCRIPTION OF THE NEW NOTES
The terms of the new notes are identical in all material respects to those
of the old notes described below, except that the new notes (i) have been
registered under the Securities Act and therefore are not subject to certain
restrictions on transfer applicable to the old notes, and (ii) are not entitled
to certain registration rights under the registration rights agreement,
including the provision for additional interest of up to 0.5% on the old notes.
The new notes are 13% Senior Discount Notes and have a principal amount at
maturity of $199 million. The new notes will mature on July 15, 2007. Interest
on the new 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. 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 new notes are secured equally with the old notes and our 12 1/2% Notes
by any proceeds of insurance policies covering certain aspects of our QuickBird
1 satellite. If the trustees for the new notes, the old notes, and our 12 1/2%
Notes receive proceeds from the insurance policies covering risks related to
QuickBird 1, we will make an offer to purchase the new notes, the old notes, and
our 12 1/2% 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 new notes, the old notes,
and our 12 1/2% Notes tendered in response to such offer to purchase exceeds the
amount of insurance proceeds available for such offer, holders of the new notes,
the old notes, and our 12 1/2% Notes that subscribe to the offer to purchase
will receive a ratable portion of the insurance proceeds. To the extent the
accreted value and interest on the new notes, the old notes, and the 12 1/2%
Notes tendered are less than the available proceeds, the excess will be returned
to us.
FORM OF NEW NOTES
The certificates representing the new notes were issued in fully registered
form, without coupons. Except as described in the next paragraph, the new notes
are 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 new 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.
<PAGE>
[Alternate page]
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) relating to the ownership and
disposition of the new notes by such U.S. holders. 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
does not address the tax consequences of the ownership and disposition of the
new 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 new 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 or 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).
Finally, a ruling from the IRS with respect to the tax consequences of the
ownership and disposition of the new notes has not been received. As such,
there can be no assurance that the IRS will not take a different position.
PROSPECTIVE INVESTORS 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.
Allocation of purchase price
Since the old notes were issued as part of an investment unit with the
Series C preferred stock, we allocated the issue price between the old note and
the Series C preferred stock based on our best judgment of their relative fair
market values on the issue date. We allocated $512.78 to each note and $171.83
to the shares of Series C preferred stock that comprise each unit. Pursuant to
Treasury Regulations issued under provisions of the Code relating to original
issue discount (the "OID Regulations"), you are bound by such allocation for
U.S. federal income tax purposes unless you disclosed on a statement attached to
your tax return for the taxable year that includes the acquisition date of such
unit that your allocation differs from ours. No assurance can be given that the
IRS will accept our allocation. If our allocation were successfully challenged
by the IRS, the issue price, original issue discount accrual on the new note,
and gain or loss on the sale or disposition of a new note or Series C preferred
stock would be different from that resulting under the allocation determined by
us.
<PAGE>
[Alternate page]
Interest penalty
The treatment of interest described below with respect to the new notes is
based in part upon our determination that, as of the date of issuance of the old
notes, there is only a remote possibility that the interest penalty would be
paid to U.S. holders of the old notes. See "Description of the old notes--
Registration rights." The IRS may take a different position, which could affect
the timing and character of interest income reported by U.S. holders of the new
notes.
Original issue discount
The old notes were issued with original issue discount ("OID") and thus the
new notes will also have 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 new note before receipt of cash or
other payments attributable to such income. Since the cash payments of stated
interest on the new 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 new 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 new 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 new notes until January 15, 2003, no
interest payments on the new notes will constitute "qualified stated interest"
and, accordingly, the stated redemption price at maturity of each new note will
equal the sum of all interest and principal payments that will be made on the
new note. The "issue price" of a new note is the portion of the issue price of
the unit allocated to the new note as determined in the manner described under
"Allocation of purchase price" above.
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 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 "yield to maturity"
is the discount rate that, when used in computing the present value of all
payments to be made under the new notes, produces an amount equal to the issue
price of the new notes. 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. 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. call such
instrument prior to maturity if the exercise of that call would reduce the
instrument's yield to maturity. If we were deemed to call the new notes, as a
result of these rules, the timing and amount of OID accrued would be different.
Acquisition premium
To the extent a holder had acquisition premium with respect to an old note,
the holder generally will have acquisition premium with respect to a new note.
A 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
new note after the purchase date over the adjusted issue price.
<PAGE>
[Alternate page]
Market discount
Any gain or loss on a disposition of a new note would generally be capital
gain or loss. However, a subsequent purchaser of a new note who did not acquire
the new note (or an old note exchanged for a new note) at its original issue,
and who acquires such new note (or such old note, as the case may be) at a price
that is less than the adjusted issue price (as determined under the OID rules
described above), may be required to treat the new note as a "market discount
bond". Any recognized gain on a disposition of the new note would then be
treated as ordinary income to the extent that it does not exceed the "accrued
market discount" on the new 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 new note.
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
The new notes will be subject to the "applicable high yield discount
obligation" provisions of the Code. Because the yield on the new notes is at
least five percentage points above the applicable federal rate and the new notes
are 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, because the yield of the new
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 new 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 new note (to the extent such
amount does not represent accrued but unpaid interest) and such holder's tax
basis in the new note. A U.S. holder's tax basis in a new note will equal the
initial purchase price of an old 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 new 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 new 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 new notes. This
withholding generally applies only if the holder (i) fails to furnish his or her
social security or other taxpayer identification number ("TIN"), (ii) furnishes
an incorrect TIN, (iii) is notified by the IRS that he or she has failed to
report proper payments of interest and dividends and the IRS has notified us the
holder is subject to backup withholding, or (iv) fails, under certain
circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is his or her correct number and that he or she
is not subject to backup withholding. Any amount withheld from payment to a
holder under the backup withholding rules is allowable as a credit against such
holder's federal income tax liability, provided that the required information is
furnished to the IRS. Certain holders (including, among others, corporations)
are not subject to backup withholding. Holders should consult their tax advisors
as to their qualifications for exemption from backup withholding and the
procedure for obtaining such an exemption.
Information reporting
We are required to furnish certain information to the IRS and will furnish
annually to record holders of the new notes information with respect to interest
paid (and OID accrued) on the new notes during the calendar year.
<PAGE>
[Alternate page]
PLAN OF DISTRIBUTION
This prospectus is to be used by Morgan Stanley Dean Witter in connection
with offers and sales of the new 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 new 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 new notes. We do
not currently intend to apply for listing of the new 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 new notes but it has no obligation to do so and
any market-making may be discontinued at any time. No assurance can be given
that an active public market for the new notes will develop.
Morgan Stanley Dean Witter acted as placement agent in connection with
the original private placement of the old notes and received a placement fee of
approximately $1.5 million in connection therewith. Morgan Stanley Dean Witter
is affiliated with entities that beneficially own 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 23% of our
outstanding common stock on an as-converted basis as of June 30, 2000.
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
new notes contemplated by this prospectus and may receive fees or commissions in
connection therewith.
We have agreed to indemnify Morgan Stanley Dean Witter against certain
liabilities under the Securities Act or to contribute to payments that Morgan
Stanley Dean Witter may be required to make in respect of such liabilities.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. 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 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.
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 21. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
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.
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 Fund of America,
Inc., ITT Industries, Inc. and the other persons listed
on the signature pages thereto.
4.2 Amended and Restated Indenture dated as of April 8, 1999
by and between EarthWatch and The Bank of New York,
including form of 12 1 2% Senior Discount Note Due 2005.
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
4.4 Pledge Agreement dated as of July 12, 1999 between
EarthWatch and The Bank of New York, as trustee.
4.5 Amended and Restated Collateral Pledge and Security
Agreement dated as of July 12, 1999 between EarthWatch
and The Bank of New York, as collateral agent
4.6 Series C Preferred Registration Rights Agreement dated as
of July 7, 1999 between EarthWatch and Morgan Stanley &
Co. Incorporated.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
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.
4.9 Specimen 12 1/2% Senior Discount Note Due 2005.
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.
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 (Included in Exhibit 5.1).
24.1* Power of Attorney (included on the signature page of the
registration statement).
25.1* Statement of Eligibility of Trustee.
27.1* Financial Data Schedules.
99.1 Form of Letter of Transmittal with respect to exchange
offer.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Exchange Agent Agreement.
</TABLE>
_________
* Previously filed.
II-2
<PAGE>
(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 22. Undertaking
1. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by one of our directors, officers or
controlling persons in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, we 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 Securities Act and will be governed by
the final adjudication of such issue.
2. We hereby undertake to respond to requests for information that is
incorporated by reference into the Prospectus pursuant to Items 4, 10(b), 11 or
13 of this Form, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding to
the request.
3. We hereby undertake to supply by means of a post-effective amendment
all information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in this Registration
Statement when it became effective.
4. We hereby undertake:
(a) 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.
(b) 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.
(c) 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.
II-3
<PAGE>
We hereby undertake as follows: that before any public reoffering of the
securities registered hereunder through use of the prospectus that is a part of
this registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), we undertake that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
We undertake that every prospectus: (1) that is filed pursuant to the
immediately preceding paragraph, or (2) that purports to meet the requirements
of Section 10(a)(3) of the Securities Act of 1933, and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes 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 the time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
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 July 10, 2000.
EARTHWATCH INCORPORATED
By: /s/ Herbert F. Satterlee III
----------------------------------------------
Herbert F. Satterlee III
President and Chief Executive Officer
Director, Chairman
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Herbert F. Satterlee III President and Chief Executive Officer, July 10, 2000
------------------------------------------------ Director, Chairman
Herbert F. Satterlee III (Principal Executive Officer)
/s/ Henry E. Dubois Chief Operating Officer, July 10, 2000
------------------------------------------------ Chief Financial Officer,
Henry E. Dubois Executive Vice President
(Principal Financial and
Accounting Officer)
* Chief Technical Officer, July 10, 2000
------------------------------------------------ Executive Vice President, Director
Walter S. Scott
* Director July 10, 2000
------------------------------------------------
Paul M. Albert, Jr.
* Director July 10, 2000
------------------------------------------------
Donald E. Foley
* Director July 10, 2000
------------------------------------------------
Anne Karalekas
* Director July 10, 2000
------------------------------------------------
Takatoshi Kodaira
* Director July 10, 2000
------------------------------------------------
Alexander S. Lushtak
* Director July 10, 2000
------------------------------------------------
Michael J. Petrick
* Director July 10, 2000
------------------------------------------------
Marvin R. Sambur
* Director July 10, 2000
------------------------------------------------
Donald W. Vanlandingham
</TABLE>
* By: /s/ Herbert F. Satterlee III
----------------------------
Herbert F. Satterlee III
ATTORNEY-IN-FACT
II-5
<PAGE>
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.
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
Allocation Fund, American Variable Insurance Series Bond
Fund, American Variable Insurance Series High-Yield Bond
Fund and Bond Fund of America, Inc., ITT Industries, Inc.
and the other persons listed on the signature pages
thereto.
4.2 Amended and Restated Indenture dated as of April 8, 1999 by
and between EarthWatch and The Bank of New York, including
form of 12 1/2% Senior Discount Note Due 2005.
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.
4.4 Pledge Agreement dated as of July 12, 1999 between
EarthWatch and The Bank of New York, as trustee.
4.5 Amended and Restated Collateral Pledge and Security
Agreement dated as of July 12, 1999 between EarthWatch and
The Bank of New York, as collateral agent.
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.
4.9 Specimen 12 1/2% Senior Discount Note Due 2005.
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.
<PAGE>
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.
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 (Included in Exhibit 5.1).
24.1* Power of Attorney (included on the signature page of the
registration statement).
25.1* Statement of Eligibility of Trustee.
27.1* Financial Data Schedules.
99.1 Form of Letter of Transmittal with respect to exchange
offer.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Exchange Agent Agreement.
_____________
* Previously filed.
