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Filed pursuant to Rule 424(b)(3)
Registration No. 333-39202
PROSPECTUS
EarthWatch Incorporated
13% SENIOR DISCOUNT NOTES DUE 2007
________________
We currently have outstanding 13% Senior Discount Notes due 2007 which have
a principal amount at maturity of $199,000,000. The 13% Senior Discount Notes
due 2007 (the "new notes") were issued on August 11, 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.
The date of this prospectus is October 13, 2000
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TABLE OF CONTENTS
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Page
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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............................................................... 44
Material relationships and related party transactions............................................................. 45
Principal stockholders............................................................................................ 47
Recapitalization.................................................................................................. 49
Description of material indebtedness.............................................................................. 51
Description of the new notes...................................................................................... 52
Form of new notes................................................................................................. 52
Description of the old notes...................................................................................... 53
Description of capital stock...................................................................................... 79
United States federal income tax consequences..................................................................... 83
Plan of distribution.............................................................................................. 86
Legal matters..................................................................................................... 86
Experts........................................................................................................... 86
Where you can find more information............................................................................... 86
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.
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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 and infrared images, or multispectral imagery,
enabling a wide range of monitoring, detection, and exploration applications.
The
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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 successfully launched its first 1-meter resolution
satellite in September 1999 and has begun serving the commercial market, Orbital
Imaging Corp., or ORBIMAGE, and ImageSat International (formerly known as 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.
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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
July 12, 2000 and closed on August 11, 2000. All old notes were exchanged for
new notes in the exchange offer.
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 terminated upon completion of the
exchange offer; and
. do not bear legends containing transfer restrictions.
See "Description of the new notes."
3
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Summary of the terms of the new notes
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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 currently are negotiating 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 are
secured equally with 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 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 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 and our 12 1/2% Notes
tendered in response to the offer to purchase exceeds
the amount of insurance proceeds available for such
offer, holders of the new 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
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, which have an aggregate
principal amount at maturity of $72 million.
At July 31, 2000, we had approximately $183.6 million
of indebtedness outstanding, all of which ranked
equally in right of payment with the new notes.
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4
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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;
. incur liens;
. engage in sale-leaseback transactions;
. pay dividends or make other distributions in respect of our capital stock;
. redeem capital stock; or
. make investments or restricted payments.
However, these limitations are subject to a number of
important qualifications and exceptions. We are, among
other things, permitted to incur additional
indebtedness, including secured debt, under specified
circumstances.
Form of 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 own book-entry
interests in the global note, and evidence of these
interests is kept in the records maintained by The
Depository Trust Company. See "Form of new notes."
Use of proceeds.............................. We will not receive any proceeds from this offering.
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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 and other consolidated financial 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 and other consolidated
financial 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 consolidated statement of
operations and other consolidated financial data for the six-month periods ended
June 30, 1999 and 2000, the period from March 31, 1995 (inception) through June
30, 2000, and the consolidated balance sheet data as of June 30, 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.
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<CAPTION>
Nine Months
from March Year Ended December 31,
31, 1995 to -------------------------------------------
December 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated 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 12,763
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 Consolidated 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) (31,857)
<CAPTION>
Period from
March 31, 1995
Six Months Ended (Inception)
June 30, June 30, To June 30,
1999 2000 2000
---- ---- ----
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenue.............................................. $ 2,855 $ 2,404 $ 15,456
-------- -------- ---------
Cost of goods sold................................... 2,530 1,554 12,595
Selling, general, and administrative................. 4,617 6,420 41,167
Research and development............................. 3,364 5,992 64,486
Loss from impairment of fixed assets................. -- -- 26,118
Gain from arbitration settlement..................... -- -- (1,515)
Loss from operations................................. (7,656) (11,562) (127,395)
Interest expense..................................... (72) (3,429) (10,426)
Interest income...................................... 586 2,537 13,782
-------- -------- ---------
Net loss............................................. $ (7,142) $(12,454) $(124,039)
======== ======== =========
Other Consolidated Financial Data:
Capital expenditures................................. $ 33,818 $ 29,303 $ 228,009
Cash provided (used) by operating
activities......................................... (6,897) (9,588) (34,654)
Cash provided (used) by investing
activities......................................... (30,085) (26,909) (252,958)
Cash provided (used) by financing
activities......................................... 48,126 (6) 333,302
Deficiency of earnings to fixed charges.............. (10,495) (23,583) (158,577)
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------- June 30, June 30,
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................ $21,690 $35,224 $ 6,410 $ 5,045 $ 82,193 $ 16,189 $ 45,690
Total assets......................................... 38,186 90,547 104,299 85,328 271,469 127,653 269,670
Total debt........................................... 597 1,188 51,511 49,804 167,148 51,779 181,296
Mandatorily redeemable preferred stock............... -- -- -- -- 129,978 -- 135,553
Stockholders' equity (deficit)....................... 33,691 83,107 39,737 26,831 (40,114) 67,948 (57,986)
</TABLE>
6
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RISK FACTORS
The new 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 purchase the 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 $124 million at June 30, 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 at least 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.
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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 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 July 31, 2000, we
had approximately $183.6 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, and the 12 1/2% Notes began to accrue cash interest on
September 1, 1999 and will be payable semiannually in cash on March 1 and
September 1 of each year, beginning on September 1, 2002. 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 and licensing 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
8
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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 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 July 31, 2000 through launch of QuickBird 1, which is
expected to occur in the fall of 2000, we expect to spend approximately $49.4
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 $45 million has been spent through
July 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, or seek additional
financing.
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 the new notes or our other
indebtedness or to fund our other liquidity needs, including our anticipated
capital expenditures, or that these expenditures will fall within our estimates.
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
that 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, or seek additional financing. 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 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 and the 12 1/2% Notes. In addition, we currently are
negotiating 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 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 launch a satellite before us and to establish
themselves in the market.
A launch failure would adversely affect our ability to deliver imagery
products and services.
Satellite launches are subject to significant risks, including disabling
damage to or loss of the satellite. 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 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
license 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.
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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, the 12 1/2% Notes, and our other indebtedness.
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
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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. Any of these events may preclude or significantly
delay our ability to launch a satellite from Russia.
We are subject to extensive government regulation.
Our business is subject to extensive regulation in the United States and in
foreign jurisdictions in which we may operate or in which our products may be
sold. Regulatory changes could significantly impact our operations by:
. restricting our development efforts and those of our customers;
. restricting the amount and type of data that we can collect;
. making current products obsolete;
. restricting sales or distribution of our products; or
. increasing competition.
We might need to modify our products or operations to comply with such
regulations. Such modifications could be expensive and time-consuming.
Foreign governments may attempt to limit or prohibit sales of images into
their country or other countries. The United States government imposes
restrictions on our ability to collect and sell imagery covering Israel and
could elect to limit or proscribe sales of imagery covering other countries or
regions. Additionally, the United States government may limit our ability to
distribute images in order to protect the safety and security of the United
States or allied military forces.
We could in the future be subjected to new laws, policies, or regulations, or
changes in the interpretation or application of existing laws, policies, and
regulations, that modify the present regulatory environment in the United States
or abroad. U.S. regulators could decide to impose limitations on U.S. companies
that are currently applicable only to other countries or other regulatory
limitations that affect satellite remote imaging operations. Any limitations of
this kind could materially adversely affect our business.
National Oceanic and Atmospheric Administration Licenses. We are required to
hold, and have obtained, licenses from the National Oceanic and Atmospheric
Administration of the United States Department of Commerce for the operation of
our commercial remote sensing satellite system. These licenses regulate our
activities in several areas. For 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.
Federal Communications Commission Licenses. We are required to hold, and have
obtained, licenses from the Federal Communications Commission for the operation
of radio frequency devices on board our 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, the 12 1/2% Notes, and our other
indebtedness. In addition, the terms of the FCC license require that we meet
certain construction and launch deadlines. Currently, our FCC license, as
amended, requires construction of QuickBird 1 to be completed by November 2000
(followed by launch no later than April 2001), and construction of QuickBird 2
to be completed by May 2001 (followed by launch no later than December 2001). If
we are unable to meet these deadlines and are unable to obtain an additional
amendment to the FCC license, our business, operating results, financial
condition, and our ability to pay interest and principal on the new notes, the
12 1/2% Notes, and our other indebtedness could be materially adversely
affected.
Risks related to the market for our products and services.
Our business will suffer if we do not compete successfully in the collection
and distribution of digital geographic and image data.
We expect to encounter substantial competition in the market for digital
geographic and image data. We expect to face competition from traditional
sources of image-based information, including aerial photography, and from high-
resolution satellite systems developed and operated by other commercial
enterprises or foreign governments. Industry analysts generally expect that
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aerial photography will remain the dominant source of imagery because it offers
superior spatial resolution as compared to imagery produced by commercial
satellites.
Aerial photography offers high-resolution imagery, is efficient and
competitively priced, and currently enjoys a majority share of the overhead
imagery market. We expect that aerial photography firms will continue to offer
products that are competitive with ours in many applications.
We also face competition from high-resolution commercial satellite ventures,
including Space Imaging, ORBIMAGE, and ImageSat. Space Imaging, a joint venture
including Lockheed Martin, E-Systems, and Mitsubishi, has developed a high-
resolution imaging system 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, 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, ImageSat has announced plans to launch two high-
resolution satellites, one for the Israeli government in 2000 and one for
commercial use 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, the 12 1/2% Notes, and our other
indebtedness.
Our business may become subject to intense price competition.
As more of our competitors successfully launch earth-observing imaging
satellites, our business will become increasingly competitive. The cost to enter
our business is very high, while operating costs, on a day to day basis, are
lower. Therefore, one of our competitors may substantially reduce prices in an
effort to gain market share and eliminate other market participants, and still
be able to carry on business and finance operations. A reduction in prices by
one of our competitors would force us to reduce our prices in order to maintain
market share. Any significant price reduction in the market could have a
material adverse effect on our revenues, operating results, financial condition,
and our ability to pay principal and interest on the new notes, the 12 1/2%
Notes, and our other indebtedness.
Our dependence on third party distributors, sales agents, and value-added
resellers could result in marketing and distribution delays.
We plan to market and 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.
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Our strategy to target certain markets for our satellite imagery is based on a
number of assumptions, some or all of which may prove to be incorrect. Our
description of potential markets for our products and services, and estimates of
the addressable markets that we discuss in this prospectus, represent our view
as of the date of this prospectus. Actual markets could vary materially from
these estimates.
As is typical in many emerging markets, demand and market acceptance for a new
product or service is subject to many uncertainties. We cannot assure you that
our products will achieve market acceptance in existing imagery markets or that
new markets will develop. Even if markets for our imagery develop, we may
capture a smaller share of these markets than we currently anticipate. We have
entered into contracts to supply imagery, which provide for agreed upon minimum
and maximum purchases by our customers of imagery and value-added products and
services. We cannot assure you that our customers will purchase any such data in
excess of minimum contractual obligations. Lack of significant market acceptance
of our products and services, delays in acceptance, or failure of certain
markets to develop would have a material adverse effect on our business,
operating results, and financial condition, and would negatively affect our
ability to pay interest and principal on the new notes, the 12 1/2% Notes, and
our other indebtedness.
Our business will suffer if we are not able to expand into international
markets or compete effectively in those markets.
We expect to derive a significant portion of our revenues from international
markets. We have limited experience internationally and may not be able to
compete effectively in international markets. International operations are
subject to certain risks, such as:
. increases in tariffs, taxes, and other trade barriers;
. difficulties in collecting accounts receivable and longer collection
periods;
. fluctuations in currency exchange rates;
. changes in political and economic stability;
. potentially adverse tax consequences;
. government regulations; and
. reduced protection for intellectual property rights in certain
countries.
Any of these factors could materially adversely affect our international
revenues and, consequently, our business, operating results, and financial
condition.
We face technological risks.
The EarthWatch system is exposed to the risks inherent in a 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 we may be unable to maintain our
competitive position, and our business, results of operations, and financial
condition may be adversely affected. Therefore we may be unable to pay interest
and principal on the new notes, the 12 1/2% Notes, and our other indebtedness.
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Risks relating to our personnel and intellectual property.
Our business will suffer if we do not attract and retain additional highly-
skilled personnel or manage our growth effectively.
Our future success depends on our ability to identify, attract, hire, and
train highly-skilled technical, managerial, sales, and marketing personnel.
Competition for skilled technical personnel is intense. Some of our competitors
have significantly greater financial resources than us and may be able to more
easily attract such skilled personnel. Moreover, competition for technical
talent in the Denver metropolitan area is particularly intense. Failure to
attract and retain the necessary technical, managerial, sales, and marketing
personnel could materially adversely affect our business, operating results, and
financial condition.
We may experience periods of rapid growth. If we fail to manage our growth,
this could materially adversely affect our business, operating results, and
financial condition. We must effectively manage our operational, financial, and
accounting systems, procedures, and controls to manage this future growth.
We may not be able to successfully operate our business if we lose key
personnel.
We believe that our success will depend on the continued services of our
senior management team and other key personnel, including Herbert F. Satterlee
III, our Chief Executive Officer and President, Dr. Walter S. Scott, our Chief
Technical Officer and Executive Vice President, and Henry Dubois, our Chief
Operating Officer 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 generally
have not entered into written employment contracts with any members of
management. Furthermore, we do not maintain key person life insurance on our
management personnel.
Our limited ability to protect our intellectual property and proprietary
information may adversely affect our competitive position.
Trade secrets, copyright laws, nondisclosure agreements, and other proprietary
rights are important to our success and competitive position. Our efforts to
protect our proprietary rights may be inadequate and may not prevent others from
using our proprietary rights. Existing trade secret and copyright laws offer
only limited protection. Further, effective trade secret and copyright
protection may not be available in every country in which our services or
products are made available, and policing unauthorized use of our proprietary
information is difficult.
The unauthorized misappropriation of our proprietary rights could have a
material adverse effect on our business, operating results, and financial
condition. Our expected use of the Internet as a means of distribution for our
images may exacerbate the risks, as it places our imagery data in the hands of
our customers in a form readily duplicated and 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 adverse effect on our business, operating results, financial condition,
and our ability to pay principal and interest on the new notes, the 12 1/2%
Notes, and our other indebtedness.
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
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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, the 12 1/2% Notes, and our other indebtedness.
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 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 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.
We cannot assure you that an active trading market will develop for the new
notes.
We have not and do not intend to apply for listing of the new notes on any
securities exchange or through 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 has advised us that it intends to make a market in the new notes;
however, Morgan Stanley is not obligated to do so and such market-making
activities, if any, may be discontinued at any time without notice, in its sole
discretion. We 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:
. 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 terminated 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 new notes outstanding with
an aggregate principal amount at maturity of $199 million and 12 1/2% Notes
outstanding with an aggregate principal amount of $72 million.
We may not have the ability to raise the funds necessary to finance the change
of control offer required by the new notes and the 12 1/2% Notes.
Upon the occurrence of certain change of control events, we will be required
to offer to repurchase the new 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 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
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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 new notes will not be deductible by us until the original issue
discount is paid by us in cash. See "United States federal income tax
consequences--Applicable high-yield discount obligations."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Risk factors," "Management's
discussion and analysis of financial condition and results of operations,"
"Business," and elsewhere in this prospectus constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties, and
other factors that may cause our or our industry's results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by the
forward-looking statements. These factors include, among others, those listed
under "Risk factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology,
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of these
terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance, or achievements. Our actual results and the timing of
certain events could differ materially from those anticipated in these forward-
looking statements.
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<PAGE>
USE OF PROCEEDS
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 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.
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, 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 restrict our ability to pay dividends on,
or make distributions in respect to, our capital stock. See "Description of the
old notes--Covenants--Summary."
18
<PAGE>
CAPITALIZATION
The following table sets forth our total cash and cash equivalents and
capitalization as of June 30, 2000. This table should be read in conjunction
with the consolidated financial statements and related notes thereto included
elsewhere in this prospectus.
June 30, 2000
(in thousands)
--------------
Cash and cash equivalents................................... $ 45,690
=========
Long-term debt:
13% Senior Discount Notes................................... $123,302
12 1/2% Senior Notes........................................ 57,893
Other long-term debt, excluding current portion............. 28
---------
Total long-term debt........................................ 181,223
---------
Mandatorily redeemable preferred stock(1) :
Series A convertible preferred stock........................ 26,470
Series B convertible preferred stock........................ 26,470
Series C convertible preferred stock........................ 82,614
---------
Total mandatorily redeemable preferred stock................ 135,554
---------
Stockholders' equity (deficit):
Preferred stock............................................. --
Common stock................................................ --
Additional paid-in-capital.................................. 78,320
Accumulated other comprehensive income (loss)............... (2)
Accumulated deficit......................................... (136,304)
---------
Total stockholder's equity (deficit)........................ (57,986)
---------
Total capitalization........................................ $ 258,791
=========
(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.
19
<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 and other consolidated financial 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 and other consolidated
financial 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 consolidated statement of
operations and other consolidated financial data for the six-month periods ended
June 30, 1999 and 2000, the period from March 31, 1995 (inception) through June
30, 2000, and the consolidated balance sheet data as of June 30, 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>
Consolidated 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 12,763
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 Consolidated 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) (31,857)
<CAPTION>
Period from
March 31, 1995
Six Months Ended (Inception)
June 30, June 30, To June 30,
1999 2000 2000
---- ---- ---
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenue.............................................. $ 2,855 $ 2,404 $ 15,456
-------- -------- ---------
Cost of goods sold................................... 2,530 1,554 12,595
Selling, general, and administrative................. 4,617 6,420 41,167
Research and development............................. 3,364 5,992 64,486
Loss from impairment of fixed assets................. -- -- 26,118
Gain from arbitration settlement..................... -- -- (1,515)
Loss from operations................................. (7,656) (11,562) (127,395)
Interest expense..................................... (72) (3,429) (10,426)
Interest income...................................... 586 2,537 13,782
-------- -------- ---------
Net loss............................................. $ (7,142) $(12,454) $(124,039)
======== ======== =========
Other Consolidated Financial Data:
Capital expenditures................................. $ 33,818 $ 29,303 $ 228,009
Cash provided (used) by operating
activities......................................... (6,897) (9,588) (34,654)
Cash provided (used) by investing
activities......................................... (30,085) (26,909) (252,958)
Cash provided (used) by financing
activities......................................... 48,126 (6) 333,302
Deficiency of earnings to fixed charges.............. (10,495) (23,583) (158,577)
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------- June 30, June 30,
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $21,690 $ 35,224 $ 6,410 $ 5,045 $ 82,193 $ 16,189 $ 45,690
Total assets.................................. 38,186 90,547 104,299 85,328 271,469 127,653 269,670
Total debt.................................... 597 1,188 51,511 49,804 167,148 51,779 181,296
Mandatorily redeemable preferred stock........ -- -- -- -- 129,978 -- 135,553
Stockholders' equity (deficit)................ 33,691 83,107 39,737 26,831 (40,114) 67,948 (57,986)
</TABLE>
20
<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. 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 199,000 units, consisting
of old notes and shares of preferred stock. Each unit consisted of an old note
which had an accreted value of $684.61 and a principal value at maturity in 2007
of $1,000 and 49.095 shares of our 8.5% Series C convertible preferred stock.
The offering resulted in aggregate gross proceeds of approximately $136 million.
On June 13, 2000, we filed a registration statement with respect to the old
notes, which the Securities and Exchange Commission declared effective on July
11, 2000. Pursuant to this registration statement, on July 12, 2000 we
commenced an exchange offer to exchange our old notes for new notes. The terms
of the new notes are identical in all material respects to those of the old
notes, except that the new notes (i) have been registered under the Securities
Act of 1933 and therefore will not be 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. All holders
of the old unregistered notes exchanged them for new registered notes and the
exchange offer expired on August 11, 2000. The Bank of New York served as the
exchange agent in connection with the exchange offer. We did not receive any
proceeds from this exchange offer.
On August 17, 2000, we filed a report on Form 8-K with the Securities and
Exchange Commission to include our restated consolidated financial statements
for the fiscal year ended December 31, 1999 and for the three-month period ended
March 31, 2000. Our consolidated financial statements for these periods were
restated due to a misstatement in the valuation of preferred stock dividends.
For a more detailed description of the restatement, please see the Form 8-K.
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<PAGE>
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.
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 license 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 licensing of
archived EarthWatch and third party imagery, image processing and enhancement
services, and market specific information products. Since familiarity with
high-resolution satellite imagery is limited, we expect the markets
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<PAGE>
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 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 July 31, 2000, we have
spent a total of $185.8 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 $83.4 million to
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<PAGE>
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
Six months ended June 30, 1999 compared to six months ended June 30, 2000
Revenue. Revenue decreased from $2.9 million for the six-month period ended
June 30, 1999 to $2.4 million for the six-month period ended June 30, 2000. The
decrease is attributable to a lack of contract revenue during the second quarter
of 2000. New and existing contracts contained few scheduled product deliveries
during the second quarter of 2000, so little revenue was realized.
Cost of goods sold. As a result of our decreased revenue, our cost of goods
sold consequently decreased from $2.5 million for the six-month period ended
June 30, 1999 to $1.6 million for the six-month period ended June 30, 2000.
Costs for both periods consisted of the direct costs associated with obtaining
third-party geographic imagery for re-sale.
Selling, general, and administrative expenses. Total selling, general, and
administrative expenses for the six-month period ended June 30, 1999 were $4.6
million, of which $3.5 million were general and administrative, and $1.1 million
were sales and marketing. Total selling, general, and administrative expenses
for the six-month period ended June 30, 2000 were $6.4 million, of which $4.0
million were general and administrative, and $2.4 million were sales and
marketing. Selling expenses increased in the first half of 2000 as a result of
increased sales staff levels and increased marketing efforts in preparation for
market entry of our products and services this year.
Research and development. Our research and development costs increased from
$3.4 million for the six-month period ended June 30, 1999 to $6.0 million for
the six-month period ended June 30, 2000. This increase was attributable to
additional staff and systems development for launch and satellite systems.
Provision for income taxes. Due to losses incurred in the six-month periods
ended June 30, 1999 and 2000, respectively, and because we calculate our net
operating loss carryforwards on an annual basis, we recorded no provision for
income taxes in either period. 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 $7.1 million and $12.5 million during the
six-month periods ended June 30, 1999 and 2000, respectively.
Year ended December 31, 1998 compared with year ended December 31, 1999
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 $1.8 million in 1998 to $5.9
million in 1999. Our revenue generated from service contracts and sales from
archives for 1998 and 1999 was approximately $400,000 for each year.
Cost of goods sold. Our cost of goods sold increased from $1.9 million in
1998 to $5.1 million in 1999. Our costs for third-party geographic imagery
increased from $1.2 million in 1998 to $5.1 million in 1999. Our costs for
providing services under other service contracts decreased from $700,000 in 1998
to $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
24
<PAGE>
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.
Year ended December 31, 1997 compared with year ended December 31, 1998
Revenue. We did not generate any significant revenue in 1997 or 1998 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 1997, we received
$35,000 in revenue under a service contract with CTA Incorporated for assisting
in the construction of a satellite for NASA. In 1998, we also derived revenue of
$358,000 from sales of aerial imagery and production services.
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.
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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, as described in the overview.
We have used this liquidity for general corporate purposes, including
primarily developing and constructing 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 June 30, 2000 and December 31, 1999, we had $45.7
million and $82.2 million, 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 offering of old notes and shares of Series C
preferred stock. See our consolidated financial statements for the fiscal year
ended December 31, 1999 and our interim consolidated financial statements for
the six months ended June 30, 2000 and the notes thereto.
We used net cash in our operating activities of $9.6 million in the six months
ended June 30, 2000, primarily to fund selling, general, and administrative
expenses and research and development activities in support of the QuickBird
programs. In 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.
We used $26.9 million in the six months ended June 30, 2000 and $97.1 million
in the year ended December 31, 1999 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 $40.7
million in capital in the remaining six months of 2000, primarily for these same
purposes.
In the six months ended June 30, 2000, we used approximately $6,000 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 1999,
offset by $0.3 million in principal payments on capital-lease obligations.
At July 31, 2000, we had approximately $183.6 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
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 successfully launched its first 1-meter resolution satellite in
September 1999 and has begun serving the commercial market, ORBIMAGE, and
ImageSat. ORBIMAGE is developing two 1-meter 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,
ImageSat has announced plans to launch a 1.8-meter and a 1-meter high-resolution
satellite, one for the Israeli government in 2000 and one for commercial use in
2001. We believe there are significant barriers for other potential entrants.
The design, creation, launch, and operation of an integrated high-resolution
commercial satellite system require significant expertise and knowledge. We and
each of our three announced competitors have been developing commercial
satellite imagery systems for more than five years. We believe it would take a
new potential competitor more than two years and significant capital to develop
and construct a high-resolution commercial imaging satellite. Most aerospace
companies capable of constructing such a satellite have already aligned
themselves with one of the announced entrants. As a result, we believe that
EarthWatch, together with the other announced early entrants, will have a
significant early-to-market advantage.
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We also believe that the emergence of high-resolution commercial remote
sensing satellites will stimulate new spending to create and update GIS
databases, especially in emerging markets in Asia, Australia, the Middle East,
and South America. Furthermore, we believe that a larger, more profitable market
will evolve for value-added information products derived from raw imagery data
processed and packaged to meet the demands of specific users. Traditionally,
overhead imagery products have been marketed in the form of raw data. We seek
to be a leading provider of value-added imagery-based applications and services,
rather than just a provider of satellite imagery. We believe our advanced image
processing technology and user friendly distribution network will enable us to
make imagery easy to use, affordable, and accessible. We believe that our focus
on developing industry-specific products will stimulate demand and expand the
market for satellite imagery and related products.
Strategy
We are committed to achieving leadership positions in specific markets for
digital imagery and derivative information products. Our strategy to achieve
our objectives includes the following elements:
Become a leading provider of imagery driven solutions
Overhead imagery products have traditionally been marketed in the form of raw
data. However, we believe that a larger, more profitable market will evolve for
value-added information products derived from raw imagery data, processed and
packaged to meet the demands of specific users. We seek to be a leading
provider of value-added imagery-based applications and services, rather than
just a provider of satellite imagery. We believe our advanced image processing
technology and user friendly distribution network will enable us to make imagery
easy to use, affordable, and accessible. We intend to continuously develop
industry-specific value-added products, such as tailored damage assessment
products for the 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.
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;
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. 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.
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
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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.
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.
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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 Tromso, 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.
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.
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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 ImageSat (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.
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 ImageSat, 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.
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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, which are scheduled for launch during the first quarter
of 2001 and by late second quarter of 2001, respectively, as publicly announced.
ImageSat. ImageSat International (formerly known as West Indian Space Ltd.)
is a joint venture composed of government-owned Israel Aircraft Industries,
Electro-Optics Industries, and Core Software Technology Inc. ImageSat has
announced plans to launch and operate a constellation of 1.8-meter and 1-meter
resolution commercial imaging satellites named EROS, one of which is for the
Israeli government and is scheduled for launch in 2000, and one of which is for
commercial use and is scheduled for launch in 2001. Based on the announced
specification for EROS satellites, we believe that they will offer lower
performance than our QuickBird satellites. However, ImageSat is associated with
the Israeli government and, if subsidized, could be able to compete aggressively
on price. ImageSat's first customer, the Israeli government, has announced that
it has reserved the full capacity of ImageSat's first and third satellites.
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 ImageSat satellites appear to be better
suited for reconnaissance than for mapping. QuickBird and IKONOS qualify as
both "mapping" and reconnaissance satellites.
Space Imaging's IKONOS is designed to offer mapping capability. However, we
do not believe that the IKONOS satellite will compete equally with QuickBird in
terms of collection capacity and positional accuracy. The IKONOS satellite
offers only an 11-kilometer swath, 64 gigabytes of storage, and a maximum
positional accuracy of four meters. In contrast, we expect QuickBird to offer a
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.
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.
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<PAGE>
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. Under our distributor agreement
with Nuova Telespazio, Eurimage will be entitled to purchase our products at
discounts of up to 50% of our retail price for end-distribution in Europe.
MacDonald Dettwiler & Associates.
MacDonald Dettwiler & Associates, Ltd. is a leading supplier of ground
processing systems for civilian satellite data and has provided our image data
archiving and distribution capabilities. In November 1995, Orbital Sciences,
one of our competitors, acquired MacDonald Dettwiler. We believe that our
rights to software developed by MacDonald Dettwiler and access to alternative
providers would allow us to proceed without MacDonald Dettwiler if Orbital
Sciences were to prevent MacDonald Dettwiler from providing such assistance. We
believe this risk was significantly reduced with the acquisition of shares
representing one-third of MacDonald Dettwiler by CAI Capital Partners & Co. II,
L.P. in December 1999, and with MacDonald Dettwiler's initial public offering of
stock in July 2000.
Datron
Datron/Transco Inc. provides products and services for emerging radio and
satellite communication markets, primarily for ground uplink facilities. Datron
is supplying us with ground station equipment for 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
Tromso, 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.
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.
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<PAGE>
Commercial remote sensing license
We have received our licenses from the National Oceanic and Atmospheric
Administration for QuickBird satellite operations. The licenses contain
restrictions to protect the foreign and national security policies of the United
States and to implement United States obligations under various international
agreements. Under such licenses, we must also provide the United States
government with access to, and the use of, our data at commercial market prices.
The United States government may limit the commercial distribution of such data
in certain circumstances.
Communications frequency license
We have licenses issued by the Federal Communications Commission, or FCC, to
operate radio frequency devices aboard our satellites and at ground stations
located in the United States.
The FCC has allocated to us frequency spectrum for telemetry, tracking and
control operations, and data downlinks, and we have obtained a license for
QuickBird 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).
The FCC followed with another amendment to the license requiring construction of
QuickBird 1 to be completed by November 2000 (followed by launch no later than
April 2001), and construction of QuickBird 2 to be completed by May 2001
(followed by launch no later than December 2001).
In order to operate internationally and comply with international regulations,
the FCC has undertaken the international coordination process before the
International Telecommunications Union (ITU) on our behalf. The ITU frequency
coordination is necessary to maintain interference protection with other
international satellite systems and there is no assurance that this
coordination will be completed successfully.
Import authorizations and foreign government licenses
We may be required to obtain import authorizations or licenses from foreign
governments in order to market and distribute EarthWatch data and products, and
to operate ground station facilities outside the United States. NOAA must also
be notified of any significant agreements with foreign governments or companies
who provide for the tasking of satellites or sensors, for real-time direct
access to unenhanced data, or for high volume data purchase agreements.
Launch license
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 July 31, 2000, we employed 176 full-time employees. Of these employees,
35 are in data systems, 80 are in ground, product, and space operations, 30 are
in marketing, sales, and customer service, and 31 are in executive, finance, and
administration. Since year-end 1999, we have increased staffing by 46%. 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
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lease approximately ten acres and 400 square feet of space, respectively, for
the sites of two ground stations located in Fairbanks, Alaska and Tromso,
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.
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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 July 31, 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.................................. 55 Vice President Space Segment
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 we merged with WorldView in March 1995. Dr. Scott has
served as a director of EarthWatch since June 1999 and from March 1995 until
April 1999. From May 1998 to June 1998, Dr. Scott served as our interim Chief
Executive Officer. Dr. Scott founded WorldView, our predecessor, in January 1992
and served as its Chief Technical Officer, Chairman of the Board, and Chief
Financial Officer from January 1992 to March 1995. From January 1986 to February
1993, he served in a variety of positions at the Lawrence Livermore National
Laboratory, including program leader of the Brilliant Pebbles Strategic Defense
Initiative program. In addition, he developed low-cost lightweight satellite
technology, managed the successful launch of several space flight experiments,
and developed computer automated design tools for the manufacture of hybrid
wafer scale integrated circuits. From June 1982 to December 1985, he was founder
and president of Scott Consulting, a software and consulting firm.
Neal T. Anderson has served as Vice President Space Segment since September
1999. Mr. Anderson is responsible for overall management of the development,
production, test, and launch of the QuickBird spacecrafts. From March 1995 to
September 1999, Mr. Anderson served as Senior Director, Space Segment. Mr.
Anderson's experience includes marketing, engineering, and management of over 25
spacecraft programs. From January 1994 to March 1995, Mr. Anderson served as a
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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.
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 the Mobil
Corporation and the General Electric Company. He also is the Director/Chairman
of the New York Corporate Treasury Association.
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<PAGE>
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 and General Manager of ITT Industries'
Aerospace/Communications Division since August 2000. From October 1998 to August
2000, Dr. Sambur served as President of ITT Defense and Vice President of ITT
Industries, where he was 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 holder of the Series A preferred stock is entitled to designate two
directors, the holders of the Series B preferred stock are entitled to designate
four directors, our Chief Executive Officer is entitled to designate two
directors, and a majority of the holders of the Series C preferred stock are
entitled to designate the remaining three directors. The numbers of directors to
be designated by the holders of Series A preferred stock and Series B preferred
stock may be adjusted if the holders' percentage ownership changes. Currently,
the board consists of ten members, as the Series B stockholders have only
designated three members.
The holder of the Series A preferred stock has designated Mr. Foley and Dr.
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
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<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, 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. 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, 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, prorated 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 $100,000:
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<PAGE>
Summary compensation table
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
---------------------- ---------------------
Securities
Name and Principal Position Year Salary ($) 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, Executive 1999 165,000 45,000 0
Vice President, and Director............... 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
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
December 31, 1999 December 31, 1999
Shares -------------------------------------------------------------
Acquired Value Exercisable(1) Unexercisable Exercisable Unexercisable
on Exercise Realized
<S> <C> <C> <C> <C> <C> <C>
Herbert F. Satterlee III -- -- 84,081 -- -- --
Walter S. Scott -- -- 5,255 -- -- --
Neal T. Anderson/(2)/ 210 -- 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 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.
41
<PAGE>
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 July 31, 2000 and on an as-converted basis, we had granted options
under the 1995 Plan to purchase approximately 589,403 shares of Series C
preferred stock, of which options to purchase approximately 48,094 shares had
been exercised, options to purchase approximately 266,118 shares had been
cancelled (due to expiration or otherwise) and options to purchase approximately
275,191 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 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 July 31, 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
42
<PAGE>
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 July 31, 2000 and on an as-converted basis, we had granted options to
certain employees under the plan to purchase an aggregate of 2,703,009 shares of
common stock, of which options to purchase approximately 176,495 shares had been
exercised, options to purchase approximately 32,210 shares had been cancelled
(due to expiration or otherwise) and options to purchase approximately 2,494,304
shares at a weighted average exercise price of $0.25 per share remained
outstanding.
The term of an option granted under the plan is stated in the option
agreement. The terms of options granted under the plan may not exceed ten years
generally and the term of an incentive stock option granted to a participant
holding more than 10% of the combined voting rights of our outstanding capital
stock may not exceed five years. Options granted under the plan generally vest
and become exercisable as set forth in the option agreement; provided that
options granted prior to the initial listing of any of our securities on a
national securities exchange to an employee who is not an officer, director, or
consultant vest at a rate of 20% over five years from the date of grant. The
option agreement may provide for an early exercise by the optionee, a right of
repurchase of vested options by us, a right of first refusal, or a re-load
option in which an optionee who exercises an option by surrendering already-
owned shares of our common stock may be granted a further option.
In general, no option, stock bonus, or restricted stock award may be
transferred by the optionee other than by will or the laws of descent or
distribution, and each option may be exercised, during the lifetime of the
optionee, only by such optionee. An optionee whose relationship with us or any
related corporation ceases for any reason (other than by death or permanent and
total disability) may exercise options in the 30 day period following such
cessation, unless such options terminate or expire sooner, by their terms, but
only to the extent the option had vested on such date of cessation. In addition,
in the event of the cessation of an optionee's employment, we may repurchase any
unvested shares granted under a stock bonus or restricted stock award. In the
event of death or total and permanent disability, the option may be exercised in
the twelve month period following the date of death or total and permanent
disability unless such options terminate or expire sooner, but only to the
extent the option had vested on the date of death or disability.
In the event we merge with or into another corporation, all outstanding
options may either be assumed or an equivalent option may be substituted by the
surviving entity or, if such options are not assumed or substituted, such
options shall become exercisable as to all of the shares subject to the options,
including shares as to which they would not otherwise be exercisable. In the
event that options become exercisable in lieu of assumption or substitution, the
board of directors shall notify optionees that all options shall be fully
exercisable for a period of 15 days, after which time the options shall
terminate.
The board of directors determines the exercise price of options granted
under the plan at the time of grant, provided that the exercise price of all
incentive stock options generally must be at least equal to the fair market
value of the shares on the date of grant. The exercise price of a nonstatutory
stock option cannot be less than 85% of the fair market value of the shares on
the date of grant. With respect to any participant who is a 10% holder of the
combined voting rights of our outstanding capital stock, the exercise price of
any incentive stock option or any 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.
43
<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.
44
<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 approximately 3.9% 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 and General Manager
of ITT Industries' Aerospace/Communications Division. Mr. Foley, a director of
EarthWatch, is the Treasurer of ITT Industries.
45
<PAGE>
Transactions with Morgan Stanley
Morgan Stanley & Co. Incorporated, which holds in excess of 10% of our
outstanding capital stock, acted as placement agent in connection with our
offering in April 1996 of 7,000,000 shares of our former Series C preferred
stock and our offering in March 1997 of 50,000 units, each consisting of one 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 July 31, 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 and $2.0 million
principal amount at maturity of the new notes. In addition, Morgan Stanley acts
as exclusive financial advisor to EarthWatch under a five-year agreement. Morgan
Stanley received $750,000 in connection with its advisory role in the
recapitalization in April 1999.
Mr. Petrick, a director of EarthWatch, is a Managing Director of Morgan
Stanley.
Transactions with 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 the 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.
We believe that all of the transactions set forth above were made on terms
no less favorable than would be obtained for similar services provided to
unrelated third parties. Any future transactions between us and our executive
officers, directors, and their affiliates will be on terms no less favorable to
us than can be obtained from unaffiliated third parties, and any material
transactions with such persons will be approved by a majority of the
disinterested members of our board of directors.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to beneficial
ownership of our voting capital stock as of July 31, 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.
Number of Shares Beneficially Owned
-----------------------------------------------
as of July 31, 2000 and Percent of Class/(1)/
-----------------------------------------------
<TABLE>
<CAPTION>
Series A Series B Series C
Directors, Named Executive Convertible Percent Convertible Percent Convertible Percent % of % of total
Officers, and Preferred of Preferred of Preferred of Common Common voting
5% stockholders Stock Series(%) Stock Series(%) Stock Series(%) Stock Stock power
--------------- ----- --------- ----- --------- ----- --------- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ITT Industries, Inc. /(2)/ 7 ,776,706 100.0 -- -- -- -- -- -- 17.7
Morgan Stanley & Co.
Incorporated /(3)/ -- -- 4,666,024 60.0 307,931 1.3 1 * 22.5
Capital Research and
Management Company /(4)/ -- -- 3,110,682 40.0 890,828 3.7 -- -- 16.2
Ball Technologies Holdings
Corp. /(5)/ -- -- -- -- 4,254,125 17.5 -- -- 7.2
Hitachi, Ltd. /(6)/ -- -- -- -- 2,323,608 9.6 -- -- 3.9
Walter S. Scott /(7)/ -- -- -- -- 598,658 2.5 498,595 18.7 1.9
Howard J. Gannes /(8)/ -- -- -- -- 66,938 * 56,108 2.1 *
Herbert F. Satterlee III /(9)/ -- -- -- -- 84,081 * 315,919 11.8 *
Jeffrey S. Kerridge /(10)/ -- -- -- -- 12,034 * 87,966 3.3 *
Neal T. Anderson /(11)/ -- -- -- -- 10,008 * 40,015 1.5 *
Paul M. Albert, Jr. /(12)/ -- -- -- -- -- -- 18,750 * *
Donald E. Foley /(13)/ -- -- -- -- -- -- -- -- --
Anne Karalekas /(14)/ -- -- -- -- -- -- 16,875 * --
Takatoshi Kodaira /(15)/ -- -- -- -- 2,323,608 9.6 -- -- 3.9
Alexander Lushtak /(16)/ -- -- -- -- 152,912 * 125,000 4.7 *
Michael J. Petrick /(17)/ -- -- -- -- -- -- -- -- --
Marvin R. Sambur /(18)/ -- -- -- -- -- -- -- -- --
Donald W. Vanlandingham /(19)/ -- -- -- -- -- -- -- -- --
All non-named
executive officers -- -- -- -- 13,190 * 516,810 19.4 *
All executive officers and
directors as a group
(18 persons) -- -- -- -- 3,261,429 13.4 1,676,038 62.8 8.4
</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 July 31, 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.
47
<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, New York
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 2,323,608 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 President and General
Manager of ITT Industries' Aerospace/Communications Division 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 Holdings Corp.,
10 Longs Peak Drive, Broomfield, Colorado 80021. Mr. Vanlandingham is the
President and Chief Executive Officer of Ball Aerospace, an affiliate of
Ball Technologies, and may be viewed as the beneficial owner of the
shares of Series C preferred stock held by Ball Technologies Holdings
Corp. Mr. Vanlandingham disclaims beneficial ownership of shares held by
Ball Technologies.
48
<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.
49
<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 July
31, 2000, ITT Industries, Morgan Stanley, and Capital Research held 17.7%,
22.5%, 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.
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DESCRIPTION OF MATERIAL INDEBTEDNESS
12 1/2% Senior Notes
Following our 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:
12 Month Period Beginning Redemption Price
------------------------- ----------------
March 1, 2002............................................ 106.2500%
March 1, 2003............................................ 103.1250%
March 1, 2004............................................ 101.5625%
March 1, 2005............................................ 100.0000%
13% Senior Discount Notes
In July 1999, we issued the old notes, which have a principal amount of $199
million at maturity. As part of the exchange offer that was consummated on
August 11, 2000, all outstanding unregistered old notes were exchanged for new
notes that were registered under the Securities Act of 1933, as amended. For a
description of the terms of the new notes, see "Description of the new notes,"
"Form of new notes," and "Description of the old notes."
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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) are 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 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 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 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 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 and the 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 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
have been deposited with The Bank of New York, as custodian for DTC, and
registered in the name of Cede & Co., as DTC's nominee, in the form of one or
more global notes. Holders of the 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.
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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. No service charge was made for any registration of transfer 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.
Under the indenture, if by August 15, 2000, we had 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) would have accrued at the rate of 0.5% per
annum and would have been 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. Under the exchange offer, all old notes were exchanged for new notes.
We closed the exchange offer on August 11, 2000. See "--Registration rights"
below.
The old notes were issued as a part of a unit, consisting of 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.
Year Redemption Price
---- ----------------
2004..................................................... 106.500%
2005..................................................... 104.333%
2006..................................................... 102.167%
2007..................................................... 100.000%
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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
On July 12, 2000, we commenced an offer to exchange the old notes for new
notes, the terms of which are identical to the old notes (except that the new
notes do not bear legends restricting the transfer thereof or provide for
registration rights or additional interest). The exchange offer closed on August
11, 2000, after remaining open for at least 20 business days after the date on
which we mailed notice of the exchange offer, or otherwise provided notice, to
holders of the old notes. The Accreted Value of each new note is identical to,
and is determined in the same manner as, the Accreted Value of the old notes so
surrendered or exchanged therefor. Interest on each new note is calculated and
paid in the same manner as interest on the old notes so surrendered and
exchanged therefor. When the exchange offer was completed, our obligation to
register or exchange old notes terminated.
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 July 31, 2000, we had
approximately $183.6 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, the Trustee is 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 July 12, 1999, in each case between EarthWatch and the collateral
agent. We refer in this "Description of the old notes" to the Amended and
Restated 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.
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 purchasing the 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, Section 314(d) of the Trust Indenture Act of 1939, as amended,
relating to the release of property or securities from the Lien and security
interest of the Security Documents and the substitution for such property or
securities of other property or securities. Any certificate or opinion required
by Section 314(d) may be made by an officer of EarthWatch, other than in cases
where Section 314(d) requires that such certificate or opinion be made by an
independent person, in which case such Person will be an independent expert
selected or approved by the Trustee in the exercise of reasonable care.
We will also comply with, or cause to be complied with, Section 314(b)
relating to opinions of counsel regarding the Lien under the 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.
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:
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Semiannual Accrual Date Accreted Value
----------------------- --------------
January 15, 2000.......................................... $ 729.88
July 15, 2000............................................. $ 777.32
January 15, 2001.......................................... $ 827.24
July 15, 2001............................................. $ 881.65
January 15, 2002.......................................... $ 938.96
July 15, 2002............................................. $1,000.00
(2) if the Specified Date occurs before the first semiannual accrual date,
the Accreted Value will equal the sum of
(a) $684.61, and
(b) an amount equal to the product of:
(1) the Accreted Value for the first semiannual accrual date less
$684.61 multiplied by
(2) a fraction, the numerator of which is the number of days from
the Closing Date to the Specified Date, using a 360-day year
of twelve 30-day months, and the denominator of which is the
number of days from the Closing Date to the first semiannual
accrual date, using a 360-day year of twelve 30-day months;
(3) if the Specified Date occurs between two semiannual accrual dates, the
Accreted Value will equal the sum of:
(a) the Accreted Value for the semiannual accrual date immediately
preceding such Specified Date, and
(b) an amount equal to the product of:
(1) the Accreted Value for the immediately following semiannual
accrual date less the Accreted Value for the immediately
preceding semiannual accrual date multiplied by
(2) a fraction, the numerator of which is the number of days from
the immediately preceding semiannual accrual date to the
Specified Date, using a 360-day year of twelve 30-day months,
and the denominator of which is 180; or
(4) if the Specified Date occurs after the last semiannual accrual date,
the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary of EarthWatch or assumed in connection with an
Asset Acquisition by a Subsidiary of EarthWatch and not Incurred in connection
with, or in anticipation of, such Person becoming a Subsidiary of EarthWatch or
such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income or loss of EarthWatch and its Subsidiaries for such period determined in
conformity with GAAP. However, the following items are excluded in computing
Adjusted Consolidated Net Income:
(1) the net income of any Person, other than net income attributable to a
Subsidiary, in which any Person other than EarthWatch or any of its
Subsidiaries has a joint interest, except to the extent of the amount of
dividends or other distributions actually paid to EarthWatch or any of its
Subsidiaries by such other Person during such period;
(2) except to the extent includable under clause (1) above, the net income or
loss of any Person accrued prior to the date it becomes a Subsidiary or is
merged into or consolidated with EarthWatch or any of its Subsidiaries or
all or substantially all of the property and assets of such person are
acquired by EarthWatch or any of its Subsidiaries;
(3) the net income of any Subsidiary (determined by excluding income resulting
from transfer of assets by EarthWatch or a Subsidiary to another
Subsidiary) to the extent that the declaration or payment of dividends or
similar distributions by such Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Subsidiary;
(4) any gains or losses, on an after-tax basis, attributable to Asset Sales;
and
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(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:
(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
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(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 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
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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 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.
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"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;
(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;
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(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;
(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
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(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 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.
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"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 Purchase 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 Purchase 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,
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(A) in respect of performance, surety or appeal bonds provided in the
ordinary course of business,
(B) under Currency Agreements and Interest Rate Agreements; provided that
such agreements (a) are designed solely to protect EarthWatch or its
Subsidiaries against fluctuations in foreign currency exchange rates
or interest rates and (b) do not increase the Indebtedness of the
obligor outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest rates or
by reason of fees, indemnities, and compensation payable thereunder
and
(C) arising from agreements providing for indemnification, adjustment of
purchase price, or similar obligations, or from Guarantees or letters
of credit, surety bonds or performance bonds securing any obligations
of EarthWatch or any of its Subsidiaries pursuant to such agreements,
in any case Incurred in connection with the disposition of any
business, assets, or a Subsidiary of EarthWatch (other than
Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such business, assets, or a Subsidiary of EarthWatch
for the purpose of financing such acquisition), in a principal amount
not to exceed the gross proceeds actually received by EarthWatch or
of its Subsidiaries in connection with such disposition;
(5) Indebtedness of EarthWatch, to the extent the net proceeds of such
Indebtedness are promptly (A) used to purchase 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.
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(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that EarthWatch or a Subsidiary of
EarthWatch may Incur pursuant to this "Limitation on Indebtedness" covenant will
not be deemed to be exceeded, with respect to any outstanding Indebtedness, due
solely to the result of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens, or
obligations with respect to letters of credit supporting Indebtedness otherwise
included in the determination of such particular amount will not be included and
(2) any Liens granted pursuant to the equal and ratable provisions referred to
in the "Limitation on Liens" covenant described below will not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, EarthWatch, in its sole discretion, will classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
Limitation on Restricted Payments
EarthWatch will not, and will not permit any of its Subsidiaries to, directly
or indirectly make any Restricted Payment if at the time of, and after giving
effect to, the proposed Restricted Payment:
(1) a Default or Event of Default will have occurred and be continuing; or
(2) the aggregate amount of all Restricted Payments made after the Closing
Date will exceed the sum of:
(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;
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(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;
(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.
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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.
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
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(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 June 30, 2000. 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) of that Act as if it were subject to such
requirements. EarthWatch will supply the Trustee and each holder of Notes or
will supply to the Trustee for forwarding to each such holder, without cost to
such holder, copies of such reports and other information. At all times prior
to registration, upon the request of any holder of 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:
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(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;
(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;
(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;
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(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; or
(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 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.
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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.
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
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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;
(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;
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(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;
(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
interest, 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 July 31, 2000: 176,496 shares of common stock were outstanding;
7,776,706 shares of Series A preferred stock were outstanding; 7,776,706 shares
of Series B preferred stock were outstanding; and 23,991,767 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 holder of Series A preferred stock has 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
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fully diluted basis) will have been sold to one holder or a group of related
holders, then each holder of Series C preferred stock shall have the right to
receive notice of such a transaction and shall also have the right to
participate in the transaction and sell a proportionate number of such holders'
Series C preferred stock in such transaction.
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. The 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 holder of
the Series A preferred stock is entitled to designate two directors, the holders
of the Series B preferred stock are entitled to designate four directors,
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 holder of the Series A preferred stock, and a
majority of the directors designated by the holders of the Series B preferred
stock must approve certain corporate actions, including:
. amendments to our certificate of incorporation, bylaws, and other
organizational documents;
. the amendment, termination, or waiver of any provision under the
recapitalization agreement;
. the issuance of equity securities;
. the grant or exercise of certain shares or equity interests, options,
warrants or conversion, or other rights;
. any new agreements granting any preemptive, antidilution, or registration
rights with respect to any class of securities;
. the incurrence of any indebtedness over $25 million; and
. the replacement of independent auditors or making material changes to
accounting methodology.
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
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elected have the power to elect all the directors to be elected at such meeting,
and no person may be elected without the support of holders of shares
representing a majority of the voting power of the shares present or represented
at such meeting.
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the certificate
of incorporation or the bylaws. Our bylaws authorize the Chairman of the Board,
the Chief Executive Officer, the President, the board of directors, or
stockholders holding in the aggregate not less than 10% of the voting power of
the company to call a special meeting of stockholders.
Under Delaware law and our bylaws, stockholders may execute an action by
written consent in lieu of a stockholder meeting. Delaware law permits a
corporation to eliminate such actions by written consent. Elimination of
written consents of stockholders may lengthen the amount of time required to
take stockholder actions since certain actions by written consent are not
subject to the minimum notice requirement of a stockholders' meeting. The
elimination of stockholders' written consents, however, deters hostile takeover
attempts. Without the availability of stockholders' actions by written consent,
a holder or group of holders controlling a majority in interest of our capital
stock would not be able to amend our bylaws or remove directors pursuant to a
stockholder's written consent. Any such holder or group of holders would have
to call a stockholders' meeting and wait until the notice periods determined by
the board of directors pursuant to our bylaws prior to taking any such action.
Provisions of Delaware law
We do not currently have publicly-traded equity securities. In the future, if
we have publicly-traded equity securities, we would become subject to Section
203 of the Delaware General Corporation Law, a provision that, in general,
prohibits a publicly-held Delaware corporation from engaging in various
"business combination" transactions with any "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder," unless:
. prior to that date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder,
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the number
of shares outstanding, those shares owned by:
(1) persons who are directors and also officers and
(2) employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or
. on or subsequent to such time the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the outstanding
voting stock not owned by the interested stockholder.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge, or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
. subject to certain exceptions, any transaction that results in the issuance
or transfer by the corporation of any stock of the corporation to the
interested stockholder;
. any transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or
. the receipt of the interested stockholder of the benefit of any loans,
advances, guarantees, pledges, or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as an entity or
person who, together with affiliates and associates, beneficially owns (or
within three years did beneficially own) 15% or more of a corporation's voting
stock. The statute could prohibit or delay mergers or other takeover or change
in control attempts with respect to us and, accordingly, may discourage attempts
to acquire us, if we have publicly-traded equity securities. No assurance can be
given that we will have publicly-traded equity securities in the future.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material U.S. federal income tax
consequences to U.S. holders (as defined below) 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.
83
<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 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 do 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 includes
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.
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.
84
<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 are 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.
85
<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 22.5% of our
outstanding common stock on an as-converted basis as of July 31, 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.
LEGAL MATTERS
The validity of the new notes offered hereby will be passed upon 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.
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.................................... F-2
Consolidated Balance Sheet........................................... F-3
Consolidated Statement of Operations................................. F-4
Consolidated Statement of Cash Flows................................. F-5
Consolidated Statement of Stockholders' Equity (Deficit)............. F-6
Notes to Consolidated Financial Statements........................... F-7
</TABLE>
F-1
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Report of Independent Accountants
--------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
EarthWatch Incorporated:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows, after the restatement described in Note 13, 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, except with respect to Note 13 for
which the date is August 15, 2000
F-2
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Balance Sheet
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1998 1999 2000
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,044,605 $ 82,193,314 $ 45,690,358
Accounts receivable, net of allowance of $0, $90,646, and $35,004, at
December 31, 1998 and 1999, and June 30, 2000, respectively 720,034 768,029 309,830
Investment securities -- 3,026,480 --
Investment securities - restricted 6,664,347 28,374,848 29,121,327
Other assets 474,092 968,769 204,309
------------ ------------- -------------
Total current assets 12,903,078 115,331,440 75,325,824
------------ ------------- -------------
Property, plant, and equipment:
Construction in progress 59,696,137 143,716,962 181,168,137
Computer equipment and software 10,287,166 12,275,986 14,954,281
Machinery and equipment 5,406,435 5,665,918 5,792,903
Furniture and fixtures 913,837 1,113,073 1,264,488
------------ ------------- -------------
76,303,575 162,771,939 203,179,809
Accumulated depreciation (8,251,176) (12,031,861) (13,859,345)
------------ ------------- -------------
Property, plant, and equipment, net 68,052,399 150,740,078 189,320,464
------------ ------------- -------------
Investment securities - restricted 3,063,279 -- --
Debt issuance costs, net 943,795 5,069,065 4,711,309
Other assets 365,126 328,537 312,682
------------ ------------- -------------
TOTAL ASSETS $ 85,327,677 $ 271,469,120 $ 269,670,279
============ ============= =============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Current liabilities:
Accounts payable $ 4,306,153 $ 12,307,440 $ 7,515,225
Accounts payable to related parties 1,408,755 645,464 2,362,853
Accrued interest payable 2,489,986 -- --
Accrued expenses 488,065 1,103,408 528,776
Deferred revenue -- 400,000 400,000
Current portion of long-term debt 242,189 92,743 72,308
------------ ------------- -------------
Total current liabilities 8,935,148 14,549,055 10,879,162
Long-term debt, net 49,561,820 167,055,390 181,223,473
------------ ------------- -------------
Total liabilities 58,496,968 181,604,445 192,102,635
------------ ------------- -------------
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, 7,776,706
shares issued and outstanding as of June 30, 2000, aggregate
liquidation preference of $27,218,471 as of June 30, 2000 -- 25,478,661 26,469,603
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, 7,776,706 shares issued and
outstanding as of June 30, 2000, aggregate liquidation preference of
$27,218,471 as of June 30, 2000 -- 25,478,661 26,469,603
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, 23,991,767 shares
issued and outstanding as of June 30, 2000, aggregate liquidation
preference of $83,971,185 as of June 30, 2000 -- 79,021,011 82,614,043
------------ ------------- -------------
Total mandatorily redeemable preferred stock -- 129,978,333 135,553,249
------------ ------------- -------------
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 or as of June 30, 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
or as of June 30, 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
or as of June 30, 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 or
as of June 30, 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, 169,986 issued and outstanding as of
June 30, 2000 204 -- 170
Additional paid-in capital 118,025,489 78,277,690 78,320,016
Accumulated other comprehensive income (loss) 43,429 (115,953) (2,234)
Accumulated deficit (91,266,092) (118,275,395) (136,303,557)
------------ ------------- -------------
Total stockholders' equity (deficit) 26,830,709 (40,113,658) (57,985,605)
------------ ------------- -------------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT) $ 85,327,677 $ 271,469,120 $ 269,670,279
============ ============= ============
</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>
Period from
January 1, 1995
(Inception) To
Year Ended December 31, Six Months Ended June 30, June 30, 2000
----------------------- -------------------------- ---------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 436,912 $ 1,808,573 $ 5,913,310 $ 2,855,241 $ 2,404,401 $ 15,455,839
Cost of Goods Sold 381,997 1,904,867 5,120,575 2,529,773 1,553,591 12,595,317
------------ ------------ ------------ ----------- ------------ -------------
Gross profit (loss) 54,915 (96,294) 792,735 325,468 850,810 2,860,522
------------ ------------ ------------ ----------- ------------ -------------
Expenses:
Selling, general and administrative 8,587,856 4,975,232 12,762,636 4,617,494 6,419,633 41,167,176
Research and development 19,121,233 9,112,745 6,956,244 3,363,625 5,992,170 64,485,738
Loss from impairment of fixed assets 25,518,696 599,015 -- -- -- 26,117,711
Gain from arbitration settlement -- (1,514,776) -- -- -- (1,514,776)
------------ ------------ ------------ ----------- ------------ -------------
Total expenses 53,227,785 13,172,216 19,718,880 7,981,119 12,411,803 130,255,849
------------ ------------ ------------ ----------- ------------ -------------
Loss from operations (53,172,870) (13,268,510) (18,926,145) (7,655,651) (11,560,993) (127,395,327)
Interest income (expense), net 2,441,885 348,955 (1,392,621) 514,030 (893,302) 3,356,172
------------ ------------ ------------ ----------- ------------ -------------
Net loss (50,730,985) (12,919,555) (20,318,766) (7,141,621) (12,454,295) (124,039,155)
Mandatorily redeemable preferred stock
Dividends and accretion -- -- (6,690,537) -- (5,573,867) (12,264,402)
------------ ------------ ------------ ----------- ------------ -------------
Net loss attributable to
common stockholders $(50,730,985) $(12,919,555) $(27,009,303) $(7,141,621) $(18,028,162) $(136,303,557)
============ ============ ============ =========== ============ =============
</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, Six Months Ended June 30,
----------------------- ---------------------------
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) $ (7,141,621) $(12,454,295)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation expense 3,138,931 4,383,188 3,885,611 2,003,744 1,851,398
Non-cash interest expense, net of
amounts capitalized -- 760,019 4,752,339 -- 3,427,791
Other non-cash charges 61,419 29,279 -- 124,016 --
Loss (gain) on disposal of property, plant
and equipment 55,974,018 667,358 3,346 -- (125)
Changes in assets and liabilities:
Accounts receivable, net (28,495,851) 28,329,903 (47,995) (946,703) 458,199
Other assets (937,094) 1,243,312 (458,088) (169,064) 778,333
Accounts payable 2,594,384 (2,153,712) 8,001,287 2,443,578 (4,792,215)
Accounts payable to related parties 1,969,383 (2,484,767) (763,291) (1,205,460) 1,717,389
Accrued interest 2,141,806 348,180 (2,420,797) (2,489,986) --
Accrued expenses 91,740 (65,797) 546,154 484,383 (574,632)
Deferred revenue 621 (1,667) 400,000 -- --
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by
operating activities (14,191,628) 18,135,741 (6,420,200) (6,897,113) (9,588,157)
------------ ------------ ------------ ------------ ------------
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 3,733,347 2,393,720
Proceeds from sale of property, plant
and equipment 256,485 3,959,280 1,213 -- 125
Construction in progress additions (53,156,096) (25,912,268) (72,681,412) (33,000,641) (26,322,182)
Other property, plant and equipment additions (1,115,314) (124,893) (2,557,024) (817,384) (2,980,610)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (68,290,263) (17,528,881) (97,070,307) (30,084,678) (26,908,947)
------------ ------------ ------------ ------------ ------------
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 48,355,758 43,545
Cash acquired in merger -- -- -- -- --
Principal payments on debt (607,595) (2,023,118) (322,984) (229,979) (49,397)
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by
financing activities 53,667,670 (1,972,246) 180,639,216 48,125,779 (5,852)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (28,814,221) (1,365,386) 77,148,709 11,143,988 (36,502,956)
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 $ 16,188,593 $ 45,690,358
============ ============ ============ ============ ============
Supplemental Disclosure of Cash Flow Information
Interest paid $ 2,939,864 $ 6,344,475 $ 3,150,575 $ 1,326,642 $ 9,640
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 2,205,404 11,128,993
Capital equipment financed through note payable 1,612,347 -- -- -- --
Issuance of mandatorily redeemable cumulative
preferred stock -- -- 39,765,364 1,471,644 5,411,205
<CAPTION>
Period from
January 1, 1995
(Inception) To
June 30, 2000
-------------
Cash Flows From Operating Activities (unaudited)
<S> <C>
Net loss $(124,039,155)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation expense 15,077,463
Non-cash interest expense, net of
amounts capitalized 8,940,149
Other non-cash charges 156,048
Loss (gain) on disposal of property, plant
and equipment 56,720,517
Changes in assets and liabilities:
Accounts receivable, net 689,295
Other assets (296,599)
Accounts payable 7,002,618
Accounts payable to related parties 2,362,853
Accrued interest --
Accrued expenses 488,597
Deferred revenue (1,755,800)
-------------
Net cash provided (used) by
operating activities (34,654,014)
-------------
Cash Flows From Investing Activities
Purchase of investment securities (45,148,332)
Proceeds from maturities of investment
securities 15,982,630
Proceeds from sale of property, plant
and equipment 4,217,103
Construction in progress additions (213,218,214)
Other property, plant and equipment additions (14,791,233)
-------------
Net cash used in investing activities (252,958,046)
-------------
Cash Flows From Financing Activities
Proceeds from issuance of long-term notes, net 145,718,374
Proceeds from issuance of preferred and
common stock, net 191,165,950
Cash acquired in merger 916,457
Principal payments on debt (4,498,363)
-------------
Net cash provided (used) by
financing activities 333,302,418
-------------
Net increase (decrease) in cash and
cash equivalents 45,690,358
Cash and Cash Equivalents
Beginning of period --
-------------
End of period $ 45,690,358
=============
Supplemental Disclosure of Cash Flow Information
Interest paid $ 12,678,148
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 34,339,993
Capital equipment financed through note payable 3,202,132
Issuance of mandatorily redeemable cumulative
preferred stock 45,176,569
</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 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 June 30, 2000 (unaudited) -- $ -- -- $ -- -- $ --
=========== =========== ======== =========== ============ ==========
<CAPTION>
Convertible Senior Additional Stock
Series D 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 -- -- (14,400,000)
Contribution of net assets in merger -- -- -- -- -- --
Issuance of common stock for services
and for stock options exercised -- -- 79,500 63,600 -- --
Issuance of preferred stock -- -- -- -- -- --
Property in-kind, conversion of debt, and
cash contributions from stockholder -- -- -- -- -- 13,381,523
Net 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 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) -- -- 169,985 170 42,326 --
Mandatorily redeemable preferred stock dividends
and accretion (unaudited) -- -- -- -- -- --
Net loss (unaudited) -- -- -- -- -- --
----------- -------- ---------- -------- ------------ -----------
Balance at June 30, 2000 (unaudited) -- $ -- 169,986 $ 170 $ 78,320,016 $ --
=========== ======== ========== ======== ============ ===========
<CAPTION>
Accumulated
Other Stockholders'
Comprehensive Accumulated Equity
Income (Loss) (Deficit) (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 -- -- 63,600
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 common stock in
connection with the recapitalization -- -- --
Mandatorily redeemable preferred stock dividends
and accretion -- (6,690,537) (6,690,537)
Net loss (159,382) (20,318,766) (20,478,148)
------------ ------------- -------------
Balance at December 31, 1999 (115,953) (118,275,395) (40,113,658)
Issuance of preferred and common stock for stock
options exercised (unaudited) -- -- 42,496
Mandatorily redeemable preferred stock dividends
and accretion (unaudited) -- (5,573,867) (5,573,867)
Net loss (unaudited) 113,719 (12,454,295) (12,340,576)
------------ ------------- -------------
Balance at June 30, 2000 (unaudited) $ (2,234) $(136,303,557) $ (57,985,605)
============ ============= =============
</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 June 30, 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.
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.
F-7
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
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.
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.
F-8
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
Unaudited Interim Financial Statements
The accompanying interim consolidated financial statements as of June 30,
2000, the consolidated statements of operations, of cash flows, and of
stockholders' equity for the six-month periods ended June 30, 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,
$20,434,719, and $12,456,529 for the years ended December 31, 1997, 1998, and
1999, and the six months ended June 30, 2000 (unaudited), 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.
<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: $3,078,360 $(51,880) $3,026,480
Maturing in one year or less................................... ============ ============= ============
U.S. Government securities as of June 30, 2000 (unaudited):
(none) (none) (none)
Maturing in one year or less................................... ============ ============= ============
</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:
</TABLE>
F-9
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
<TABLE>
<S> <C> <C> <C>
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 June 30, 2000 (unaudited):
Maturing in one year or less............................................. $29,123,561 $ (2,234) $29,121,327
=========== ======== ===========
</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 June 30, 2000
----------------- ----------------- -------------
(unaudited)
<S> <C> <C> <C>
QuickBird satellites $58,063,457 $125,414,700 $151,911,526
Digital Globe software 477,315 14,809,982 23,525,642
Ground station equipment 1,155,365 3,492,280 5,730,969
----------- ------------ ------------
$59,696,137 $143,716,962 $181,168,137
=========== ============ ============
</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.
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.
F-10
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
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.
The Company's long-term debt and capital-lease obligations are comprised of
the following:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
------------ ------------ --------
1998 1999 2000
---- ---- ----
(unaudited)
<S> <C> <C> <C>
13% Senior Discount Notes, net of unamortized discount of $0,
$86,681,504, and $75,698,402, respectively, effective rate of 15.9%.... $ -- $112,318,496 $123,301,598
12 1/2% Senior Notes, net of unamortized discount of $669,944,
$17,321,394, and $14,107,451, respectively............................. 49,330,056 54,678,606 57,892,549
Capital-lease obligations.............................................. 473,953 151,031 101,634
----------- ------------ ------------
49,804,009 167,148,133 181,295,781
Less: current portion.................................................. (242,189) (92,743) (72,308)
----------- ------------ ------------
$49,561,820 $167,055,390 $181,223,473
=========== ============ ============
</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>
F-11
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
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.
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
F-12
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
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 June 30, 2000, there were 7,776,706 shares of Series A Convertible
Preferred Stock outstanding held of record by one stockholder and 7,776,706
shares of Series B Convertible Preferred Stock outstanding held of record by
six stockholders.
Except with respect to the voting rights and representation on the board of
directors, the Company's Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock are identical in all respects.
Rank. Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock are pari passu and rank senior to Series C Convertible Preferred Stock
and Common Stock with respect to dividends, liquidation preference, and
redemption.
Dividends. The holders of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock are entitled to receive cumulative dividends,
whether or not declared by the Company's board of directors, at an annual
rate of 7% until no later than June 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.
F-13
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
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 holder of Series A Convertible Preferred Stock has
the right to elect two persons to the board of directors and the holders of
the Series B Convertible Preferred Stock have the right to elect four persons
to the board of directors.
Series C Convertible Preferred Stock
As of June 30, 2000, there were 23,991,767 shares of Series C Convertible
Preferred Stock outstanding.
Rank. The Series C Convertible Preferred Stock is junior to the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock, but
senior to the Common Stock, with respect to dividends, liquidation
preference, and redemption.
Dividends. The holders of Series C Convertible Preferred Stock are entitled
to cumulative dividends, whether or not declared by the board of directors,
at an annual rate of 8.5% until no later than June 15, 2002. Such dividends
are payable quarterly on March 31, June 30, September 30, and December 31,
and commenced on June 30, 1999. Until June 15, 2002, such dividends may be
paid, subject to certain limitations, at the Company's option, either in cash
or in additional shares of Series C Convertible Preferred Stock. After June
15, 2002, dividends will accrue at an annual rate of 8.5% of the liquidation
preference and will be payable, when, as, and if declared by the board of
directors, in cash only. If any dividend is not paid in full in cash on a
quarterly payment date after June 15, 2002, the liquidation preference of the
Series C Convertible Preferred Stock will be increased by an amount equal to
the product of (a) the amount per share not paid divided by the total amount
payable per share and (b) one quarter of the dividend rate multiplied by the
effective liquidation preference. The Company is prohibited from paying
dividends on any shares of stock having rights junior to the Series C
Convertible Preferred Stock until all accumulated dividends have been paid on
the Series C Convertible Preferred Stock.
Liquidation Preference. Upon liquidation, dissolution, or winding up, the
holders of the Series C Convertible Preferred Stock will be entitled to
receive out of the assets available for distribution, following payment of
the Series A and Series B liquidation preference, an amount equal to $3.50
per share, plus all accrued and unpaid dividends, subject to adjustment.
Conversion. Until June 15, 2002, each share of Series C Convertible Preferred
Stock will be convertible at the option of the holder into that number of
shares of Common Stock obtained by dividing the Series C liquidation
preference, plus any accumulated but unpaid dividends by $3.50, subject to
anti-dilution adjustments. Prior to June 15, 2002, each share of Series C
Convertible Preferred Stock will automatically convert into Common Stock at
the applicable conversion ratio upon the earlier of (a) an initial public
offering of shares of Common Stock with an aggregate public offering price of
at least $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.
F-14
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
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
As of June 30, 2000, there were 169,986 shares Common Stock outstanding.
Holders of Common Stock are entitled to one vote for each share held of
record at all meetings of the stockholders. Holders of Common Stock are not
entitled to cumulative voting rights with respect to the election of
directors. Subject to preferences that are applicable to outstanding shares
of preferred stock, holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the board of directors out of funds
legally available to be paid.
In the event of a liquidation, dissolution, or winding up, holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of the outstanding preferred
stock. Holders of Common Stock have no preemptive rights and no right to
convert their Common Stock into any other securities. There are no redemption
provisions applicable to the Common Stock. The outstanding shares of Common
Stock are fully paid and nonassessable.
8. Stock Options
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%
</TABLE>
F-15
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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.
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
Expired - - (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 12,463 shares of new Series C Convertible Preferred Stock, as
converted from 28,250 shares of Series A Stock. The warrants are exercisable
at $4.53 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.
The Company's deferred tax assets are comprised of the following as of
December 31:
F-16
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
<TABLE>
<CAPTION>
1998 1999
---- ----
Deferred tax assets
<S> <C> <C>
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 255,883 455,109
------------ ------------
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 six months 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:
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.
F-17
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
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.
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
F-18
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
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 $1
million 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. In June 2000
(unaudited), the Company entered into a contract to provide third-party
data to NIMA for the contract value of $1.1 million.
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
$3,335,334 during the years ending December 31, 1998 and 1999,
respectively.
F-19
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
________________________________________________________________________________
12. Summary of Activity by Geographical Area
<TABLE>
<CAPTION>
($ in Millions)
Net Sales U.S. Other Consolidated
--------- ---- ----- ------------
<S> <C> <C> <C>
Cumulative since inception (unaudited) $ 15,455.8 $ - $ 15,455.8
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
</TABLE>
13. Restatement
Subsequent to the issuance of the Company's consolidated financial
statements for the fiscal year ended December 31, 1999, it was determined
that the reported dividends and accretion on the Company's mandatorily
redeemable preferred stock were improperly recorded. As a result, the
accompanying consolidated financial statements have been restated using the
correct amounts. A summary of the effects of the restatement follows:
<TABLE>
<CAPTION>
As of or for the period ended (in millions)
---------------------------------------------
December 31, 1999
---------------------------------------------
Previously
reported Restated
----------------------- --------------------
<S> <C> <C>
Mandatorily redeemable preferred stock:
7% Cumulative convertible - Series A $ 24.1 $ 25.5
7% Cumulative convertible - Series B 24.1 25.5
8.5% Cumulative convertible - Series C 75.1 79.0
Accumulated deficit 111.7 118.3
Stockholders' equity (deficit) (33.5) (40.1)
Net loss attributable to common stockholders (20.4) (27.0)
</TABLE>
F-20
<PAGE>
================================================================================
WE HAVE NOT AUTHORIZED ANY PERSON TO MAKE A STATEMENT THAT DIFFERS FROM WHAT IS
IN THIS PROSPECTUS. IF ANY PERSON DOES MAKE A STATEMENT THAT DIFFERS FROM WHAT
IS IN THIS PROSPECTUS, YOU SHOULD NOT RELY ON IT. THIS PROSPECTUS IS NOT AN
OFFER TO SELL, NOR IS IT SEEKING AN OFFER TO BUY, THESE SECURITIES IN ANY STATE
IN WHICH THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION IN THIS PROSPECTUS
IS COMPLETE AND ACCURATE AS OF ITS DATE, BUT THE INFORMATION MAY CHANGE AFTER
THAT DATE.
EarthWatch Incorporated
13% SENIOR DISCOUNT NOTES DUE 2007
______________
PROSPECTUS
______________
OCTOBER 13, 2000
