10-Q/A 1 d10qa.txt FORM 10-Q/A NO. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________ FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 Commission file number 333-39202 EarthWatch Incorporated (Exact Name of Registrant as Specified in Its Charter) Delaware 31-1420852 (State or other jurisdiction of (I.R.S. Employer Identification Incorporation or organization) Number) EarthWatch Incorporated 1900 Pike Road Longmont, Colorado 80501 (Address of principal executive offices, including zip code) (303) 682-3800 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The registrant had 217,901 shares of common stock outstanding as of April 30, 2001. ================================================================================ This Form 10-Q/A amends and restates the items listed below contained in the registrant's Form 10-Q for the quarterly period ended March 31, 2001. The amendments correct the presentation of the registrant's cash flows for the quarterly period ended March 31, 2001 and the period from January 1, 1995 (Inception) through March 31, 2001. Table of Contents
PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheet. 1 Consolidated Statement of Operations. 2 Consolidated Statement of Cash Flows. 3 Consolidated Statement of Stockholders' Equity (Deficit). 4 Notes to Consolidated Financial Statements. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8 Signatures 11
================================================================================ Reference is made to this document to Digital Global(R) and Your Planet Online(R), which are registered trademarks owned by the company, and Seconds an Orbit(TM), which is a trademark of the Company. EarthWatch Incorporated (A Development Stage Company) Consolidated Balance Sheet -------------------------------------------------------------------------------
December 31, March 31, 2000 2001 -------------- --------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 5,725,779 $ 27,780,718 Accounts receivable, net of allowance for doubtful accounts of zero and $81,148, respectively 251,408 1,512,061 Insurance proceeds receivable - restricted 265,000,000 - Investment securities - - Investment securities - restricted 6,295,382 236,760,935 Other current assets 398,101 568,722 -------------- --------------- Total current assets 277,670,670 266,622,436 -------------- --------------- Property, plant, and equipment: Construction in progress 89,716,474 94,881,022 Computer equipment and software 15,365,444 15,370,977 Machinery and equipment 5,770,640 5,770,640 Furniture and fixtures 1,281,911 1,281,474 -------------- --------------- Total property, plant, and equipment 112,134,469 117,304,113 Accumulated depreciation and amortization (15,419,714) (16,162,614) -------------- --------------- Net property, plant, and equipment 96,714,755 101,141,499 -------------- --------------- Debt issuance costs, net 4,682,127 4,504,223 Other assets 310,664 281,591 -------------- --------------- TOTAL ASSETS $ 379,378,216 $ 372,549,749 ============== =============== LIABILITIES, MANDATORY REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT) Liabilities Current liabilities: Accounts payable $ 11,289,385 $ 3,721,184 Accounts payable to related parties 982,232 690,149 Accrued expenses 3,988,060 4,070,551 Debt 195,484,650 203,591,898 -------------- --------------- Total current liabilities 211,744,327 212,073,782 -------------- --------------- Contingencies Mandatorily redeemable preferred stock due 2009: 7% Cumulative convertible - Series A; $.001 par value; 10,000,000 shares authorized; 8,051,273 and 8,192,170 shares issued and outstanding as of December 31, 2000 and March 31, 2001, respectively; aggregate liquidation preference of $28,672,595 as of March 31, 2001 27,473,699 27,987,928 7% Cumulative convertible - Series B; $.001 par value; 10,000,000 shares authorized; 8,051,273 and 8,192,170 shares issued and outstanding as of December 31, 2000 and March 31, 2001, respectively; aggregate liquidation preference of $28,672,595 as of March 31, 2001 27,473,699 27,987,928 8.5% Cumulative convertible - Series C; $.001 par value; 25,000,000 shares authorized, issued and outstanding as of December 31, 2000 and March 31, 2001; aggregate liquidation preference of $89,440,001 as of March 31, 2001 86,298,993 88,199,432 -------------- --------------- Total mandatorily redeemable preferred stock 141,246,391 144,175,288 -------------- --------------- Stockholders' equity (deficit): Common stock; $.001 par value; 100,000,000 shares authorized; 195,420, and 215,438 shares issued and outstanding at December 31, 2000 and March 31, 2001, respectively 195 215 Additional paid-in capital 61,824,829 58,902,055 Deferred stock compensation (534,600) (493,375) Deficit accumulated during the development stage (34,902,926) (42,108,216) -------------- --------------- Total stockholders' equity (deficit) 26,387,498 16,300,679 -------------- --------------- TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT) $ 379,378,216 $ 372,549,749 ============== ===============
The accompanying notes are an integral part of these consolidated financial statements. 1 EarthWatch Incorporated (A Development Stage Company)
Consolidated Statement of Operations -------------------------------------------------------------------------------------------------------------------------- Period from January 1, 1995 Three Months Ended March 31, (Inception) to ------------------------------------ March 31, 2000 2001 2001 ----------------- ----------------- ------------------- (Unaudited) (Unaudited) (Unaudited) Revenue $ 2,019,248 $ 3,817,744 $ 20,205,235 Cost of goods sold 1,343,535 2,970,050 16,110,289 ----------------- ----------------- ------------------- Gross profit 675,713 847,694 4,094,946 ----------------- ----------------- ------------------- Expenses: Selling, general, and administrative 3,015,742 2,794,366 52,874,881 Research and development 2,379,624 2,158,457 74,094,239 Loss from impairment of fixed assets, net of insurance recoveries - - (81,489,890) Gain from arbitration settlement - - (1,514,776) ----------------- ----------------- ------------------- Total expenses 5,395,366 4,952,823 43,964,454 ----------------- ----------------- ------------------- Loss from operations (4,719,653) (4,105,129) (39,869,508) Interest expense (1,984,390) (4,726,377) (16,215,287) Interest income 1,332,397 1,626,216 16,976,579 ----------------- ----------------- ------------------- Loss before provision for income taxes (5,371,646) (7,205,290) (39,108,216) Provision for income taxes - - (3,000,000) ----------------- ----------------- ------------------- Net loss (5,371,646) (7,205,290) (42,108,216) Mandatorily redeemable preferred stock dividends and accretion (2,809,259) (2,927,755) (20,886,350) ----------------- ----------------- ------------------- Net loss attributable to common stockholders $ (8,180,905) $ (10,133,045) $ (62,994,566) ================= ================= ===================
The accompanying notes are an integral part of these consolidated financial statements. 2 Earth Watch Incorporated (A Development Stage Company)
Consolidated Statement of Cash Flows ---------------------------------------------------------------------------------------------------------------------------------- Period from January 1, 1995 (Inception) to Three Months Ended March 31, March 31, -------------------------------- 2000 2001 2001 -------------- -------------- -------------- (Unaudited) (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (5,371,646) $ (7,205,290) $ (42,108,216) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation expense 894,225 742,900 17,744,645 Non-cash interest expense 1,980,668 4,725,976 14,823,356 Non-cash loss from disposals and impairments of property plant, and equipment, net of insurance recoveries - - (79,886,959) Non-cash stock compensation - 41,225 962,625 Changes in assets and liabilities: Accounts receivable, net 684,691 (1,260,653) (512,936) Other assets 562,068 (141,548) (627,939) Accounts payable (4,379,717) (7,568,201) 3,208,575 Accounts payable - related parties (489,884) (292,083) 690,149 Accrued expenses 49,872 83,633 1,944,903 -------------- -------------- -------------- Net cash provided (used) by operating activities (6,069,723) (10,874,041) (83,761,797) -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investment securities - (236,760,935) (281,909,267) Proceeds from maturities of investment securities 2,814,866 6,295,382 44,990,238 Proceeds from sales of property, plant, and equipment - - 4,216,978 Insurance proceeds from loss of satellites - 265,000,000 294,000,000 Constuction in progress additions (14,207,685) (1,586,106) (267,440,060) Other property, plant, and equipment additions (1,592,802) (5,096) (15,566,564) -------------- -------------- -------------- Net cash provided (used) by investing activities (12,985,621) 32,943,245 (221,708,675) -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term notes, net - - 145,718,374 Proceeds from issuance of preferred and common stock, net 11,260 5,001 191,177,335 Cash acquired in merger - - 916,457 Principal payments on debt (30,164) (19,266) (4,560,976) -------------- -------------- -------------- Net cash provided (used) by financing activities (18,904) (14,265) 333,251,190 -------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents (19,074,248) 22,054,939 27,780,718 Cash and cash equivalents, beginning of period 82,193,314 5,725,779 - -------------- -------------- -------------- Cash and cash equivalents, end of period $ 63,119,066 $ 27,780,718 $ 27,780,718 ============== ============== ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 3,481 $ 401 $ 12,672,062 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Assets acquired pursuant to capital-lease and financing obligations $ - $ - $ 4,599,935 Net book value of assets acquired in merger - - 4,290,496 Liabilities assumed in merger - - 3,738,588 Stockholder advances converted to equity - - 1,030,000 Property in-kind contributed by stockholder - - 7,521,028 Non-cash interest capitalized in construction in progress 5,295,655 3,578,442 51,118,378 Issuance of mandatorily redeemable preferred stock 2,727,967 - 50,706,266
The accompanying notes are an integral of these consolidated financial statements. 3 EarthWatch Incorporated (A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) ------------------------------------------------------------------------------------------------------------------- Convertible Convertible Series A Series B Preferred Stock Preferred Stock -------------------------------- -------------------------------- Shares Amount Shares Amount ----------- ----------- ---------- -------------- Balance at January 1, 1995 (inception) - $ - - $ - Issuance of stock in exchange for future cash contributions and contributions of property in-kind 8,000,000 14,400,000 - - Contribution of net assets in merger 5,362,285 551,908 - - Issuance of common stock for services and for stock options exercised - - - - Issuance of preferred stock 5,475,001 21,712,635 189,040 1,890,400 Property in-kind, conversion of debt, and cash contributions from stockholder - - - - Net and comprehensive income (loss) - - - - ----------- ----------- -------- -------------- Balance at December 31, 1995 18,837,286 36,664,543 189,040 1,890,400 Restatement of capital stock and additional paid-in capital for reincorporation as of January 1, 1996 - (36,645,706) - (1,890,211) Issuance of stock in exchange for property in-kind and other, net 513,124 513 22,260 22 Issuance of preferred stock - - 100,000 100 Property in-kind contributed by stockholder - - - - Net and comprehensive income (loss) - - - - ----------- ----------- -------- -------------- Balance at December 31, 1996 19,350,410 19,350 311,300 311 Issuance of common stock - - - - Issuance of common stock for services and for stock options exercised - - - - Issuance of preferred stock - - - - Other - - - - Net and comprehensive income (loss) - - - - ----------- ----------- -------- -------------- Balance at December 31, 1997 19,350,410 19,350 311,300 311 Issuance of preferred and common stock for stock options exercised 17,916 18 - - Net and comprehensive income (loss) - - - - ----------- ----------- -------- -------------- Balance at December 31, 1998 19,368,326 19,368 311,300 311 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) Issuance of preferred and common stock in connection with the recapitalization - - - - Mandatorily redeemable preferred stock dividends and accretion - - - - Net and comprehensive income (loss) - - - - ----------- ----------- -------- -------------- Balance at December 31, 1999 - - - - Issuance of preferred and common stock for stock options exercised - - - - Deferred stock compensation - - - - Amortization of deferred stock compensation - - - - Mandatorily redeemable preferred stock dividends and accretion - - - - Net and comprehensive income (loss) - - - - ----------- ----------- -------- -------------- Balance at December 31, 2000 - - - - Issuance of preferred and common stock for stock options exercised (unaudited) - - - - Amortization of deferred stock compensation (unaudited) - - - - Mandatorily redeemable preferred stock dividends and accretion (unaudited) - - - - Net and comprehensive income (loss) (unaudited) - - - - ----------- ----------- -------- -------------- Balance at March 31, 2001 (unaudited) - $ - - $ - =========== =========== ======== ============== Consolidated Statement of Stockholders' Equity (Deficit) ----------------------------------------------------------------------------------------------------------------------- Convertible Senior Convertible Series C Series D Preferred Stock Preferred Stock --------------------------- ----------------------------- Shares Amount Shares Amount ---------- ---------- ---------- ----------- Balance at January 1, 1995 (inception) - $ - - $ - Issuance of stock in exchange for future cash contributions and contributions of property in-kind - - - - Contribution of net assets in merger - - - - Issuance of common stock for services and for stock options exercised - - - - Issuance of preferred stock - - - - Property in-kind, conversion of debt, and cash contributions from stockholder - - - - Net and comprehensive income (loss) - - - - ---------- ---------- ---------- ----------- Balance at December 31, 1995 - - - - 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 - - - - Issuance of preferred stock 7,000,000 7,000 400,000 400 Property in-kind contributed by stockholder - - - - Net and comprehensive income (loss) - - - - ---------- ---------- ---------- ----------- Balance at December 31, 1996 7,000,000 7,000 400,000 400 Issuance of common stock - - - - Issuance of common stock for services and for stock options exercised - - - - Issuance of preferred stock - - 600,000 600 Other - - - - Net and comprehensive income (loss) - - - - ---------- ---------- ---------- ----------- Balance at December 31, 1997 7,000,000 7,000 1,000,000 1,000 Issuance of preferred and common stock for stock options exercised - - - - Net and comprehensive income (loss) - - - - ---------- ---------- ---------- ----------- Balance at December 31, 1998 7,000,000 7,000 1,000,000 1,000 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. - - - - Reclassification of preferred and common stock into Series C 8.5% Cumulative Convertible Redeemable Preferred Stock Due 2009 in connection with the recapitalization (7,000,000) (7,000) (1,000,000) (1,000) Issuance of preferred and common stock in connection with the recapitalization - - - - Mandatorily redeemable preferred stock dividends and accretion - - - - Net and comprehensive income (loss) - - - - ---------- ---------- ---------- ----------- Balance at December 31, 1999 - - - - Issuance of preferred and common stock for stock options exercised - - - - Deferred stock compensation - - - - Amortization of deferred stock compensation - - - - Mandatorily redeemable preferred stock dividends and accretion - - - - Net and comprehensive income (loss) - - - - ---------- ---------- ---------- ----------- Balance at December 31, 2000 - - - - Issuance of preferred and common stock for stock options exercised (unaudited) - - - - Amortization of deferred stock compensation (unaudited) - - - - Mandatorily redeemable preferred stock dividends and accretion (unaudited) - - - - Net and comprehensive income (loss) (unaudited) - - - - ---------- ---------- ---------- ----------- Balance at March 31, 2001 (unaudited) - $ - - $ - ========== ========== ========== =========== Consolidated Statement of Stockholders' Equity (Deficit) ----------------------------------------------------------------------------------------------------------------------------------- Deficit Accumulated Accumulated Total Common Stock Additional Other During the Stockholders' -------------------- Paid-in Comprehensive Development Equity Shares Amount Capital Other Income (Loss) Stage (Deficit) ---------- -------- ----------- ------------ ------------- ------------ ---------- Balance at January 1, 1995 (inception) - $ - $ - $ $ - $ - $ - Issuance of stock in exchange for future cash contributions and contributions of property in-kind 1 - - (14,400,000) - - - Contribution of net assets in merger - - - - - - 551,908 Issuance of common stock for services and for stock options exercised 79,500 63,600 - - - - 63,600 Issuance of preferred stock - - - - - - 23,603,035 Property in-kind, conversion of debt, and cash contributions from stockholder - - - 13,381,523 - - 13,381,523 Net and comprehensive income (loss) - - - - - (3,909,208) (3,909,208) ---------- ---------- -------- ----------- ------------ ------------- ------------- Balance at December 31, 1995 79,501 63,600 - (1,018,477) - (3,909,208) 33,690,858 Restatement of capital stock and additional paid-in capital for reincorporation as of January 1, 1996 - (63,521) 38,599,438 - - - - Issuance of stock in exchange for property in-kind and other, net - - 2,288,561 - - - 2,289,096 Issuance of preferred stock - - 69,833,305 - - - 69,840,805 Property in-kind contributed by stockholder - - (25,944) 1,018,477 - - 992,533 Net and comprehensive income (loss) - - - - - (23,706,344) (23,706,344) ---------- -------- ----------- ------------ ------------- ------------- ----------- Balance at December 31, 1996 79,501 79 110,695,360 - - (27,615,552) 83,106,948 Issuance of common stock - - 1,229,240 - - - 1,229,240 Issuance of common stock for services and for stock options exercised 69,416 70 55,463 - - - 55,533 Issuance of preferred stock - - 5,999,400 - - - 6,000,000 Other - - (4,773) - - - (4,773) Net and comprehensive income (loss) - - - - 80,400 (50,730,985) (50,650,585) ---------- -------- ----------- ------------ ------------- ------------- ----------- Balance at December 31, 1997 148,917 149 117,974,690 - 80,400 (78,346,537) 39,736,363 Issuance of preferred and common stock for stock options exercised 54,631 55 50,799 - - - 50,872 Net and comprehensive income (loss) - - - - (36,971) (12,919,555) (12,956,526) ---------- -------- ----------- ------------ ------------- ------------- ----------- Balance at December 31, 1998 203,548 204 118,025,489 - 43,429 (91,266,092) 26,830,709 Issuance of preferred and common stock for stock options exercised 1,000 1 799 - - - 800 Issuance of common stock for warrants exercised 1,556,000 1,556 14,004 - - - 15,560 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 (1,760,548) (1,761)(39,765,364) - - - (39,792,042) Issuance of preferred and common stock in connection with the recapitalization 1 - - - - - - Mandatorily redeemable preferred stock dividends and accretion - - (6,690,537) - - - (6,690,537) Net and comprehensive income (loss) - - - - (159,382) (20,318,766) (20,478,148) ---------- -------- ----------- ------------ ------------- ------------- ----------- Balance at December 31, 1999 1 - 71,587,153 - (115,953) (111,584,858) (40,113,658) Issuance of preferred and common stock for stock options exercised 195,419 195 49,734 - - - 49,929 Deferred stock compensation - - 1,456,000 (1,456,000) - - - Amortization of deferred stock compensation - - - 921,400 - - 921,400 Mandatorily redeemable preferred stock dividends and accretion - - (11,268,058) - - - (11,268,058) Net and comprehensive income (loss) - - - - 115,953 76,681,932 76,797,885 ---------- -------- ----------- ------------ ------------- ------------- ----------- Balance at December 31, 2000 195,420 195 61,824,829 (534,600) - (34,902,926) 26,387,498 Issuance of preferred and common stock for stock options exercised (unaudited) 20,018 20 4,981 - - - 5,001 Amortization of deferred stock compensation (unaudited) - - - 41,225 - - 41,225 Mandatorily redeemable preferred stock dividends and accretion (unaudited) - - (2,927,755) - - - (2,927,755) Net and comprehensive income (loss) (unaudited - - - - (7,205,290) (7,205,290) ---------- -------- ----------- ------------ ------------- ------------- ----------- Balance at March 31, 2001 (unaudited) 215,438 $ 215 $58,902,055 $ (493,375) $ - $ (42,108,216) $16,300,679 ========== ======== =========== ============ ============= ============= ===========
The accompanying notes are an integral part of these consolidated financial statements. 4 EarthWatch Incorporated (A Development Stage Company) Notes to Consolidated Financial Statements (Unaudited) ================================================================================ 1. Basis of Presentation The consolidated financial statements have been prepared by EarthWatch Incorporated and its subsidiaries without an audit, except for the December 31, 2000 balance sheet, which has been derived from audited financial statements. The statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") and reflect all adjustments, consisting of only normal recurring accruals which are, in the opinion of management, necessary for a fair statement of the results of operations for the periods shown. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto filed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2000. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year ending December 31, 2001. Certain items previously reported under specific financial statement captions have been reclassified to conform to the current presentation, as well as the reflection of insurance proceeds received from the loss of satellites as an element of cash flows from investing activities. 2. Construction in Progress Construction in progress consists primarily of satellite construction and launch costs, ground station construction costs, and third-party developed software. Construction in progress consisted of the following: December 31, 2000 March 31, 2001 ----------------- -------------- QuickBird 2 satellite $55,952,495 $59,590,775 Digital Globe software 26,570,191 27,623,902 Ground station equipment 7,193,788 7,666,345 ----------- ----------- $89,716,474 $94,881,022 =========== =========== 3. Debt On February 28, 2001, as required by the indentures governing our 12 1/2% Senior Notes due 2005 and our 13% Senior Discount Notes due 2007, respectively, we offered to purchase all of our outstanding notes at their accreted value on the date of purchase, using the insurance proceeds relating to the loss of our QuickBird 1 satellite in November 2000. The offer expired on April 2, 2001 and we repurchased $127.4 million in principal amount at maturity of outstanding 13% notes and all outstanding 12 1/2% notes on April 3, 2001, resulting in an extraordinary loss on early extinguishment of debt of approximately $23.0 million. In connection with the offer, we entered into a Recapitalization Agreement and Consent dated as of April 2, 2001 ("Recapitalization Agreement") with certain holders of our 13% notes. Pursuant to the Recapitalization Agreement, these noteholders agreed to refrain from tendering their notes in the offer, thus allowing us to have the use of the funds that would otherwise be used to repurchase their notes. We also granted registration rights to certain holders of 13% notes and Series C preferred stock and pledged government securities to secure certain repurchase rights of the noteholders. Furthermore, we obtained the consent of these noteholders and amended the indenture governing the notes in certain respects. In the Recapitalization Agreement, we also agreed, among other things, that we would, by no later than June 15, 2001: . obtain at least $9 million of vendor financing from Ball Aerospace & Technologies Corp.; . amend our certificate of incorporation to (a) require that we purchase, at each holder's option, that holder's shares of our Series A and B preferred stock, if an insurable event occurs under the QuickBird 2 insurance policy, (b) increase the number of authorized shares of our common stock and each series 5 EarthWatch Incorporated (A Development Stage Company) Notes to Consolidated Financial Statements (Unaudited) ================================================================================ of our preferred stock, and (c) extend the time period by one year during which holders of our preferred stock may convert their shares into shares of our common stock; . issue 10,843,297 additional shares of our Series C preferred stock to the holders of 13% notes that signed the Recapitalization Agreement; . purchase at least $155 million of insurance covering the launch and in-orbit operations of our QuickBird 2 satellite; and . pledge the QuickBird 2 insurance in favor of The Bank of New York, as collateral agent for (a) the holders of notes and for Ball Aerospace & Technologies Corp., and (b) the holders of our Series A preferred stock and Series B preferred stock. In April 2001, we secured a $9.0 million borrowing facility with Ball Aerospace & Technologies Corp., one of our stockholders, which we intend to use to fund the completion of QuickBird 2. This vendor financing facility will accrue interest at an annual rate of 11%, which will become payable seven months following the launch of QuickBird 2. Beginning with the eighth month and ending with the eighteenth month following the launch of QuickBird 2, principal, in equal monthly amounts, and interest are payable in cash each month. In conjunction with this arrangement, we agreed to issue to Ball Aerospace & Technologies Corp. 903,608 shares of Series C preferred stock. We cannot assure you that the remaining contemplated transactions will be completed. If we do not, among other things, consummate the transactions required to be consummated by June 15, 2001, we must complete by August 1, 2001 an offer to purchase all of the then-outstanding notes for a purchase price equal to their accreted value as of the date of purchase. Based on our current operating plan and provided we can complete the other contemplated transactions in the Recapitalization Agreement prior to June 15, 2001, we believe that existing capital resources will meet our anticipated cash needs for the foreseeable future. If we face any launch delays, if our satellite system takes longer to become operational, if technical or regulatory developments require that we modify the design of our satellite system, if we are unable to complete the other contemplated transactions by June 15, 2001, if we are unable to achieve our revenue targets, or if we incur other additional unforeseen costs, we may require additional capital. We do not have a revolving credit facility or other source of readily available capital. Therefore, any shortfall in funds available for our operations or to service our debt would cause us serious liquidity problems. In such case, we would need to seek additional financing which we may not be able to obtain on commercially reasonable terms or at all. Failure to obtain such additional financing may result in a material adverse effect on our business and would significantly increase existing doubt about our ability to continue as a going concern. We have incurred transaction costs associated with the Recapitalization Agreement of approximately $1.2 million. The estimated fair value of our debt instruments was approximately $233,192,000 at March 31, 2000.
The Company's debt is comprised of the following at: December 31, March 31, 2000 2001 ------------- ------------- 13% Senior Discount Notes, net of unamortized discount of $64,852,862 and $58,669,609, respectively, effective rate of 15.9% $ 134,147,138 $ 140,330,391 12 1/2% Senior Notes, net of unamortized discount of $10,731,089 and $8,777,514, respectively, effective rate of 12.9% 61,268,911 63,222,486 Capital-lease obligations 68,601 39,021 ------------- ------------- 195,484,650 203,591,898 Less: current portion (195,484,650) (203,591,898) ------------- ------------- $ -- $ -- ============= =============
6 EarthWatch Incorporated (A Development Stage Company) Notes to Consolidated Financial Statements (Unaudited) ================================================================================ 4. Commitments Effective March 2001, we entered into a launch services agreement for our QuickBird 2 satellite. This agreement increases our remaining noncancelable contract commitments, excluding the purchase of launch and in-orbit insurance discussed above, through launch to $27.4 million. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as amended. Some of the statements in this Quarterly Report on Form 10-Q, as amended, constitute forward-looking statements. These statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry's results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. These factors include, among others, those listed under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q, as amended, and in the other documents we file with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2000. In some cases, you can identify forward-looking statements by terminology, such as "may," "will," "should," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of these terms or comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance, or achievements. Our actual results and the timing of certain events could differ materially from those anticipated in the forward-looking statements. Results of Operations Three months ended March 31, 2000 compared to three months ended March 31, 2001 Revenue. Our revenue has been generated primarily from the processing and sale of geographic imagery purchased from third-party suppliers. These sources of revenue increased from $2.0 million for the three-month period ended March 31, 2000 to $3.8 million for the three-month period ended March 31, 2001. Varying delivery dates within new and existing contracts have resulted in significant revenue fluctuations for these two periods. Revenue for the remainder of fiscal 2000 decreased substantially in anticipation of the launch of QuickBird 1. A similar decrease is not expected in fiscal 2001. Cost of Goods Sold. Our cost of goods sold includes third party geographic imagery purchased for sale under contract. As a result of our increased revenue, our cost of goods sold consequently increased from $1.3 million for the three-month period ended March 31, 2000 to $3.0 million for the three-month period ended March 31, 2001. Costs for both periods were primarily the direct costs associated with obtaining third-party geographic imagery for resale. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses were $3.0 million and $2.8 million for the three-month periods ended March 31, 2000 and 2001, respectively. These expenses decreased due to staff reductions and reduced operating activities following the loss of QuickBird 1. We expect these costs to increase in the future as we increase staff levels and implement new procedures in preparation for full-scale operations and market entry of our products and services. Research and Development. Our research and development costs were $2.4 million and $2.2 million for the three-month periods ended March 31, 2000 and 2001, respectively. These expenses decreased due to staff reductions and reduced operating activities following the loss of QuickBird 1. Interest Expense. Interest expense increased significantly from $2.0 million for the three-month period ended March 31, 2000 to $4.7 million for the three- month period ended March 31, 2001. This increase was the result of higher average debt balances outstanding during the three-month period ended March 31, 2001 and lower capitalization of interest due to the completion of QuickBird 1 in 2000. Interest Income. Interest income increased from $1.3 million for the three- month period ended March 31, 2000 to $1.6 million for the three-month period ended March 31, 2001. This increase was the result of higher average investment balances outstanding during the three-month period ended March 31, 2001. Net Loss. We had net losses of $5.4 million and $7.2 million for the three- month periods ended March 31, 2000 and 2001, respectively. 8 Liquidity and Capital Resources On February 28, 2001, as required by the indentures governing our 12 1/2% Senior Notes due 2005 and our 13% Senior Discount Notes due 2007, respectively, we offered to purchase all of our outstanding notes at their accreted value on the date of purchase, using the insurance proceeds relating to the loss of our QuickBird 1 satellite in November 2000. The offer expired on April 2, 2001 and we repurchased $127.4 million in principal amount at maturity of outstanding 13% notes and all outstanding 12 1/2% notes on April 3, 2001, resulting in an extraordinary loss on early extinguishment of debt of approximately $23.0 million. In connection with the offer, we entered into a Recapitalization Agreement and Consent dated as of April 2, 2001 ("Recapitalization Agreement") with certain holders of our 13% notes. Pursuant to the Recapitalization Agreement, these noteholders agreed to refrain from tendering their notes in the offer, thus allowing us to have the use of the funds that would otherwise be used to repurchase their notes. We also granted registration rights to certain holders of notes and Series C preferred stock and pledged government securities to secure certain repurchase rights of the noteholders. Furthermore, we obtained the consent of these noteholders and amended the indenture governing the notes in certain respects. In the Recapitalization Agreement, we also agreed, among other things, that we would, by no later than June 15, 2001: . obtain at least $9 million of vendor financing from Ball Aerospace & Technologies Corp.; . amend our certificate of incorporation to (a) require that we purchase, at each holder's option, that holder's shares of our Series A and B preferred stock, if an insurable event occurs under the QuickBird 2 insurance policy, (b) increase the number of authorized shares of our common stock and each series of our preferred stock, and (c) extend the time period by one year during which holders of our preferred stock may convert their shares into shares of our common stock; . issue 10,843,297 additional shares of our Series C preferred stock to the holders of 13% notes that signed the Recapitalization Agreement; issue 903,608 additional shares of our Series C preferred stock to the Ball Technologies Holding Corporation; . purchase at least $155 million of insurance covering the launch and in-orbit operations of our QuickBird 2 satellite; and . pledge the QuickBird 2 insurance in favor of The Bank of New York, as collateral agent for (a) the holders of notes and for Ball Aerospace & Technologies Corp., and (b) the holders of our Series A preferred stock and Series B preferred stock. In April 2001, we secured a $9.0 million borrowing facility with Ball Aerospace & Technologies Corp., one of our stockholders, which we intend to use to fund the completion of QuickBird 2. This vendor financing facility will accrue interest at an annual rate of 11%, which will become payable seven months following the launch of QuickBird 2. Beginning with the eighth month and ending with the eighteenth month following the launch of QuickBird 2, principal, in equal monthly amounts, and interest are payable in cash each month. In conjunction with this arrangement, we agreed to issue to Ball Aerospace & Technologies Corp. 903,608 shares of Series C preferred stock. We cannot assure you that the remaining contemplated transactions will be completed. If we do not, among other things, consummate the transactions required to be consummated by June 15, 2001, we must complete by August 1, 2001 an offer to purchase all of the then-outstanding notes for a purchase price equal to their accreted value as of the date of purchase. We had net cash used by operating activities of $10.9 million and $6.1 million for the three-month periods ended March 31, 2001 and 2000, respectively. This difference was primarily the result of a reduction in accounts payable outstanding, resulting from the finalization of our Recapitalization Agreement. As a result of receiving $265 million of insurance proceeds, we had net cash provided by investing activities of $32.9 million for the three-month period ended March 31, 2001 as compared to $13.0 million used by investing activities during the same period in 2000. As a result of our collateral agreement with our note holders, $236.8 million of these proceeds were deposited into a restricted escrow account for the repurchase of notes 9 submitted in our tender offer. Excluding the insurance proceeds and deposits in the restricted escrow account, we had $4.7 million of cash provided by investing activities in 2001. This increase was primarily the result of the release of restricted investments for final payment of the QuickBird 1 insurance premiums during the three-month period ended March 31, 2001. Based on our current operating plan and provided we can complete the other contemplated transactions in the Recapitalization Agreement prior to June 15, 2001, we believe that existing capital resources will meet our anticipated cash needs for the foreseeable future. If we face any launch delays, if our satellite system takes longer to become operational, if technical or regulatory developments require that we modify the design of our satellite system, if we are unable to complete the other contemplated transactions by June 15, 2001, if we are unable to achieve our revenue targets, or if we incur other additional unforeseen costs, we may require additional capital. We do not have a revolving credit facility or other source of readily available capital. Therefore, any shortfall in funds available for our operations or to service our debt would cause us serious liquidity problems. In such case, we would need to seek additional financing which we may not be able to obtain on commercially reasonable terms or at all. Failure to obtain such additional financing may result in a material adverse effect on our business and would significantly increase existing doubt about our ability to continue as a going concern. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Longmont, State of Colorado. EARTHWATCH INCORPORATED (Registrant) Date: May 24, 2001 By: /s/ Henry E. Dubois ----------------- ------------------------------------------ Henry E. Dubois Chief Financial Officer, Chief Operating Officer, Executive Vice President (Principal Financial and Accounting Officer) 11