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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
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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