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

================================================================================ 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 -------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial statements. 1 EarthWatch Incorporated (A Development Stage Company)

The accompanying notes are an integral part of these consolidated financial statements. 2 Earth Watch Incorporated (A Development Stage Company)

The accompanying notes are an integral of these consolidated financial statements. 3 EarthWatch Incorporated (A Development Stage Company)

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.

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

EARTHWATCH INC 10-Q/A