<PAGE>
Exhibit 99.4
Restated Financial Statements
EarthWatch Incorporated
(A Development Stage Company)
Report of Independent Accountants
--------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
EarthWatch Incorporated:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows, after the restatement described in Note 13, present fairly, in all
material respects, the financial position of EarthWatch Incorporated (a
development stage company) and its subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 for the consolidated statement of
operations and cash flows, and for each of the five years in the period ended
December 31, 1999 for the consolidated statement of stockholders' equity
(deficit), in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Denver, Colorado
March 31, 2000, except with respect to Note 13 for
which the date is August 15, 2000
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Balance Sheet
---------------------------------------------------------------------------------------------------------------------------------
December 31, December 31, March 31,
1998 1999 2000
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,044,605 $ 82,193,314 $ 63,119,066
Accounts receivable, net of allowance of
$0, $90,646, and $43,118, at December 31, 1998
and 1999, and March 31, 2000, respectively 720,034 768,029 83,338
Investment securities - 3,026,480 -
Investment securities - restricted 6,664,347 28,374,848 28,641,042
Other assets 474,092 968,769 415,665
----------- ------------ ------------
Total current assets 12,903,078 115,331,440 92,259,111
----------- ------------ ------------
Property, plant, and equipment:
Construction in progress 59,696,137 143,716,962 163,220,303
Computer equipment and software 10,287,166 12,275,986 13,687,733
Machinery and equipment 5,406,435 5,665,918 5,748,545
Furniture and fixtures 913,837 1,113,073 1,187,586
----------- ------------ ------------
76,303,575 162,771,939 183,844,167
Accumulated depreciation (8,251,176) (12,031,861) (12,902,171)
----------- ------------ ------------
Property, plant, and equipment, net 68,052,399 150,740,078 170,941,996
----------- ------------ ------------
Investment securities - restricted 3,063,279 - -
Debt issuance costs, net 943,795 5,069,065 4,891,265
Other assets 365,126 328,537 319,573
----------- ------------ ------------
TOTAL ASSETS $85,327,677 $271,469,120 $268,411,945
=========== ============ ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,306,153 $ 12,307,440 $ 7,927,723
Accounts payable to related parties 1,408,755 645,464 155,580
Accrued interest payable 2,489,986 - -
Accrued expenses 488,065 1,103,408 1,153,282
Deferred revenue - 400,000 400,000
Current portion of long-term debt 242,189 92,743 77,011
----------- ------------ ------------
Total current liabilities 8,935,148 14,549,055 9,713,596
Long-term debt, net ` 49,561,820 167,055,390 174,139,481
----------- ------------ ------------
Total liabilities 58,496,968 181,604,445 183,853,077
----------- ------------ ------------
Mandatorily redeemable preferred stock due 2009
7% Cumulative convertible - Series A; $.001 par value, 0
shares authorized, issued, and outstanding as of
December 31, 1998; 10,000,000 shares authorized,
7,505,765 shares issued and outstanding as of December
31, 1999; 10,000,000 shares authorized,
7,642,955 shares issued and outstanding as of March 31,
2000, aggregate liquidation preference of $26,750,342 - 25,478,661 25,980,149
7% Cumulative convertible - Series B; $.001 par value,
0 shares authorized, issued, and outstanding as of
December 31, 1998; 10,000,000 shares authorized,
7,505,765 shares issued and outstanding as of December
31, 1999; 10,000,000 shares authorized, 7,642,955
shares issued and outstanding as of March 31, 2000,
aggregate liquidation preference of $26,750,342 - 25,478,661 25,980,149
8.5% Cumulative convertible - Series C; $.001 par value,
0 shares authorized, issued, and outstanding as of
December 31, 1998; 25,000,000 shares authorized,
22,987,305 shares issued and outstanding as of
December 31, 1999; 10,000,000 shares authorized,
23,492,337 shares issued and outstanding as of March
31, 2000, aggregate liquidation preference of
$82,223,180 - 79,021,011 80,827,307
----------- ------------ ------------
Total mandatorily redeemable preferred stock - 129,978,333 132,787,605
----------- ------------ ------------
Stockholders' Equity (Deficit)
Series A Convertible preferred stock, $0.001 par value,
21,500,000 shares authorized, 19,368,326 shares issued
and outstanding as of December 31, 1998; none authorized,
issued, or outstanding as of December 31, 1999 and as of
March 31, 2000 19,368 - -
Series B Convertible preferred stock, $0.001 par value,
5,000,000 shares authorized, 311,300 shares issued and
outstanding as of December 31, 1998; none authorized,
issued, or outstanding as of December 31, 1999 and as
of March 31, 2000 311 - -
Series C Senior Convertible preferred stock, $0.001 par
value, 7,000,000 shares authorized, issued, and
outstanding as of December 31, 1998; none authorized,
issued, or outstanding as of December 31, 1999 and as
of March 31, 2000 7,000 - -
Series D Convertible preferred stock, $0.001 par value,
1,000,000 shares authorized, issued, and outstanding
as of December 31, 1998; none authorized, issued, or
outstanding as of December 31, 1999 and as of
March 31, 2000 1,000 - -
Common stock, $.001 par value, 65,000,000 shares
authorized, 203,548 shares issued and outstanding as
of December 31,1998; 100,000,000 shares authorized, one
share issued and outstanding as of December 31, 1999;
100,000,000 shares authorized, 44,986 issued and
outstanding as of March 31, 2000 204 - 45
Additional paid-in capital 118,025,489 78,277,690 78,288,891
Accumulated other comprehensive income (loss) 43,429 (115,953) (61,373)
Accumulated deficit (91,266,092) (118,275,395) (126,456,300)
----------- ------------ ------------
Total stockholders' equity (deficit) 26,830,709 (40,113,658) (48,228,737)
----------- ------------ ------------
TOTAL LIABILITIES, MANDATORILY REDEEMBABLE
PREFERRED STOCK, AND STOCKHOLDERS'
EQUITY (DEFICIT) $85,327,677 $271,469,120 $268,411,945
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-1
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Statement of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
March 31, 1995
Year Ended December 31, Three Months Ended March 31, (Inception)
---------------------------------------- --------------------------------- To
1997 1998 1999 1999 2000 March 31, 2000
---------- --------- ---------- ---------- ----------- --------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 436,912 $ 1,808,573 $ 5,913,310 $ 167,247 $ 2,019,248 $ 15,070,687
Cost of Goods Sold 381,997 1,904,867 5,120,575 142,770 1,343,535 12,385,261
------------- -------------- ------------- ------------- ------------- -------------
Gross profit
(loss) 54,915 (96,294) 792,735 24,477 675,713 2,685,426
------------- -------------- ------------- ------------- ------------- -------------
Expenses:
Selling,
general and
administrative 8,587,856 4,975,232 12,762,636 2,231,113 3,015,742 37,763,284
Research and
development 19,121,233 9,112,745 6,956,244 2,067,030 2,379,624 60,873,192
Loss from
impairment of
fixed assets 25,518,696 599,015 - - - 26,117,711
Gain from
arbitration
settlement - (1,514,776) - - - (1,514,776)
------------- -------------- ------------- ------------- ------------- -------------
Total expenses 53,227,785 13,172,216 19,718,880 4,298,143 5,395,366 123,239,411
------------- -------------- ------------- ------------- ------------- -------------
Loss from
operations (53,172,870) (13,268,510) (18,926,145) (4,273,666) (4,719,653) (120,553,985)
Interest income
(expense), net 2,441,885 348,955 (1,392,621) 129,795 (651,993) 3,597,481
------------- -------------- ------------- ------------- ------------- -------------
Net loss (50,730,985) (12,919,555) (20,318,766) (4,143,871) (5,371,646) (116,956,504)
Mandatorily
redeemable
preferred
stock
dividends
and accretion - - (6,690,537) - (2,809,259) (9,499,796)
------------- ------------- ------------- ------------- ------------- -------------
Net loss
attributable
to common
stockholders $ (50,730,985) $ (12,919,555) $ (27,009,303) $ (4,143,871) $ (8,180,905) $(126,456,300)
============= ============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-2
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Period from
March 31, 1995
(Inception)
Year Ended December 31, Three Months Ended March 31, To
1997 1998 1999 1999 2000 March 31, 2000
------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities (unaudited) (unaudited) (unaudited)
Net loss $(50,730,985) $(12,919,555) $(20,318,766) $ (4,143,871) $ (5,371,646) $(116,956,504)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation expense 3,138,931 4,383,188 3,885,611 1,182,628 894,225 14,120,290
Non-cash interest expense, net of
amounts capitalized - 760,019 4,752,339 - 1,980,668 7,493,026
Other non-cash charges 61,419 29,279 - 7,989 - 156,048
Loss on disposal of property,
plant and equipment 55,974,018 667,358 3,346 - - 56,720,642
Changes in assets and liabilities:
Accounts receivable, net (28,495,851) 28,329,903 (47,995) 436,256 684,691 915,787
Other assets (937,094) 1,243,312 (458,088) (733,847) 562,068 (512,864)
Accounts payable 2,594,384 (2,153,712) 8,001,287 1,960,114 (4,379,717) 7,415,114
Accounts payable to related
parties 1,969,383 (2,484,767) (763,291) (1,075,860) (489,884) 155,580
Accrued expenses 2,233,546 282,383 (1,874,643) (1,559,681) 49,872 1,113,101
Deferred revenue 621 (1,667) 400,000 - - (1,755,800)
------------ ------------ ------------ ------------ ------------ -------------
Net cash provided (used) by
operating activities (14,191,628) 18,135,741 (6,420,200) (3,926,272) (6,069,723) (31,135,580)
------------ ------------ ------------ ------------ ------------ -------------
Cash Flows From Investing Activities
Purchase of investment securities (16,579,338) (882,000) (27,686,994) - - (45,148,332)
Proceeds from maturities of investment
securities 2,304,000 5,431,000 5,853,910 3,716,000 2,814,866 16,403,776
Proceeds from sale of property, plant
and equipment 256,485 3,959,280 1,213 - - 4,216,978
Construction in progress additions (53,156,096) (25,912,268) (72,681,412) (4,167,903) (14,207,685) (201,103,717)
Other property, plant and equipment
additions (1,115,314) (124,893) (2,557,024) (264,611) (1,592,802) (13,403,425)
------------ ------------ ------------ ------------ ------------ -------------
Net cash used in investing
activities (68,290,263) (17,528,881) (97,070,307) (716,514) (12,985,621) (239,034,720)
------------ ------------ ------------ ------------ ------------ -------------
Cash Flows From Financing Activities
Proceeds from issuance of long-term
notes, net 48,268,288 - 97,450,086 - - 145,718,374
Proceeds from issuance of preferred and
common stock, net 6,006,977 50,872 83,512,114 800 11,260 191,133,665
Proceeds from issuance of units, net - - - - - -
Cash acquired in merger - - - - - 916,457
Principal payments on debt (607,595) (2,023,118) (322,984) (48,955) (30,164) (4,479,130)
------------ ------------ ------------ ------------ ------------ -------------
Net cash provided (used) by
financing activities 53,667,670 (1,972,246) 180,639,216 (48,155) (18,904) 333,289,366
------------ ------------ ------------ ------------ ------------ -------------
Net increase in cash and cash
equivalents (28,814,221) (1,365,386) 77,148,709 (4,690,941) (19,074,248) 63,119,066
Cash and Cash Equivalents
Beginning of period 35,224,212 6,409,991 5,044,605 5,044,605 82,193,314 -
------------ ------------ ------------ ------------ ------------ -------------
End of period $ 6,409,991 $ 5,044,605 $ 82,193,314 $ 353,664 $ 63,119,066 $ 63,119,066
============ ============ ============ ============ ============ =============
Supplemental Disclosure of Cash Flow
Information
Interest paid $ 2,939,864 $ 6,344,475 $ 3,150,575 $ 3,133,245 $ 3,481 $ 12,671,989
Supplemental Disclosure of Non-Cash
Investing and Financing Activities
New capital lease obligations $ 304,730 $ - $ - $ - $ - $ 1,397,803
Net book value of assets received in
merger - - - - - 4,290,496
Liabilities assumed in merger - - - - - 3,738,588
Stockholder advances converted to
equity - - - - - 1,030,000
Property in-kind contributed by
stockholder (3,524) - - - - 7,521,028
Non-cash interest capitalized in
construction in progress 5,670,000 6,056,000 11,340,000 1,749,902 5,295,655 28,506,656
Capital equipment financed through
note payable 1,612,347 - - - - 3,202,132
Issuance of mandatorily redeemable
cumulative preferred stock - - 39,765,364 - - 39,765,364
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
Earthwatch Incorporated
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Convertible Convertible Convertible Senior
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 - $ - - $ - - $ -
Issuance of stock in exchange for future
cash contributions and contributions
of property in-kind 8,000,000 14,400,000 - - - -
Contribution of net assets in merger 5,362,285 551,908 - - - -
Issuance of common stock for services
and for stock options exercised - - - - - -
Issuance of preferred stock 5,475,001 21,712,635 189,040 1,890,400 - -
Property in-kind, conversion of debt, and
cash contributions from stockholder - - - - - -
Net loss - - - - - -
----------- ----------- --------- ----------- ----------- -----------
Balance at December 31, 1995 18,837,286 36,664,543 189,040 1,890,400 - -
Restatement of capital stock and additional
paid-in capital for reincorporation as
of January 1, 1996 - (36,645,706) - (1,890,211) - -
Issuance of stock in exchange for property
in-kind and other, net 513,124 513 22,260 22 - -
Issuance of preferred stock - - 100,000 100 7,000,000 7,000
Property in-kind contributed by stockholder - - - - - -
Net loss - - - - - -
----------- ----------- --------- ----------- ----------- -----------
Balance at December 31, 1996 19,350,410 19,350 311,300 311 7,000,000 7,000
Issuance of common stock - - - - - -
Issuance of common stock for services
and for stock options exercised - - - - - -
Issuance of preferred stock - - - - - -
Other - - - - - -
Net gain (loss) - - - - - -
----------- ----------- --------- ----------- ----------- -----------
Balance at December 31, 1997 19,350,410 19,350 311,300 311 7,000,000 7,000
Issuance of preferred and common stock for
stock options exercised 17,916 18 - - - -
Net loss - - - - - -
----------- ----------- --------- ----------- ----------- -----------
Balance at December 31, 1998 19,368,326 19,368 311,300 311 7,000,000 7,000
Issuance of preferred and common stock for
stock options exercised - - - - - -
Issuance of common stock for warrants
exercised - - - - - -
Surrender and cancellation of shares from Ball
Technologies Holdings Corp. (2,761,983) (2,762) - - - -
Reclassification of preferred and common
stock into Series C 8.5% Cumulative
Convertible Redeemable Preferred Stock
Due 2009 in connection with the
recapitalization (16,606,343) (16,606) (311,300) (311) (7,000,000) (7,000)
Issuance of preferred and common stock
in connection with the recapitalization - - - - - -
Issuance of Mandatorily Redeemable preferred
stock in connection with the unit offering - - - - - -
Mandatorily redeemable preferred stock dividends
and accretion - - - - - -
Net loss - - - - - -
----------- ----------- --------- ----------- ----------- -----------
Balance at December 31, 1999 - - - - - -
Issuance of preferred and common stock for
stock options exercised (unaudited) - - - - - -
Mandatorily redeemable preferred stock dividends
and accretion - - - - - -
Net gain (loss) (unaudited) - - - - - -
----------- ----------- --------- ----------- ----------- -----------
Balance at March 31, 2000 (unaudited) - $ - - $ - - $ -
=========== =========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
Earthwatch Incorporated
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Convertible
Series D Additional Stock
Preferred Stock Common Stock Paid-in Subscription
Shares Amount Shares Amount Capital Receivable
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 - $ - - $ - $ - $ -
Issuance of stock in exchange
for future cash contributions
and contributions of property
in-kind - - 1 - - (14,400,000)
Contribution of net assets in merger - - - - - -
Issuance of common stock for services
and for stock options exercised - - 79,500 63,600 - -
Issuance of preferred stock - - - - - -
Property in-kind, conversion of debt,
and cash contributions from
stockholder - - - - - 13,381,523
Net loss - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 - - 79,501 63,600 - (1,018,477)
Restatement of capital stock and
additional paid-in capital for
reincorporation as of
January 1, 1996 - - - (63,521) 38,599,438 -
Issuance of stock in exchange
for property in-kind and other, net - - - - 2,288,561 -
Issuance of preferred stock 400,000 400 - - 69,833,305 -
Property in-kind contributed by stockholder - - - - (25,944) 1,018,477
Net loss - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 400,000 400 79,501 79 110,695,360 -
Issuance of common stock - - - - 1,229,240 -
Issuance of common stock for services
and for stock options exercised - - 69,416 70 55,463 -
Issuance of preferred stock 600,000 600 - - 5,999,400 -
Other - - - - (4,773) -
Net gain (loss) - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 1,000,000 1,000 148,917 149 117,974,690 -
Issuance of preferred and common stock
for stock options exercised - - 54,631 55 50,799 -
Net gain (loss) - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 1,000,000 1,000 203,548 204 118,025,489 -
Issuance of preferred and common
stock for stock options exercised - - 1,000 1 799 -
Issuance of common stock for warrants
exercised - - 1,556,000 1,556 14,004 -
Surrender and cancellation of shares from Ball
Technologies Holdings Corp. - - - - 2,762 -
Reclassification of preferred and common
stock into Series C 8.5% Cumulative
Convertible Redeemable Preferred Stock
Due 2009 in connection with the
recapitalization (1,000,000) (1,000) (1,760,548) (1,761) (39,765,364) -
Issuance of preferred and common stock
in connection with the recapitalization - - 1 - - -
Issuance of Mandatorily Redeemable preferred
stock in connection with the unit offering - - - - - -
Mandatorily redeemable preferred stock dividends
and accretion - - - - - -
Net loss - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 - - 1 - 78,277,690 -
Issuance of preferred and common stock for
stock options exercised (unaudited) - - 44,985 45 11,201 -
Mandatorily redeemable preferred stock dividends
and accretion - - - - - -
Net gain (loss) (unaudited) - - - - - -
---------- ---------- ---------- ---------- ----------- ----------
Balance at March 31, 2000 (unaudited) - $ - 44,986 $ 45 $78,288,891 -
========== ========== ========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<TABLE>
<CAPTION>
Accumulated
Other Total
Comprehensive Accumulated Stockholders'
Income (Loss) (Deficit) Equity (Deficit)
<S> <C> <C> <C>
Balance at January 1, 1995 $ - $ - $ -
Issuance of stock in exchange
for future cash contributions
and contributions of property
in-kind - - -
Contribution of net assets in merger - - 551,908
Issuance of common stock for services
and for stock options exercised - - 63,600
Issuance of preferred stock - - 23,603,035
Property in-kind, conversion of debt,
and cash contributions from
stockholder - - 13,381,523
Net loss - (3,909,208) (3,909,208)
---------- ------------- -------------
Balance at December 31, 1995 - (3,909,208) 33,690,858
Restatement of capital stock and
additional paid-in capital for
reincorporation as of
January 1, 1996 - - -
Issuance of stock in exchange
for property in-kind and other, net - - 2,289,096
Issuance of preferred stock - - 69,840,805
Property in-kind contributed by stockholder - - 992,533
Net loss - (23,706,344) (23,706,344)
---------- ------------- -------------
Balance at December 31, 1996 - (27,615,552) 83,106,948
Issuance of common stock - - 1,229,240
Issuance of common stock for services
and for stock options exercised - - 55,533
Issuance of preferred stock - - 6,000,000
Other - - (4,773)
Net gain (loss) 80,400 (50,730,985) (50,650,585)
---------- ------------- -------------
Balance at December 31, 1997 80,400 (78,346,537) 39,736,363
Issuance of preferred and common stock
for stock options exercised - - 50,872
Net loss (36,971) (12,919,555) (12,956,526)
---------- ------------- -------------
Balance at December 31, 1998 43,429 (91,266,092) 26,830,709
Issuance of preferred and common
stock for stock options exercised - - 800
Issuance of common stock for warrants - - 15,560
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 - - (39,792,042)
Issuance of preferred and common stock
in connection with the recapitalization - - -
Issuance of Mandatorily Redeemable preferred
stock in connection with the unit offering - - -
Mandatorily redeemable preferred stock dividends
and accretion - (6,690,537) (6,690,537)
Net loss (159,382) (20,318,766) (20,478,148)
---------- ------------- -------------
Balance at December 31, 1999 (115,953) (118,275,395) (40,113,658)
Issuance of preferred and common stock for
stock options exercised (unaudited) - - 11,246
Mandatorily redeemable preferred stock dividends
and accretion (unaudited) - (2,809,259) (2,809,259)
Net loss (unaudited) 54,580 (5,371,646) (5,317,066)
---------- ------------- -------------
Balance at March 31, 2000 (unaudited) $ (61,373) $(126,456,300) $ (48,228,737)
========== ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. General Information
EarthWatch Incorporated and its subsidiaries ("EarthWatch" or the
"Company"), a development stage company, was incorporated on September 30,
1994 under the laws of the State of Colorado and, on August 21, 1995, was
reincorporated in the State of Delaware. The Company commenced operations
on March 31, 1995 with the contribution of the net assets of WorldView
Imaging Corporation ("WorldView") and certain assets of Ball Corporation
("Ball") (the "Merger") (See "Note 3--Merger Agreement"). The Company is a
supplier of digital geographic imagery and is building high-resolution
commercial imaging satellites to generate high-quality, direct-to-desktop
digital imagery of the earth's surface. The Company's current and
anticipated customers include utility, real estate, engineering,
transportation, agricultural, and media companies as well as federal, state
and local governments.
Since inception, the Company has incurred considerable losses and is
expected to incur additional losses subsequent to March 31, 2000. The
Company has not yet generated any significant revenues from its imaging
business. Therefore, the Company is considered to be in the development
stage.
2. Summary of Significant Accounting Principles
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany
investments, accounts, and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments, excluding restricted
investment securities, purchased with an original maturity of three months
or less, to be cash equivalents. Cash equivalents are carried at amortized
cost.
Investment Securities
The Company accounts for its investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," which requires that
individual debt and equity securities be classified into one of three
categories: trading, held to maturity, or available for sale. The Company
determines the appropriate classification of investment securities at the
time of purchase and reevaluates such designation at each balance sheet
date.
Property and Equipment
Property and equipment are recorded at cost. Pursuant to SFAS No. 34,
"Capitalization of Interest Cost", the cost of significant assets includes
capitalized interest incurred during the construction and development
period. Depreciation is computed using the straight-line method over the
estimated useful lives of the respective assets (three to seven years).
Leasehold improvements and assets acquired pursuant to capital-lease
obligations are amortized on a straight-line basis over the shorter of
their useful lives or lease terms; such amortization is included in
depreciation expense. Repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets based on
fair values or undiscounted cash flows, in the event fair value is not
readily determinable, whenever events or changes in circumstances occur
which indicate the carrying amount of an asset may not be recoverable.
Impairments are measured using discounted cash flows.
Revenue Recognition
Revenue is primarily derived from the sale of third-party imagery under
contracts to customers. Revenue is also earned processing third-party data,
such as aerial photography, into usable digital imagery. Revenue from these
sales is recognized when the product has been delivered to the customer.
F-6
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Research and Development Costs
The Company records as research and development expense all engineering
costs associated with the design of its satellites where the Company
maintains the risk associated with design failure. Once the satellite
design is stable and not subject to significant modification, engineering
costs are capitalized as investments in satellite equipment.
Advertising Costs
Advertising costs are expensed as incurred and historically have been
immaterial.
Stock-Based Compensation
The Company uses the intrinsic value method of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees to account
for all of its employee stock-based compensation plans. Stock-based
compensation for nonemployees is computed using the fair value method under
SFAS 123, Accounting for Stock-Based Compensation.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable earnings. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
more likely than not to be realized.
Fair Values of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
investment securities, accounts receivable, accounts payable, accrued
liabilities, and debt. The carrying amounts of financial instruments, other
than investments and debt, approximate fair value due to their short-term
maturities. The Company's investment securities were accounted for at fair
value. The carrying amount of debt approximates its fair value based upon
rates currently available for similar instruments.
Concentration of Credit Risk
The Company's cash and cash equivalents and investment securities are
maintained in various financial institutions. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk in this area.
Significant Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenue and
expenses during the periods. Actual results could differ from these
estimates, making it reasonably possible that a change in these estimates
could occur in the near-term.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and hedging activities. SFAS No. 133 requires
the recognition of all derivative instruments as either assets or
liabilities in the statements of financial position and measurement of
those derivative instruments at fair value. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
Currently (and historically), the Company does not hold derivative
instruments or engage in hedging activities. The adoption of this standard
is not expected to have a material effect on the Company's financial
statements.
F-7
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 provides specific guidance, among other things, as to
the recognition of revenue related to up-front non-refundable fees and
service charges received in connection with a contractual arrangement. The
Company does not anticipate that the adoption of SAB 101 will have a
material impact on its financial condition or results of operations.
As of July 1, 2000, FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of Accounting
Principles Board Opinion No. 25," which clarifies certain issues related to
the accounting for stock-based compensation, will apply to the Company. The
adoption of this standard is not expected to have a material effect on the
Company's financial statements.
Unaudited Interim Financial Statements
The accompanying interim consolidated financial statements as of March 31,
2000, the consolidated statements of operations, of cash flows, and of
stockholders' equity for the three-month periods ended March 31, 2000 and
1999, are unaudited. In the opinion of the Company, the unaudited interim
consolidated financial statements have been prepared on the same basis as
the audited consolidated financial statements and reflect all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the results for the interim periods.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting comprehensive income and its components in financial
statements. Comprehensive income includes all changes in equity during a
period from non-owner sources. Total comprehensive loss was $50,650,585,
$12,876,126, and $20,434,719 for the years ended December 31, 1997, 1998,
and 1999, respectively.
Reclassification
Certain items previously reported in specific financial statement captions
have been reclassified to conform to the current presentation.
3. Merger Agreement
On March 31, 1995, Ball and WorldView consummated the Merger pursuant to an
Agreement and Plan of Merger (the "Agreement") which was entered into on
January 25, 1995. Pursuant to this Agreement, the stockholders of WorldView
contributed assets and liabilities of WorldView with a net carrying value
of $551,908 in exchange for 5,362,285 shares of the Company's Series A
preferred stock ("Series A Preferred Stock"). Pursuant to this Agreement,
Ball provided two gimbaled mirror systems in exchange for 875,000 shares of
Series A Preferred Stock; Ball also provided $10,000,000 cash in exchange
for 7,125,000 shares of Series A Preferred Stock. The contributed net
assets were recorded by the Company at amounts equal to Ball's and
WorldView's basis in such net assets.
4. Investment Securities
In connection with the issuance of the 12 1/2% senior notes (the "Senior
Notes"), due March 1, 2001, the Company purchased U.S. Treasury notes to be
held in escrow as security for the first six semi-annual interest payments
on the Notes. During the third quarter of 1999, these securities were
released from escrow in connection with the exchange for 12 1/2% notes due
March 1, 2005. During the first quarter of 2000, they were sold and
converted to cash.
F-8
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross
Unrealized
Investment Securities Cost Gains (Losses) Fair Value
--------------------- ---- -------------- ----------
<S> <C> <C> <C>
U.S. Government securities as of December 31, 1998:
Maturing in one year or less..................................... (none) (none) (none)
========== ============= ==========
U.S. Government securities as of December 31, 1999:
Maturing in one year or less..................................... $3,078,360 ($51,880) $3,026,480
========== ============= ==========
U.S. Government securities as of March 31, 2000:
Maturing in one year or less..................................... (none) (none) (none)
========== ============= ==========
</TABLE>
In connection with the issuance of the 13% senior discount notes (the
"Senior Discount Notes"), the Company purchased U.S. Treasury notes to be
held in escrow as security for the premiums on the launch insurance on the
QuickBird 1 satellite.
<TABLE>
<CAPTION>
Gross
Unrealized
Investment Securities - Restricted Cost Gains (Losses) Fair Value
---------------------------------- ---- -------------- -----------
<S> <C> <C> <C>
U.S. Government securities as of December 31, 1998:
Maturing in one year or less........................................... $ 6,642,610 $ 21,737 $ 6,664,347
Maturing in more than one year......................................... 3,041,587 21,692 3,063,279
----------- --------- -----------
$ 9,684,197 $ 43,429 $ 9,727,626
=========== ========= ===========
U.S. Government securities as of December 31, 1999:
Maturing in one year or less........................................... $28,438,921 ($64,073) $28,374,848
=========== ========= ===========
U.S. Government securities as of March 31, 2000:
Maturing in one year or less........................................... $28,702,415 ($61,373) $28,641,042
=========== ========= ===========
</TABLE>
5. Construction In Progress and Loss from Impairment of Fixed Assets
Construction in progress consists primarily of satellite construction and
launch costs, ground station construction costs, and third-party developed
software. Construction in progress consisted of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999 March 31, 2000
----------------- ----------------- --------------
<S> <C> <C> <C>
QuickBird satellites $58,063,457 $125,414,700 $139,798,406
Digital Globe software 477,315 14,809,982 19,653,719
Ground station equipment 1,155,365 3,492,280 3,768,178
----------- ------------ ------------
$59,696,137 $143,716,962 $163,220,303
=========== ============ ============
</TABLE>
During the year-ended December 31, 1998, the Company determined that
certain software would not be used with the QuickBird satellite system.
Accordingly, the total accumulated development costs of $599,000 are
included in the Statement of Operations as a loss from impairment of fixed
assets for the year ended December 31, 1998.
F-9
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
On December 24, 1997, the EarlyBird 1 satellite was successfully launched
from the Svobodny Cosmodrome. Four days later, on December 28, 1997, the
Company's mission operations center lost contact with the satellite. After
several weeks of continued unsuccessful efforts to contact EarlyBird 1,
management determined that the satellite was lost and filed a proof of loss
claim with the Company's insurance carriers. Due to the uncertainty related
to the performance of EarlyBird 2 and the costs necessary to complete and
launch this second satellite, the Company determined that it would not plan
a future launch of EarlyBird 2. Accordingly, as of December 31, 1997, the
total accumulated construction costs for the EarlyBird satellite program,
including EarlyBird 1, EarlyBird 2, and related ground equipment were
included in the Statement of Operations as a $25.5 million loss from
impairment of fixed assets, net of the expected insurance proceeds
receivable of $29 million.
6. Debt
12 1/2% Senior Notes and Warrant Issuance
On March 19, 1997, the Company issued $50,000,000 in Senior Notes
representing 50,000 units. Each Unit included one warrant (the "Warrants")
to purchase 31.12 shares of Common Stock at an exercise price of $0.01 per
share, subject to adjustment. The Senior Notes rank pari passu in right of
payment with all existing and future unsubordinated unsecured indebtedness
of the Company.
Recapitalization
In April 1999, the Company amended and restated the Senior Notes Indenture,
dated as of March 1997. Under the amended and restated Senior Notes
Indenture, the new senior notes (the "New Senior Notes") replaced the
Senior Notes, extending the maturity from March 1, 2001 to March 1, 2005,
and the indenture trustee for the Senior Notes authorized the release of
all collateral securing the Senior Notes upon the securing of the New
Senior Notes with the proceeds of satellite insurance for QuickBird 1. The
Company is to accrete the next six semi-annual interest payments, which
will result in an increase of the principal of the securities to $72
million. The interest rate remains at 12 1/2%. The Company recorded an
additional discount on the notes equal to the difference between the
current principal balance and the principal balance at maturity.
13% Senior Discount Notes and Series C 8 1/2% Convertible Redeemable
Preferred Stock Issuance
On July 12, 1999, the Company received $136,237,390 gross proceeds from a
debt and equity offering. This offering represented 199,000 units, each of
which consisted of one Senior Discount Note due July 15, 2007 ("Senior
Discount Note") and 49.095 shares of the Company's Series C 8 1/2%
Cumulative Convertible Redeemable Preferred Stock ("Series C Convertible
Preferred Stock"). Each note had an initial accreted value of $684.61 and
has a principal amount at maturity of $1,000.00. The Senior Discount Notes
do not begin to accrue cash interest until July 15, 2002. Beginning on
January 15, 2003, interest will be payable on January 15 and July 15 of
each year. The Company may redeem any of the Senior Discount Notes
beginning on July 15, 2004. Issuance costs of $6.0 million were incurred in
connection with the issuance of the units. Of these costs, $4.5 million
were allocated to the Senior Discount Notes and $1.5 million were allocated
to the Series C Convertible Preferred Stock. The Company allocated the
gross proceeds between the debt and equity securities issued using their
relative fair values. This allocation resulted in additional debt discount
of $34,195,000.
The Company is obligated to use its best efforts to consummate an exchange
offer for the Senior Discount Notes by August 15, 2000 or to cause a
registration statement with respect to the resales of the Senior Discount
Notes to be declared effective as soon as practicable after that time.
Prior to that time, the Senior Discount Notes are designated as eligible
for trading in private offerings, resales, and trading through automated
linkages, or the PORTAL market.
The Senior Discount Notes rank equally with the other unsubordinated
indebtedness of the Company. The Senior Discount Notes will be senior to
any subordinated indebtedness of the Company. The notes will be secured by
an interest in insurance proceeds that the Company receives in the event of
a loss or substantial impairment of its planned QuickBird 1 satellite.
F-10
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
The Company's long-term debt and capital-lease obligations are comprised of
the following:
<TABLE>
<CAPTION>
December 31, December 31, March 31,
------------- ------------- -------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
13% Senior Discount Notes, net of unamortized discount of $0,
$86,681,504, and $81,189,953, respectively, effective rate of 15.9%.... $ -- $112,318,496 $117,810,047
12 1/2% Senior Notes, net of unamortized discount of $669,944,
$17,321,394, and $15,714,423, respectively............................. 49,330,056 54,678,606 56,285,577
Capital-lease obligations.............................................. 473,953 151,031 120,868
----------- ------------ ------------
49,804,009 167,148,133 174,216,492
Less: current portion.................................................. (242,189) (92,743) (77,011)
----------- ------------ ------------
$49,561,820 $167,055,390 $174,139,481
=========== ============ ============
</TABLE>
Future payments under debt and capital-lease obligations are summarized
below:
<TABLE>
<S> <C>
2000 $ 103,120
2001 59,001
2002 - 2004 74,240,000
Thereafter 353,110,000
-------------
Total minimum debt and lease payments 427,512,121
Less: amounts representing interest (156,361,090)
-------------
Present value of minimum debt and lease payments 271,151,031
Less: current portion (92,743)
-------------
Long-term portion $ 271,058,288
=============
</TABLE>
7. Stockholders' Equity
In conjunction with the Company's reincorporation in Delaware on August 21,
1995, the Company changed the par value of its outstanding common stock
("Common Stock") and all convertible preferred stock from no par value to a
par value of $0.001.
Recapitalization
A special meeting of the Company's stockholders was called in April 1999 to
discuss a preferred stock financing and recapitalization of the Company.
The stockholders approved and adopted an Amended and Restated Certificate
of Incorporation and a Recapitalization Agreement, which resulted in three
new series of EarthWatch Preferred Stock. At the closing, shares of the
Company's new Series A 7% Cumulative Convertible Redeemable Preferred Stock
("Series A Convertible Preferred Stock") and Series B 7% Cumulative
Convertible Redeemable Preferred Stock ("Series B Convertible Preferred
Stock") and new Common Stock were sold and issued for an aggregate cash
payment of $50,000,000. In accordance with the Recapitalization Agreement,
all outstanding shares of Common Stock and former Series A, B, C, and D
preferred stock were exchanged (at a 1 to .44116 ratio for all outstanding
Preferred Stock and at a 1 to .210202 ratio for all outstanding Common
Stock) for an aggregate of 11,042,075 shares of Series C Convertible
Preferred Stock.
Additional Funding
As discussed in Note 6--Debt, 199,000 units, each of which consisted of one
Senior Discount Note and 49.095 shares of Series C Convertible Preferred
Stock were issued in July 1999.
Description of EarthWatch Stock
The following description summarizes certain terms of the Company's capital
stock and certain provisions of the Company's amended and restated
certificate of incorporation and bylaws.
F-11
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Old Series A and B Convertible Preferred Stock
Each share of Series A Convertible Preferred Stock (the "Old Series A
Preferred Stock") and Series B Convertible Preferred Stock (the "Old Series
B Preferred Stock") was, as of December 31, 1998, convertible into one
share of Common Stock, subject to future adjustment in the event of
recapitalizations or dividends of Common Stock. The holders of Old Series A
Preferred Stock had the contractual right to receive additional shares upon
certain issuances of stock for a price less than $4.00 per share. The
conversion ratio of Old Series B Preferred Stock was subject to adjustment
upon certain issuances of stock for a price less than $10.00 per share.
All Old Series A and B Preferred Stock, by their terms, were convertible at
the option of the holder at any time and converted into Common Stock
simultaneously upon an initial public offering with gross proceeds of at
least $5,000,000 or with the written notice to the Company from holders of
a majority of the outstanding shares of either of the two series of
participating preferred stock consenting thereto. Upon conversion, all
accrued and unpaid dividends, whether or not declared, were canceled.
All Old Series A and B Preferred Stock were voting and had liquidation
preferences (Old Series A Stock and Series B Stock at $4.00 and $10.00 per
share, respectively, plus an amount equal to all declared but unpaid
dividends on each share).
When, and only if, dividends were declared by the Company's Board of
Directors, the Series A Stock and Series B Stock participated pari passu
and had a right to receive dividends of $0.32 per share per annum prior to
any dividends paid to holders of Common Stock. Upon the distribution to
each common stockholder of an amount per share equal to $4.00 divided by
the Old Series A Stock conversion ratio, the Old Series A Stock, Old Series
B Stock, and Common Stock shared in any remaining liquidation distributions
on a pro rata as-converted basis.
Old Series C Senior Convertible Preferred Stock Issuance
On April 30, 1996, the Company issued 7,000,000 shares of 12% Series C
Convertible Senior Preferred Stock (the "Old Series C Preferred Stock") at
a price of $10.00 per share. Holders of the Old Series C Preferred Stock
were entitled to dividends at an annual rate of 12% of the accreted
liquidation preference on a quarterly basis commencing June 30, 1996. All
unpaid dividends compounded quarterly at the annual dividend rate. The
Company did not declare or pay in cash the dividends accrued as of December
31, 1998. Accordingly, the liquidation preference increased from $10.00 to
$13.72 per share as of December 31, 1998.
Each share of Old Series C Preferred Stock was convertible, at the option
of the holder, at any time into one share of Common Stock of the Company,
subject to adjustment in certain events. Accrued and unpaid dividends may
be converted concurrently with the conversion of the Old Series C Preferred
Stock, at the option of the holder only upon certain events, at a
conversion price equal to 85% of the market price of the Company's Common
Stock.
Old Series D Convertible Preferred Stock
The Old Series D Convertible Preferred Stock (the "Old Series D Preferred
Stock") had the same terms as the Old Series B Stock but excluded anti-
dilution protection.
Series A and Series B Convertible Preferred Stock
As of March 31, 2000, there were 7,642,955 shares of Series A Convertible
Preferred Stock outstanding held of record by one stockholder and 7,642,955
shares of Series B Convertible Preferred Stock outstanding held of record
by six stockholders.
Except with respect to the voting rights and representation on the board of
directors, the Company's Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock are identical in all respects.
F-12
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Rank. Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock are pari passu and rank senior to Series C Convertible
Preferred Stock and Common Stock with respect to dividends, liquidation
preference, and redemption.
Dividends. The holders of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock are entitled to receive cumulative dividends,
whether or not declared by the Company's board of directors, at an annual
rate of 7% until no later than June 15, 2002. Such dividends are payable
quarterly on March 31, June 30, September 30, and December 31, and
commenced on June 30, 1999. Such dividends may be paid, subject to certain
limitations, at the Company's option, either in cash or in additional
shares of Series A Convertible Preferred Stock or Series B Convertible
Preferred Stock, as applicable, until June 15, 2002. After June 15, 2002,
dividends will accrue at an annual rate of 7% of the liquidation preference
and will be payable, when, as, and if declared by the board of directors,
in cash only. If any dividend is not paid in full in cash on a quarterly
payment date after June 15, 2002, the liquidation preference of the Series
A Convertible Preferred Stock and Series B Convertible Preferred Stock will
be increased by an amount equal to the product of (a) the amount per share
not paid divided by the total amount payable per share and (b) one quarter
of the dividend rate multiplied by the effective liquidation preference.
The Company is prohibited from paying dividends on any shares of stock
having rights junior to the Series A and Series B Convertible Preferred
Stock until all accumulated dividends have been paid on the Series A and
Series B Convertible Preferred Stock.
Liquidation Preference. Upon liquidation, dissolution, or winding up, the
holders of Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock will be entitled to receive out of the assets available for
distribution prior to and in preference of the Series C Convertible
Preferred Stock, an amount equal to $3.50 per share, plus all accrued and
unpaid dividends, subject to adjustment.
Conversion. From June 15, 1999 and until June 15, 2002, each share of
Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock is convertible at the option of the holder into that number of shares
of Common Stock obtained by dividing the applicable liquidation preference,
plus any accumulated but unpaid dividends by $3.50, subject to anti-
dilution adjustments. Prior to June 15, 2002, each share of Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock will
automatically convert into Common Stock at the applicable conversion ratio
upon the earlier of (a) an initial public offering of shares of Common
Stock with an aggregate public offering price of at least $35,000,000 and
(b) the listing of shares of the Company's Common Stock under certain
circumstances. After June 15, 2002, each share of Series A Preferred Stock
and Series B Preferred Stock shall not be convertible into common
stock.
Anti-dilution. The conversion price of the Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock is subject to adjustment
under certain circumstances, including upon any subsequent issuance of
capital stock. The issuance of the Series C Convertible Preferred Stock
resulted in an adjustment in the conversion prices of the Series A and
Series B Convertible Preferred Stock.
Redemption. The Company is required to redeem all of the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock
outstanding on March 31, 2009, at a redemption price equal to 100% of the
then existing applicable liquidation preference, plus accrued and unpaid
dividends to the date of redemption, subject to the legal availability of
funds.
Voting Rights. Each holder of Series A Convertible Preferred Stock is
entitled to .65 (subject to adjustment) votes per share held (on an as-
converted basis) and each holder of Series B Convertible Preferred Stock is
entitled to 1.35 (subject to adjustment) votes per share held (on an as-
converted basis).
Board Representation. The holders of Series A Convertible Preferred Stock
have the right to elect two persons to the board of directors and the
holders of the Series B Convertible Preferred Stock have the right to elect
four persons to the board of directors.
Series C Convertible Preferred Stock
Rank. The Series C Convertible Preferred Stock is junior to the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock, but
senior to the Common Stock, with respect to dividends, liquidation
preference, and redemption.
F-13
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Dividends. The holders of Series C Convertible Preferred Stock are entitled
to cumulative dividends, whether or not declared by the board of directors,
at an annual rate of 8.5% until no later than June 15, 2002. Such dividends
are payable quarterly on March 31, June 30, September 30, and December 31,
and commenced on June 30, 1999. Until June 15, 2002, such dividends may be
paid, subject to certain limitations, at the Company's option, either in
cash or in additional shares of Series C Convertible Preferred Stock. After
June 15, 2002, dividends will accrue at an annual rate of 8.5% of the
liquidation preference and will be payable, when, as, and if declared by
the board of directors, in cash only. If any dividend is not paid in full
in cash on a quarterly payment date after June 15, 2002, the liquidation
preference of the Series C Convertible Preferred Stock will be increased by
an amount equal to the product of (a) the amount per share not paid divided
by the total amount payable per share and (b) one quarter of the dividend
rate multiplied by the effective liquidation preference. The Company is
prohibited from paying dividends on any shares of stock having rights
junior to the Series C Convertible Preferred Stock until all accumulated
dividends have been paid on the Series C Convertible Preferred Stock.
Liquidation Preference. Upon liquidation, dissolution, or winding up, the
holders of the Series C Convertible Preferred Stock will be entitled to
receive out of the assets available for distribution, following payment of
the Series A and Series B liquidation preference, an amount equal to $3.50
per share, plus all accrued and unpaid dividends, subject to adjustment.
Conversion. Until June 15, 2002, each share of Series C Convertible
Preferred Stock will be convertible at the option of the holder into that
number of shares of Common Stock obtained by dividing the Series C
liquidation preference, plus any accumulated but unpaid dividends by $3.50,
subject to anti-dilution adjustments. Prior to June 15, 2002, each share of
Series C Convertible Preferred Stock will automatically convert into Common
Stock at the applicable conversion ratio upon the earlier of (a) an initial
public offering of shares of Common Stock with an aggregate public offering
price of at least $35,000,000 and (b) the listing of shares of the
Company's Common Stock under certain circumstances. After June 15, 2002,
each share of Series C preferred stock shall not be convertible into common
stock.
Antidilution. The conversion price of the Series C Convertible Preferred
Stock is subject to adjustment under certain circumstances.
Redemption. The Company is required to redeem all of the Series C
Convertible Preferred Stock outstanding on March 31, 2009, at a redemption
price equal to 100% of the effective liquidation preference, plus accrued
and unpaid dividends to the date of redemption, subject to the legal
availability of funds therefor.
Voting Rights. Each holder of EarthWatch Series C Convertible Preferred
Stock is entitled to one (subject to adjustment) vote per share on an "as-
converted" basis.
Board Representation. The holders of the Series C Convertible Preferred
Stock are entitled to elect three members of the board of directors.
Tag-along Rights. If one stockholder or a group of stockholders proposes to
sell any shares of capital stock in one transaction such that, following
such sale, shares of capital stock representing more than 35% of the then
outstanding shares (on a fully-diluted basis) will have been sold to one
holder or a group of related holders, then each holder of Series C
Convertible Preferred Stock shall have the right to receive notice of such
a transaction and shall also have the right to participate in the
transaction and sell a proportionate number of such holders' Series C
Convertible Preferred Stock in such transaction.
Common Stock
Holders of Common Stock are entitled to one vote for each share held of
record at all meetings of the stockholders. Holders of Common Stock are not
entitled to cumulative voting rights with respect to the election of
directors. Subject to preferences that are applicable to outstanding shares
of preferred stock, holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the board of directors out of funds
legally available to be paid.
In the event of a liquidation, dissolution, or winding up, holders of
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of the outstanding
preferred stock. Holders of Common Stock have no preemptive rights and no
right to convert their Common Stock into any other securities. There are no
redemption provisions applicable to the Common Stock. The outstanding
shares of Common Stock are fully paid and nonassessable.
F-14
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
8. Stock Options
The Company maintains a 1995 Stock Option/Stock Issuance Plan (the "95
Plan") pursuant to which incentive and nonqualified stock options to
purchase shares of the Company's stock or the stock itself may be issued to
employees, officers, directors, and consultants. Under the 95 Plan,
incentive stock options are granted at an exercise price not less than the
fair value of the stock on the date of grant, as determined by the
Company's Board of Directors. Options granted pursuant to the 95 Plan are
subject to certain terms and conditions as contained in the 95 Plan itself,
generally vest over a four-year period, and are immediately exercisable.
Upon termination of services to the Company by the optionee, any exercised
but unvested shares are subject to repurchase by the Company at the
original exercise price. During 1999, the Board of Directors amended the 95
Plan eliminating future grants.
In conjunction with the Recapitalization Agreement in 1999, all outstanding
options were exchanged for new replacement options for the purchase of
Series C Convertible Preferred Stock. The replacement options were granted
with terms substantially equivalent to the options they were replacing,
except that the exercise prices and number of shares were converted using
the same exchange ratios used in the Recapitalization Agreement for
outstanding shares.
Had compensation expense for the Company's stock options been determined
based on the fair values at the grant dates for awards under the plan
consistent with the method of accounting prescribed by SFAS No. 123,
Accounting for Stock-based Compensation, the Company's net loss for the
current period would have been as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $(50,730,985) $(12,919,555) $(20,318,766)
Net loss - pro forma (50,813,468) (13,029,611) (20,396,318)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 0.00% 0.00% 0.00%
Risk free interest rate 5.80% - 6.76% 5.27% - 5.63% 4.60% - 5.14%
Expected life of options (years) 5.00 4.42 5.00
</TABLE>
The weighted-average fair values of options granted during 1997, 1998, and
1999 were $0.21, $0.17, and $0.94 per share, respectively. The weighted-
average remaining contractual life of outstanding options is approximately
seven years.
F-15
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Changes during 1997, 1998, and 1999 in options outstanding were as follows:
<TABLE>
<CAPTION>
Number Weighted- Number Weighted- Number Weighted-
of Series A Average of Common Average of Series C Average
Preferred Exercise Stock Exercise Preferred Exercise
Shares (1) Price Shares (1) Price Shares (1) Prices
---------- ----- ---------- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1997 37,800 $0.05 1,158,300 $0.80
Options granted - 620,295 0.80
Exercised - (10,282) 0.80
Expire - (117,571) 0.80
---------- -----
Outstanding at December 31, 1997 37,800 0.05 1,650,742 0.80
Options granted - 798,655 0.80
Exercised (17,916) 0.05 (54,631) 0.80
Expired or terminated (2,084) 0.05 (1,019,595) 0.80
------- ----- ---------- -----
Outstanding at December 31, 1998 17,800 0.05 1,375,171 0.80 -
As converted (17,800) 0.05 (1,375,171) 0.80 296,916 $3.71
Adjustment for conversion rounding (5) 3.71
Options granted 12,297 3.71
Exercised (5,025) 3.71
Expired or terminated (10,859) 3.71
------- -----
Outstanding at December 31, 1999 293,324 3.71
======= =====
Outstanding options vested 192,716
Available for grant at December 31, 1999 0
</TABLE>
(1) As converted to Series C Convertible Preferred in April 1999.
On February 15, 2000, the Board of Directors approved the written 1999
Equity Incentive Plan. Options for 2,352,388 shares of Common Stock were
issued to EarthWatch employees shortly thereafter with an exercise price of
$0.25 per share.
Stock Warrants
As of December 31, 1999, the Company had outstanding warrants exercisable
for the purchase of 12,462.8 shares of new Series C Convertible Preferred
Stock, as converted from 28,250 shares of Series A Stock. The warrants are
exercisable at $1.00 per share through May 27, 2001. In addition, warrants
were issued in connection with the 12 1/2% Senior Notes and were exercised
for the purchase of 1,556,000 shares of Common Stock in connection with the
recapitalization and restructuring of the debt (See "Note 6--Debt").
9. Income Taxes
At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $89,027,000. If unused, the
carryforwards will expire beginning in 2010. The Internal Revenue code
places certain limitations on the annual amount of net operating loss
carryforwards which can be utilized if certain changes in the Company's
ownership occurs. Changes in the Company's ownership may limit the use of
such carryforward benefits.
F-16
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
The Company's deferred tax assets are comprised of the following as of
December 31:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 31,039,655 $ 33,762,887
Satellite asset write-off 4,827,914 4,827,914
Research credit carryforward 988,788 988,788
Accrued vacation benefits 108,142 207,098
Accelerated depreciation 112,876 42,858
Other 255,883 445,109
------------ ------------
Gross deferred tax assets 37,333,258 40,284,654
Valuation allowance (37,333,258) (40,284,654)
------------ ------------
Net deferred tax assets $ -0- $ -0-
============ ============
</TABLE>
Net deferred tax assets have been reduced to zero by a valuation allowance
based on current evidence which indicates that it is considered more likely
than not that these benefits will not be realized.
The following is a reconciliation of the statutory U.S. Federal income tax
rate to the Company's effective income tax rate of continuing operations:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate 34.0% 34.0% 34.0%
State income tax rate, net of federal benefit 5.0 5.0 5.0
Meals and entertainment (0.2) (0.5) (0.2)
Disqualified interest (17.1) - -
Effect of change in valuation allowance and other items (21.7) (38.5) (38.8)
------ ------ ------
Effective income tax rate -% - % -%
====== ====== ======
Additions to valuation allowance $(20.6) $ (5.2) $ (3.0)
------ ------ ------
</TABLE>
10. Benefit Plan
In October 1995, the Company adopted a 401k Savings and Retirement Plan
(the "401k Plan"), a tax-qualified plan covering all of its employees.
Employees may elect to contribute, subject to certain limitations, up to
15% of their annual compensation to the 401k Plan. The 401k Plan provides
that the Company may contribute matching or additional contributions to the
401k Plan at the discretion of the Board of Directors. The Company did not
make any contributions to the 401k Plan in 1997, 1998, or 1999, or during
the first quarter of 2000.
11. Commitments
Operating Leases
The Company leases its facilities under various operating lease
arrangements. Future minimum lease payments under noncancelable leases as
of December 31, 1999 are summarized below:
F-17
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
2000 $ 617,897
2001 146,220
2002 133,278
2003 120,336
2004 and thereafter 120,792
----------
Total minimum lease payments $1,138,523
==========
Rent expense relating to the operating leases approximated $1,230,000,
$988,422, and $888,305 for the years ended December 31, 1997, 1998, and
1999, respectively.
Major Contracts
Ball Aerospace & Technologies Corp. Contract
In March 1996, the Company entered into a labor hour contract with Ball
Aerospace & Technologies Corp. ("Ball Aerospace"), for the provision of
engineering services in support of the various tasks associated with the
spacecraft as identified and authorized by the Company. This contract is
currently in full force and effect. During the year ended December 31,
1997, the Company made payments to Ball Aerospace totaling $22,287,707
under this contract.
Effective October 14, 1997 in conjunction with the settlement of a letter
contract for the design and manufacture of QuickBird 1 & 2, the Company
entered into an agreement with Ball Aerospace granting the Company an
option to purchase either one or two 1-meter QuickBird spacecraft at
varying contract amounts, depending on the timing of the Company's exercise
of that option. Under the agreement, Ball Aerospace is permitted to sell
spacecraft based on the QuickBird design to third parties under certain
circumstances. Ball Aerospace did not perform any work under the agreement
from October 1997 through May 1998, and the Company did not make any
payments to Ball Aerospace during that time. Pursuant to the terms of the
agreement, the Company issued to Ball Aerospace a promissory note in the
principal amount of approximately $1.6 million; the Company repaid all
obligations outstanding under the note in full on May 15, 1998.
Effective June 9, 1998, upon the expiration of the Ball Aerospace
agreement, the Company entered into a new agreement with Ball Aerospace,
which was amended on February 16, 1999. This agreement restarted work on
the QuickBird 1, with a total fixed cost of $33.8 million and allowed the
Company to exercise an option until March 15, 1999 to purchase a second
QuickBird satellite at a cost of $31.1 million. During the years ended
December 31, 1998 and 1999, the Company made payments to Ball Aerospace
totaling $9,976,000 and $33,455,000 under this contract.
Eastman Kodak Company Agreement
During October 1996, the Company and Eastman Kodak Company ("Kodak")
entered into an agreement for the QuickBird Sensor Subsystem. Under this
agreement, Kodak will provide the necessary resources for the definition,
design, production, integration, test, and verification of one Sensor
Subsystem and critical parts required for a second Sensor Subsystem. The
contract also includes an option for completion of the second Sensor
Subsystem. In return, the Company will pay Kodak amounts totaling
approximately $18,215,950 based upon the accomplishment of specific program
milestones.
In April 1997, the Company exercised an option with Kodak to begin work on
the second Sensor Subsystem, increasing the total contractual value to
$24,840,950. During the third quarter of 1997, this agreement was amended
to significantly reduce the scheduled level of effort for the period from
August 1997 to February 1998.
In March 1998, the Company and Kodak agreed to a restart of the first
Sensor Subsystem with a total value of $21,700,000 and an option for the
second. In December 1998, the Company exercised the option for the second
subsystem.
F-18
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
This increased the total contract value to $26,900,000, of which
$5,456,580, $4,325,000, and $5,994,891 have been paid during the years
ending December 31, 1997, 1998, and 1999, respectively.
The first sensor subsystem was delivered in July 1999. The second sensor
subsystem was delivered in June 2000.
Fokker Contract
In September 1997, the Company signed an agreement with Fokker Space B.V.
("Fokker") for two solar array assemblies in connection with the QuickBird
satellite program. The fixed price for this contract is $7,651,000 plus
financing charges. During 1998, the Company sold the first assembly to Ball
Aerospace at a price equal to the Company's cost in the assembly. The
Company has included $712,700 in accounts payable as of December 31, 1999
relating to the services performed by Fokker.
In February 1999, the Company and Fokker signed a contract for the
fabrication of a third solar array, which will be used for QuickBird 2. The
contract price is $3,300,000. The array is scheduled for delivery in
September 2000. Amounts totaling $500,000, $3,746,578, and $4,415,459 have
been paid during the years ending December 31, 1997, 1998, and 1999,
respectively.
ITT Industries, Inc. Transactions
In December 1998, the Company entered into various contracts with the ITT
Systems division of ITT Industries, Inc. for system engineering and other
efforts associated with the scheduling and tasking module of the QuickBird
satellite and the development of a satellite simulator. The current value
of these contracts is $4,099,867 and $441,471.
In June 1999, EarthWatch entered into a contract relating to a study of a
sensor to determine, among other things, the current state of the art of
sensor technology, the advantages and disadvantages possessed by the
various technologies, and the feasibility of the various sensor
technologies. The value of this effort is $204,911.
Kearfott Guidance & Navigation Corporation
In March 2000, the Company entered into an incentive agreement with the
Kearfott Guidance & Navigation Corporation relating to the purchase order
00RDK00188 with Ball Aerospace and Technologies Corporation to deliver
three Two Axis Rate Assemblies ("TARAs") on or before July 31, 2000. These
TARAs were received on June 18, 2000 and the Company paid Kearfott one
million dollars for early delivery.
MDA Contract
During June 1996, the Company and MacDonald Dettwiler and Associates
("MDA") entered into an agreement whereby the Company agreed to purchase a
total of $6,800,000 in goods and services from MDA. As of December 31,
1999, the Company has included $307,016 in accounts payable for goods and
services from MDA. Amounts totaling $997,225, $322,102, and $3,091,653 have
been paid during the years ending December 31, 1997, 1998, and 1999,
respectively.
NASA - Earth Science Enterprise Contract
In September 1998, the Company entered into a contract with National
Aeronautics and Space Administration ("NASA") for the supply of data sets
through delivery orders. Contract maximum value is $9,900,000. A formal
Delivery Order was received from NASA with a value of $6,202,900. The
Company recognized $557,700 and $5,120,286 in revenue under this contract
during the years ended December 31, 1998 and 1999, respectively.
NIMA - Commercial Imagery Infrastructure/Data Buy
The Company entered into a contract with National Imagery Mapping Agency
("NIMA") for the development and/or enhancement of the Company's
infrastructure to facilitate delivery of metadata, imagery products, and
wideband imagery data to NIMA, and to provide, upon receipt of a delivery
order, metadata, imagery, and wideband imagery products. The current
minimum value of the contract is $2,353,500 with a maximum not to exceed
value of $100,000,000. The Company recognized $546,675 in revenue under
this contract for the year ended December 31, 1999.
F-19
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
STC Contract
In July 1997, the Company and Scientific and Technological Center ("STC
Complex") entered into a contract whereby STC will provide launch and
associated services for the dormant EarlyBird 2 satellite. The Company can
terminate this contract without any additional liability at any time.
United Start Contract
The Company has an agreement with United Start Corporation ("United
Start"), whereby United Start would provide launch and associated services
for the QuickBird 1 satellite launch before November 30, 2001. The Company
is to provide a combination of archival data and cash totaling $14,000,000
over the term of the contract. The Company has included $1,850,000 in
accounts payable as of December 31, 1999. The Company has paid $153,559 and
$3,335,334 during the years ending December 31, 1998 and 1999,
respectively.
12. Summary of Activity by Geographical Area
($ in Millions)
Net Sales U.S. Other Consolidated
--------- ---- ----- ------------
Cumulative since inception $ 15,070.6 $ - $ 15,070.6
1997 436.9 - 436.9
1998 1,808.6 - 1,808.6
1999 5,913.3 - 5,913.3
Long-Lived Assets U.S. Other Consolidated
----------------- ---- ----- ------------
1998 $ 74,625.3 $1,678.3 $ 76,303.6
1999 161,093.6 1,678.3 162,771.9
13. Restatement
Subsequent to the issuance of the Company's consolidated financial
statements for the fiscal year ended December 31, 1999 and the unaudited
three-month period ended March 31, 2000, it was determined that the
reported dividends and accretion on the Company's mandatorily redeemable
preferred stock were incorrectly recorded. As a result, the accompanying
consolidated financial statements have been restated using the correct
amounts. A summary of the effects of the restatement follows:
<TABLE>
<CAPTION>
As of or for the period ended (in millions)
----------------------------------------------------------
December 31, 1999 March 31, 2000
-------------------------- --------------------------
Previously Previously
reported Restated reported Restated
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mandatorily redeemable preferred stock: (Unaudited)
7% Cumulative convertible - Series A $ 24.1 $ 25.5 $ 24.1 $ 26.0
7% Cumulative convertible - Series B 24.1 25.5 24.1 26.0
8.5% Cumulative convertible - Series C 75.1 79.0 75.1 80.8
Accumulated deficit 111.7 118.3 117.1 126.5
Stockholders' equity (deficit) (33.5) (40.1) (38.9) (48.2)
Net loss attributable to common stockholders (20.4) (27.0) (5.4) (8.2)
</TABLE>
In addition, the unaudited net loss attributable to common stockholders for
the period from March 31, 1995 (inception) to March 31, 2000 would have
increased from $117.1 million to $126.5 million.
F-20
