<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 [_] No [X]
As of June 30, 2000, there were outstanding 169,986 shares of the
registrant's common stock, par value $.001 per share.
================================================================================
<PAGE>
INDEX
Part I--Financial Information
Item 1. Financial statements
Consolidated balance sheet 1
Consolidated statement of operations 2
Consolidated statement of cash flows 3
Consolidated statement of stockholders' equity (deficit) 4
Notes to consolidated financial statements 5
Item 2. Management's discussion and analysis of financial
condition and results of operations 7
Item 3. Quantitative and qualitative disclosures about market risk 11
Part II--Other Information
Item 2. Changes in Securities and Use of Proceeds 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
Part I
Financial Information
Item 1. Financial Statements
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Balance Sheet
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 82,193,314 $ 45,690,358
Accounts receivable, net of allowance of $90,646 and $35,004 at
December 31, 1999 and June 30, 2000, respectively 768,029 309,830
Investment securities 3,026,480 --
Investment securities - restricted 28,374,848 29,121,327
Other assets 968,769 204,309
------------- -------------
Total current assets 115,331,440 75,325,824
------------- -------------
Property, plant, and equipment:
Construction in progress 143,716,962 181,168,137
Computer equipment and software 12,275,986 14,954,281
Machinery and equipment 5,665,918 5,792,903
Furniture and fixtures 1,113,073 1,264,488
------------- -------------
Total property, plant, and equipment 162,771,939 203,179,809
Accumulated depreciation (12,031,861) (13,859,345)
------------- -------------
Property, plant, and equipment, net 150,740,078 189,320,464
------------- -------------
Debt issuance costs, net 5,069,065 4,711,309
Other assets 328,537 312,682
------------- -------------
Total assets $ 271,469,120 $ 269,670,279
============= =============
Liabilities, Mandatorily Redeemable Preferred Stock,
and Stockholders' Equity (Deficit)
Liabilities
Current liabilities:
Accounts payable $ 12,307,440 $ 7,515,225
Accounts payable to related parties 645,464 2,362,853
Accrued expenses 1,103,408 528,776
Deferred revenue 400,000 400,000
Current portion of long-term debt 92,743 72,308
------------- -------------
Total current liabilities 14,549,055 10,879,162
Long-term debt, net 167,055,390 181,223,473
------------- -------------
Total liabilities 181,604,445 192,102,635
------------- -------------
Mandatorily Redeemable Preferred Stock due 2009
7% Cumulative convertible - Series A; $.001 par value, 10,000,000 shares
authorized, 7,505,765 shares issued and outstanding as of December 31,
1999; 10,000,000 shares authorized, 7,776,706 shares issued and
outstanding as of June 30, 2000,
aggregate liquidation preference of $27,218,471 25,478,661 26,469,603
7% Cumulative convertible - Series B; $.001 par value, 10,000,000 shares authorized,
7,505,765 shares issued and outstanding as of December 31, 1999; 10,000,000
shares authorized, 7,776,706 shares issued and outstanding as of June 30, 2000,
aggregate liquidation preference of $27,218,471 25,478,661 26,469,603
8.5% Cumulative convertible - Series C; $.001 par value, 25,000,000 shares
authorized, 22,987,305 shares issued and outstanding as of December 31,
1999; 25,000,000 shares authorized, 23,991,767 shares issued and
outstanding as of June 30, 2000,
aggregate liquidation preference of $83,971,185 79,021,011 82,614,043
------------- -------------
Total mandatorily redeemable preferred stock 129,978,333 135,553,249
------------- -------------
Stockholders' Equity (Deficit)
Common stock, $0.001 par value, 100,000,000 shares authorized, one share issued
and outstanding as of December 31, 1999; 100,000,000 shares authorized,
169,986 shares issued and outstanding as of June 30, 2000 -- 170
Additional paid-in capital 78,277,690 78,320,016
Accumulated other comprehensive income (loss) (115,953) (2,234)
Accumulated deficit (118,275,395) (136,303,557)
------------- -------------
Total stockholders' equity (deficit) (40,113,658) (57,985,605)
------------- -------------
Total liabilities, mandatorily redeemable preferred stock,
and stockholders' equity (deficit) $ 271,469,120 $ 269,670,279
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
1
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Statement of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
January 1, 1995
(Inception)
Three-Month Period Ended Six-Month Period Ended To
June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000 June 30, 2000
<S> <C> <C> <C> <C> <C>
Revenue $ 2,687,994 $ 385,152 $ 2,855,241 $ 2,404,401 $ 15,455,839
Cost of Goods Sold 2,387,003 210,056 2,529,773 1,553,591 12,595,317
------------- ------------- ------------- ------------- -------------
Gross profit 300,991 175,096 325,468 850,810 2,860,522
------------- ------------- ------------- ------------- -------------
Expenses
Selling, general, and administrative 2,386,381 3,403,892 4,617,494 6,419,633 41,167,176
Research and development 1,296,595 3,612,546 3,363,625 5,992,170 64,485,738
Loss from impairment of fixed assets -- -- -- -- 26,117,711
Gain from arbitration settlement -- -- -- -- (1,514,776)
------------- ------------- ------------- ------------- -------------
Total expenses 3,682,976 7,016,438 7,981,119 12,411,803 130,255,849
------------- ------------- ------------- ------------- -------------
Loss from operations (3,381,985) (6,841,342) (7,655,651) (11,560,993) (127,395,327)
Interest income (expense), net 384,235 (241,309) 514,030 (893,302) 3,356,172
------------- ------------- ------------- ------------- -------------
Net loss (2,997,750) (7,082,651) (7,141,621) (12,454,295) (124,039,155)
Mandatorily redeemable preferred stock
dividends and accretion -- (2,764,606) -- (5,573,867) (12,264,402)
------------- ------------- ------------- ------------- -------------
Net loss attributable to common
stockholders $ (2,997,750) $ (9,847,257) $ (7,141,621) $ (18,028,162) $(136,303,557)
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
2
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Statement of Cash Flows
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
January 1, 1995
(Inception)
Six-Month Period Ended To
June 30, 1999 June 30, 2000 June 30, 2000
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (7,141,621) $ (12,454,295) $(124,039,155)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation expense 2,003,744 1,851,398 15,077,463
Non-cash interest expense, net of amounts capitalized -- 3,427,791 8,940,149
Other non-cash charges 124,016 -- 156,048
Loss (gain) on disposal of property, plant, and equipment -- (125) 56,720,517
Changes in assets and liabilities:
Accounts receivable, net (946,703) 458,199 689,295
Other assets (169,064) 778,333 (296,599)
Accounts payable 2,443,578 (4,792,215) 7,002,618
Accounts payable to related parties (1,205,460) 1,717,389 2,362,853
Accrued interest (2,489,986) -- --
Accrued expenses 484,383 (574,632) 488,597
Deferred revenue -- -- (1,755,800)
------------- ------------- -------------
Net cash used by operating activities (6,897,113) (9,588,157) (34,654,014)
------------- ------------- -------------
Cash Flows From Investing Activities
Purchase of investment securities -- -- (45,148,332)
Proceeds from maturities of investment securities 3,733,347 2,393,720 15,982,630
Proceeds from sale of property, plant, and equipment -- 125 4,217,103
Construction in progress additions (33,000,641) (26,322,182) (213,218,214)
Other property, plant, and equipment additions (817,384) (2,980,610) (14,791,233)
------------- ------------- -------------
Net cash used by investing activities (30,084,678) (26,908,947) (252,958,046)
------------- ------------- -------------
Cash Flows From Financing Activities
Proceeds from issuance of long-term notes, net -- -- 145,718,374
Proceeds from issuance of preferred and common stock, net 48,355,758 43,545 191,165,950
Cash acquired in merger -- -- 916,457
Principal payments on debt (229,979) (49,397) (4,498,363)
------------- ------------- -------------
Net cash provided by financing activities 48,125,779 (5,852) 333,302,418
------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 11,143,988 (36,502,956) 45,690,358
Cash and Cash Equivalents
Beginning of period 5,044,605 82,193,314 --
------------- ------------- -------------
End of period $ 16,188,593 $ 45,690,358 $ 45,690,358
============= ============= =============
Supplemental Disclosure of Cash Flow Information
Interest paid $ 1,326,642 $ 9,640 $ 12,678,148
Supplemental Disclosure of Non-Cash Investing and
Financing Activities
New capital lease obligations $ -- $ -- $ 1,397,803
Net book value of assets received in merger -- -- 4,290,496
Liabilities assumed in merger -- -- 3,738,588
Stockholder advances converted to equity -- -- 1,030,000
Property in-kind contributed by stockholder -- -- 7,521,028
Non-cash interest capitalized in construction in progress 2,205,404 11,128,993 34,339,993
Capital equipment financed through note payable -- -- 3,202,132
Issuance of mandatorily redeemable cumulative
preferred stock 1,471,644 5,411,205 45,176,569
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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 -- -- -- -- -- --
Mandatorily redeemable preferred stock
dividends and accretion -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ---------- -------
Balance at December 31, 1999 -- -- -- -- -- --
Issuance of preferred and common stock for
stock options exercised -- -- -- -- -- --
Mandatorily redeemable preferred stock
dividends and accretion -- -- -- -- -- --
Net gain (loss) -- -- -- -- -- --
------------ ------------ ------------ ------------ ---------- -------
Balance at June 30, 2000 -- $ -- -- $ -- -- $ --
============ ============ ============ ============ ========== =======
[SPLIT TABLE CONTINUES]
<CAPTION>
Convertible
Series D Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
<S> <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 -- --
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 -- -- -- -- --
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1995 -- -- 79,501 63,600 --
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)
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1996 400,000 400 79,501 79 110,695,360
Issuance of common stock -- -- -- -- 1,229,240
Issuance of common stock for services
and for stock options exercised -- -- 69,416 70 55,463
Issuance of preferred stock 600,000 600 -- -- 5,999,400
Other -- -- -- -- (4,773)
Net gain (loss) -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1997 1,000,000 1,000 148,917 149 117,974,690
Issuance of preferred and common stock for
stock options exercised -- -- 54,631 55 50,799
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1998 1,000,000 1,000 203,548 204 118,025,489
Issuance of preferred and common stock for
stock options exercised -- -- 1,000 1 799
Issuance of common stock for warrants
exercised -- -- 1,556,000 1,556 14,004
Surrender and cancellation of shares from
Ball Technologies Holdings Corp. -- -- -- -- 2,762
Reclassification of preferred and common
stock into Series C 8.5% Cumulative
Convertible Redeemable Preferred Stock
Due 2009 in connection with the
recapitalization (1,000,000) (1,000) (1,760,548) (1,761) (39,765,364)
Issuance of preferred and common stock
in connection with the recapitalization -- -- 1 -- --
Mandatorily redeemable preferred stock
dividends and accretion -- -- -- -- --
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1999 -- -- 1 -- 78,277,690
Issuance of preferred and common stock for
stock options exercised -- -- 169,985 170 42,326
Mandatorily redeemable preferred stock
dividends and accretion -- -- -- -- --
Net gain (loss) -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at June 30, 2000 -- $ -- 169,986 $ 170 $ 78,320,016
============= ============= ============= ============= =============
[SPLIT TABLE CONTINUES]
<CAPTION>
Accumulated
Stock Other Total
Subscription Comprehensive Accumulated Stockholders'
Receivable Income (Loss) (Deficit) Equity (Deficit)
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ -- $ -- $ -- $ --
Issuance of stock in exchange for future
cash contributions and contributions
of property in-kind (14,400,000) -- -- --
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 -- -- 13,381,523
Net loss -- -- (3,909,208) (3,909,208)
------------- ------------- ------------- -------------
Balance at December 31, 1995 (1,018,477) -- (3,909,208) 33,690,858
Restatement of capital stock and additional
paid-in capital for reincorporation as
of January 1, 1996 -- -- -- --
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 1,018,477 -- -- 992,533
Net loss -- -- (23,706,344) (23,706,344)
------------- ------------- ------------- -------------
Balance at December 31, 1996 -- -- (27,615,552) 83,106,948
Issuance of common stock -- -- -- 1,229,240
Issuance of common stock for services
and for stock options exercised -- -- -- 55,533
Issuance of preferred stock -- -- -- 6,000,000
Other -- -- -- (4,773)
Net gain (loss) -- 80,400 (50,730,985) (50,650,585)
------------- ------------- ------------- -------------
Balance at December 31, 1997 -- 80,400 (78,346,537) 39,736,363
Issuance of preferred and common stock for
stock options exercised -- -- -- 50,872
Net loss -- (36,971) (12,919,555) (12,956,526)
------------- ------------- ------------- -------------
Balance at December 31, 1998 -- 43,429 (91,266,092) 26,830,709
Issuance of preferred and common stock for
stock options exercised -- -- -- 800
Issuance of common stock for warrants
exercised -- -- -- 15,560
Surrender and cancellation of shares from
Ball Technologies Holdings Corp. -- -- -- --
Reclassification of preferred and common
stock into Series C 8.5% Cumulative
Convertible Redeemable Preferred Stock
Due 2009 in connection with the
recapitalization -- -- -- (39,792,042)
Issuance of preferred and common stock
in connection with the recapitalization -- -- -- --
Mandatorily redeemable preferred stock
dividends and accretion -- -- (6,690,537) (6,690,537)
Net loss -- (159,382) (20,318,766) (20,478,148)
------------- ------------- ------------- -------------
Balance at December 31, 1999 -- (115,953) (118,275,395) (40,113,658)
Issuance of preferred and common stock for
stock options exercised -- -- -- 42,496
Mandatorily redeemable preferred stock
dividends and accretion -- -- (5,573,867) (5,573,867)
Net gain (loss) -- 113,719 (12,454,295) (12,340,576)
------------- ------------- ------------- -------------
Balance at June 30, 2000 $ -- $ (2,234) $(136,303,557) $ (57,985,605)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
EARTHWATCH INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements have been prepared by
EarthWatch Incorporated and its subsidiaries (the "Company") without an
audit, except for the December 31, 1999 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 by the Company with the SEC on Form 8-K on August
17, 2000. The results of operations for the six months ended June 30,
2000 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2000.
2. Major Contracts
Kearfott Guidance & Navigation Corporation. In March 2000, the Company
entered into an incentive agreement with the Kearfott Guidance &
Navigation Corporation with Ball Aerospace and Technologies Corporation
to deliver three Two Axis Rate Assemblies ("TARAs") on or before July
31, 2000. These TARAs were received June 18, 2000 and the Company paid
Kearfott $1 million for early delivery.
NIMA. In June 2000, the Company entered into a contract to provide
third-party data to the National Imagery & Mapping Agency ("NIMA") for
the contract value of $1.1 million.
3. 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 Senior 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.
<TABLE>
<CAPTION>
Gross
Unrealized Fair
Investment Securities Cost Gains (Losses) Value
--------------------- ---- -------------- -----
<S> <C> <C> <C>
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 June 30, 2000:
Maturing in one year or less................... $ -0- $ -0- $ -0-
========== ======== ==========
</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 for the QuickBird 1 satellite.
5
<PAGE>
<TABLE>
<CAPTION>
Gross
Unrealized Fair
Investment Securities - Restricted Cost Gains (Losses) Value
---------------------------------- ---- -------------- -----
<S> <C> <C> <C>
U.S. Government securities as of December 31, 1999:
Maturing in one year or less............ $28,438,921 $(64,073) $28,374,848
=========== ======== ===========
U.S. Government securities as of June 30, 2000:
Maturing in one year or less............ $29,123,561 $ (2,234) $29,121,327
=========== ======== ===========
</TABLE>
4. Construction in Progress
Construction in progress consists primarily of satellite
construction and launch costs, ground station construction costs,
capitalized interest, and third-party developed software. Construction
in progress consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------- -------------
<S> <C> <C>
QuickBird satellites $ 125,414,700 $ 151,911,526
Digital Globe(R)software 14,809,982 23,525,642
Ground station equipment 3,492,280 5,730,969
------------- -------------
$ 143,716,962 $ 181,168,137
============= =============
</TABLE>
5. Debt
The Company's long-term debt and capital lease obligations are
comprised of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ------------
<S> <C> <C>
13% Senior Discount Notes, net of unamortized discount of
$86,681,504 and $75,698,402, respectively, effective rate
of 15.9% ......................................................... $112,318,496 $123,301,598
12 1/2% Senior Notes, net of unamortized discount of
$17,321,394 and $14,107,451, respectively........................ 54,678,606 57,892,549
Capital lease obligations.............................................. 151,031 101,634
------------ ------------
167,148,133 181,295,781
Less: current portion.................................................. (92,743) (72,308)
------------ ------------
$167,055,390 $181,223,473
============ ============
</TABLE>
6. Stock Options
On February 15, 2000, the Board of Directors approved the written 1999
Equity Incentive Plan. Through June 30, 2000, options for 2,653,849
shares of common stock have been granted under this plan to EarthWatch
employees, directors, and consultants with an exercise price of $0.25
per share.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information, statements relating to our plans,
objectives, and future performance are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are based on management's current expectations. Because of various risks and
uncertainties, actual strategies and results in future periods may differ
materially from those currently expected.
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this document.
Digital Globe(R) and Your Planet Online(R) are our registered trademarks and
Seconds on Orbit(TM) is our trademark.
Overview
We plan to create and market a variety of information products derived
from satellite imagery of the earth's surface. We are currently building two
satellites capable of collecting high-resolution digital imagery of the earth's
surface, as well as a comprehensive image collection, enhancement, and digital
archive system known as our Digital Globe database. Our QuickBird satellites are
designed to collect 1-meter resolution gray scale and 4-meter resolution color
imagery of the earth and will have the ability to revisit most areas almost
daily. We plan to launch the QuickBird 1 satellite in the fall of 2000.
We were originally incorporated as a wholly-owned subsidiary of Ball
Corporation ("Ball"). On March 31, 1995, we merged with WorldView Imaging
Corporation ("WorldView"), which had been founded by Dr. Walter S. Scott, our
Chief Technical Officer and Executive Vice President. In connection with the
merger, Ball contributed certain assets and technology, in addition to making a
substantial cash investment. WorldView received the first United States
government license to operate a high-resolution satellite for commercial use and
was developing the EarlyBird when it merged with us.
EarthWatch is in an early development stage. Since the merger, we have
invested in research and development to develop our satellite system, and have
incurred substantial operating costs and selling, general, and administrative
expenses. We completed and launched EarlyBird 1, our first satellite, in
December 1997. However, four days after a successful launch, we lost contact
with EarlyBird 1. We were unable to reestablish communications and determined
that the satellite was a total loss. As a result, we have not generated any
significant revenue from our proposed primary satellite imagery business and
will not do so until we successfully launch and begin licensing imagery
generated by QuickBird 1. We have generated only limited revenue from other
related projects.
On April 8, 1999, we completed a recapitalization. As a result, all of
our existing common and preferred stock were converted into shares of Series C
preferred stock at varying conversion ratios. In connection with the
recapitalization, ITT Industries, Inc., Morgan Stanley & Co. Incorporated, and
entities affiliated with Capital Research and Management Company purchased
shares of our common stock, Series A preferred stock, and Series B preferred
stock for an aggregate purchase price of approximately $50 million. Morgan
Stanley also received one share of Common Stock. This investment by the new
equity partners caused the existing stockholders, including Ball, to become
minority owners. As a result, we may have experienced a change in control. Also,
we obtained the consent of holders of our 12 1/2% Senior Discount Notes due 2005
to amend the indenture governing the 12 1/2% notes and change the terms of such
securities, including extending their maturity to March 1, 2005.
On July 12, 1999, we completed a private offering of 199,000 units,
consisting of 13% Senior Discount Notes due 2007 and shares of preferred stock.
Each unit consisted of a 13% note which had an accreted value of $684.61 and a
principal amount at maturity in 2007 of $1,000 and 49.095 shares of our Series C
convertible preferred stock. The offering resulted in aggregate gross proceeds
of approximately $136 million.
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On June 13, 2000, we filed a registration statement with respect to the
13% notes, which the Securities and Exchange Commission declared effective on
July 11, 2000. Pursuant to this registration statement, on July 12, 2000 we
commenced an exchange offer to exchange our old 13% notes for registered 13%
notes. The terms of the registered 13% notes are identical in all material
respects to those of the old 13% notes, except that the registered notes (i)
have been registered under the Securities Act of 1933 and therefore will not be
subject to certain restrictions on transfer applicable to the old notes and (ii)
are not entitled to certain registration rights under the registration rights
agreement including the provision for additional interest of up to 0.5% on the
old notes. All holders of the old 13% unregistered notes exchanged them for 13%
registered notes and the exchange offer expired on August 11, 2000. The Bank of
New York served as the exchange agent in connection with the exchange offer. We
did not receive any proceeds from this exchange offer.
On August 17, 2000, we filed a report on Form 8-K with the Securities
and Exchange Commission to include our restated consolidated financial
statements for the fiscal year ended December 31, 1999 and for the three-month
period ended March 31, 2000. Our consolidated financial statements for these
periods were restated due to a misstatement in the valuation of preferred stock
dividends. For a more detailed description of the restatement, please see the
Form 8-K.
We have realized significant operating losses and negative earnings
before interest, taxes, depreciation, and amortization ("EBITDA"). We expect our
operating expenses to increase as we develop our QuickBird satellites and
imaging network, product and service lines, and customer base. We expect our
revenue and operating results will vary significantly from period to period.
Given our growth strategy, we expect to realize significant operating
losses at least through the third quarter of 2001 due to anticipated substantial
operating expenses, including additional research and development expenses,
launch insurance costs, and expenditures for sales and marketing, as well as
increased general and administrative expenses. Our ability to generate operating
income and cash flow is primarily dependent upon the timely construction and
successful deployment of QuickBird 1 and the development of related ground
systems, our ability to develop a customer base and distribution channels for
our imagery products and services, and demand for our products and services. We
cannot assure you that our products will achieve significant market acceptance
in existing imagery markets or that new markets anticipated by us will develop
in the expected time periods, if at all.
Initially, we expect to provide imagery primarily to foreign governments,
U.S. government agencies, and large commercial users. We will also target local
and municipal governments that currently use aerial and low-resolution satellite
imagery for mapping, environmental monitoring, and land use and infrastructure
planning. We expect that revenue from government customers will account for a
majority of our revenues for the first few years after we begin selling products
based on QuickBird 1 imagery. However, we believe that over the next several
years, commercial sales will account for an increasing portion of our revenues
as our industry demonstrates the utility of satellite imagery-based products.
We expect to begin generating revenue several months after QuickBird 1
is launched. We will use this initial period to test the system. Most of our
first year revenues will come from government customers. We anticipate that many
customers will wait to enter into imagery contracts until after QuickBird 1 is
successfully launched and fully operational.
We expect that a number of our customers will eventually want to have
their own ground stations to receive imagery. However, we expect that many of
these customers will wait until satellite operations are assured before
investing in new and upgraded ground stations. Although construction time
varies, it usually ranges from six months for an upgrade to two years for a new
facility. Until these customers upgrade or construct their own ground stations,
they will need to receive delivery of our imagery through our ground stations
and distribution systems.
We believe that QuickBird 2, which is scheduled for launch in 2001,
will enable us to sell considerably more Seconds on Orbit and direct downlinks,
especially to three major markets--Asia, Europe, and the Middle East--where
customers are closely spaced. Our Seconds on Orbit product is designed to allow
customers to purchase imaging time on our satellites directly. We believe the
planned
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sun synchronous orbit of QuickBird 2 will produce imagery complementary to our
QuickBird 1 capabilities, given that QuickBird 1 is on an inclined orbit.
Results of Operations
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Revenue. Our revenue has been generated primarily from the processing and sale
of geographic imagery purchased from third-party suppliers. These sources of
revenue decreased from $2.7 million for the three-month period ended June 30,
1999 to $385,152 for the three-month period ended June 30, 2000. New and
existing contracts contained few scheduled product deliveries during the second
quarter in 2000, so little revenue was realized.
Cost of Goods Sold. As a result of our decreased revenue, our cost of goods sold
consequently decreased from $2.4 million for the three-month period ended June
30, 1999 to $210,056 for the three-month period ended June 30, 2000. Costs for
both periods were the direct costs associated with obtaining third-party
geographic imagery for re-sale.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses for the second quarter of 1999 were $2.4 million, of
which $1.8 million were general and administrative, and $.6 million were sales
and marketing. Total selling, general, and administrative expenses for the
second quarter of 2000 were $3.4 million, of which $1.9 million were general and
administrative, and $1.5 million were sales and marketing. Selling expenses
increased in the second quarter of 2000 as a result of increased sales staff
levels and increased marketing efforts in preparation for market entry of our
products and services this year.
Research and Development. Our research and development costs increased from $1.3
million for the second quarter of 1999 to $3.6 million for the same period in
2000. This increase was attributable to additional staff and systems development
for launch and satellite systems.
Provision for Income Taxes. Due to losses incurred in the three-month periods
ended June 30, 1999 and 2000, we recorded no provision for income taxes in
either quarter. We calculate our net operating loss carryforwards on an annual,
rather than a quarterly, basis. Therefore, no amount is shown as of June 30,
2000. As of December 31, 1999, we had approximately $89.0 million in net
operating loss carryforwards; however, such deferred tax benefits were not
recorded as an asset because we have no history of profitability. In addition,
utilization of net operating loss carryforwards may be subject to limitation,
depending on changes in our ownership.
Net Loss. We had net losses of $3.0 million and $7.1 million in the three-month
periods ended June 30, 1999 and 2000, respectively.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Revenue. Revenue decreased from $2.9 million for the six-month period ended June
30, 1999 to $2.4 million for the six-month period ended June 30, 2000. The
decrease is attributable to a lack of contract revenue during the second quarter
of 2000, as mentioned above.
Cost of Goods Sold. As a result of our decreased revenue, our cost of goods sold
consequently decreased from $2.5 million for the six-month period ended June 30,
1999 to $1.6 million for the six-month period ended June 30, 2000. Costs for
both periods consisted of the direct costs associated with obtaining third-party
geographic imagery for re-sale.
Selling, General, and Administrative Expenses. Total selling, general, and
administrative expenses for the six-month period ended June 30, 1999 were $4.6
million, of which $3.5 million were general and
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administrative, and $1.1 million were sales and marketing. Total selling,
general, and administrative expenses for the six-month period ended June 30,
2000 were $6.4 million, of which $4.0 million were general and administrative,
and $2.4 million were sales and marketing. Selling expenses increased in the
first half of 2000 as a result of increased sales staff levels and increased
marketing efforts in preparation for market entry of our products and services
this year.
Research and Development. Our research and development costs increased from $3.4
million for the six-month period ended June 30, 1999 to $6.0 million for the
same period in 2000. This increase was attributable to additional staff and
systems development for launch and satellite systems.
Provision for Income Taxes. Due to losses incurred in the six-month periods
ended June 30, 1999 and 2000, and because we calculate our net operating loss
carryforwards on an annual basis, we recorded no provision for income taxes in
either period. As of December 31, 1999, we had approximately $89.0 million in
net operating loss carryforwards; however, such deferred tax benefits were not
recorded as an asset because we have no history of profitability. In addition,
utilization of net operating loss carryforwards may be subject to limitation,
depending on changes in our ownership.
Net Loss. We had net losses of $7.1 million and $12.5 million during the
six-month periods ended June 30, 1999 and 2000, respectively.
Liquidity and Capital Resources
Since our recapitalization, our primary sources of liquidity have been
private sales of equity and debt securities to our strategic partners and
investors, including Ball Corporation, Capital Research and Management, Hitachi,
ITT Industries, Morgan Stanley, and other investors, as described in the
overview.
We have used this liquidity for general corporate purposes, including
primarily developing and constructing satellites and ancillary facilities in
preparation for the anticipated launches. Pending the use of such proceeds, we
invest such funds in short-term, interest-bearing, investment grade securities.
As of December 31, 1999 and June 30, 2000, we had $82.2 and $45.7 million,
respectively, in cash and cash equivalents.
We used net cash in our operating activities of $9.6 million in the six
months ended June 30, 2000, primarily to fund selling, general, and
administrative expenses, and research and development activities in support of
the QuickBird programs.
In the six months ended June 30, 2000, we used $26.9 million in
investing activities. In this period, we invested capital for satellite
construction, imagery processing and archiving facilities, ground stations, and
satellite control operations. We also purchased equipment for our general and
administrative activities, and for continuing research and development
activities related to the QuickBird program.
In the year ended December 31, 1999, we derived $180.6 million from
various financing activities. Of this amount, $48.3 million was derived from our
recapitalization and $130.2 million was derived from the unit offering closing
in July, offset by $0.3 million in principal payments on capital-lease
obligations.
At June 30, 2000, we had approximately $181 million of indebtedness.
Such indebtedness will have a fully accreted value of $271 million on July 15,
2002. In addition, our 13% notes will begin to accrue cash interest on July 15,
2002 and will be payable semiannually in cash on January 15 and July 15 of each
year, beginning on January 15, 2003.
Based on our current operating plan, we believe that existing capital
resources will meet our anticipated cash needs for the foreseeable future. If we
face any launch delays, if the system takes longer to become operational, if
technical or regulatory developments require that we modify the design of the
EarthWatch system, if we are unable to achieve our revenue targets, or if we
incur other additional unforeseen costs, we may require additional capital. We
do not have a revolving credit facility or other
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source of readily available capital. Therefore, any shortfall in funds available
for our operations or to service our debt would cause us serious liquidity
problems. In such case, we would need to seek additional financing which we may
not be able to obtain on commercially reasonable terms or at all. A significant
delay in the launch of QuickBird 1 would require us to modify our operating plan
and to defer substantial amounts of planned capital expenditures. This, in turn,
would delay deployment of the complete EarthWatch system and may prevent us from
continuing as a going concern. In addition, we could experience higher costs if
we have to modify our future satellites. If we incur any such additional costs
or if our receipt of revenue is delayed, we could need additional financing.
Failure to obtain such additional financing may result in a material adverse
effect on our business and could prevent us from continuing as a going concern.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our cash and cash equivalents in short-term,
interest-bearing, investment grade securities. We do not currently hold any
derivative instruments and do not engage in hedging activities. Also, we
currently do not hold any variable interest rate debt or lines of credit, and
currently do not generally enter into any transactions denominated in a foreign
currency. Therefore, our exposure to interest rate and foreign exchange
fluctuations is minimal.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this report 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. You should read the section entitled "Risk Factors"
contained in our Registration Statement on Form S-4 (File No. 333-39202) filed
with the Securities and Exchange Commission on June 13, 2000, for a more
detailed discussion of the risks affecting our business and our prospects.
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.
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PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the period covered by this report, we granted stock options to
purchase 276,430 shares of our common stock at the exercise price of $0.25 per
share to our employees, consultants, directors, and other service providers
under our 1999 Equity Incentive Plan. During the period covered by this report,
we also issued and sold an aggregate of 125,000 shares of our common stock and
283 shares of our Series C preferred stock at exercise prices of $0.25 per share
and $3.805 per share, respectively, to employees, consultants, directors, and
other service providers under direct issuances and exercises of stock options
under our 1999 Equity Incentive Plan and 1995 Stock Option/Stock Issuance Plan,
respectively. These securities were not registered under the Securities Act of
1933, as amended (the "Securities Act"), in reliance upon the exception provided
by Section 4(2) of the Securities Act and/or Rule 701 promulgated thereunder for
transactions by an issuer not involving a public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K for the
quarter ended June 30, 2000.
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SIGNATURES
In accordance with 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
Date: August 22, 2000 By: /s/ Herbert F. Satterlee III
--------------- ----------------------------------
Herbert F. Satterlee III
President, Chief Executive Officer,
Chairman of the Board
(Principal Executive Officer)
Date: August 22, 2000 By: /s/ Henry E. Dubois
--------------- ----------------------------------
Henry E. Dubois
Chief Financial Officer, Chief
Operating Officer, Executive Vice
President (Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
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