<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 September 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 [ X ] No [ ]
As of September 30, 2000, there were outstanding 195,246 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)
<TABLE>
<CAPTION>
Consolidated Balance Sheet
------------------------------------------------------------------------------------------------------------------------------------
December 31, September 30,
1999 2000
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 82,193,314 $ 30,247,361
Accounts receivable, net of allowances of $90,646 and $23,036 at
December 31, 1999 and September 30, 2000, respectively 768,029 372,988
Investment securities 3,026,480 -
Investment securities - restricted 28,374,848 29,511,176
Other assets 968,769 246,953
------------------ ----------------
Total current assets 115,331,440 60,378,478
------------------ ----------------
Property, plant, and equipment:
Construction in progress 143,716,962 189,730,132
Computer equipment and software 12,275,986 15,508,928
Machinery and equipment 5,665,918 5,858,314
Furniture and fixtures 1,113,073 1,350,636
------------------ ----------------
Total property, plant, and equipment 162,771,939 212,448,010
Accumulated depreciation (12,031,861) (14,818,411)
------------------ ----------------
Property, plant, and equipment, net 150,740,078 197,629,599
------------------ ----------------
Debt issuance costs, net 5,069,065 4,529,452
Other assets 328,537 312,682
------------------ ----------------
Total assets $ 271,469,120 $ 262,850,211
================== ================
Liabilities, Mandatorily Redeemable Preferred Stock, and Stockholders' Equity (Deficit)
Liabilities
Current liabilities:
Accounts payable $ 12,307,440 $ 1,857,254
Accounts payable to related parties 645,464 110,169
Accrued expenses 1,103,408 2,459,693
Deferred revenue 400,000 645,000
Current portion of long-term debt 92,743 61,888
------------------ ----------------
Total current liabilities 14,549,055 5,134,004
Long-term debt, net 167,055,390 188,336,732
------------------ ----------------
Total liabilities 181,604,445 193,470,736
------------------ ----------------
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, 7,912,798 shares issued and outstanding as of September 30, 2000,
aggregate liquidation preference of $27,694,793 25,478,661 26,967,483
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, 7,912,798 shares issued and outstanding as of September 30, 2000,
aggregate liquidation preference of $27,694,793 25,478,661 26,967,483
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, 24,501,592 shares issued and outstanding as of September 30, 2000,
aggregate liquidation preference of $85,755,572 79,021,011 84,437,540
------------------ ----------------
Total mandatorily redeemable preferred stock 129,978,333 138,372,506
------------------ ----------------
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, 195,246 share
issued and outstanding as of September 30, 2000 - 195
Additional paid-in capital 78,277,690 78,326,294
Accumulated other comprehensive income (loss) (115,953) 9,012
Accumulated deficit (118,275,395) (147,328,532)
------------------ ----------------
Total stockholders' equity (deficit) (40,113,658) (68,993,031)
------------------ ----------------
Total liabilities, mandatorily redeemable preferred stock,
and stockholders' equity (deficit) $ 271,469,120 $ 262,850,211
================== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Statement of Operations
------------------------------------------------------------------------------------------------------------------------------------
Period from
January 1,
1995
(Inception)
Three-Month Period Ended Nine-Month Period Ended To
September 30, September 30, September 30, September 30, September 30,
1999 2000 1999 2000 2000
------------- -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenue $ 1,932,648 $ 268,023 $ 4,787,889 $ 2,672,424 $ 15,723,863
Cost of Goods Sold 1,723,747 167,562 4,253,520 1,721,153 12,762,879
------------- -------------- -------------- ------------ --------------
Gross profit 208,901 100,461 534,369 951,271 2,960,984
------------- -------------- -------------- ------------ --------------
Expenses
Selling, general, and administrative 3,037,636 4,545,271 7,655,130 10,964,904 45,712,446
Research and development 4,381,006 3,323,092 7,744,631 9,315,262 67,808,830
Loss from impairment of fixed assets - - - - 26,117,711
Gain from arbitration settlement - - - - (1,514,776)
------------- -------------- -------------- ------------ --------------
Total expenses 7,418,642 7,868,363 15,399,761 20,280,166 138,124,211
------------- -------------- -------------- ------------ --------------
Loss from operations (7,209,741) (7,767,902) (14,865,392) (19,328,895) (135,163,227)
Interest income (expense), net (1,283,917) (437,816) (769,887) (1,331,118) 2,918,356
------------- -------------- -------------- ------------ --------------
Net loss (8,493,658) (8,205,718) (15,635,279) (20,660,013) (132,244,871)
Mandatorily redeemable preferred stock dividends
and accretion - (2,819,257) - (8,393,124) (15,083,661)
------------- -------------- -------------- ------------ --------------
Net loss attributable to common
stockholders $ (8,493,658) $ (11,024,975) $ (15,635,279) $(29,053,137) $ (147,328,532)
============= ============== ============== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
Period from
January 1,
1995
(Inception)
Nine-Month Period Ended To
September 30, September 30, September 30,
1999 2000 2000
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (15,635,279) $ (20,660,013) $ (132,244,871)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation expense 11,939,858 2,786,551 16,012,616
Non-cash interest expense, net of amounts capitalized - 4,944,476 10,456,834
Other non-cash charges 154,475 - 156,048
Loss (gain) on disposal of property, plant, and equipment 308 (125) 56,720,517
Changes in assets and liabilities:
Accounts receivable, net 136,441 395,041 626,137
Other assets (317,857) 735,688 (339,244)
Accounts payable 1,599,540 (10,450,186) 1,344,645
Accounts payable to related parties (954,177) (535,294) 110,170
Accrued interest (445,303) (69,189) (138,378)
Accrued expenses (1,552,110) 1,425,473 2,557,891
Deferred revenue 400,000 245,000 (1,510,800)
---------------- ---------------- ---------------
Net cash used by operating activities (4,674,104) (21,182,578) (46,248,435)
---------------- ---------------- ---------------
Cash Flows From Investing Activities
Purchase of investment securities (27,686,994) - (45,148,332)
Proceeds from maturities of investment securities 6,651,000 2,015,117 15,604,027
Proceeds from sale of property, plant, and equipment 2,429 125 4,217,103
Construction in progress additions (60,075,028) (29,091,133) (215,987,165)
Other property, plant, and equipment additions (1,332,221) (3,662,903) (15,473,526)
---------------- ---------------- ---------------
Net cash used by investing activities (82,440,814) (30,738,794) (256,787,893)
---------------- ---------------- ---------------
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 50,773,176 49,850 191,172,255
Proceeds from issuance of units, net 130,201,994 - -
Cash acquired in merger - - 916,457
Principal payments on debt (288,352) (74,431) (4,523,397)
---------------- ---------------- ---------------
Net cash provided by financing activities 180,686,818 (24,581) 333,283,689
---------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents 93,571,900 (51,945,953) 30,247,361
Cash and Cash Equivalents
Beginning of period 5,044,605 82,193,314 -
---------------- ---------------- ---------------
End of period $ 98,616,505 $ 30,247,361 $ 30,247,361
================ ================ ===============
Supplemental Disclosure of Cash Flow Information
Interest paid $ 3,145,567 $ 17,511 $ 12,686,019
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 7,148,896 16,922,035 40,133,035
Capital equipment financed through note payable - - 3,202,132
Issuance of mandatorily redeemable cumulative
preferred stock 3,933,072 8,148,239 47,913,603
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
EarthWatch Incorporated
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Statement of Stockholders' Equity (Deficit)
------------------------------------------------------------------------------------------------------------------------------------
Convertible Convertible
Series A Series B
Preferred Stock Preferred Stock
Shares Amount Shares Amount
<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 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
Property in-kind contributed by stockholder - - - -
Net loss - - - -
------------------ ----------------- -------------- ----------------
Balance at December 31, 1996 19,350,410 19,350 311,300 311
Issuance of common stock - - - -
Issuance of common stock for services
and for stock options exercised - - - -
Issuance of preferred stock - - - -
Other - - - -
Net gain (loss) - - - -
------------------ ----------------- -------------- ----------------
Balance at December 31, 1997 19,350,410 19,350 311,300 311
Issuance of preferred and common stock for
stock options exercised 17,916 18 - -
Net loss - - - -
------------------ ----------------- -------------- ----------------
Balance at December 31, 1998 19,368,326 19,368 311,300 311
Issuance of preferred and common stock for
stock options exercised - - - -
Issuance of common stock for warrants
exercised - - - -
Surrender and cancellation of shares from Ball
Technologies Holdings Corp. (2,761,983) (2,762) - -
Reclassification of preferred and common
stock into Series C 8.5% Cumulative
Convertible Redeemable Preferred Stock
Due 2009 in connection with the
recapitalization (16,606,343) (16,606) (311,300) (311)
Issuance of preferred and common stock
in connection with the recapitalization - - - -
Mandatorily redeemable preferred stock dividends
and accretion - - - -
Net loss - - - -
------------------ ----------------- -------------- ----------------
Balance at December 31, 1999 - - - -
Issuance of preferred and common stock for
stock options exercised (unaudited) - - - -
Mandatorily redeemable preferred stock dividends
and accretion (unaudited) - - - -
Net gain (loss) (unaudited) - - - -
------------------ ----------------- -------------- ----------------
Balance at September 30, 2000 (unaudited) - $ - - $ -
================== ================= ============== ================
</TABLE>
<TABLE>
<CAPTION>
Convertible Senior Convertible
Series C Series D
Preferred Stock Preferred Stock
Shares Amount Shares Amount
<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 - - - -
Contribution of net assets in merger - - - -
Issuance of common stock for services
and for stock options exercised - - - -
Issuance of preferred stock - - - -
Property in-kind, conversion of debt, and
cash contributions from stockholder - - - -
Net loss - - - -
---------------- --------------- ---------------- ---------------
Balance at December 31, 1995 - - - -
Restatement of capital stock and additional
paid-in capital for reincorporation as
of January 1, 1996 - - - -
Issuance of stock in exchange for property
in-kind and other, net - - - -
Issuance of preferred stock 7,000,000 7,000 400,000 400
Property in-kind contributed by stockholder - - - -
Net loss - - - -
---------------- --------------- ---------------- ---------------
Balance at December 31, 1996 7,000,000 7,000 400,000 400
Issuance of common stock - - - -
Issuance of common stock for services
and for stock options exercised - - - -
Issuance of preferred stock - - 600,000 600
Other - - - -
Net gain (loss) - - - -
---------------- --------------- ---------------- ---------------
Balance at December 31, 1997 7,000,000 7,000 1,000,000 1,000
Issuance of preferred and common stock for
stock options exercised - - - -
Net loss - - - -
---------------- --------------- ---------------- ---------------
Balance at December 31, 1998 7,000,000 7,000 1,000,000 1,000
Issuance of preferred and common stock for
stock options exercised - - - -
Issuance of common stock for warrants
exercised - - - -
Surrender and cancellation of shares from Ball
Technologies Holdings Corp. - - - -
Reclassification of preferred and common
stock into Series C 8.5% Cumulative
Convertible Redeemable Preferred Stock
Due 2009 in connection with the
recapitalization (7,000,000) (7,000) (1,000,000) (1,000)
Issuance of preferred and common stock
in connection with the recapitalization - - - -
Mandatorily redeemable preferred stock dividends
and accretion - - - -
Net loss - - - -
---------------- --------------- ---------------- ---------------
Balance at December 31, 1999 - - - -
Issuance of preferred and common stock for
stock options exercised (unaudited) - - - -
Mandatorily redeemable preferred stock dividends
and accretion (unaudited) - - - -
Net gain (loss) (unaudited) - - - -
---------------- --------------- ---------------- ---------------
Balance at September 30, 2000 (unaudited) - $ - - $ -
================ =============== ================ ===============
</TABLE>
<TABLE>
<CAPTION>
Additional Stock
Common Stock Paid-in Subscription
Shares Amount Capital Receivable
<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 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 - - 69,833,305 -
Property in-kind contributed by stockholder - - (25,944) 1,018,477
Net loss - - - -
---------------- ------------- ------------------- -----------------
Balance at December 31, 1996 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 - - 5,999,400 -
Other - - (4,773) -
Net gain (loss) - - - -
---------------- ------------- ------------------- -----------------
Balance at December 31, 1997 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 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 (1,760,548) (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 (unaudited) 195,245 195 48,604 -
Mandatorily redeemable preferred stock dividends
and accretion (unaudited) - - - -
Net gain (loss) (unaudited) - - - -
---------------- ------------- ------------------- -----------------
Balance at September 30, 2000 (unaudited) 195,246 $ 195 $ 78,326,294 $ -
================ ============= =================== =================
</TABLE>
<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
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 (unaudited) - - 48,799
Mandatorily redeemable preferred stock dividends
and accretion (unaudited) - (8,393,124) (8,393,124)
Net gain (loss) (unaudited) 124,965 (20,660,013) (20,535,048)
---------------- -------------------- -----------------
Balance at September 30, 2000 (unaudited) $ 9,012 $ (147,328,532) $ (68,993,031)
================ ==================== =================
</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 restated consolidated financial statements and notes
thereto filed by the Company with the SEC in our prospectus under Rule 424 on
October 13, 2000. The results of operations for the nine months ended
September 30, 2000 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2000.
2. Major Contracts
The Company has not entered into any major contracts for the three
months ended September 30, 2000.
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
Investment Securities Cost Gains (Losses) Fair 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 September 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.
<TABLE>
<CAPTION>
Gross
Unrealized
Investment Securities - Restricted Cost Gains (Losses) Fair 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 September 30, 2000:
Maturing in one year or less............... $ 29,502,164 $ 9,012 $ 29,511,176
================= ================== =================
</TABLE>
5
<PAGE>
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, September 30,
1999 2000
------------ ------------
<S> <C> <C>
QuickBird satellites $125,414,700 $157,544,764
Digital Globe(R) software 14,809,982 26,143,068
Ground station equipment 3,492,280 6,042,300
------------ ------------
$143,716,962 $189,730,132
============ ============
</TABLE>
In August 2000, the Company obtained an additional $35 million of
insurance coverage, increasing the Company's total insurance coverage to
$265 million for QuickBird 1, to cover the risks associated with a total
loss of QuickBird 1 on launch or during operation.
5. Debt
The Company's long-term debt and capital lease obligations are comprised
of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ ------------
<S> <C> <C>
13% Senior Discount Notes, net of unamortized discount of $86,681,504
and $70,195,160, respectively, effective rate of 15.9%...................... $112,318,496 $128,804,840
12 1/2% Senior Notes, net of unamortized discount of
$17,321,394 and $12,482,821, respectively................................... 54,678,606 59,517,179
Capital lease obligations...................................................... 151,031 76,601
------------ ------------
167,148,133 188,398,620
Less: current portion.......................................................... (92,743) (61,888)
------------ ------------
$167,055,390 $188,336,732
============ ============
</TABLE>
6. Stock Options
On February 15, 2000, the Board of Directors approved the written 1999
Equity Incentive Plan. Through September 30, 2000, options for 2,784,547
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.
7. Subsequent Events
In October, the Company obtained an $80 million in-transit insurance
policy to cover the risk associated with the transport of QuickBird 1 and
related equipment from Ball Aerospace to Russia in preparation for launch.
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 OrbitTM 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. On March 31, 1995, we merged with WorldView Imaging Corporation,
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 satellites (predecessor satellites to the QuickBird satellites) when
it merged with us.
We are 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 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 8.5%
Series C convertible preferred stock. The offering resulted in aggregate gross
proceeds of approximately $136 million.
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In August 2000, we exchanged all of the original 13% notes for
substantially identical 13% notes that we registered under the Securities Act.
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 and
resulted in an increase in our total mandatorily redeemable preferred stock,
total stockholders' deficit, and net loss attributable to common stockholders
from our previously reported figures. 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, or 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 sun synchronous orbit of QuickBird 2 will produce imagery complementary
to our QuickBird 1 capabilities, given that QuickBird 1 is on an inclined orbit.
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Results of Operations
Three months ended September 30, 1999 compared to three months ended
September 30, 2000
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 $1.9 million for the three-month period ended September
30, 1999 to $268,023 for the three-month period ended September 30, 2000. New
and existing contracts contained few scheduled product deliveries during the
third 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 $1.7 million for the three-month period ended
September 30, 1999 to $167,562 for the three-month period ended September 30,
2000. Costs for both periods were primarily the direct costs associated with
obtaining third-party geographic imagery for resale.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses for the third quarter of 1999 were $3.0 million, of
which $2.1 million were general and administrative, and $.9 million were sales
and marketing. Total selling, general, and administrative expenses for the
third quarter of 2000 were $4.5 million, of which $3.0 million were general and
administrative, and $1.5 million were sales and marketing. As expected, general
and administrative expenses increased in the third quarter of 2000 when
compared to the third quarter of 1999 due to our implementation of new
procedures in preparation for full-scale operations. Selling expenses increased
in the third quarter of 2000 when compared to the third quarter of 1999 as a
result of increased sales staff levels and increased marketing efforts in
preparation for market entry of our products and services.
Research and Development. Our research and development costs decreased from
$4.4 million for the third quarter of 1999 to $3.3 million for the same period
in 2000. This decrease was attributable to a decrease in research and
development costs associated with the launch and satellite systems and the fact
that we are now in a construction in progress and testing phase of our systems.
Provision for Income Taxes. Due to losses incurred in the three-month periods
ended September 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 September
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.
Interest income (expense), net. Net interest income (expense) decreased from
($1.3 million) for the three-month period ended September 30, 1999 to ($437,816)
for the three-month period ended September 30, 2000. This decrease was
primarily attributable to an increasing capitalization of interest expense on
the debt during the three-month period ended September 30, 2000.
Net Loss. We had net losses of $8.5 million and $8.2 million in the three-month
periods ended September 30, 1999 and 2000, respectively.
Nine months ended September 30, 1999 compared to nine months ended September 30,
2000
Revenue. Revenue decreased from $4.8 million for the nine-month period ended
September 30, 1999 to $2.7 million for the nine-month period ended September 30,
2000. The decrease is attributable to a lack of contract revenue during the
third quarter of 2000, as mentioned above.
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Cost of Goods Sold. As a result of our decreased revenue, our cost of goods
sold consequently decreased from $4.3 million for the nine-month period ended
September 30, 1999 to $1.7 million for the nine-month period ended September 30,
2000. Costs for both periods primarily consisted of the direct costs associated
with obtaining third-party geographic imagery for resale.
Selling, General, and Administrative Expenses. Total selling, general, and
administrative expenses for the nine-month period ended September 30, 1999 were
$7.7 million, of which $5.6 million were general and administrative, and $2.1
million were sales and marketing. Total selling, general, and administrative
expenses for the nine-month period ended September 30, 2000 were $11.0 million,
of which $7.0 million were general and administrative, and $4.0 million were
sales and marketing. As expected, general and administrative expenses increased
in the first nine months of 2000 when compared to the first nine months of 1999
due to our implementation of new procedures in preparation for full-scale
operations. Selling expenses increased in the first nine months of 2000 when
compared to the first nine months of 1999 as a result of increased sales staff
levels and increased marketing efforts in preparation for market entry of our
products and services.
Research and Development. Our research and development costs increased from
$7.7 million for the nine-month period ended September 30, 1999 to $9.3 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 nine-month periods
ended September 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.
Interest income (expense), net. Net interest income (expense) increased from
($769,887) for the nine-month period ended September 30, 1999 to ($1.3 million)
for the nine-month period ended September 30, 2000. This increase was primarily
attributable to interest expense on the debt from the unit offering of July 1999
incurred for a small portion of the nine-month period ended September 30, 1999,
as compared to that of the entire nine-month period ended September 30, 2000.
Net Loss. We had net losses of $15.6 million and $20.7 million during the nine-
month periods ended September 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 September 30, 2000, we had $82.2 and $30.2 million,
respectively, in cash and cash equivalents.
We used net cash in our operating activities of $21.2 million in the nine
months ended September 30, 2000, primarily to fund selling, general, and
administrative expenses, and research and development activities in support of
the QuickBird programs.
In the nine months ended September 30, 2000, we used $30.7 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.
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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 September 30, 2000, we had approximately $188 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 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,
U.S. dollar investment grade securities. We hold all investments through
maturity and none are held longer than 90 days. 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.
In connection with the issuance of our 12 1/2% Senior Notes and our 13%
Senior Discount Notes, we purchased U.S. Treasury notes. Our exposure to
interest rate and foreign exchange fluctuations for these investment securities
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. These factors include, among other, those listed
under "Summary," "Risk Factors," "Management's discussion and analysis of
financial condition and results of operations," "Business," and elsewhere
contained in our prospectus under Rule 424 as filed with the Securities and
Exchange Commission on October 13, 2000. In some cases, you can identify
forward-looking statements by terminology, such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of these terms or comparable
terminology. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
events, levels of activity, performance, or achievements. Our actual results
and the timing of certain events could differ materially from those anticipated
in the forward-looking statements.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three-months ended September 30, 2000, we granted stock options
to purchase 130,538 shares of our common stock with a 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 25,260 shares of our common stock for $0.25 per
share 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 exemption 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
On August 17, 2000, we filed a report on Form 8-K to restate and
file the consolidated financial statements for the fiscal year ended
December 31, 1999 and for the three-month period ended March 31,
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: November 13, 2000 By: /s/ Herbert F. Satterlee III
------------------------------------
Herbert F. Satterlee III
President, Chief Executive Officer,
Chairman of the Board
(Principal Executive Officer)
Date: November 13, 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
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27 Financial Data Schedule
