10-Q 1 0001.txt FORM 10-Q 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. 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 Part I Financial Information Item 1. Financial Statements EarthWatch Incorporated (A Development Stage Company)
Consolidated Balance Sheet ------------------------------------------------------------------------------------------------------------------------------------ December 31, September 30, 1999 2000 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 ================== ================
The accompanying notes are an integral part of these consolidated financial statements. 1 EarthWatch Incorporated (A Development Stage Company)
Consolidated Statement of Operations ------------------------------------------------------------------------------------------------------------------------------------ Period from January 1, 1995 (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 ------------- -------------- -------------- ------------ -------------- 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) ============= ============== ============== ============ ==============
The accompanying notes are an integral part of these consolidated financial statements. 2 EarthWatch Incorporated (A Development Stage Company)
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 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
The accompanying notes are an integral part of these consolidated financial statements. 3 EarthWatch Incorporated (A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) ------------------------------------------------------------------------------------------------------------------------------------ Convertible Convertible Series A Series B Preferred Stock Preferred Stock Shares Amount Shares Amount Balance at January 1, 1995 - $ - - $ - 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) - $ - - $ - ================== ================= ============== ================
Convertible Senior Convertible Series C Series D Preferred Stock Preferred Stock Shares Amount Shares Amount 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) - $ - - $ - ================ =============== ================ ===============
Additional Stock Common Stock Paid-in Subscription Shares Amount Capital Receivable 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 $ - ================ ============= =================== =================
Accumulated Other Total Comprehensive Accumulated Stockholders' Income (Loss) (Deficit) Equity (Deficit) 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) ================ ==================== =================
The accompanying notes are an integral part of these consolidated financial statements. 4 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.
Gross Unrealized Investment Securities Cost Gains (Losses) Fair Value --------------------- ----------------- ------------------ ----------------- 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- ================= ================== =================
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.
Gross Unrealized Investment Securities - Restricted Cost Gains (Losses) Fair Value ------------------------------------------------------------ ----------------- ------------------ ---------------- 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 ================= ================== =================
5 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:
December 31, September 30, 1999 2000 ------------ ------------ 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 ============ ============
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:
December 31, September 30, 1999 2000 ------------ ------------ 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 ============ ============
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 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. 7 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. 8 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. 9 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. 10 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. 11 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. 12 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) 13 EXHIBIT INDEX Exhibit Number Description -------------- ----------- 27 Financial Data Schedule