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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 March 31, 2001
Commission file number 333-39202
EarthWatch Incorporated
(Exact Name of Registrant as Specified in Its Charter)
Delaware 31-1420852
(State or other jurisdiction of (I.R.S. Employer Identification
Incorporation or organization) Number)
EarthWatch Incorporated
1900 Pike Road
Longmont, Colorado 80501
(Address of principal executive offices, including zip code)
(303) 682-3800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The registrant had 217,901 shares of common stock outstanding as of April
30, 2001.
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Table of Contents
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. 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds. 10
Item 4. Submission of Matters to a Vote of Security Holders. 10
Item 6. Exhibits and Reports on Form 8-K. 11
Signatures 13
- --------------------------------------------------------------------------------
Reference is made in this document to Digital Globe(R) and Your Planet
Online(R), which are registered trademarks owned by the Company, and Seconds on
Orbit(TM), which is a trademark of the Company.
EarthWatch Incorporated
(A Development Stage Company)
Consolidated Balance Sheet
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, March 31,
2000 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,725,779 $ 27,780,718
Accounts receivable, net of allowance for doubtful accounts of zero and
$81,148, respectively 251,408 1,512,061
Insurance proceeds receivable - restricted 265,000,000 -
Investment securities - -
Investment securities - restricted 6,295,382 236,760,935
Other current assets 398,101 568,722
------------- -------------
Total current assets 277,670,670 266,622,436
------------- -------------
Property, plant, and equipment:
Construction in progress 89,716,474 94,881,022
Computer equipment and software 15,365,444 15,370,977
Machinery and equipment 5,770,640 5,770,640
Furniture and fixtures 1,281,911 1,281,474
------------- -------------
Total property, plant, and equipment 112,134,469 117,304,113
Accumulated depreciation and amortization (15,419,714) (16,162,614)
------------- -------------
Net property, plant, and equipment 96,714,755 101,141,499
------------- -------------
Debt issuance costs, net 4,682,127 4,504,223
Other assets 310,664 281,591
------------- -------------
TOTAL ASSETS $ 379,378,216 $ 372,549,749
============= =============
LIABILITIES, MANDATORY REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Current liabilities:
Accounts payable $ 11,289,385 $ 3,721,184
Accounts payable to related parties 982,232 690,149
Accrued expenses 3,988,060 4,070,551
Debt 195,484,650 203,591,898
------------- -------------
Total current liabilities 211,744,327 212,073,782
------------- -------------
Commitments and contingencies
Mandatorily redeemable preferred stock due 2009:
7% Cumulative convertible - Series A; $.001 par value; 10,000,000 shares
authorized; 8,051,273 and 8,192,170 shares issued and outstanding as
of December 31, 2000 and March 31, 2001, respectively; aggregate
liquidation preference of $28,672,595 as of March 31, 2001 27,473,699 27,987,928
7% Cumulative convertible - Series B; $.001 par value; 10,000,000 shares authorized;
8,051,273 and 8,192,170 shares issued and outstanding as of December
31, 2000 and March 31, 2001, respectively; aggregate liquidation
preference of $28,672,595 as of March 31, 2001 27,473,699 27,987,928
8.5% Cumulative convertible - Series C; $.001 par value; 25,000,000 shares authorized,
issued and outstanding as of December 31, 2000 and March 31, 2001; aggregate
liquidation preference of $89,440,001 as of March 31, 2001 86,298,993 88,199,432
------------- -------------
Total mandatorily redeemable preferred stock 141,246,391 144,175,288
------------- -------------
Stockholders' equity (deficit):
Common stock; $.001 par value; 100,000,000 shares authorized; 195,420, and
215,438 shares issued and outstanding at December 31, 2000 and March
31, 2001, respectively 195 215
Additional paid-in capital 61,824,829 58,902,055
Deferred stock compensation (534,600) (493,375)
Deficit accumulated during the development stage (34,902,926) (42,108,216)
------------- -------------
Total stockholders' equity (deficit) 26,387,498 16,300,679
------------- -------------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 379,378,216 $ 372,549,749
============= =============
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
Three Months Ended March 31, (Inception) to
------------- ------------- March 31,
2000 2001 2001
------------ ------------- -------------
Revenue $ 2,019,248 $ 3,817,744 $ 20,205,235
Cost of goods sold 1,343,535 2,970,050 16,110,289
------------ ------------- -------------
Gross profit 675,713 847,694 4,094,946
------------ ------------- -------------
Expenses:
Selling, general, and administrative 3,015,742 2,794,366 52,874,881
Research and development 2,379,624 2,158,457 74,094,239
Loss from impairment of fixed assets, net of
insurance recoveries - - (81,489,890)
Gain from arbitration settlement - - (1,514,776)
------------ ------------- -------------
Total expenses 5,395,366 4,952,823 43,964,454
------------ ------------- -------------
Loss from operations (4,719,653) (4,105,129) (39,869,508)
Interest expense (1,984,390) (4,726,377) (16,215,287)
Interest income 1,332,397 1,626,216 16,976,579
------------ ------------- -------------
Loss before provision for income taxes (5,371,646) (7,205,290) (39,108,216)
Provision for income taxes - - (3,000,000)
------------ -------------- -------------
Net loss (5,371,646) (7,205,290) (42,108,216)
Mandatorily redeemable preferred stock
dividends and accretion (2,809,259) (2,927,755) (20,886,350)
------------ ------------- -------------
Net loss attributable to common stockholders $ (8,180,905) $ (10,133,045) $ (62,994,566)
============ ============= =============
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) to
Three Months Ended March 31, March 31,
------------------------------
2000 2001 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,371,646) $ (7,205,290) $(42,108,216)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation expense 894,225 742,900 17,744,645
Non-cash interest expense 1,980,668 4,725,976 14,823,356
Non-cash loss from disposals and impairments of property
plant, and equipment, net of insurance recoveries - - (50,886,959)
Non-cash stock compensation - 41,225 962,625
Changes in assets and liabilities:
Accounts receivable, net 684,691 (1,260,653) (512,936)
Insurance proceeds receivable - restricted - 265,000,000 265,000,000
Other assets 562,068 (141,548) (627,939)
Accounts payable (4,379,717) (7,568,201) 3,208,575
Accounts payable - related parties (489,884) (292,083) 690,149
Accrued expenses 49,872 83,633 1,944,903
------------ ------------- ------------
Net cash provided (used) by operating activities (6,069,723) 254,125,959 210,238,203
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities - (236,760,935) (281,909,267)
Proceeds from maturities of investment securities 2,814,866 6,295,382 44,990,238
Proceeds from sales of property, plant, and equipment - - 4,216,978
Constuction in progress additions (14,207,685) (1,586,106) (267,440,060)
Other property, plant, and equipment additions (1,592,802) (5,096) (15,566,564)
------------ ------------- ------------
Net cash used by investing activities (12,985,621) (232,056,755) (515,708,675)
------------ ------------- ------------
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 11,260 5,001 191,177,335
Cash acquired in merger - - 916,457
Principal payments on debt (30,164) (19,266) (4,560,976)
------------ ------------- ------------
Net cash provided (used) by financing activities (18,904) (14,265) 333,251,190
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents (19,074,248) 22,054,939 27,780,718
Cash and cash equivalents, beginning of period 82,193,314 5,725,779 -
------------ ------------- ------------
Cash and cash equivalents, end of period $ 63,119,066 $ 27,780,718 $ 27,780,718
============ ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 3,481 $ 401 $ 12,672,062
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Assets acquired pursuant to capital-lease and financing obligations $ - $ - $ 4,599,935
Net book value of assets acquired 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 5,295,655 3,578,442 51,118,378
Issuance of mandatorily redeemable preferred stock 2,727,967 - 50,706,266
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 Convertible
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
------------------------- ------------------------ -----------------------
Shares Amount Shares Amount Shares Amount
---------- ------------ -------- ------------ ---------- --------
Balance at January 1, 1995 (inception) - $ - - $ - - $ -
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 and comprehensive income (loss) - - - - - -
---------- ------------ -------- ----------- ---------- --------
Balance at December 31, 1995 18,837,286 36,664,543 189,040 1,890,400 - -
Restatement of capital stock and additional
paid-in capital for reincorporation as
of January 1, 1996 - (36,645,706) - (1,890,211) - -
Issuance of stock in exchange for property
in-kind and other, net 513,124 513 22,260 22 - -
Issuance of preferred stock - - 100,000 100 7,000,000 7,000
Property in-kind contributed by stockholder - - - - - -
Net and comprehensive income (loss) - - - - - -
---------- ------------ -------- ----------- ---------- --------
Balance at December 31, 1996 19,350,410 19,350 311,300 311 7,000,000 7,000
Issuance of common stock - - - - - -
Issuance of common stock for services
and for stock options exercised - - - - - -
Issuance of preferred stock - - - - - -
Other - - - - - -
Net and comprehensive income (loss) - - - - - -
---------- ------------ -------- ----------- ---------- --------
Balance at December 31, 1997 19,350,410 19,350 311,300 311 7,000,000 7,000
Issuance of preferred and common stock for
stock options exercised 17,916 18 - - - -
Net and comprehensive income (loss) - - - - - -
---------- ------------ -------- ----------- ---------- --------
Balance at December 31, 1998 19,368,326 19,368 311,300 311 7,000,000 7,000
Issuance of preferred and common stock for
stock options exercised - - - - - -
Issuance of common stock for warrants
exercised - - - - - -
Surrender and cancellation of shares from
Ball Technologies Holdings Corp. (2,761,983) (2,762) - - - -
Reclassification of preferred and common
stock into Series C 8.5% Cumulative
Convertible Redeemable Preferred Stock
Due 2009 in connection with the
recapitalization (16,606,343) (16,606) (311,300) (311) (7,000,000) (7,000)
Issuance of preferred and common stock
in connection with the recapitalization - - - - - -
Mandatorily redeemable preferred stock
dividends and accretion - - - - - -
Net and comprehensive income (loss) - - - - - -
---------- ------------ -------- ----------- ---------- --------
Balance at December 31, 1999 - - - - - -
Issuance of preferred and common stock
for stock options exercised - - - - - -
Deferred stock compensation - - - - - -
Amortization of deferred stock compensation - - - - - -
Mandatorily redeemable preferred stock
dividends and accretion - - - - - -
Net and comprehensive income (loss) - - - - - -
---------- ------------ -------- ----------- ---------- --------
Balance at December 31, 2000 - - - - - -
Issuance of preferred and common stock
for stock options exercised (unaudited) - - - - - -
Amortization of deferred stock
compensation (unaudited) - - - - - -
Mandatorily redeemable preferred stock
dividends and accretion (unaudited) - - - - - -
Net and comprehensive income (loss) (unaudited) - - - - - -
---------- ------------ -------- ----------- ---------- --------
Balance at March 31, 2001 (unaudited) - $ - - $ - - $ -
========== ============ ======== =========== ========== ========
- ----------------------------------------------------------------------------------------------------------------------------------
Convertible
Series D Additional
Preferred Stock Common Stock Paid-in
---------------------------- -----------------------------
Shares Amount Shares Amount Capital
---------- ----------- ---------- ------------ ------------
Balance at January 1, 1995 (inception) - $ - $ - $ - $ -
Issuance of stock in exchange for future
cash contributions and contributions
of property in-kind - - 1 - -
Contribution of net assets in merger - - - - -
Issuance of common stock for services
and for stock options exercised - - 79,500 63,600 -
Issuance of preferred stock - - - - -
Property in-kind, conversion of debt, and
cash contributions from stockholder - - - - -
Net and comprehensive income (loss) - - - - -
---------- ----------- ---------- ------------ ------------
Balance at December 31, 1995 - - 79,501 63,600 -
Restatement of capital stock and additional
paid-in capital for reincorporation as
of January 1, 1996 - - - (63,521) 38,599,438
Issuance of stock in exchange for property
in-kind and other, net - - - - 2,288,561
Issuance of preferred stock 400,000 400 - - 69,833,305
Property in-kind contributed by stockholder - - - - (25,944)
Net and comprehensive income (loss) - - - - -
---------- ----------- ---------- ------------ ------------
Balance at December 31, 1996 400,000 400 79,501 79 110,695,360
Issuance of common stock - - - - 1,229,240
Issuance of common stock for services
and for stock options exercised - - 69,416 70 55,463
Issuance of preferred stock 600,000 600 - - 5,999,400
Other - - - - (4,773)
Net and comprehensive income (loss) - - - - -
---------- ----------- ---------- ------------ ------------
Balance at December 31, 1997 1,000,000 1,000 148,917 149 117,974,690
Issuance of preferred and common stock for
stock options exercised - - 54,631 55 50,799
Net and comprehensive income (loss) - - - - -
---------- ----------- ---------- ------------ ------------
Balance at December 31, 1998 1,000,000 1,000 203,548 204 118,025,489
Issuance of preferred and common stock for
stock options exercised - - 1,000 1 799
Issuance of common stock for warrants
exercised - - 1,556,000 1,556 14,004
Surrender and cancellation of shares from
Ball Technologies Holdings Corp. - - - - 2,762
Reclassification of preferred and common
stock into Series C 8.5% Cumulative
Convertible Redeemable Preferred Stock
Due 2009 in connection with the
recapitalization (1,000,000) (1,000) (1,760,548) (1,761) (39,765,364)
Issuance of preferred and common stock
in connection with the recapitalization - - 1 - -
Mandatorily redeemable preferred stock
dividends and accretion - - - - (6,690,537)
Net and comprehensive income (loss) - - - - -
---------- ----------- ---------- ------------ ------------
Balance at December 31, 1999 - - 1 - 71,587,153
Issuance of preferred and common stock
for stock options exercised - - 195,419 195 49,734
Deferred stock compensation - - - - 1,456,000
Amortization of deferred stock compensation - - - - -
Mandatorily redeemable preferred stock
dividends and accretion - - - - (11,268,058)
Net and comprehensive income (loss) - - - - -
---------- ----------- ---------- ------------ ------------
Balance at December 31, 2000 - - 195,420 195 61,824,829
Issuance of preferred and common stock
for stock options exercised (unaudited) - - 20,018 20 4,981
Amortization of deferred stock
compensation (unaudited) - - - - -
Mandatorily redeemable preferred stock
dividends and accretion (unaudited) - - - - (2,927,755)
Net and comprehensive income (loss) (unaudited) - - - - -
---------- ----------- ---------- ------------ ------------
Balance at March 31, 2001 (unaudited) - $ - 215,438 $ 215 $ 58,902,055
========== =========== =========== ============ ============
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated Deficit Accumulated
Other During the Total
Comprehensive Development Stockholders'
Other Income (Loss) Stage Equity (Deficit)
------------ ------------- ------------------- ----------------
Balance at January 1, 1995 (inception) $ - $ - $ - $ -
Issuance of stock in exchange for future
cash contributions and contributions
of property in-kind (14,400,000) - - -
Contribution of net assets in merger - - - 551,908
Issuance of common stock for services
and for stock options exercised - - - 63,600
Issuance of preferred stock - - - 23,603,035
Property in-kind, conversion of debt, and
cash contributions from stockholder 13,381,523 - - 13,381,523
Net and comprehensive income (loss) - - (3,909,208) (3,909,208)
------------ ------------- ------------------- ----------------
Balance at December 31, 1995 (1,018,477) - (3,909,208) 33,690,858
Restatement of capital stock and additional
paid-in capital for reincorporation as
of January 1, 1996 - - - -
Issuance of stock in exchange for property
in-kind and other, net - - - 2,289,096
Issuance of preferred stock - - - 69,840,805
Property in-kind contributed by stockholder 1,018,477 - - 992,533
Net and comprehensive income (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 and comprehensive income (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 and comprehensive income (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)
Net and comprehensive income (loss) - (159,382) (20,318,766) (20,478,148)
------------ ------------- ------------------- ----------------
Balance at December 31, 1999 - (115,953) (111,584,858) (40,113,658)
Issuance of preferred and common stock
for stock options exercised - - - 49,929
Deferred stock compensation (1,456,000) - - -
Amortization of deferred stock compensation 921,400 - - 921,400
Mandatorily redeemable preferred stock
dividends and accretion - - - (11,268,058)
Net and comprehensive income (loss) - 115,953 76,681,932 76,797,885
------------ ------------- ------------------- ----------------
Balance at December 31, 2000 (534,600) - (34,902,926) 26,387,498
Issuance of preferred and common stock
for stock options exercised (unaudited) - - - 5,001
Amortization of deferred stock
compensation (unaudited) 41,225 - - 41,225
Mandatorily redeemable preferred stock
dividends and accretion (unaudited) - - - (2,927,755)
Net and comprehensive income (loss) (unaudited) - (7,205,290) (7,205,290)
------------ ------------- ------------------- ----------------
Balance at March 31, 2001 (unaudited) $ (493,375) $ - $ (42,108,216) $ 16,300,679
============ ============= =================== ================
4
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Basis of Presentation
The consolidated financial statements have been prepared by EarthWatch
Incorporated and its subsidiaries without an audit, except for the December
31, 2000 balance sheet, which has been derived from audited financial
statements. The statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") and
reflect all adjustments, consisting of only normal recurring accruals which
are, in the opinion of management, necessary for a fair statement of the
results of operations for the periods shown. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto filed in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2000. The
results of operations for the three months ended March 31, 2001 are not
necessarily indicative of the results to be expected for the full year
ending December 31, 2001.
2. Construction in Progress
Construction in progress consists primarily of satellite construction
and launch costs, ground station construction costs, and third-party
developed software. Construction in progress consisted of the following:
December 31, 2000 March 31, 2001
----------------- --------------
QuickBird 2 satellite $55,952,495 $59,590,775
Digital Globe software 26,570,191 27,623,902
Ground station equipment 7,193,788 7,666,345
----------- -----------
$89,716,474 $94,881,022
=========== ===========
3. Debt
On February 28, 2001, as required by the indentures governing our 12
1/2% Senior Notes due 2005 and our 13% Senior Discount Notes due 2007,
respectively, we offered to purchase all of our outstanding notes at their
accreted value on the date of purchase, using the insurance proceeds
relating to the loss of our QuickBird 1 satellite in November 2000. The
offer expired on April 2, 2001 and we repurchased $127.4 million in
principal amount at maturity of outstanding 13% notes and all outstanding
12 1/2% notes on April 3, 2001, resulting in an extraordinary loss on early
extinguishment of debt of approximately $23.0 million.
In connection with the offer, we entered into a Recapitalization
Agreement and Consent dated as of April 2, 2001 ("Recapitalization
Agreement") with certain holders of our 13% notes. Pursuant to the
Recapitalization Agreement, these noteholders agreed to refrain from
tendering their notes in the offer, thus allowing us to have the use of the
funds that would otherwise be used to repurchase their notes. We also
granted registration rights to certain holders of 13% notes and Series C
preferred stock and pledged government securities to secure certain
repurchase rights of the noteholders. Furthermore, we obtained the consent
of these noteholders and amended the indenture governing the notes in
certain respects.
In the Recapitalization Agreement, we also agreed, among other things,
that we would, by no later than June 15, 2001:
. obtain at least $9 million of vendor financing from Ball
Aerospace & Technologies Corp.;
. amend our certificate of incorporation to (a) require that we
purchase, at each holder's option, that holder's shares of our
Series A and B preferred stock, if an insurable event occurs
under the QuickBird 2 insurance policy, (b) increase the number
of authorized shares of our common stock and each series of our
preferred stock, and (c) extend the time period by one year
during which holders of our preferred stock may convert their
shares into shares of our common stock;
. issue 10,843,297 additional shares of our Series C preferred
stock to the holders of 13% notes that signed the
Recapitalization Agreement;
5
EarthWatch Incorporated
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
. purchase at least $155 million of insurance covering the launch
and in-orbit operations of our QuickBird 2 satellite; and
. pledge the QuickBird 2 insurance in favor of The Bank of New
York, as collateral agent for (a) the holders of notes and for
Ball Aerospace, and (b) the holders of our Series A preferred
stock and Series B preferred stock.
In April 2001, we secured a $9.0 million borrowing facility with Ball
Aerospace & Technologies Corp., one of our stockholders, which we intend to
use to fund the completion of QuickBird 2. This vendor financing facility
will accrue interest at an annual rate of 11%, which will become payable
seven months following the launch of QuickBird 2. Beginning with the
eighth month and ending with the eighteenth month following the launch of
QuickBird 2, principal, in equal monthly amounts, and interest are payable
in cash each month. In conjunction with this arrangement, we agreed to
issue to Ball Aerospace & Technologies Corp. 903,608 shares of Series C
preferred stock.
We cannot assure you that the remaining contemplated transactions will
be completed. If we do not, among other things, consummate the transactions
required to be consummated by June 15, 2001, we must commence on the next
business day and complete within 20 business days thereafter an offer to
purchase all of the then-outstanding notes for a purchase price equal to
their accreted value as of the date of purchase.
We have incurred transaction costs associated with the Recapitalization
Agreement of approximately $1.2 million. The estimated fair value of our
debt instruments was approximately $233,192,000 at March 31, 2000.
Based on our current operating plan and provided we can complete the
other contemplated transactions in the Recapitalization Agreement prior to
June 15, 2001, we believe that existing capital resources will meet our
anticipated cash needs for the foreseeable future. If we face any launch
delays, if our satellite system takes longer to become operational, if
technical or regulatory developments require that we modify the design of
our satellite system, if we are unable to complete the other contemplated
transactions by June 15, 2001, if we are unable to achieve our revenue
targets, or if we incur other additional unforeseen costs, we may require
additional capital. We do not have a revolving credit facility or other
source of readily available capital. Therefore, any shortfall in funds
available for our operations or to service our debt would cause us serious
liquidity problems. In such case, we would need to seek additional
financing which we may not be able to obtain on commercially reasonable
terms or at all. Failure to obtain such additional financing may result in
a material adverse effect on our business and would significantly increase
existing doubt about our ability to continue as a going concern.
The Company's debt is comprised of the following at: December 31, March 31,
2000 2001
------------- -------------
13% Senior Discount Notes, net of unamortized discount of
$64,852,862 and $58,669,609, respectively, effective rate of 15.9% $ 134,147,138 $ 140,330,391
12 1/2% Senior Notes, net of unamortized discount of $10,731,089
and $8,777,514, respectively, effective rate of 12.9% 61,268,911 63,222,486
Capital-lease obligations 68,601 39,021
------------- ------------
195,484,650 203,591,898
Less: current portion (195,484,650) (203,591,898)
------------- -------------
$ -- $ --
============= =============
4. Commitments
Effective March 2001, we entered into a launch services agreement for
our QuickBird 2 satellite. This agreement increases our remaining
noncancelable contract commitments, excluding the purchase of launch and
in-orbit insurance discussed above, through launch to $27.4 million.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and notes
thereto included elsewhere in this Quarterly Report on Form 10-Q. Some of the
statements in this Quarterly Report on Form 10-Q constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties, and
other factors that may cause our or our industry's results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. These factors include, among others, those listed
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere in this Quarterly Report on Form 10-Q and in the
other documents we file with the Securities and Exchange Commission, including
our Annual Report on Form 10-K for the year ended December 31, 2000. In some
cases, you can identify forward-looking statements by terminology, such as
"may," "will," "should," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of these terms or comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, events, levels of activity, performance, or
achievements. Our actual results and the timing of certain events could differ
materially from those anticipated in the forward-looking statements.
Results of Operations
Three months ended March 31, 2000 compared to three months ended March 31, 2001
Revenue. Our revenue has been generated primarily from the processing and sale
of geographic imagery purchased from third-party suppliers. These sources of
revenue increased from $2.0 million for the three-month period ended March 31,
2000 to $3.8 million for the three-month period ended March 31, 2001. Varying
delivery dates within new and existing contracts have resulted in significant
revenue fluctuations for these two periods. Revenue for the remainder of fiscal
2000 decreased substantially in anticipation of the launch of QuickBird 1. A
similar decrease is not expected in fiscal 2001.
Cost of Goods Sold. Our cost of goods sold includes third party geographic
imagery sold under contract. As a result of our increased revenue, our cost of
goods sold consequently increased from $1.3 million for the three-month period
ended March 31, 2000 to $3.0 million for the three-month period ended March 31,
2001. Costs for both periods were primarily the direct costs associated with
obtaining third-party geographic imagery for resale.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses were $3.0 million and $2.8 million for the three-month
periods ended March 31, 2000 and 2001, respectively. These expenses decreased
due to staff reductions and reduced operating activities following the loss of
QuickBird 1. We expect these costs to increase in the future as we increase
staff levels and implement new procedures in preparation for full-scale
operations and market entry of our products and services.
Research and Development. Our research and development costs were $2.4 million
and $2.2 million for the three-month periods ended March 31, 2000 and 2001,
respectively. These expenses decreased due to staff reductions and reduced
operating activities following the loss of QuickBird 1.
Interest Expense. Interest expense increased significantly from $2.0 million for
the three-month period ended March 31, 2000 to $4.7 million for the three-month
period ended March 31, 2001. This increase was the result of higher average debt
balances outstanding during the three-month period ended March 31, 2001 and
lower capitalization of interest due to the completion of QuickBird 1 in 2000.
Interest Income. Interest income increased from $1.3 million for the three-month
period ended March 31, 2000 to $1.6 million for the three-month period ended
March 31, 2001. This increase was the result of higher average investment
balances outstanding during the three-month period ended March 31, 2001.
Net Loss. We had net losses of $5.4 million and $7.2 million for the three-
month periods ended March 31, 2000 and 2001, respectively.
7
Liquidity and Capital Resources
On February 28, 2001, as required by the indentures governing our 12
1/2% Senior Notes due 2005 and our 13% Senior Discount Notes due 2007,
respectively, we offered to purchase all of our outstanding notes at their
accreted value on the date of purchase, using the insurance proceeds relating to
the loss of our QuickBird 1 satellite in November 2000. The offer expired on
April 2, 2001 and we repurchased $127.4 million in principal amount at maturity
of outstanding 13% notes and all outstanding 12 1/2% notes on April 3, 2001,
resulting in an extraordinary loss on early extinguishment of debt of
approximately $23.0 million.
In connection with the offer, we entered into a Recapitalization
Agreement and Consent dated as of April 2, 2001 ("Recapitalization Agreement")
with certain holders of our 13% notes. Pursuant to the Recapitalization
Agreement, these noteholders agreed to refrain from tendering their notes in the
offer, thus allowing us to have the use of the funds that would otherwise be
used to repurchase their notes. We also granted registration rights to certain
holders of notes and Series C preferred stock and pledged government securities
to secure certain repurchase rights of the noteholders. Furthermore, we obtained
the consent of these noteholders and amended the indenture governing the notes
in certain respects.
In the Recapitalization Agreement, we also agreed, among other things,
that we would, by no later than June 15, 2001:
. obtain at least $9 million of vendor financing from Ball
Aerospace & Technologies Corp.;
. amend our certificate of incorporation to (a) require that we
purchase, at each holder's option, that holder's shares of our
Series A and B preferred stock, if an insurable event occurs
under the QuickBird 2 insurance policy, (b) increase the number
of authorized shares of our common stock and each series of our
preferred stock, and (c) extend the time period by one year
during which holders of our preferred stock may convert their
shares into shares of our common stock;
. issue 10,843,297 additional shares of our Series C preferred
stock to the holders of 13% notes that signed the
Recapitalization Agreement;
. issue 903,608 additional shares of our Series C preferred stock
to the Ball Technologies Holding Corporation;
. purchase at least $155 million of insurance covering the launch
and in-orbit operations of our QuickBird 2 satellite; and
. pledge the QuickBird 2 insurance in favor of The Bank of New
York, as collateral agent for (a) the holders of notes and for
Ball Aerospace, and (b) the holders of our Series A preferred
stock and Series B preferred stock.
In April 2001, we secured a $9.0 million borrowing facility with Ball
Aerospace & Technologies Corp., one of our stockholders, which we intend to use
to fund the completion of QuickBird 2. This vendor financing facility will
accrue interest at an annual rate of 11%, which will become payable seven months
following the launch of QuickBird 2. Beginning with the eighth month and ending
with the eighteenth month following the launch of QuickBird 2, principal, in
equal monthly amounts, and interest are payable in cash each month. In
conjunction with this arrangement, we agreed to issue to Ball Aerospace &
Technologies Corp. 903,608 shares of Series C preferred stock.
We cannot assure you that the remaining contemplated transactions will
be completed. If we do not, among other things, consummate the transactions
required to be consummated by June 15, 2001, we must commence on the next
business day and complete within 20 business days thereafter an offer to
purchase all of the then-outstanding notes for a purchase price equal to their
accreted value as of the date of purchase.
As a result of receiving $265 million of insurance proceeds, we had net
cash provided by operating activities of $254.1 million for the three-month
period ended March 31, 2001. As a result of our collateral agreement with our
note holders, $236.8 million of these proceeds were deposited into a restricted
escrow account for the repurchase of notes submitted in our tender offer.
Excluding the insurance proceeds, we had net cash used by operating activities
of $10.9 million and $6.1 million for the three-month periods ended March 31,
2001 and
8
2000, respectively. This difference was primarily the result of a reduction in
accounts payable outstanding, resulting from the finalization of our
Recapitalization Agreement.
As a result of $236.8 million of the insurance proceeds being deposited
in a restricted escrow account, we had net cash used by investing activities of
$232.1 million for the three-month period ended March 31, 2001. Excluding this
amount, we had $4.7 million of cash provided by investing activities in 2001 as
compared to $13.0 million used by investing activities during the same period in
2000. This increase was primarily the result of the release of restricted
investments for final payment of the QuickBird 1 insurance premiums during the
three-month period ended March 31, 2001.
Based on our current operating plan and provided we can complete the
other contemplated transactions in the Recapitalization Agreement prior to June
15, 2001, we believe that existing capital resources will meet our anticipated
cash needs for the foreseeable future. If we face any launch delays, if our
satellite system takes longer to become operational, if technical or regulatory
developments require that we modify the design of our satellite system, if we
are unable to complete the other contemplated transactions by June 15, 2001, if
we are unable to achieve our revenue targets, or if we incur other additional
unforeseen costs, we may require additional capital. We do not have a revolving
credit facility or other source of readily available capital. Therefore, any
shortfall in funds available for our operations or to service our debt would
cause us serious liquidity problems. In such case, we would need to seek
additional financing which we may not be able to obtain on commercially
reasonable terms or at all. Failure to obtain such additional financing may
result in a material adverse effect on our business and would significantly
increase existing doubt about our ability to continue as a going concern.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We invest our cash and cash equivalents and restricted investments in
short-term, U.S. dollar interest-bearing, investment grade securities with
maturities less than 90 days. As of March 31, 2001, the interest rates on these
investments have not fluctuated more than one percentage point since they were
purchased. We do not currently hold any derivative instruments and do not engage
in hedging activities. Also, we currently do not hold any variable interest rate
debt or lines of credit, and currently do not generally enter into any
transactions denominated in a foreign currency. Therefore, our exposure to
interest rate and foreign exchange fluctuations is minimal.
As of March 31, 2001, we estimate the fair value of our debt to be
approximately $233.2 million using its accreted value plus accrued and unpaid
interest as of that date. This methodology was utilized as a result of our
tender offer in effect on that date and our requirement to make a repurchase
offer for the untendered notes in the event qualifying insurance for QuickBird 2
is not obtained by the required date. Upon the resolution of the insurance
contingency, the fair value of the untendered notes will depend upon rates for
similar instruments at that time. To the extent interest rates increase, our
costs of financing would increase at such time as we are required to refinance
our debt.
9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
During the three-months ended March 31, 2001, we granted stock options
to purchase 26,400 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.
In April 2001, pursuant to the Recapitalization Agreement, we entered
into the First Supplemental Indenture to the Indenture, which governs our 13%
notes and requires us, among other things, to (a) obtain launch and in-orbit
operations insurance in respect of our anticipated QuickBird 2 satellite and (b)
make an offer to repurchase the 13% notes at their accreted value on the date of
repurchase (i) in the event all of the contemplated transactions are not
completed by June 15, 2001 and to consummate the offer to repurchase no later
than August 1, 2001, and (ii) within 30 days of receipt by the collateral
trustee of any proceeds under the QuickBird 2 insurance policy and to consummate
such offer to repurchase no later than 60 days after the commencement of the
offer.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of our stockholders was held on December 12,
2000.
(b) The annual meeting included the election of directors. The names
of the directors and the results of the vote for such directors are described in
(c) below.
(c) The matters voted upon at the annual meeting are as follows:
(1) Election of Directors
---------------------
Director Votes Received Votes Withheld
-------- -------------- --------------
Paul M. Albert, Jr. 7,912,798 0
Donald E. Foley 7,912,798 0
Anne Karalekas 7,912,798 0
Takatoshi Kodaira 22,378,612 2,125,808
Alexander S. Lushtak 22,377,365 2,127,055
Michael J. Petrick 7,912,798 0
Dr. Marvin R. Sambur 7,912,798 0
Herbert F. Satterlee, III 22,577,202 1,927,218
Walter S. Scott 22,579,669 1,924,751
Donald W. Vanlandingham 22,305,493 2,198,927
Based upon these voting results, each of the aforementioned
persons was elected as a director. In March, 2001, Dr. Sambur informed
us that he was resigning from the board of directors, effective the
last day of March, to devote his time to other matters. On May 7, the
board elected Henry J. Driesse, Vice President of ITT Industries, Inc.
and President of ITT Defense, to serve the remainder of Dr. Sambur's
term.
(2) Approval of 1999 Equity Incentive Plan
--------------------------------------
At the annual meeting, the stockholders were asked to approve the
1999 Equity Incentive Plan. Under the plan, 10,000,000 shares of common
stock have been reserved for issuance. The plan provides for the grant
of incentive stock options to employees and nonstatutory stock options,
stock bonuses, and restricted stock awards to employees, directors, and
consultants to purchase common stock. The purpose of
10
the plan is to secure and retain qualified personnel and to provide
incentives to such personnel to achieve success for the company. The
plan is administered by the board or a committee appointed by the
board, which determines recipients and types of awards to be granted,
including the exercise price, number of shares subject to the award,
and the exercisability thereof.
The results of the vote for the approval of the 1999 Equity
Incentive Plan are as follows:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
35,107,807 12,194 237
Our current Amended and Restated Certificate of Incorporation
contains provisions that may conflict with respect to the ability of
our stockholders to grant proxies or powers of attorney at any annual
or special meeting of stockholders. As a result, there is some issue
with respect to the ability of such stockholders to grant proxies or
powers of attorney. However, many of our stockholders have purported to
use proxies in connection with the 2000 annual meeting of stockholders
to approve the actions above. Therefore, there may be uncertainty with
respect to the validity of actions that have been approved by the
stockholders at the annual meeting. Accordingly, we plan to solicit the
stockholders by written consent to, among other things, ratify the
actions of the stockholders at the 2000 annual meeting. However, we
cannot assure you that the consent solicitation will be consummated, or
if it is consummated, that the stockholders will ratify the actions
taken at the 2000 annual meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
---------- -----------
2.2* Recapitalization Agreement and Consent
dated as of April 2, 2001 by and among
EarthWatch Incorporated, Morgan Stanley
& Co. Incorporated, Post Balanced Fund,
Post High Yield LP, Post Total Return
Fund, Opportunity Fund, Dickstein & Co.,
L.P., Dickstein International Limited,
Hitachi Software Engineering Co., Ltd.,
Sun America High Income Fund and Sun
America Series Trust High Yield
Portfolio.
4.10* Notes Registration Rights Agreement
dated as of April 3, 2001 by and among
EarthWatch Incorporated, The Bank of New
York and Morgan Stanley & Co.
Incorporated.
4.11* Series C Preferred Registration Rights
Agreement dated as of April 3, 2001 by
and among EarthWatch Incorporated,
Morgan Stanley & Co. Incorporated, Post
Balanced Fund, Post High Yield LP, Post
Total Return Fund, Opportunity Fund,
Dickstein & Co., L.P., Dickstein
International Limited, Sun America High
Income Fund, Sun America Series Trust
High Yield Portfolio, Hitachi Software
Engineering Co., Ltd. and Ball
Technologies Holdings Corp.
4.12* Pledge Agreement dated as of April 3,
2001 by and among EarthWatch
Incorporated, The Bank of New York, as
trustee, and The Bank of New York, as
securities intermediary.
4.13* First Supplemental Indenture to the
Indenture dated as of April 16, 2001 by
and between EarthWatch Incorporated and
The Bank of New York, as trustee.
10.12+ Launch Services Agreement dated February
2, 2001 between EarthWatch and Delta
Launch Services, Inc.
10.12(a)+ Amendment 1 to Launch Services Agreement
dated March 15, 2001 between EarthWatch
and Delta Launch Services, Inc.
10.13 Credit Agreement dated as of April 20,
2001 by and between EarthWatch
Incorporated and Ball Aerospace &
Technologies Corp.
* Incorporated by reference to the exhibits with the
corresponding exhibit numbers in our Current Report on Form
8-K filed with the Securities and Exchange Commission on
April 25, 2001.
11
+ Portions of this exhibit have been omitted pursuant to a
request for confidential treatment, and the omitted portions
have been filed separately with the Securities and Exchange
Commission.
(b) Reports on Form 8-K
A report on Form 8-K was filed on March 21, 2001 to report
preliminary unaudited financial information for the year ended December
31, 2000.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Longmont, State of
Colorado.
EARTHWATCH INCORPORATED
(Registrant)
Date: May 15, 2001 By: /s/ Henry E. Dubois
---------------------------- ------------------------------
Henry E. Dubois
Chief Financial Officer,
Chief Operating Officer,
Executive Vice President
(Principal Financial and
Accounting Officer)
13