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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 September 30, 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 272,059 shares of common stock outstanding as of
September 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. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds. 11
Item 6. Exhibits and Reports on Form 8-K. 11
Signatures 12
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Reference is made in this document to Digital Globe (R), Your Planet Online (R)
and Seconds on Orbit(R), which are registered trademarks owned by the Company.
EarthWatch Incorporated, dba DigitalGlobe
(A Development Stage Company)
Consolidated Balance Sheet
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, September 30,
2000 2001
--------------- ---------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,725,779 $ 18,548,382
Accounts receivable 251,408 1,759,576
Insurance proceeds receivable - restricted 265,000,000
Investment securities - restricted 6,295,382
Other current assets 398,101 660,366
--------------- ---------------
Total current assets 277,670,670 20,968,324
--------------- ---------------
Property, plant, and equipment:
Construction in progress 89,716,474 169,765,844
Computer equipment and software 15,365,444 15,770,433
Machinery and equipment 5,770,640 5,547,978
Furniture and fixtures 1,281,911 1,352,770
--------------- ---------------
Total property, plant, and equipment 112,134,469 192,437,025
Accumulated depreciation and amortization (15,419,714) (18,023,421)
--------------- ---------------
Net property, plant, and equipment 96,714,755 174,413,604
--------------- ---------------
Debt issuance costs, net 4,682,127 11,345,562
Other assets 310,664 281,591
--------------- ---------------
TOTAL ASSETS $ 379,378,216 $ 207,009,081
=============== ===============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 11,289,385 $ 946,048
Accounts payable to related parties 982,232 554,782
Accrued expenses 3,988,060 5,103,905
Current portion of long-term debt to related parties, net 195,484,650 3,344,784
--------------- ---------------
Total current liabilities 211,744,327 9,949,519
Long-term debt to related parties, net - 60,647,926
--------------- ---------------
Total liabilities 211,744,327 70,597,445
--------------- ---------------
Contingencies
Mandatorily redeemable preferred stock due 2009:
7% Cumulative convertible - Series A; $.001 par value; 10,000,000 and 12,000,000
shares authorized and 8,051,273 and 8,481,405 shares issued and outstanding
as of December 31, 2000 and September 30, 2001, respectively; aggregate
liquidation preference of $29,684,918 as of September 30, 2001 27,473,699 29,043,129
7% Cumulative convertible - Series B; $.001 par value; 10,000,000 and 12,000,000
shares authorized and 8,051,273 and 8,481,405 shares issued and outstanding
as of December 31, 2000 and September 30, 2001, respectively; aggregate
liquidation preference of $29,684,918 as of September 30, 2001 27,473,699 29,043,129
8.5% Cumulative convertible - Series C; $.001 par value; 25,000,000 and 50,000,000
shares authorized and 25,000,000 and 38,690,897 issued and outstanding as of
December 31, 2000 and September 30, 2001, respectively; aggregate liquidation
preference of $135,418,140 as of September 30, 2001 86,298,993 97,845,415
--------------- ---------------
Total mandatorily redeemable preferred stock 141,246,391 155,931,673
--------------- ---------------
Stockholders' equity (deficit):
Common stock; $.001 par value; 100,000,000 and 150,000,000 shares authorized and
195,420 and 272,059 shares issued and outstanding as of December 31, 2000
and September 30, 2001, respectively 195 272
Additional paid-in capital 61,824,829 56,557,293
Deferred stock compensation (534,600) (382,806)
Deficit accumulated during the development stage (34,902,926) (75,694,796)
--------------- ---------------
Total stockholders' equity (deficit) 26,387,498 (19,520,037)
--------------- ---------------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 379,378,216 $ 207,009,081
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
1
EarthWatch Incorporated, dba DigitalGlobe
(A Development Stage Company)
Consolidated Statement of Operations (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Period from
January 1, 1995
Three Months Ended Nine Months Ended (Inception) to
September 30, September 30, September 30,
--------------------------- ------------------------------
2000 2001 2000 2001 2001
---------- ------------ -------------- ------------- ----------------
Revenue $ 268,023 $ 3,675,027 $ 2,672,424 $ 8,826,585 $ 25,214,076
Cost of goods sold 167,562 2,770,402 1,721,153 6,675,603 19,815,842
----------- ------------ -------------- ------------- ----------------
Gross profit 100,461 904,625 951,271 2,150,982 5,398,234
----------- ------------ -------------- ------------- ----------------
Expenses:
Selling, general and administrative 4,545,271 3,899,965 10,964,904 9,947,824 60,028,339
Research and development 3,323,092 3,724,720 9,315,262 8,013,748 79,949,530
Loss from impairment of fixed assets, net of
insurance recoveries - - - (81,489,890)
Gain from arbitration settlement - - - (1,514,776)
----------- ------------ -------------- ------------- ----------------
Total expenses 7,868,363 7,624,685 20,280,166 17,961,572 56,973,203
----------- ------------ -------------- ------------- ----------------
Loss from operations (7,767,902) (6,720,060) (19,328,895) (15,810,590) (51,574,969)
Interest expense (1,517,321) (4,947,251) (4,726,377) (16,215,287)
Interest income 1,079,505 325,441 3,616,133 2,783,462 18,133,825
----------- ------------ -------------- ------------- ----------------
Loss before provision for income taxes (8,205,718) (6,394,619) (20,660,013) (17,753,505) (49,656,431)
Provision for income taxes - - - - (3,000,000)
----------- ------------ -------------- ------------- ----------------
Loss before extraordinary loss on early
extinguishment of debt (8,205,718) (6,394,619) (20,660,013) (17,753,505) (52,656,431)
Extraordinary loss on early extinguishment of debt - - - (23,038,365) (23,038,365)
----------- ------------ -------------- ------------- ----------------
Net loss (8,205,718) (6,394,619) (20,660,013) (40,791,870) (75,694,796)
Mandatorily redeemable preferred stock
dividends and accretion (2,819,257) (2,226,933) (8,393,124) (5,286,618) (23,245,213)
----------- ------------ -------------- ------------- ----------------
Net loss attributable to common stockholders $(11,024,975) $(8,621,552) $(29,053,137) $(46,078,488) $(98,940,009)
=========== ============ ============== ============= ================
The accompanying notes are an integral part of these consolidated financial
statements.
2
EarthWatch Incorporated, dba DigitalGlobe
(A Development Stage Company)
Consolidated Statement of Cash Flows (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
--------------------------------------
2000 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(20,660,013) $ (40,791,870)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation expense 2,786,551 2,603,716
Non-cash interest expense 4,944,476 4,725,976
Non-cash extraordinary loss on early extinquishment of debt - 3,148,098
Non-cash loss from disposals and impairments of property
plant, and equipment, net of insurance recoveries (125) -
Non-cash stock compensation - 151,794
Changes in assets and liabilities:
Accounts receivable, net 395,041 (1,508,168)
Other assets 735,688 (233,191)
Accounts payable (10,450,186) (10,343,337)
Accounts payable - related parties (535,294) (427,450)
Accrued interest payable - related parties (69,189) (38,279,332)
Accrued expenses 1,670,473 1,116,987
------------------ ------------------
Net cash provided (used) by operating activities (21,182,578) (79,836,777)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities - (236,760,935)
Proceeds from maturities of investment securities 2,015,117 243,056,317
Proceeds from sales of property, plant, and equipment 125 -
Insurance proceeds from loss of satellites - 265,000,000
Constuction in progress additions (29,091,133) (61,947,933)
Other property, plant, and equipment additions (3,662,903) (253,185)
------------------ ------------------
Net cash used by investing activities (30,738,794) 209,094,264
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments related to) issuance of long-term notes, net - (1,727,490)
Proceeds from issuance of preferred and common stock, net 49,850 19,159
Cash acquired in merger - -
Principal payments on debt (74,431) (114,726,553)
------------------ ------------------
Net cash provided (used) by financing activities (24,581) (116,434,884)
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (51,945,953) 12,822,603
Cash and cash equivalents, beginning of period 82,193,314 5,725,779
------------------ ------------------
Cash and cash equivalents, end of period $ 30,247,361 $ 18,548,382
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 17,511 $ 38,280,272
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Assets acquired pursuant to capital-lease and financing obligations $ - $ 9,000,000
Net book value of assets acquired in merger - -
Liabilities assumed in merger - -
Stockholder advances converted to equity - -
Property in-kind contributed by stockholder - -
Non-cash interest capitalized in construction in progress 16,922,035 9,101,438
Issuance of mandatorily redeemable preferred stock 8,148,239 12,968,492
Consolidated Statement of Cash Flows (unaudited)
- ----------------------------------------------------------------------------------------------------------
Period from
January 1, 1995
(Inception) to
September 30,
2001
----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(75,694,796)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation expense 19,605,461
Non-cash interest expense 14,823,356
Non-cash extraordinary loss on early extinquishment of debt 3,148,098
Non-cash loss from disposals and impairments of property
plant, and equipment, net of insurance recoveries (79,886,959)
Non-cash stock compensation 1,073,194
Changes in assets and liabilities:
Accounts receivable, net (760,451)
Other assets (719,582)
Accounts payable 433,439
Accounts payable - related parties 554,782
Accrued interest payable - related parties (38,279,332)
Accrued expenses 2,978,257
----------------
Net cash provided (used) by operating activities (152,724,533)
----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities (281,909,267)
Proceeds from maturities of investment securities 281,751,173
Proceeds from sales of property, plant, and equipment 4,216,978
Insurance proceeds from loss of satellites 294,000,000
Constuction in progress additions (327,801,887)
Other property, plant, and equipment additions (15,814,653)
----------------
Net cash used by investing activities (45,557,656)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments related to) issuance of long-term notes, net 143,990,884
Proceeds from issuance of preferred and common stock, net 191,191,493
Cash acquired in merger 916,457
Principal payments on debt (119,268,263)
----------------
Net cash provided (used) by financing activities 216,830,571
----------------
Net increase (decrease) in cash and cash equivalents 18,548,382
Cash and cash equivalents, beginning of period -
----------------
Cash and cash equivalents, end of period $ 18,548,382
================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 50,951,933
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Assets acquired pursuant to capital-lease and financing obligations $ 13,599,935
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 56,641,374
Issuance of mandatorily redeemable preferred stock 63,674,758
The accompanying notes are an integral part of these consolidated financial
statements.
3
EarthWatch Incorporated, dba DigitalGlobe
(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 (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
Property in-kind contributed by stockholder - - - -
Net and comprehensive income (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 and comprehensive income (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 and comprehensive income (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 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 September 30, 2001 (unaudited) - $ - - $ -
================= ================= ============= ================
Convertible Senior Convertible
Series C Series D
Preferred Stock Preferred Stock
--------------------------------- ---------------------------------
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 - - - -
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 and comprehensive income (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 and comprehensive income (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 and comprehensive income (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 and comprehensive income (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 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 September 30, 2001 (unaudited) - $ - - $ -
================ =============== =============== ===============
Common Stock Additional
------------------------------ Paid-in
Shares Amount Capital Other
--------------- ------------- ------------------ -----------------
Balance at January 1, 1995 (inception) - $ - $ - $ -
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 and comprehensive income (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 and comprehensive income (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 and comprehensive income (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 and comprehensive income (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 - - (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 (1,456,000)
Amortization of deferred stock compensation - - - 921,400
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 (534,600)
Issuance of preferred and common stock
for stock options exercised (unaudited) 76,639 77 19,082 -
Amortization of deferred stock
compensation (unaudited) - - - 151,794
Mandatorily redeemable preferred stock
dividends and accretion (unaudited) - - (5,286,618) -
Net and comprehensive income (loss) (unaudited) - - - -
--------------- ------------- ------------------ -----------------
Balance at September 30, 2001 (unaudited) 272,059 $ 272 $ 56,557,293 $ (382,806)
=============== ============= ================== =================
Accumulated Deficit Accumulated
Other During the Total
Comprehensive Development Stockholders'
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 - - -
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 and comprehensive income (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 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 - - -
Amortization of deferred stock compensation - - 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 - (34,902,926) 26,387,498
Issuance of preferred and common stock
for stock options exercised (unaudited) - - 19,159
Amortization of deferred stock
compensation (unaudited) - - 151,794
Mandatorily redeemable preferred stock
dividends and accretion (unaudited) - - (5,286,618)
Net and comprehensive income (loss) (unaudited) (40,791,870) (40,791,870)
---------------- ------------------- -----------------
Balance at September 30, 2001 (unaudited) $ - $ (75,694,796) $ (19,520,037)
================ =================== =================
The accompanying notes are an integral part of these consolidated financial
statements.
4
EarthWatch Incorporated, dba DigitalGlobe
(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, dba DigitalGlobe, 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
adjustments that are, in the opinion of management, necessary for a fair
presentation of the consolidated financial statements. These consolidated
financial statements should 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 and nine months ended September 30, 2001 are not necessarily
indicative of the results to be expected for the full year ending December
31, 2001.
New Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," SFAS
No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," were
issued in 2001. The adoption of these standards is not expected to have a
material impact on our consolidated financial position or results of
operations.
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 September 30, 2001
----------------- ------------------
(unaudited)
QuickBird 2 satellite $ 55,952,495 $ 132,542,313
Digital Globe software 26,570,191 28,795,398
Ground station equipment 7,193,788 8,428,133
------------ -------------
$ 89,716,474 $ 169,765,844
============ =============
3. Debt to Related Parties
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, we
offered to purchase all of our outstanding notes at their accreted values
per their respective indentures 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. The extraordinary loss on early extinguishment of debt was the
result of the write-off of unamortized debt discount and deferred financing
costs associated with the redeemed notes. The combined repurchase price
totaled $172.9 million.
In connection with the offer, we entered into a Recapitalization
Agreement and Consent dated as of April 2, 2001 (the "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. Pursuant to
the Recapitalization Agreement, we also:
. granted registration rights to certain holders of notes and Series C
preferred stock;
5
EarthWatch Incorporated, dba DigitalGlobe
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
. obtained the consent of the holders of notes and amended the indenture
governing the notes in certain respects;
. amended our certificate of incorporation to, among other things, (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;
. issued 10,843,297 additional shares of our Series C preferred stock to
the holders of the notes that signed the Recapitalization Agreement and
their assignees;
. purchased launch and in-orbit insurance for our QuickBird 2 satellite;
and
. pledged 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.
We have incurred transaction costs associated with the Recapitalization
Agreement of approximately $1.2 million, of which $1.0 million was paid to
Morgan Stanley.
In April 2001, we obtained a $9.0 million borrowing facility with Ball
Aerospace, one of our stockholders, which we are using to fund the
completion of QuickBird 2. This vendor financing facility accrues interest
at an annual rate of 11%, which will become payable seven months following
the launch of QuickBird 2. Beginning in June 2002 and ending with April
2003, principal, in equal monthly amounts, and interest are payable in cash
each month. In conjunction with this arrangement, we issued to Ball
Aerospace 903,608 shares of Series C preferred stock in June 2001.
Based on our current operating plan, we believe that existing capital
resources will meet our anticipated cash needs through fiscal 2002. If our
satellite system takes longer than expected to become operational, if
technical or regulatory developments require that we modify the design of
our satellite 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.
Failure to obtain such additional financing may result in a material
adverse effect on our business and would significantly increase risk of our
ability to continue as a going concern.
The book value of our debt, net of unamortized deferred financing costs
and debt discounts, approximates its fair value at September 30, 2001.
Our debt is comprised of the following at: December 31, September 30,
2000 2001
----------------- -----------------
(unaudited)
13% Senior Discount Notes, net of unamortized discount of
$64,852,862 and $16,364,588, respectively, effective rate of 18.0% $ 134,147,138 $ 55,285,412
12 1/2% Senior Notes, net of unamortized discount of $10,731,089
and zero, respectively 61,268,911 --
11% Vendor financing facility, net of unamortized discount of zero and
$591,271, respectively, effective rate of 17.5% -- 8,692,567
Capital-lease obligations 68,601 14,731
------------- -------------
195,484,650 63,992,710
Less: current portion (195,484,650) (3,344,784)
------------- -------------
$ -- $ 60,647,926
============= =============
6
EarthWatch Incorporated, dba DigitalGlobe
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. Related Party Transaction
During the three-month period ended September 30, 2001, a division of
ITT Industries, Inc., a stockholder of ours, performed research and
development services for us totaling $500,000.
5. Commitments
As of September 30, 2001, we have noncancelable operating lease and
contract commitments totaling $17.6 million.
6. Subsequent Event
On October 18, 2001, our QuickBird satellite was successfully launched
and deployed from Vandenberg Air Force Base in California. The spacecraft is
now undergoing an on-orbit calibration and commissioning period, which is
expected to last approximately 90 days.
7
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 September 30, 2000 compared to three months ended September
30, 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 $268,000 for the three-month period ended September 30,
2000 to $3.7 million for the three-month period ended September 30, 2001, due to
increased quantities of images sold. Revenue from the sale of third-party
imagery decreased for the remainder of fiscal 2000 due to diversion of resources
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 $168,000 for the three-month period ended
September 30, 2000 to $2.8 million for the three-month period ended September
30, 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 $4.5 million for the three-month period ended
September 30, 2000 and $3.9 million for the three-month period ended September
30, 2001. The decrease was due to lower marketing and legal expenditures during
the period. 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 $3.3 million
for the three-month period ended September 30, 2000 and $3.7 million for the
three-month period ended September 30, 2001. This increase was the result of the
additional research and development services provided during the three-month
period ended September 30, 2001 by a division of ITT Industries, one of our
stockholders.
Interest Expense. Interest expense decreased from $1.5 million for the
three-month period ended September 30, 2000 to zero for the three-month period
ended September 30, 2001. This decrease was the result of lower average debt
balances outstanding during the three-month period ended September 30, 2001
resulting in the allocation of all interest incurred during the period to
capitalized interest as part of the cost of our QuickBird 2 satellite.
Interest Income. Interest income decreased from $1.1 million for the three-month
period ended September 30, 2000 to $325,000 for the three-month period ended
September 30, 2001, due to lower average investment balances outstanding and
lower rates of return on investments during the three-month period ended
September 30, 2001.
8
Net Loss. We had net losses of $8.2 million for the three-month period ended
September 30, 2000 and $6.4 million for the three-month period ended September
30, 2001. This decrease in net loss was primarily the result of lower interest
expense and higher gross profit for the period.
Nine months ended September 30, 2000 compared to nine months ended September 30,
2001
Revenue. Our revenue increased from $2.7 million for the nine-month period ended
September 30, 2000 to $8.8 million for the nine-month period ended September 30,
2001, due to increased quantities of images sold. Revenue from the sale of
third-party imagery decreased for the remainder of fiscal 2000 due to diversion
of resources in anticipation of the launch of QuickBird 1. A similar decrease is
not expected in fiscal 2001.
Cost of Goods Sold. As a result of our increased revenue, our cost of goods sold
consequently increased from $1.7 million for the nine-month period ended
September 30, 2000 to $6.7 million for the nine-month period ended September 30,
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 $11.0 million for the nine-month period ended
September 30, 2000 and $9.9 million for the nine-month period ended September
30, 2001. The decrease was due to lower marketing and legal expenditures during
the period. 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 $9.3 million
for the nine-month period ended September 30, 2000 and $8.0 million for the
nine-month period ended September 30, 2001. These expenses decreased due to
staff reductions and reduced operating activities following the loss of
QuickBird 1, partially offset by the additional research and development
services provided during the third quarter of 2001 by a division of ITT
Industries, one of our stockholders. We expect these costs to increase following
the launch of QuickBird 2.
Interest Expense. Interest expense decreased from $4.9 million for the
nine-month period ended September 30, 2000 to $4.7 million for the nine-month
period ended September 30, 2001. This decrease was the result of lower average
debt balances outstanding during the period since our early extinguishment of
notes in April 2001, resulting in the allocation of all interest incurred
during the subsequent period to capitalized interest as part of the cost of our
QuickBird 2 satellite.
Interest Income. Interest income decreased from $3.6 million for the nine-month
period ended September 30, 2000 to $2.8 million for the nine-month period ended
September 30, 2001, due to lower average investment balances outstanding and
lower rates of return on investments during the nine-month period ended
September 30, 2001.
Net Loss. We had net losses of $20.7 million for the nine-month period ended
September 30, 2000 and $40.8 million for the nine-month period ended September
30, 2001. This increase in net loss was primarily the result of the
extraordinary loss on early extinguishment of debt incurred in April 2001, as
discussed in Note 3 to our consolidated financial statements.
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, we offered to
purchase all of our outstanding notes at their accreted values per their
respective indentures 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. The combined repurchase price totaled $172.9
million.
9
In connection with the offer, we entered into a Recapitalization
Agreement and Consent dated as of April 2, 2001 (the "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. Pursuant to the
Recapitalization Agreement, we also:
. granted registration rights to certain holders of notes and Series C
preferred stock;
. obtained the consent of the holders of notes and amended the indenture
governing the notes in certain respects;
. amended our certificate of incorporation to, among other things, (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;
. issued 10,843,297 additional shares of our Series C preferred stock to
the holders of the notes that signed the Recapitalization Agreement and
their assignees;
. purchased launch and in-orbit insurance for our QuickBird 2 satellite;
and
. pledged 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.
We have incurred transaction costs associated with the Recapitalization
Agreement of approximately $1.2 million, of which $1.0 million was paid to
Morgan Stanley.
In April 2001, we obtained a $9.0 million borrowing facility with Ball
Aerospace, one of our stockholders, which we are using to fund the completion of
QuickBird 2. This vendor financing facility accrues interest at an annual rate
of 11%, which will become payable seven months following the launch of QuickBird
2. Beginning in June 2002 and ending with April 2003, principal, in equal
monthly amounts, and interest are payable in cash each month. In conjunction
with this arrangement, we issued to Ball Aerospace 903,608 shares of Series C
preferred stock in June 2001. As of September 30, 2001, we had drawn the full
$9.0 million under this facility.
Net cash used by operating activities increased from $21.2 million for
the nine-month period ended September 30, 2000 to $79.8 million for the nine-
month period ended September 30, 2001. This increase was primarily the result of
the payment of accrued interest and the extraordinary loss incurred in
conjunction with the redemption of notes in 2001.
Based on our current operating plan, we believe that existing capital
resources will meet our anticipated cash needs through fiscal 2002. If our
satellite system takes longer than expected to become operational, if technical
or regulatory developments require that we modify the design of our satellite
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. Failure to obtain such additional financing may
result in a material adverse effect on our business and would significantly
increase risk of 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 September 30, 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 are not obligated for 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.
10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
During the three months ended September 30, 2001, we granted stock options
to purchase 412,060 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 11,971 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. 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.
Appropriate legends are affixed to the stock certificates issued in the
transactions listed above. Similar legends were imposed in connection with any
subsequent sales of any such securities. Each of the purchasers that are our
employees or directors had access to information through their relationship
with us. Each purchaser was given the opportunity to ask questions of and
request information from EarthWatch. Each investor represented and acknowledged
to EarthWatch in writing that it had this opportunity. Some of the purchasers
asked questions and requested information. EarthWatch complied with all requests
that it deemed reasonable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
11
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.
EARTHWATCH INCORPORATED
(Registrant)
Date: November 13, 2001 By: /s/ Henry E. Dubois
--------------------- --------------------------------------------
Henry E. Dubois
Chief Financial Officer, Chief Operating
Officer,
Executive Vice President
(Principal Financial and Accounting Officer)
12