UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

 

 

Commission File Number 001-33015

 

GeoEye, Inc.
(Exact name of registrant as specified in its charter)

 

(703) 480-7500
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

 

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 þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The number of shares outstanding of Common Stock, par value $0.01, as of November 5, 2010 was 22,114,179 shares.

 

 

TABLE OF CONTENTS

 

 

In this quarterly report, “GeoEye,” the “Company,” “we,” “our,” and “us” refer to GeoEye, Inc. and its subsidiaries.

 

We own or have rights to various copyrights, trademarks, and trade names used in our business, including the following: GEOEYE^®; IKONOS^®; MJ HARDEN^®; ORBIMAGE^®; ORBVIEW^®; ROADTRACKER^®; GEOEYE FOUNDATION^tm; GEOPROFESSIONAL^tm; GEOSTEREO^tm; GEOFUSE^tm; EYEQ^tm; EYEON^tm; SEASTAR^sm; SEASTAR FISHERIES INFORMATION SERVICE^sm; MARINE INFORMATION SERVICE^sm; MASTERCAST^tm; OCEAN MONITORING SERVICE^sm; ORBBUOY^tm; ORBMAP^tm; TRUSTED IMAGERY EXPERTS^tm; and VESSEL TRACKING^tm;

 

 

GEOEYE, INC.

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

GEOEYE, INC.

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

GEOEYE, INC.

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

GEOEYE, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Business

 

GeoEye is a leading commercial provider of high-accuracy, high-resolution Earth imagery, as well as a provider of image processing services and imagery information services to U.S. and foreign government defense and intelligence organizations, domestic federal and foreign civil agencies and commercial customers. We own and operate three Earth-imaging satellites, GeoEye-1, IKONOS and Orbview-2, and three airplanes with advanced high-resolution imagery collection capabilities. GeoEye-1 is the world’s highest resolution and most accurate commercial Earth-imaging satellite. In addition to our imagery collection capacities, we are a global leader in the creation of enhanced satellite imagery information products and services. We operate four state-of-the-art high-resolution image processing and production facilities. Our St. Louis facility processes imagery from numerous commercial and government sensors, in addition to our own, to produce a variety of value-added products. We believe we are the only major commercial imagery satellite operator who can produce imagery from multiple satellite sources in addition to our own. Our satellite and aerial imagery products and services provide our customers with timely and accurate location intelligence, enabling them to analyze geospatial information and monitor and map areas of interest to their needs and demands. We serve a growing global market that requires high-resolution imagery and precision mapping products for applications such as national defense and intelligence, online mapping, environmental monitoring and resource management, energy exploration, asset monitoring, urban planning, infrastructure planning and monitoring, disaster preparedness and emergency response. We believe the combination of our highly accurate satellite and aerial imaging assets, our high-resolution image processing and production facilities, especially our multi-source production capability, and our color digital imagery library differentiate us from our competitors. This enables us to deliver a comprehensive range of imaging products and services to our diverse customer base.

 

Basis of Presentation

 

The condensed consolidated financial statements of GeoEye have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. The financial information included herein, other than the condensed consolidated balance sheet as of December 31, 2009, has been prepared without audit. The condensed consolidated balance sheet as of December 31, 2009, has been derived from, but does not include, all the disclosures contained in, the audited consolidated financial statements for the year ended December 31, 2009. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments and accruals that are necessary for a fair presentation of the results of all interim periods presented herein and are of a normal recurring nature.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in GeoEye’s Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for the interim period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

 

Additionally, certain amounts in the prior period have been reclassified to conform to the current period presentation.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of GeoEye and all of its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires management to make judgments, estimates and assumptions that affect the

 

amount reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

Restricted Cash

 

The Company is party to irrevocable standby letters of credit, in connection with contracts between GeoEye and third parties, in the ordinary course of business to serve as performance obligation guarantees. As of September 30, 2010, the Company had $15.8 million classified as restricted cash as a result of the irrevocable standby letters of credit. Approximately $4.0 million is available within one year and is classified as current, and the remaining $11.8 million is available through 2022.

 

In connection with the issuance of the 2015 Notes in 2009 (see Note 8), the Company deposited $47.8 million of the net proceeds into a restricted cash account. During the third quarter of 2010, these restricted proceeds were used to finance a portion of the costs of constructing a new high-resolution satellite.

 

Investments

 

We record our investments in debt securities at amortized cost or fair value, and classify these securities as short-term investments on the consolidated balance sheet when the original maturities at purchase are greater than ninety days but less than one year.

 

The Company’s short-term investments consist of debt securities which include commercial paper, corporate bonds, agency notes, variable rate demand notes and certificates of deposit. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are recorded at amortized cost and classified as held-to-maturity. Investments in debt securities that are not classified as held-to-maturity are carried at fair value and classified as available-for-sale.

 

We evaluate our investments for other-than-temporary impairment on a quarterly basis. Other-than-temporary impairment occurs when the fair value of an investment is below our carrying value, and we determine that difference is not recoverable in the near future. Factors we consider to make such determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period, and our intent to sell, or whether it is more likely than not that we will be required to sell the investment before recovery of the amortized cost basis.

 

As of September 30, 2010, we categorized our investments as either available-for-sale or held-to-maturity, and all of these outstanding short-term investments mature within one year. Although the variable-rate demand notes have long-term contractual maturity dates of 20 to 30 years, the interest rates reset weekly. Despite the long-term nature of the underlying securities, they are classified as short-term due to our ability to quickly liquidate or put back these securities. As of December 31, 2009, we had no investments.

 

Preferred Stock

 

In September 2010, the Company issued Series A Convertible Preferred Stock, or the Preferred Stock, par value of $.01 per share. Cumulative dividends on the Preferred Stock are payable at a rate of 5% per annum of the $1,000 liquidation preference per share. At the Company’s option, dividends may be declared and paid in cash out of funds legally available, when, as and if declared by the Board of Directors of the Company. If not paid in cash, an amount equal to the cash dividends due is added to the liquidation preference. Dividends payable in cash are recorded in current liabilities. All dividends payable, whether in cash or as an addition to the liquidation preference, are recorded as a reduction to our retained earnings.

 

Earnings per Share

 

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Net income available to common shareholders is equal to net income less preferred stock dividends and income allocated to participating securities. The Company’s preferred shares are participating securities. Diluted earnings per share is calculated by dividing net income available to common shareholders as adjusted for the effect of dilutive common equivalent shares by the

 

weighted average number of common and dilutive common equivalent shares outstanding during the year. Common equivalent shares consist of the common shares issuable upon the conversion of the convertible preferred shares (using the if-converted method) and those issuable related to stock options, deferred stock units, employee stock purchase plan shares and non-vested stock (using the treasury stock method).

 

New Accounting Pronouncements

 

In October 2009, the Financial Accounting Standards Board, or FASB, issued revised guidance on revenue from multiple deliverable arrangements including principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated and the allocation of the consideration. Additionally, this revised guidance requires an entity to allocate revenue in multiple-element arrangements using estimated selling prices of deliverables if vendor-specific or other third-party evidence of value is not available. The new guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. We are currently evaluating the impact of this accounting guidance and do not expect any significant impact on our consolidated financial statements.

 

In October 2009, the FASB revised its guidance on accounting for revenue that contains tangible products and software. The new guidance revised the scope of software revenue guidance, such that software included together with tangible products would not be included within its scope. The revised guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. We are currently evaluating the impact of this accounting guidance and do not expect any significant impact on our consolidated financial statements.

 

In January 2010, the FASB issued new guidance that requires new disclosures for fair value measurements and provides clarification for existing disclosures requirements. More specifically, it requires reporting entities to 1) disclose separately the amount of significant transfers into and out of Level 1 and Level 2 fair-value measurements and to describe the reasons for the transfers, and 2) provide information on purchases, sales, issuances and settlements on a gross basis rather than net in the reconciliation of Level 3 fair-value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the Level 3 fair-value measurements disclosures that are effective for fiscal years beginning after December 15, 2010. The adoption of the updated guidance did not have an effect on the Company’s consolidated results of operations, financial condition or cash flow during the first nine months of 2010.

 

In March 2010, the Patient Protection and Affordable Care Act, or PPACA, and the Health Care and Education Reconciliation Act were both signed into law. While the new law may impact our healthcare plan, we currently believe this impact will not be material. We will continue to review the impact of the new healthcare legislation.

 

 

The U.S. government’s National Geospatial-Intelligence Agency, or NGA, announced in March 2003 that it intended to support, through the NextView program, the continued development of the commercial satellite imagery industry. The NGA also announced that it intended to award two imagery providers with contracts to support the engineering, construction and launch of the next generation of imagery satellites. On September 30, 2004, the NGA awarded us a contract as the second provider under the NextView program and, as a result, we contracted for the construction of a new satellite, GeoEye-1. Under the NextView program, we began delivering imagery to the NGA from our IKONOS satellite in February 2007 and from our GeoEye-1 satellite in the first quarter of 2009. GeoEye-1 was launched in September 2008 and started commercial operations and obtained certification from the NGA in February 2009, at which point the satellite commenced full operations. Total capitalized costs (including financing and launch insurance costs) of the GeoEye-1 satellite and related ground systems incurred were $478.3 million.

 

Under the NextView contract, the NGA agreed to support the project with a cost share totaling approximately $237.0 million spread over the course of the project development and subject to various milestones. On March 19, 2009, the NGA had paid the Company its cost share obligation in full. GeoEye had deferred recognition of the cost share amounts from the NGA as revenue until GeoEye-1’s in-service date in February 2009. We recognize this

 

revenue on a straight-line basis over the expected nine-year depreciable operational life of the satellite. During the three and nine months ended September 30, 2010, we recognized $6.0 million and $18.1 million of deferred revenue under the NextView contract, respectively. The Company built, launched and deployed GeoEye-1 for less than the maximum cost specified in the NGA contract. As a result, we credited a portion of the NGA’s cost share payments, approximately $20.0 million, against imagery purchase obligations during 2009.

 

On December 9, 2008, we entered into the NextView Service Level Agreement, or SLA, with the NGA under which the NGA agreed to purchase GeoEye-1 imagery from us through November 30, 2009. On September 1, 2009, the NGA extended the SLA through March 31, 2010. In addition, the NGA, on March 1, 2010, modified the SLA, giving it the option to extend the term of the SLA beyond March 31, 2010. The SLA was extended through August 31, 2010. The NextView SLA provided for monthly payments of $12.5 million, subject to a maximum reduction of 10% based on performance metrics. Under the NextView SLA, to the extent that less than $12.5 million was paid by the NGA in any month, the shortfall was used to fund an extension of the contract. On August 6, 2010, the NGA awarded us a new contract under the EnhancedView program, which includes the EnhancedView SLA on terms similar to the NextView SLA. The EnhancedView SLA replaced the NextView SLA portion of the NextView program as of September 1, 2010. We recognized $25.0 million and $99.6 million of imagery revenue under the NextView SLA during the three and nine months ended September 30, 2010, respectively and $38.1 million and $87.1 million of imagery revenue during the three and nine months ended September 30, 2009, respectively.

 

 

On August 6, 2010, the NGA awarded us a contract under its EnhancedView program that is worth up to $3.8 billion, assuming the NGA exercises all of its options and we perform as specified. The award provides for a new satellite imagery delivery SLA; the engineering, construction and launch of GeoEye-2; the design and procurement of associated ground station equipment; and the design and procurement of additional infrastructure to support government operations, value-added products and other services, including web-based delivery of information. This competitively awarded contract supports the EnhancedView program by providing products and services that will help meet the increasing geospatial intelligence needs of the intelligence community and the Department of Defense.

 

The award provides for a new satellite imagery delivery SLA with the NGA valued at up to $2.8 billion. The EnhancedView SLA initially provides for continued monthly payments by the NGA of up to $12.5 million ($150 million per year), subject to a maximum reduction of 10% based on performance metrics. Under the EnhancedView SLA, when GeoEye-2 becomes operational, which we currently expect will occur in 2013, payments under the award will increase by an additional $15.3 million per month ($183.6 million per year). The term of the EnhancedView SLA is one year, with nine one-year renewal options exercisable by the NGA. Imagery deliveries under the EnhancedView SLA began on September 1, 2010, and the imagery is collected by the Company’s existing satellite constellation, with GeoEye-2 to collect additional imagery when it becomes operational.

 

As part of the EnhancedView Agreement, the NGA has agreed to contribute up to $337.0 million of the overall construction and launch costs of the GeoEye-2 satellite and associated ground station equipment. The contribution will be made in two cost share payments: the first payment of approximately $111.0 million when the GeoEye-2 satellite is delivered to integration and test; and the second payment, and balance of the cost share, when the GeoEye-2 satellite becomes operational.

 

The award also provides for up to an estimated $702.0 million for value-added products and services and our EyeQ Web Mapping Services to be delivered over the life of the EnhancedView SLA. This award component includes funding for the design and procurement of additional infrastructure to support government operations.

 

This program replaced the NextView program, except that GeoEye will continue to fulfill existing NextView value-added product and services orders until such orders are complete. New value-added product and services orders are expected to be placed under the EnhancedView contract. The NextView SLA portion of the NextView program was replaced by the EnhancedView SLA as of September 1, 2010. We recognized $12.3 million of imagery revenue under the EnhancedView SLA during the three and nine months ended September 30, 2010, respectively.

 

 

As of September 30, 2010, short-term investments consisted of the following (in thousands):

 

 

As of September 30, 2010, there were no other-than-temporary impairments of the Company’s investments.

 

 

Property, plant and equipment consisted of the following (in thousands):

 

 

We record property, plant and equipment at cost. We also capitalize certain internal and external costs incurred to develop software for internal use. Costs of major enhancements to internal use software are capitalized, while routine maintenance of existing software is charged to expense as incurred. Depreciation expense related to property, plant and equipment was $2.3 million and $2.1 million for the three months ended September 30, 2010 and 2009, respectively, and $6.7 million and $5.5 million for the nine months ended September 30, 2010 and 2009, respectively.

 

 

Satellites and related ground systems consist of the following (in thousands):

 

 

The capitalized costs of the Company’s satellites and related ground systems include internal and external direct labor costs, internally developed software, material and depreciation costs related to assets that support the satellites’ construction and development. The cost of the Company’s satellites and related ground systems also includes capitalized interest incurred during the construction, development and initial in-orbit testing period. The launch insurance premiums, including the period from launch through in-orbit calibration and commissioning, have been capitalized as part of the cost of the satellites and are amortized over the useful life of the satellites.

 

As of September 30, 2010 and December 31, 2009, we have incurred total capitalized costs of $204.0 million and $66.8 million, respectively, related to the Company’s development efforts for EnhancedView, primarily consisting of costs for the construction of GeoEye-2.

 

The Company maintains insurance policies for GeoEye-1 with both full coverage and total-loss-only coverage in compliance with our indentures. As of September 30, 2010, we carried $250.0 million in-orbit insurance on GeoEye-1, comprised in part of $187.0 million of full coverage to be paid if GeoEye-1’s capabilities become impaired as measured against a set of specifications. Of such coverage, $137.0 million expires December 1, 2010; and $50.0 million expires September 6, 2011. We also carry $63.0 million of insurance in the event of a total loss of the satellite, which expires December 1, 2010. The IKONOS satellite is insured for $20.0 million of in-orbit coverage, which expires on December 1, 2010.

 

Total satellite and related ground systems depreciation expense was $13.4 million and $13.6 million for the three months ended September 30, 2010 and 2009, respectively, and $39.9 million and $33.2 million for the nine months ended September 30, 2010 and 2009, respectively.

 

 

The Company’s effective tax rate was 39.5% and 37.0% before discrete items for the nine months ended September 30, 2010 and 2009, respectively. Income tax expense was $8.0 million and $6.5 million including discrete items for the three months ended September 30, 2010 and 2009, respectively. Income tax expense was $21.5 million and $10.1 million including discrete items for the nine months ended September 30, 2010 and 2009, respectively. The Company’s effective tax rate exclusive of discrete items differs from the federal tax rate due to state and local income taxes, the recording of unrecognized tax benefits, adjustments to our recorded valuation allowance and permanent book/tax difference items.

 

The impact of the Preferred Stock issuance (see Note 9) relating to the fair value adjustment of the Preferred Stock Commitment of approximately $26.6 million is not deductible for tax purposes and contributes to an overall effective tax rate of 76.6% for the nine months ended September 30, 2010.

 

 

On October 9, 2009, the Company issued $400.0 million aggregate principal, net of original issue discount of $20.0 million, of 9.625% Senior Secured Notes due October 1, 2015, or the 2015 Notes. Interest is payable on the 2015 Notes semi-annually in arrears on April 1 and October 1 of each year. At any time on or after October 1, 2013, the Company may redeem, on one or more occasions, all or part of the 2015 Notes at 104.813% of principal for the subsequent 12-month period and at 100% of principal on October 1, 2014, and thereafter. Proceeds from the sale of the 2015 Notes were used in part to redeem all of our Senior Secured Floating Rate Notes due 2012, or the 2012 Notes.

 

In August 2010, the Company completed the exchange of $400.0 million aggregate principal amount of its 2015 Notes, for notes that have been registered under the Securities Act of 1933, or the Securities Act, as amended. The terms of the registered notes are the same as the terms of the original notes, except that they are now registered under the Securities Act. The transfer restrictions, registration rights and additional interest provisions are not applicable to the registered notes.

 

The 2015 Notes issued by the Company are unconditionally guaranteed jointly and severally, on a senior secured first-priority basis, by all existing and future domestic restricted subsidiaries of the Company, or the Guarantor Subsidiaries. The 2015 Notes and the guarantees are secured by a lien on substantially all of the assets of the Company and the guarantors. Except for a minor investment in a foreign subsidiary, the Company does not have any independent assets or operations other than its ownership in all of the capital stock of its Guarantor Subsidiaries. Since inception, all of the Company’s operations have been conducted through its wholly-owned subsidiaries.

 

See Note 15, Subsequent Event, for further description of our long-term debt.

 

Interest Expense, Net

 

The composition of interest expense, net, was as follows (in thousands):

 

 

Interest expense, net, primarily includes interest expense on our 2015 Notes as well as interest on our previously redeemed 2012 Notes for the three and nine months ended September 30, 2010 and 2009, respectively. Interest expense, net, also includes amortized prepaid financing costs and amortization of debt discount.

 

 

On March 4, 2010, the Company entered into a binding commitment with Cerberus Capital Management, L.P. to purchase preferred stock and provide debt financing, the proceeds of which were to be used for development and launch of GeoEye-2. Subsequently, on March 22, 2010, the Company entered into a Stock Purchase Agreement and a Note Purchase Agreement with Cerberus Satellite LLC, or Cerberus. This additional financing related to the development and launch of GeoEye-2 was necessary, because the original proposal for EnhancedView required that, upon a successful contract award, the Company would need to provide a letter of credit for the full amount of any potential cost share award for the development of GeoEye-2 that would be received from the NGA for a period of up to three years after the NGA’s certification of the satellite’s imagery. Under the Stock Purchase Agreement, Cerberus agreed to purchase from the Company and the Company agreed to sell to Cerberus, subject to certain conditions including a successful contract award requiring a letter of credit, up to 115,000 shares of a newly issued series of convertible preferred stock of the Company, having an initial liquidation preference of $1,000 per share. If the Company received a contract award without the letter of credit requirement, the Company would no longer be obligated to issue 115,000 shares of Preferred Stock to Cerberus, but Cerberus would have the option to purchase 80,000 shares of the Preferred Stock. Under the terms of the Note Purchase Agreement, at the Company’s option, and assuming a letter of credit requirement, Cerberus also agreed to provide the Company with debt financing of $100.0 million, contingent upon the Company receiving an award from the NGA with a letter of credit requirement. This letter of credit requirement was subsequently eliminated.

 

The Company was awarded the EnhancedView contract without the letter of credit requirement, thus the debt financing of $100.0 million was not issued and the Notes Purchase Agreement expired. During the first quarter of 2010, the Company had paid a non-refundable commitment fee of 2%, or $2.0 million, of the face value of the Cerberus debt financing, and incurred other costs related to the debt financing. These costs incurred with respect to the Note Purchase Agreement were written off at the time of the contract expiration. Therefore, total unamortized prepaid financing costs of $6.4 million, including the non-refundable commitment fee, were expensed in the third quarter of 2010.

 

The Preferred Stock Commitment represented an arm’s length exchange of value between the Company and Cerberus that contained multiple elements. The Preferred Stock Commitment was comprised of a Contingent Forward Sale of 115,000 shares of Preferred Stock, a Contingent Written Call option on 80,000 shares of Preferred Stock and a $2.3 million contingent fee payment by the Company. All elements of the Preferred Stock Commitment were executed together in contemplation of each other as a single unit of account with three distinct mutually exclusive settlement alternatives and represented an obligation of the Company to issue shares of Preferred Stock that were redeemable for cash by the Company upon conditional events that were outside of the Company’s control.

 

We determined that this financial instrument, not in the form of a share, contained a conditional obligation on the part of the Company to redeem its equity shares by transferring assets in the future and was therefore, presented as a liability and was initially and subsequently measured at fair value until Cerberus purchased the preferred stock on September 22, 2010.

 

On September 22, 2010, we consummated the preferred stock issuance pursuant to the Stock Purchase Agreement with Cerberus. Pursuant to the terms of the Stock Purchase Agreement and as a result of the EnhancedView award by the NGA being made without the letter of credit requirement, Cerberus purchased 80,000 shares of Preferred Stock having a liquidation preference of $1,000 per share. This resulted in net proceeds to the Company of $78.0 million, after discounts and before issuance costs.

 

The Preferred Stock is convertible on issuance, at the option of the holders. The liquidation value of $1,000 per preferred share, and the conversion rate of $29.76 per common share, allow the Preferred Stock to be initially convertible into 2.7 million shares of common stock of the Company. The Preferred Stock represents an ownership interest assuming conversion of such Preferred Stock to the Company’s common stock, of approximately 11% as of September 30, 2010.

 

On or after September 22, 2016, and, subject to the right of the holder to first convert into common stock of the Company, the Company may at its option redeem the Preferred Stock, in whole or in part, provided the weighted average trading price for the common stock of the Company is equal to or greater than $52.08 for a period of 30 or more consecutive trading days immediately preceding the call for redemption, and the common stock underlying the Preferred Stock is registered on an effective registration statement.

 

The holders of the Preferred Stock are entitled to receive cumulative dividends payable quarterly at the rate of 5% per annum of the liquidation preference of $1,000 per share. At the Company’s option, dividends may be declared and paid in cash out of funds legally available when, as and if declared by the Board of Directors of the Company. Dividends are payable quarterly in arrears on January 1, April 1, July 1 and October 1 with the first dividend payable on October 1, 2010. If not paid in cash, an amount equal to the cash dividend due will be added to the liquidation preference. The Preferred Stock shall also participate in dividends on common stock, if declared. In the event of a change in control of the Company, the dividends payable to the Preferred Stock holders shall be increased to 15% per annum. The Company declared a dividend on the Preferred Stock on September 30, 2010 and paid $0.1 million on October 1, 2010. The dividend payable as of September 30, 2010 was included under current liabilities as of that date.

 

The holders of the Preferred Stock will vote with the common stock on an as-converted basis, but no holder of Preferred Stock may vote more than the equivalent of 19.99% of the Company’s outstanding voting securities. As long as Cerberus either (i) owns at least 50% of the Preferred Stock (or common stock issuable upon conversion thereof) or (ii) owns Preferred Stock representing at least 7.5% of the Company’s outstanding voting securities, on a fully-converted basis, it will be entitled to appoint one director to the Company’s Board of Directors. In addition, as long as Cerberus either (i) owns at least 50% of the Preferred Stock (or common stock issuable upon conversion thereof) or (ii) owns Preferred Stock representing at least 5% of the Company’s outstanding voting securities, on a fully-converted basis, it will be entitled to appoint one observer to attend all meetings of the Company’s Board of Directors. On October 27, 2010, a Cerberus representative was appointed to the Company’s Board of Directors.

 

In the event of a change in control of the Company, the holders of Preferred Stock will have the option to exchange their Preferred Stock and receive either (i) the amount and form of consideration that would have been received had such Preferred Stock been converted to common stock immediately prior to consummation of such transaction or (ii) cash in an amount equal to 115.0% of the then-applicable liquidation preference of such Preferred Stock, plus any declared but unpaid dividends. Until the redemption price is paid in full, the conversion amount submitted for redemption may be converted, in whole or in part, by the holder into shares of common stock of the Company.

 

The Preferred Stock will rank senior upon liquidation to any other series of capital stock or other equity securities of the Company. In the event of a liquidation event, the holders of the Preferred Stock shall be entitled to receive, in cash, an amount per preferred share equal to the liquidation preference amount of $1,000 per share plus accrued dividends. This shall be paid out of the assets of the Company, whether from capital or from earnings

 

available for distribution to its stockholders, before any amount shall be paid to the holders of capital stock of the Company.

 

Until converted by the holders of the Preferred Stock or redeemed by the Company, the Preferred Stock shall be recorded within the permanent equity section of the consolidated balance sheet of the Company as all the redemption conditions are solely within the control of the Company. On September 22, 2010, the Preferred Stock Commitment was valued at $26.6 million and the change in the value from June 30, 2010, of $16.0 million was recorded as a non-operating expense in the third quarter 2010. The fair value of the Preferred Stock Commitment on that date of $26.6 million was then transferred to additional paid-in capital and included in the basis of the Preferred Stock.

 

 

The Company applies authoritative accounting guidance for fair value measurements of financial and nonfinancial assets and liabilities. The guidance defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance requires disclosure of the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. There is an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. There are three levels of inputs that may be used to measure fair value:

 

Level 1:  quoted prices (unadjusted) in active markets for identical assets or liabilities

 

Level 2:  observable prices that are based on inputs not quoted on active markets, but corroborated by market data

 

Level 3:  unobservable inputs are used when little or no market data is available

 

GeoEye’s financial instruments include cash and cash equivalents, short-term investments, restricted cash, accounts receivable, accounts payable, accrued liabilities and debt. The carrying amounts of cash and cash equivalents, available-for-sale short-term investments, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values due to the short-term nature of these instruments. The Company records debt at cost, net of debt discount and issuance costs.

 

At September 30, 2010, financial assets and liabilities that were required to be measured for disclosure purposes at fair value on a recurring basis consisted of cash and cash equivalents, available-for-sale short-term investments, restricted cash, accounts receivable, accounts payable, accrued liabilities and debt.

 

The following table provides information about the financial assets and liabilities measured at fair value on a recurring basis (in thousands):

 

 

As of September 30, 2010, our financial assets that are required to be measured for disclosure purposes at fair value are our short-term investments in variable-rate demand notes. We classified these securities as Level 2 instruments due to the usage of quoted market prices and observable market data.

 

The Company issued $400.0 million of 2015 Notes, due October 1, 2015, and used a portion of the proceeds to repurchase $249.5 million of the 2012 Notes with $0.5 million remaining outstanding until January 2010. We classify the 2015 Notes within Level 2 as the valuation inputs are determined based on quoted prices and market observable data. The fair value of the 2012 Notes as of December 31, 2009, was determined based on market trades of the 2012 Notes and was classified within Level 2.

 

 

Accounts payable and accrued expenses consisted of the following (in thousands):

 

 

 

Earnings per Share

 

Basic earnings per share, or EPS, is computed based on the weighted-average number of shares of the Company’s Common Stock outstanding. Diluted EPS is computed based on the weighted-average number of shares of the Company’s Common Stock outstanding and other dilutive securities. Securities which contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are required to be included in the computation of basic EPS and diluted EPS pursuant to the two-class method. We determined our preferred stock is a participating security.

 

The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations (in thousands):

 

 

 

 

 

For the three months ended September 30, 2010, 2.7 million potential common shares from the conversion of preferred stock and 0.4 million stock options, deferred stock units, employee stock purchase plan shares and non-vested stock were not included in the calculation of diluted EPS as we were in a loss position and their inclusion would have been anti-dilutive. For the nine months ended September 30, 2010, 2.7 million potential common shares from the conversion of preferred stock and 0.3 million stock options were excluded from the calculation of diluted EPS, as their inclusion would have been anti-dilutive. For the three and nine months ended September 30, 2009, 0.1 million and 0.2 million stock options, respectively, were excluded from the computation of dilutive EPS as the exercise price exceeded the average market price during the period.

 

Changes in Stockholders’ Equity

 

Changes in stockholders’ equity for the nine months ended September 30, 2010, consisted of the following (in thousands):

 

 

During 2010, we granted a total of 0.3 million shares of non-vested stock which vest over three- to four-year periods and 0.3 million stock options which vest over a four-year period. In addition, we granted 0.1 million restricted stock units to executive officers as part of a Long Term Incentive Plan, or LTIP. These restricted stock units have both performance and service requirements that vest over a two-year period and are subject to a three-year restriction on the sale or transfer of the shares.

 

In June 2010, the stockholders approved the 2010 Omnibus Incentive Plan, or the 2010 Plan, which provides for the granting of a maximum of 1.45 million additional shares of the Company’s Common Stock to participants under the 2010 Plan.

 

Comprehensive (Loss) Income

 

For the three and nine months ended September 30, 2010 and 2009, there were no material differences between net (loss) income as reported and comprehensive (loss) income.

 

Warrants

 

There were no outstanding warrants as of September 30, 2010. Of the outstanding warrants as of December 31, 2009, 1.8 million were exercised for shares of the Company’s Common Stock at $10 per share through March 25, 2010. The remaining warrants, which were immaterial, expired unexercised on March 25, 2010.

 

 

The Company operates in a single industry segment, in which it provides imagery, imagery-processing services and imagery information products and services to customers around the world.

 

For the three months ended September 30, 2010 and 2009, GeoEye recognized revenue related to contracts with the U.S. government, the Company’s largest customer, of $55.2 million and $53.6 million, representing 64% and 67% of total revenues, respectively. For the nine months ended September 30, 2010 and 2009, the Company recognized revenue of $164.9 million and $129.7 million under its contract with the U.S. government, representing

 

67% and 66% of total revenues, respectively. GeoEye had no other customers for whom revenues exceeded 10% of total revenues during the three or nine months ended September 30, 2010 or 2009.

 

The Company has two product lines, which are: (a) Imagery, including the NextView cost share, and (b) Production and Other Services.

 

Total revenues were as follows (in thousands):

 

 

Total domestic and international revenues were as follows (in thousands):

 

 

Our property, plant and equipment and ground systems are held domestically.

 

 

Contractual Obligations

 

The following table summarizes our contractual obligations at September 30, 2010:

 

 

 

 

In addition to the above, the Company has entered into commitments subsequent to September 30, 2010, totaling up to $278.2 million, primarily in purchase obligations, which expire in 2012 and 2013. Also, subsequent to September 30, 2010, the Company closed a debt offering of $125.0 million in aggregate principal of 8.625% Senior Secured Notes due October 1, 2016, or the 2016 Notes. Interest payments on the new $125.0 million commitment will be made semi-annually in arrears on April 1 and October 1 of each year (see Note 15).

Operating Leases

 

The Company has commitments for operating leases primarily relating to equipment and office and operating facilities. We lease various real properties under operating leases that generally require us to pay taxes, insurance, maintenance and minimum lease payments. These leases contain escalation provisions for increases as a result of increases in real estate taxes and operating expenses. Substantially all of these leases have lease terms ranging from three to twelve years. Total rental expense under operating leases for the three and nine months ended September 30, 2010 was approximately $0.9 and $2.0 million, respectively, and the total rental expense under operating leases for the three and nine months ended September 30, 2009, was approximately $0.5 and $1.6 million, respectively. In August 2010, we entered into a twelve-year lease agreement for a total commitment of $26.6 million for office space to relocate our corporate headquarters in Virginia.

 

Contingencies

 

GeoEye, from time to time, may be party to various lawsuits, legal proceedings and claims arising in the normal course of business. The Company cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, the Company believes that the outcome of any existing or known threatened proceedings, even if determined adversely, should not have a material adverse impact on the Company’s financial results, liquidity or operations.

 

 

On October 8, 2010, the Company closed a debt offering of $125.0 million in aggregate principal of 8.625% Senior Secured Notes due October 1, 2016, or the 2016 Notes. Interest payments on the new $125.0 million commitment will be made semi-annually in arrears on April 1 and October 1 of each year. At any time on or after October 1, 2013, the Company may on one or more occasions redeem all or part of the 2016 Notes at 104.313% of principal for the subsequent 12-month period, at 102.156% of principal on October 1, 2014 for the subsequent 12-month period and at 100% of principal on October 1, 2015, and thereafter.

 

The net proceeds of the 2016 Notes offering are being used for general corporate purposes, which may include working capital, future production and services expansion, contingent capital expenditures and other strategic opportunities.

 

The 2016 Notes are unconditionally guaranteed, jointly and severally, on a secured second-priority basis, by all existing and future domestic restricted subsidiaries of the Company. The 2016 Notes and the guarantees are secured by a lien on substantially all of the assets of the Company and the guarantors.

FORWARD-LOOKING STATEMENTS

 

All statements other than those of historical facts included in this Quarterly Report on Form 10-Q, or Quarterly Report, including those related to our financial outlook, liquidity, goals, business strategy, projected plans and objectives of management for future operating results, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements as long as they are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements.

 

These forward-looking statements are subject to numerous assumptions, risks and uncertainties, based on our current expectations and projections about future events, including, but not limited to, the factors set forth below, and under the captions “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part 1- Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 12, 2010, or 2009 Annual Report, and in our other Exchange Act filings. The forward-looking statements made in this Quarterly Report on Form 10-Q reflect our intentions, plans, expectations, assumptions and beliefs about future events. Our actual results, performance or achievements could be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, there is a risk that these expectations will not be attained, and that any deviations will be material. We disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Quarterly Report to reflect any changes in our expectations or any change in events, conditions or circumstances on which any statement is based.

 

 

The information included in this Quarterly Report should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2009 Annual Report. In preparing the discussion and analysis contained in this Item 2, we assume that readers have read or have access to the discussion and analysis contained in the 2009 Annual Report and in our other Exchange Act filings. In addition, the following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes, and “Part I — Item 1A — Risk Factors,” which describes key risks associated with our operations and industry, and “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2009 Annual Report.

 

Overview

 

GeoEye is a leading commercial provider of high-accuracy, high-resolution Earth imagery, as well as a provider of image processing services and imagery information services to U.S. and foreign government defense and intelligence organizations, domestic federal and foreign civil agencies and commercial customers. We own and operate three Earth-imaging satellites, GeoEye-1, IKONOS and Orbview-2, and three airplanes with advanced high-resolution imagery collection capabilities. GeoEye-1 is the world’s highest resolution and most accurate commercial Earth-imaging satellite. In addition to our imagery collection capacities, we are a global leader in the creation of enhanced satellite imagery information products and services. We operate four state of the art high-resolution image processing and production facilities. Our St. Louis facility processes imagery from numerous commercial and government sensors, in addition to our own, to produce a variety of value-added products. We believe we are the only major commercial imagery satellite operator who can produce imagery from multiple satellite sources in addition to our own. Our satellite and aerial imagery products and services provide our customers with timely and accurate location intelligence, enabling them to analyze geospatial information and monitor and map areas of interest to their needs and demands. We serve a growing global market that requires high-resolution imagery and precision mapping products for applications such as national defense and intelligence, online mapping, environmental monitoring and resource management, energy exploration, asset monitoring, urban planning,

infrastructure planning and monitoring, disaster preparedness and emergency response. We own one of the largest commercial color digital satellite imagery libraries in the world, which contains more than 483 million square kilometers of color imagery of the Earth. We believe the combination of our highly accurate satellite and aerial imaging assets, our high-resolution image processing and production facilities, especially our multi-source production capability, and our color digital imagery library differentiate us from our competitors. This enables us to deliver a comprehensive range of imaging products and services to our diverse customer base.

 

Our principal sources of revenue are derived from imaging services, the sale of satellite imagery directly to end users or value-added resellers, the provision of direct access to our satellites, and associated ground system and processing technology upgrades and operations and maintenance services. We also derive significant revenue from value-added production services where we combine our images with data and imagery from our own and other sources to create sophisticated information products. We have recently initiated information services pursuant to which we derive revenue from hosting information for customers and delivering it through Web services.

 

Revenues are generally recognized upon delivery of products or services. Revenues from the NGA cost share amounts received under our NextView contract used for the construction of the GeoEye-1 satellite are recognized on a straight-line basis over the expected nine-year operational life of the satellite, which started commercial operations in February 2009. Our operating expenses principally include direct costs of revenue (principally labor and overhead, subcontractor and other direct costs, and satellite insurance); depreciation and amortization, principally relating to our satellites; and selling, general and administrative expenses, which include costs associated with administrative and general management functions, and costs from marketing, advertising, promotion and other selling expenses. Our expenses also include interest expense on our 2015 Notes. We capitalize interest incurred during satellite and ground system construction and development and in-orbit commissioning and the portion of the premiums associated with the insurance coverage of the launch and in-orbit commissioning period of our satellites. Accordingly, prior to the start of GeoEye-1’s commercial operations, we capitalized a portion of insurance premiums in the cost of the satellite that will be amortized over the estimated life of GeoEye-1. Following launch and in-orbit commissioning, insurance premium amounts are charged to expense ratably over the related policy periods. We are currently in the process of construction of the GeoEye-2 satellite, which includes the receipt of cost share amounts from the NGA under the EnhancedView contract upon expected completion of certain milestones in 2012 and 2013.

 

Products and Services

 

We offer a wide range of imagery products and services, including the collection of satellite and aerial imagery, imagery processing, production services, development of satellite collection systems, operations and maintenance of collection systems and information services. Our customers receive products tailored to their needs, applications and business and government operations.

 

Satellite Imagery

 

We offer a wide range of high-resolution satellite imagery products that provide our customers with time-critical visual imagery, data and information, which we divide into three general categories:

 

Geo.  Our Geo product, which is the foundation of the imagery product line, is a map-oriented image suitable for a broad range of customer uses. Geo images are suitable for customer visualization and monitoring applications and are delivered to our customers in a data and information format capable of being processed into other advanced imagery products using standard commercially available software.

 

GeoProfessional.  Our GeoProfessional products consist of imagery that has been aligned and geographically corrected by our experienced staff of production personnel to provide the most accurate and precise imagery currently available from a commercial satellite provider. Our production personnel also have the ability to combine various satellite and aerial images into a single, highly detailed and comprehensive image. Available in various levels of accuracy, these GeoProfessional products are suitable for feature extraction, change detection, base mapping and other similar geo-location applications.

GeoStereo.  Our GeoStereo product uses at least two images of the same location at different angles to provide our customers with a three-dimensional image of a given location. GeoStereo provides the base images that are used for three-dimensional feature recognition and extraction. These GeoStereo products support a wide range of imagery applications such as digital elevation model creation, building height extraction, spatial layers and three-dimensional feature extraction.

 

Aerial Imagery

 

Our aerial imagery products are designed to support specific customer requests for high-resolution and highly accurate images. We offer two main types of aerial imagery collected by our dedicated fleet of three imaging aircraft: (1) digital aerial imaging; and (2) light detection and ranging (LiDAR) imaging (an optical remote sensing technology using laser pulses to determine distances to an object or surface). The use of digital aerial imaging provides our commercial and government customers with complete digital images, which can be easily stored in a data management system. The LiDAR technology is a valuable tool for measuring and recording elevation data for use in topographic mapping and three-dimensional terrain and surface modeling, useful in the field of engineering.

 

Production Services

 

Images and image products generated by our production service operations are purchased by both U.S. government agencies and commercial customers. Production services typically entail the processing and production of specific data and imagery information products that are built to stringent customer specifications. We have developed advanced processing systems that enable us to process raw data from a wide range of both government and commercial sensors (imaging satellites) and then merge the source images into very precise information and imagery products to meet the needs of a broad range of customers. Our production services range from the generation of precision imagery products (for example, digital elevation maps) to the extraction of site-specific features (for example, airports, highways and buildings) for our customers’ database development.

 

Our production services, which are designed to increase the accuracy and precision of satellite and aerial imagery, include the following production processes:

 

 

Our production services include LiDAR elevation data, maps, topographic maps, digital orthophoto imagery, remote sensing services, survey and inventory services and Geospatial Information System (GIS) consulting and implementation. We also offer geospatial products and services to help develop and manage geospatial data to support customer documentation needs, inventory of resources and engineering and development applications.

Information Services

 

We also provide imagery information services, which combine our imagery with real-time, third-party data to create a sophisticated and customized information product for our customers. During the second quarter, we launched our information services business in an effort to give our customers global on-demand access to imagery and related information products over the Web. This new Web services platform, which we call EyeQ, provides the core infrastructure for this new service and our new geospatial information services business. EyeQ commenced operations in April 2010.

 

EyeQ delivers imagery and other location-based information through annual subscriptions and user licenses. EyeQ offers a Web interface with tools that function as our customers’ data center. EyeQ serves up imagery and other standards-based content throughout the customers’ data network and out to their customers and partners.

 

With EyeQ, our customers have access to secure, timely and accurate location information delivered into their business environment. EyeQ is user friendly and is available twenty-four hours a day and seven days a week. EyeQ serves our goal of simplifying access to and delivery of imagery and location information.

 

Impact of Significant Transactions

 

GeoEye-2 Satellite and EnhancedView Program

 

On August 6, 2010, the NGA awarded us a contract under its EnhancedView program that is worth up to $3.8 billion, assuming the NGA exercises all of its options and we perform as specified. The award provides for a new satellite imagery delivery SLA; the engineering, construction and launch of GeoEye-2; the design and procurement of associated ground station equipment; and the design and procurement of additional infrastructure to support government operations, value-added products and other services, including web-based delivery of information. This competitively awarded contract supports the EnhancedView program by providing products and services that will help meet the increasing geospatial intelligence needs of the intelligence community and the Department of Defense.

 

The award includes the following components:

 

 

 

 

This program replaced the NextView program, which the NGA extended through August 2010. GeoEye will continue to fulfill existing NextView value-added product and services orders until such orders are complete. New value-added product and services orders are expected to be placed under the EnhancedView contract. The NextView SLA portion of the NextView program was replaced by the EnhancedView SLA as of September 1, 2010.

 

In preparation for meeting the U.S. government’s need and given the long lead time associated with providing additional capacity, we entered into a contract with ITT Corporation during the third quarter of 2007, pursuant to

which ITT Corporation commenced work on the advanced camera for our GeoEye-2 satellite. ITT Corporation’s work has been used to accelerate the deployment of GeoEye-2 so that it could become operational in 2013. On March 11, 2010, the Company announced the selection of Lockheed Martin Space Systems Company to build the GeoEye-2 satellite and has subsequently signed a launch agreement with Lockheed Martin Commercial Launch Services. As of September 30, 2010, we have incurred total capitalized costs of $204.0 million for EnhancedView, primarily consisting of costs for the construction of GeoEye-2.

 

Preferred Stock

 

On March 4, 2010, the Company entered into a binding commitment with Cerberus Capital Management, L.P. to purchase preferred stock and provide debt financing, the proceeds of which were to be used for development and launch of GeoEye-2. Subsequently, on March 22, 2010, the Company entered into a Stock Purchase Agreement and a Note Purchase Agreement with Cerberus Satellite LLC, or Cerberus. This additional financing related to the development and launch of GeoEye-2 was necessary, because the original proposal for EnhancedView required that, upon a successful contract award, the Company would need to provide a letter of credit for the full amount of any potential cost share award for the development of GeoEye-2 that would be received from the NGA for a period of up to three years after the NGA’s certification of the satellite’s imagery. Under the Stock Purchase Agreement, Cerberus agreed to purchase from the Company and the Company agreed to sell to Cerberus, subject to certain conditions including a successful contract award requiring a letter of credit, up to 115,000 shares of a newly issued series of convertible preferred stock of the Company, having an initial liquidation preference of $1,000 per share. If the Company received a contract award without the letter of credit requirement, the Company would no longer be obligated to issue 115,000 shares of Preferred Stock to Cerberus, but Cerberus would have the option to purchase 80,000 shares of Series A Convertible Preferred Stock, or the Preferred Stock. Under the terms of the Note Purchase Agreement, at the Company’s option, and assuming a letter of credit requirement, Cerberus also agreed to provide the Company with debt financing of $100.0 million, contingent upon the Company receiving an award from the NGA with a letter of credit requirement. This letter of credit requirement was subsequently eliminated.

 

On September 22, 2010, we consummated a preferred stock issuance pursuant to the Stock Purchase Agreement with Cerberus. Pursuant to the terms of the Stock Purchase Agreement and as a result of the EnhancedView award by the NGA being made without the letter of credit requirement, Cerberus purchased 80,000 shares of Preferred Stock having a liquidation preference of $1,000 per share, resulting in net proceeds to the Company of $78.0 million, after discounts and before issuance costs.

 

The issuance of 80,000 shares of Preferred Stock to Cerberus represents an ownership interest, assuming conversion of such Preferred Stock to the Company’s common stock, of approximately 11% as of September 30, 2010.

 

The Preferred Stock will be entitled to receive a dividend at an annual rate of 5%, payable in kind, in cash or securities, at the Company’s option. The Preferred Stock will have a conversion price of $29.76 per share, subject to adjustment and customary anti-dilution adjustments. Holders of the Preferred Stock will vote with the Company’s common stock on an as-converted basis. However, Cerberus is not permitted to vote with Preferred Stock to the extent it would result in Cerberus voting more than an equivalent of 19.99% of the Company’s outstanding voting securities.

 

GeoEye-1 Satellite, NextView Program and Service Level Agreement

 

The NGA announced in March 2003 that it intended to support, through the NextView program, the continued development of the commercial satellite imagery industry. The NGA also announced that it intended to award two imagery providers with contracts to support the engineering, construction and launch of the next generation of imagery satellites. On September 30, 2004, the NGA awarded us a contract as the second provider under the NextView program and, as a result, we contracted for the construction of a new satellite, GeoEye-1. Under the NextView program, we began delivering imagery to the NGA from our IKONOS satellite in February 2007 and from our GeoEye-1 satellite in the first quarter of 2009.

GeoEye-1 was launched in September 2008 and started commercial operations and obtained certification from the NGA in February 2009, at which point the satellite commenced full operations. GeoEye-1 is currently the world’s highest-resolution and highest-accuracy commercial imagery satellite and offers both black-and-white and color imagery. The GeoEye-1 satellite was constructed as part of our participation in the NextView program. We achieved deployment of GeoEye-1 for less than the maximum cost specified in our NextView contract with the NGA.

 

Total capitalized costs (including financing and launch insurance costs) of the GeoEye-1 satellite and ground systems were $478.3 million. Under the NextView contract, the NGA agreed to support the project with a cost share totaling approximately $237.0 million spread over the course of the project development and subject to various milestones. In March 2009, the NGA paid us the final installment of its cost share obligation. We recognize this as revenue on a straight-line basis over the expected nine-year operational life of the satellite. During the three and nine months ended September 30, 2010, we recognized $6.0 million and $18.1 million of cost share revenue under the NextView contract.

 

On December 9, 2008, we entered into the NextView SLA with the NGA, under which the NGA agreed to purchase GeoEye-1 imagery from us through November 30, 2009. On September 1, 2009, the NGA extended the SLA through March 31, 2010. In addition, the NGA, on March 1, 2010, modified the SLA, giving it the option to extend the term of the SLA beyond March 31, 2010. The SLA was extended through August 31, 2010. The NextView SLA provided for monthly payments of $12.5 million, subject to a maximum reduction of 10% based on performance metrics. Under the NextView SLA, to the extent that less than $12.5 million was paid by the NGA in any month, the shortfall was used to fund an extension of the contract. On August 6, 2010, the NGA awarded us a new contract under the EnhancedView program, which includes monthly payments under the EnhancedView SLA on terms similar to the NextView SLA. The EnhancedView SLA replaced the NextView SLA portion of the NextView program as of September 1, 2010. During the three and nine months ended September 30, 2010, we recognized $25.0 million and $99.6 million of revenue under the NextView SLA. During the three and nine months ended September 30, 2010, we recognized $12.3 million of revenue under the EnhancedView SLA.

 

In addition to the SLA contract for NextView and EnhancedView, we received new U.S. government awards during the nine months ended September 30, 2010, totaling more than $32.5 million to supply geospatial products and services. Under these awards, which are expected to be completed during 2011, we will provide the NGA with a significant amount of value-added, imagery-based geospatial-intelligence products. We began delivering imagery to the NGA under the new awards in the third quarter of 2010 and recognized $5.1 million of imagery revenue during the three and nine months ended September 30, 2010.

 

In December 2009, we announced that our engineers detected an irregularity in the equipment that GeoEye-1 uses to point the antenna that transmits imagery to receiving stations on the ground. The irregularity limits the range of movement of GeoEye-1’s downlink antenna, which affects GeoEye-1’s ability to image and downlink simultaneously. GeoEye-1 is able to downlink imagery to GeoEye’s and customer ground stations when not collecting images.

 

In May 2009, we announced that our engineers detected an anomaly with GeoEye-1 affecting the collection of color imagery by a narrow band of pixels within an image. As a result, we modified our operations and currently collect, produce and deliver color imagery to customers that is unaffected by the anomaly. Subsequently, an adjacent band of pixels experienced the same anomaly. GeoEye-1 imagery collection, production and delivery to customers is unaffected by this second occurrence because of the previous operational modifications implemented by the Company, and the pixel bands affected by the anomaly continue to collect panchromatic (black-and-white) images normally. While we have designed modifications that we believe would significantly reduce or eliminate the effects to the Company of these types of failures, any failure of our cameras on any of our satellites or other loss of satellite capacity or functionality could require different satellite operational modifications that may have a material adverse effect on our imagery collection operations, and also could materially affect our financial condition and results from operations.

Results of Operations

 

Comparison of the Results of Operations for the Three and Nine Months Ended September 30, 2010 and 2009

 

 

Revenues

 

 

Imagery revenues primarily include imagery sales, affiliate access fees and operations and maintenance fees. NextView cost share revenues include the recognition of deferred revenue related to the cost share amounts from the NGA. Production and other services revenues primarily include revenue from production orders for the NGA and commercial customers, as well as our digital aerial imagery service and the SeaStar Fisheries information service.

Imagery revenues increased during the three months ended September 30, 2010, compared to the same period in 2009, primarily due to an increase in deliveries to domestic commercial customers as well as revenue related to the delivery of a customer imagery system upgrade in the third quarter of 2010. Imagery revenues increased during the nine months ended September 30, 2010, compared to the same period in 2009, primarily due to the increased level of deliveries to the NGA and other regional affiliate and domestic commercial customers using GeoEye-1 for the full nine months of 2010, as compared to seven-and-a-half months in 2009 as a result of commencement of GeoEye-1 operations in February 2009.

 

Production and other services revenues increased for the three and nine months ended September 30, 2010, compared to the same periods in 2009, primarily due to an increase in our value-added production services resulting from higher customer demand and system process improvements and enhancements.

 

Total domestic and international revenues were as follows: