UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

For the transition period from           to          

 

Commission File Number 001-33015

 

GeoEye, Inc.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(703) 480-7500

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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, as amended, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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):

 

(Do not check if a smaller reporting company)

 

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

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $437,576,864

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes þ     No o

 

The number of shares outstanding of Common Stock, par value $0.01, as of March 10, 2010 was 21,103,232 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of GeoEye, Inc.’s 2010 Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 3, 2010, to be filed within 120 days after the close of the Registrant’s fiscal year, are incorporated by reference in Part III of this Form 10-K.

 

 

TABLE OF CONTENTS

 

 

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

FORWARD LOOKING STATEMENTS

 

All statements other than those of historical facts included in this Form 10-K, 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. 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 the risks set forth below and under the captions “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A). The forward-looking statements made in this annual report on Form 10-K (Annual Report) 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 Form 10-K to reflect any changes in our expectations or any change in events, conditions or circumstances on which any statement is based.

 

Trademarks

 

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;

 

 

Overview

 

GeoEye is a leading commercial provider of highest accuracy, highest resolution earth imagery, image processing services and imagery information products 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 fixed-wing aircraft with advanced high-resolution imagery collection capabilities. GeoEye-1 is the world’s highest resolution and most accurate commercial 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 high-resolution image processing and production facilities which can process, manage, analyze and share imagery from any commercial or government satellite. Our satellite and aerial imagery products and services provide our customers with the timely, and accurate location intelligence, enabling them to analyze, monitor and map 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, and disaster preparedness and emergency response. We own one of the largest commercial color digital satellite imagery libraries in the world, which contains more than 405 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, and our color digital imagery library differentiates us from our competitors. This enables us to deliver a comprehensive range of imaging products and services to our diverse customer base.

 

Products and Services

 

We offer a wide range of imagery products and services, including: the collection of satellite and aerial imagery, imagery processing, and production services 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, which 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 provides 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 generated by our production service operations are purchased by both U.S. Government agencies and commercial customers. Production services typically entails 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 image products in order 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 customer’s 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 Service (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. For example, our SeaStar marine information service, which is offered on a subscription basis, provides the commercial fishing industry with sophisticated mapping information, which includes such data as sea surface temperatures and ocean currents as well as analysis of this information, to assist fishermen in locating fish more efficiently.

 

We are developing 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^tm, will provide the core infrastructure for this new service and our new geospatial information services business.

The EyeQ Web Services Platform

 

The EyeQ Web services platform will sell imagery and other location intelligence based on multi-year subscriptions and seat licenses, rather than selling imagery pixels by the square kilometer. EyeQ will also offer a Web interface with tools that function as our customers’ data center. EyeQ can serve up imagery and other content throughout the customers’ data network and also out to their customers and partners.

 

With EyeQ, our customers will get easy access to their imagery, tailored to their needs, all through cloud computing. EyeQ will be user friendly and 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.

 

This real-time Web delivery will first be provided to the NGA through a program known as Rapid Dissemination of Online Geospatial Intelligence, also called RDOG. RDOG represents our first step toward delivering information services over the Web. Phase one of RDOG program involves a contract to produce and deliver a digital image map of an entire country for the NGA. After this product is built, we will have a separate contract to host the information product in a Web-services environment, so any of the NGA employees covered by the license agreement can access it anytime, anywhere. We received this hosting contract in late February 2010.

 

The NGA issued a contract in March 2010 for subscription-based access to this Web mapping service. We are on track to move from beta into formal operations by the end of March. After GeoEye brings the Web services online for the U.S. Government in early spring, we will begin rolling the EyeQ service out to our commercial customers. These information services will be offered to a wide range of government and commercial clients for application in the oil and gas industry, mining, engineering, construction and infrastructure industries, and also for use in the public safety market.

 

RDOG is, in effect, a customized version of our overall information services offering that we will be rolling out this summer, under the brand name EyeQ.

 

Customers

 

Our products and services are sold and provided to many U.S. Government agencies, including the national security community, foreign governments and North American and international commercial customers.

 

We sell our imagery by means of image collection orders, both satellite and aerial, and from our satellite imagery library, which currently comprises over 405 million square kilometers of high-resolution imagery. Our imagery products and services are sold through direct and indirect sales channels, resellers, direct salespeople, strategic partners and via our customer service and production services personnel. Our imagery customers can buy imagery from us through various sales arrangements, including purchasing imagery by the square kilometer, or by buying monthly subscription-based access to one of our satellites and associated ground processing technology and support services. Certain international government customers pay for direct access to our satellites, which gives them the right to task the satellites and to receive direct downlinks from the satellite. We have the ability to deliver imagery products by means of electronic delivery using file transfer protocol (FTP) or by the use of physical media such as CDs, DVDs, hard drives or electronic distribution. The key factors in determining the appropriate delivery method depends on the customer needs and the file size of the imagery product ordered.

 

Domestic Customers

 

U.S. Government

 

Our products and services are provided to various U.S. Government, defense, intelligence and law enforcement agencies and civil agency customers. Under the NextView Program, the National Geospatial-Intelligence Agency (NGA) acquires imagery and imagery derived products on behalf of its clients in the U.S. defense, intelligence and law enforcement agencies. Other U.S. Government agencies that purchase satellite imagery include the U.S. Department of Interior, U.S. Geological Survey, U.S. Fish and Wildlife Service, National Park Service, National Aeronautics and Space Administration, U.S. Air Force, U.S. Army and the U.S. Department of Agriculture. For the year ended December 31, 2009, we recognized aggregate revenues of $181.9 million from the U.S. Government, which represented approximately 67% of our total revenues.

Commercial and Other

 

Our North American commercial customers, which represented 6% of our revenues for the year ended December 31, 2009, purchased both satellite and aerial imagery from us. Our North American commercial customers operate in a variety of different market segments, including on-line mapping, GIS, precision mapping, infrastructure, oil and gas, environmental monitoring, agriculture, mining, utilities and transportation. We sell imagery and products to our North American resellers and they in turn add additional value to the products for sale to the end user. One example of our North American commercial relationship is our multi-year agreement with Google, Inc. to provide satellite imagery for its online consumer and commercial applications (Google Earth and Google Maps).

 

International Customers

 

Our international customers, which represented 27% of our total revenues for the year ended December 31, 2009, is primarily comprised of foreign governments but also includes commercial customers. Most foreign countries currently do not have satellite collection programs as technically sophisticated as those in the United States and must either rely on limited aerial imagery collection for their imagery applications or purchase imagery from reliable commercial satellite providers, such as GeoEye. Our international customers primarily use imagery for national defense, intelligence programs; agricultural planning and monitoring; resource monitoring; national border monitoring; environmental and infrastructure monitoring; and construction planning.

 

Many of our international customers purchase satellite images and data that are delivered directly to the customers’ own satellite ground stations. These international customers contract to purchase the right to send imagery collection orders directly to our satellite and to receive direct downlinks of imagery from our satellites within a particular coverage zone (cone of communication) while the satellite is over their territory. Customers purchasing imagery in this manner enter into take-or-pay arrangements with us, and these contracts generally have a duration of one to five years. Certain contracts entered into with international customers (affiliates) prior to our acquisition of Space Imaging LLC (Space Imaging) specified that IKONOS’ images taken over the affiliate’s territory were sold to the affiliate.

 

We have modified the old IKONOS business model in connection with the launch of our newest satellite, GeoEye-1. We now retain a significant amount of GeoEye-1 capacity over all territories, including those in which we have international affiliates. In addition, we grant our international affiliates licenses to use and re-sell GeoEye-1 images collected by them in their territories; however, in most cases, we retain the rights to those images outside of such territories. This change has provided us significantly greater flexibility to collect imagery for the U.S. Government and other customers, to reduce our cost of goods sold, to sell a significantly increased number of images to our customer base and to more effectively utilize our archive.

 

NextView Program

 

The U.S. Government’s NGA, announced in March 2003 that it intended to support, through the NextView program, the continued development of the commercial satellite imagery industry through contracts to support the engineering, construction and launch of the next generation of imagery satellites by two providers. Under the NextView program, GeoEye constructed a new satellite, GeoEye-1. GeoEye-1 was launched in September 2008 and started commercial operations and obtained certification from NGA in February 2009, at which point the satellite commenced full operations. Total final capitalized costs (including financing and launch insurance costs) of the GeoEye-1 satellite and related ground systems incurred was $480.8 million.

 

Under the NextView contract, 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, NGA had paid the Company its cost share obligation in full. GeoEye had deferred recognition of the cost share amounts from NGA as revenue until GeoEye-1’s in-service date in February 2009. We recognize this revenue on a straight-line basis over the nine-year depreciable operational life of the satellite. 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 NGA’s cost share payments, approximately $20.0 million, against imagery purchase obligations during 2009.

In December 2008, we finalized a Service Level Agreement modification (SLA), to the NextView contract with NGA. On September 1, 2009, the NGA extended the SLA through March 31, 2010. On March 1, 2010, NGA modified the SLA to provide the option to extend the term of the SLA beyond March 31, 2010. The SLA has been extended through June 30, 2010, followed by six additional one-month option periods, with the last option period expiring on December 31, 2010. Under the SLA, GeoEye began delivering imagery to NGA in the first quarter of 2009 and we recognized $124.9 million of imagery revenue under the SLA during the year ended December 31, 2009.

 

During 2009, we received new U.S. Government awards totaling more than $37.9 million to supply the NGA with a significant amount of value-added, imagery-based geospatial-intelligence products. These awards are in addition to the SLA modification to the NextView contract and are expected to be completed during 2010. We recognized $10.4 million of imagery revenue during the year ended December 31, 2009, under these awards.

 

Business Operations

 

Our business operations are structured to ensure timely, accurate and accessible delivery of our products and services to our global customers. To that end, we have established an integrated system that includes collection systems, production facilities and a global distribution system.

 

Collection System

 

We own and operate satellite and aerial collection systems, including:

 

 

The following table summarizes the primary characteristics of our satellites:

 

 

GeoEye-1

 

GeoEye-1 has been designed to collect 0.41-meter (approximately equivalent to 16 inches) resolution black and white imagery (known by the industry term as panchromatic) and 1.65 meter resolution color imagery (known in the industry as multispectral) of the Earth’s surface, both individually and simultaneously. It can collect up to 127 million square kilometers per year in the color mode, the more popular mode, or 255 million square kilometers per year in the black and white mode. Although imagery can be collected at this highest resolution for the U.S. Government, due to current U.S. licensing restrictions, products for non-government customers must be re-sampled to no better than 0.5-meters before being made available for sale to non-U.S. Government customers. For

more details on this restriction, see “— Government Regulation — United States” below. In addition to 0.5-meter ground resolution imagery, GeoEye-1 offers geolocation accuracy, which is currently better than five meters, which means that customers can map natural and man-made features to within five meters of their true location on the Earth’s surface without ground control points. GeoEye-1 can downlink imagery to a customer whose ground station has the appropriate receiving equipment and has the ability to take simultaneous black and white and color imagery, allowing us to deliver “pan sharpened multispectral” imagery, which is in effect black and white imagery to which color has been accurately added, yielding a colorized product at higher resolution than would otherwise be available. GeoEye-1 can capture stereo images on the same orbital pass, allowing us to provide digital elevation data.

 

We maintain insurance policies for GeoEye-1 with both full coverage and total-loss-only coverage in compliance with the indenture governing our 9.625% Senior Secured Notes due 2015 (2015 Notes). As of December 31, 2009, we carried $250.0 million in-orbit insurance for GeoEye-1, comprised in part by $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, $20.0 million expires on September 6, 2010, $117 million expires December 1, 2010 and $50 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.

 

On December 11, 2009, GeoEye’s engineers detected an irregularity in the equipment that GeoEye-1 satellite uses to point the antenna that transmits imagery to receiving ground stations on Earth. Due to the irregularity, the satellite was taken out of service during December for testing and analysis. We have developed alternative plans to support our impacted customers and have been doing so since January 2010. One-time charges of $6.1 million were incurred in the fourth quarter as a result of the satellite irregularity and contract modifications.

 

The irregularity limits the range of movement of the downlink antenna, which affects GeoEye-1’s ability to image and downlink simultaneously to certain customers. GeoEye-1 is able to downlink imagery to GeoEye’s four ground stations, since down-linking to these ground stations is a separate function from the satellites imaging activities. The irregularity has no impact on our on-going ability to deliver imagery to the NGA under the SLA and to those of our regional affiliates for whom we collect and deliver imagery.

 

This issue did affect a few of the Company’s overseas customers who own ground stations and have contracted to receive direct downlinks, to the extent they wanted to simultaneously collect and downlink. The future impact of this irregularity on international revenues is expected to be minimal.

 

The GeoEye-1 satellite was launched in September 2008 and started commercial operations on February 5, 2009. NGA certified the imagery as meeting NGA’s specifications on February 20, 2009, at which point we commenced full operations. GeoEye-1 is currently the world’s highest-resolution color commercial remote-sensing satellite.

 

IKONOS

 

GeoEye acquired this satellite through the acquisition of Space Imaging in 2006. IKONOS provides 0.82-meter resolution black and white and 3.2-meter resolution color imagery with a geolocation accuracy of approximately 7.8 meters. IKONOS can collect about 200,000 square kilometers of imagery per day. Like GeoEye-1, IKONOS is designed to downlink imagery to a customer and to accept imaging collection orders directly from customers. In addition, like GeoEye-1, IKONOS has the ability to take simultaneous black and white and color imagery, allowing us to deliver “pan sharpened multispectral” imagery and can capture stereo images on the same orbital pass. The Company maintains $20.0 million of in-orbit insurance for IKONOS, which expires December 1, 2010, and is paid if the satellite’s capabilities become impaired as measured against a set of specifications. The IKONOS satellite was launched in September 1999.

 

OrbView-2

 

OrbView-2 collects 1.0-kilometer, low resolution color imagery and is the first commercial satellite to image the Earth’s entire surface on a daily basis in color. OrbView-2 downlinks imagery to both our primary and backup ground stations and to various regional receiving stations around the world. We provide OrbView-2 value-added

products on a global basis to approximately 300 customers in the commercial fishing industry under our SeaStar Fisheries Information Service, where we couple our imagery with weather forecasts and other data that allow these customers to better predict high yielding fishing areas. High-resolution imagery is not considered critical in this market. We also provide OrbView-2 imagery to researchers and the U.S. Government agencies for scientific and environmental applications. The satellite’s coverage supports a wide array of projects focusing on global change, global warming, and non-scientific applications for commercial fishing, environmental monitoring and naval operations. The OrbView-2 satellite was launched in August 1997.

 

GeoEye-2

 

We believe that demand for satellite imagery from the U.S. Government will increase beyond the available supply in the 2013 timeframe. Given the long lead time associated with providing additional capacity, we entered into a contract with ITT Corporation in October 2007 to begin work on the camera for GeoEye-2. This head start in building the camera means we could accelerate GeoEye-2’s deployment so that it could be launched in late 2012 with imagery being commercially available for sale in early 2013. As of December 31, 2009 we have spent a total of $66.8 million on components of GeoEye-2. We view these expenditures as prudent and believe they will position us to move quickly should an opportunity arise to expand our existing NGA relationship to include the development of a new satellite. We expect to continue to make reasonable investments in GeoEye-2’s development, but we do not expect to launch or commission the GeoEye-2 satellite on an accelerated basis without an agreement with the NGA under its EnhancedView Program. We are currently participating in the NGA request-for-proposal contract process for the EnhancedView Program. This program will allow the U.S. government to continue to receive a supply of unclassified, highly accurate satellite imagery from commercial satellite imagery providers and will replace the NextView program, which could expire in June 2010, unless the NGA exercises their option to extend it through December 31, 2010. Prior to launch and commissioning GeoEye-2, we may require additional capital depending on the terms of our agreement, if any, with NGA. If we were not to build GeoEye-2 on an accelerated basis, we would most likely proceed so that a new high-resolution satellite could be used as a replacement satellite for GeoEye-1 in the 2016 to 2017 timeframe.

 

Production Facilities

 

GeoEye operates four production facilities that provide advanced image processing products, engineering analysis and related services. We also operate or contract with other facilities that provide satellite control and communications services.

 

The following table summarizes the primary characteristics of production facilities and satellite control and communications services:

 

 

Our two operations centers in Dulles, VA and Thornton, CO:

 

 

 

The Dulles, Virginia operations center sends satellite imaging collection orders, referred to in the industry as tasking orders, to the GeoEye-1 satellite. The Thornton, Colorado operations center sends imaging collection orders to our IKONOS satellite and provides backup collection order capabilities for the GeoEye-1 satellite. Our international regional affiliates can also send imaging collection orders to both GeoEye-1 and IKONOS. The tasking process is complex and employs software systems to evaluate whether a customer’s tasking request is feasible. In order to be feasible, the satellite must be able to view the desired area on a certain day at the time it passes overhead. Additionally, adverse weather conditions, such as clouds or sun angle, may make it inadvisable to attempt to image a certain area on any given day. The order must be received in time for processing and transmission to the satellite. The tasking system considers the relative priority of different requests by one customer or several customers and calculates the satellite’s ability to collect more than one area of the Earth on the same orbital pass.

 

Our St. Louis, Missouri image processing facility provides advanced image processing products, engineering analysis and related services to the U.S. Government and other commercial customers. The St. Louis facility can produce imagery products from various sources including images acquired from U.S. Government satellites, our GeoEye-1 and IKONOS satellite, the satellites operated by our competitors and many of the current international satellites, in addition to aerial imagery. Our St. Louis facility provides us with a unique competitive advantage, as we believe that we are the only operator of high-resolution imagery satellites that also operates a source-agnostic production facility that can assimilate imagery from any imagery source to generate the sophisticated information products required by our customers.

 

Our MJ Harden facility in Mission, Kansas offers a range of geospatial products and services to help develop and manage geospatial data to support documentation, resources inventory and engineering and development applications. The services are based on 50 years of experience in photogrammetric mapping, GIS implementation and geospatial information technology development and include: digital aerial imagery, LiDAR elevation data, planimetric maps, topographic maps, digital orthophoto imagery, remote sensing services, survey and inventory services and GIS consulting and implementation. MJ Harden provides digital aerial imagery collection, photogrammetry services, mobile and geographic information system technology and implementation services, field data collection and other related services that provide customers with asset-mapping and corridor management solutions. Customers include utilities and oil and gas pipeline companies; engineering companies; real estate developers; and federal, state and local government agencies, among others.

 

In addition to the operations centers listed above, we also contract with ground station facilities in Kiruna, Sweden; Tromso, Norway; and Troll, Antarctica that provide relay services to capture and transmit satellite imagery to our production facilities.

 

Global Distribution Network

 

Our global distribution network consists of:

 

 

The image processing centers receive imagery downlinked to multiple ground antennas and are equipped with numerous work stations that process and convert the digital imagery into imagery products. The centers are designed to archive the maximum number of high-resolution satellite images per day and have the capability to generate a variety of geospatial products for resale. “Geospatial products” refers to information products created by combining imagery with data related to geographic location, spatial relationships and other data.

Contracted Backlog

 

We have historically had and currently have a substantial backlog, which provides some assurance regarding our future revenue expectations. Backlog reduces the volatility of our net cash provided by operating activities, more than would be typical for a company outside our industry.

 

Our backlog was approximately $271.4 million at December 31, 2009 and approximately $236.2 million at December 31, 2008. See “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” and related notes in Item 8 of this Annual Report. Backlog includes our SLA with the NGA, access fee agreements with our international regional affiliates, regional affiliate ground station operations and maintenance contracts, commercial imagery contracts and value-added products and services.

 

Our backlog as of December 31, 2009, included approximately $81.4 million of contracts with the U.S. Government, including approximately $39.5 million related specifically to the SLA. In addition to this backlog, we have recently added another $37.5 million with our most recent SLA extension. Most of our government contracts are funded incrementally on a year-to-year basis; however, certain international government and commercial customers have signed multi-year contracts. Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies could materially adversely affect our financial condition and results of operations. Furthermore, contracts with the U.S. Government may be terminated or suspended by the U.S. Government at any time, with or without cause, which could result in a reduction in backlog.

 

In addition, there is $196.3 million of remaining unamortized revenue related to payments made prior to FOC from NGA, of which $24.2 million is expected to be recognized during 2010. We have not included this in our backlog because no specific services will be rendered to recognize the revenue. The balance will be recognized on a straight-line basis over the useful life of the satellite.

 

Company History

 

GeoEye was initially organized as ORBIMAGE Holdings, Inc., Delaware corporation, on April 4, 2005. It was formed to enable its predecessor registrant, and subsequently its wholly-owned subsidiary, ORBIMAGE Inc., a Delaware corporation, to implement a holding company organizational structure. ORBIMAGE Inc. was established on December 31, 2003 in conjunction with Orbital Imaging Corporation’s reorganization and emergence from Chapter 11 bankruptcy. Effective June 21, 2005, we reorganized into a holding company structure, by means of a merger conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware (the Merger). As a result of the Merger, each stockholder of ORBIMAGE Inc. became a holder of the common stock of ORBIMAGE Holdings Inc., evidencing the same proportional interests, and ORBIMAGE Inc. became a direct, wholly owned subsidiary of ORBIMAGE Holdings Inc. Accordingly, the Company became the successor registrant of ORBIMAGE Inc. On January 10, 2006, we adopted the brand name GeoEye. On September 28, 2006, the stockholders of the Company voted to formally change the legal name of the Company from ORBIMAGE Holdings, Inc. to GeoEye, Inc.

 

On September 15, 2005, we entered into a definitive asset purchase agreement (Purchase Agreement) to acquire the operating assets of Space Imaging. On January 10, 2006, we completed the acquisition of Space Imaging (SI) pursuant to the terms of the Purchase Agreement. The final cash purchase price, including acquisition costs, was approximately $51.5 million. The acquisition was financed mainly through the incurrence of $50.0 million of indebtedness. We were required to prepay the debt with 100% of the excess cash flows of the acquired operations calculated on a quarterly basis. We finished repaying the debt on February 2, 2007.

 

On March 15, 2007, we acquired MJ Harden Associates, Inc. (MJ Harden) through a stock purchase of all of the outstanding stock of MJ Harden’s sole owner, i5, Inc. MJ Harden is a leading provider of digital aerial imagery and geospatial information solutions.

In December 2009, we established a new foreign subsidiary in Singapore to service our expanding Asia customer base, GeoEye Asia Pte. Ltd. In January 2010, we changed the names of the Company’s subsidiaries as follows:

 

 

Competition

 

We compete against various public and private companies, as well as systems owned by the U.S. Government and foreign state-sponsored entities that provide satellite and aerial imagery products and services to the commercial market. Our major competitor for high-resolution satellite imagery is DigitalGlobe, Inc. (DigitalGlobe), a publicly listed commercial vendor of space imagery. International competitors for high-resolution satellite imagery and imagery products include: the National Remote Sensing Agency, Department of Space (Government of India), RADARSAT International (Canada), ImageSat International N.V. (Israel), SPOT Image SA (France), Taiwan and Korea. For risks associated with competition, see “Item 1A. Risk Factors.”

 

Employees

 

At December 31, 2009, we had 534 employees. Generally, our employees are retained on an at-will basis. We have entered into employment agreements with certain of our key employees. Certain of our employees have non-competition agreements that prohibit them from competing with us for various periods following termination of their employment.

 

Government Regulation

 

The satellite remote imaging industry is a highly regulated industry, both domestically and internationally. In the U.S., the operation of remote imaging satellites generally requires licenses from the Department of Commerce (DoC) and from the Federal Communications Commission (FCC). Furthermore, remote sensing satellite and ground control station technologies are subject to U.S. export control licensing and regulation under the International Traffic in Arms Regulations (ITAR) administered by the Department of State and the Export Administration Regulations (EAR) administered by the DoC. In addition, we are party to certain classified U.S. Government contracts, the performance of which is subject to U.S. facility and personnel clearance laws and regulations. As is the case with any U.S. business, we are subject to U.S. Government Foreign Corrupt Practices Act restrictions regarding conducting business with foreign government officials and U.S. Treasury Department restrictions prohibiting conducting business with certain embargoed countries or entities or persons on the Specifically Designated Nationals list maintained by the U.S. Treasury Department. Finally, in order to provide satellite access services and imagery products internationally, our satellites may require International Telecommunications Union (ITU) notification and registration and licenses from the governments of foreign countries where our services and products will be distributed.

 

United States

 

Department of Commerce Regulation

 

The DoC, through the National Oceanic and Atmospheric Administration (NOAA), is responsible for granting commercial imaging satellite operating licenses and for coordinating satellite imaging applications among several governmental agencies to ensure that any license addresses all U.S. national security and foreign policy concerns, and complies with all international obligations of the United States. We are required to obtain a DoC license to operate each of our remote sensing satellite systems and provide imagery services to our customers.

 

We currently have DoC licenses for all of our existing satellite systems. We also hold a DoC license that we intend to use for the GeoEye-2 satellite system that is being developed. We intend to modify this DoC license, subject to DoC approval, to reflect the final technical specifications for the GeoEye-2 satellite if we are awarded an agreement to build

the GeoEye-2 satellite under the NGA’s EnhancedView program. The DoC license for GeoEye-2 is a constellation license and authorizes us to operate an additional satellite subject to DoC approval. The DoC licenses for our satellites are valid through the operational lifetime of each satellite. We expect to satisfy the terms of each of the DoC licenses for our satellites and to maintain the regulatory licenses and approvals necessary for their ongoing operations.

 

Our DoC licenses generally include the following key operating conditions:

 

 

FCC regulation

 

The FCC is responsible for licensing commercial satellite and ground systems and the radio frequencies used by commercial satellite systems. In general, the FCC grants licenses to commercial satellite systems that conform to the technical, legal and financial requirements for these systems set forth in FCC regulations.

 

Below is a table summarizing the FCC license grant and expiration dates for the operation of our current satellites and related ground systems:

 

We also hold an FCC license to operate the OrbView-3 satellite, which remains in orbit but which ceased commercial operations in 2007. In the future, we will be required to obtain FCC licenses and approvals in connection with any new high-resolution satellites that we plan to operate.

 

We expect that GeoEye-2 will operate in the same radio frequency bands as our GeoEye-1 and IKONOS satellites and their associated ground systems or other frequency bands allocated for use by remote sensing satellite service providers, subject to FCC approval and that we will obtain the FCC licenses and approvals necessary for GeoEye-2 operations.

 

Export Controls and Security Clearance Regulation

 

We are subject to a complex set of export control and security clearance regulations for the products and services we offer.

 

Among other things, we are a registrant under ITAR and we hold export licenses and other approvals from the U.S. Department of State’s Directorate of Defense Trade Control (DDTC) for the export of hardware, software and technical data relating to the potential defense-related satellites, ground stations, image processing facilities and support services provided to customers. Additional approvals may be required from DDTC and from the DoC’s Bureau of Industry and Security in certain cases. For example, export licenses may be required if certain foreign persons or entities are involved in the development or acquisition of our products and services. Also, the export of a GeoEye supplied ground station or image processing facility to a foreign person would require a DDTC export approval. The suspension or cancellation of our ITAR registration or DDTC approval to export our products and services would have a material adverse effect on our business and results of operations.

 

In addition, we require certain facility and personnel security clearances to perform our classified U.S. Government-related business. Security clearances are subject to regulations and requirements including the National Industrial Security Program Operating Manual, which provides baseline standards for the protection of classified information released or disclosed to industry in connection with classified U.S. Government contracts. The suspension or cancellation of our facility clearances, or the inability to maintain personnel security clearances for our personnel to perform classified U.S. Government contracts, would have a material adverse effect on our business and results of operations.

 

Furthermore, any change in the ownership of GeoEye involving a transfer to foreign persons or entities may increase U.S. Government scrutiny and lead to more onerous requirements in connection with both export controls and security clearances. A transfer to foreign ownership could also trigger other requirements, including filings with and review by the Committee on Foreign Investment in the United States pursuant to the Exon-Florio Provision and approval by NOAA under our DoC licenses. Depending on the country of origin and identity of foreign owners, other restrictions and requirements could arise.

 

Future Developments

 

U.S. regulators may subject us in the future to new laws, policies or regulations, or changes in the interpretation or application of existing laws, policies and regulations that modify the present U.S. regulatory environment. U.S. regulators could decide to impose limitations on U.S. companies that are currently applicable only to other countries, or other regulatory limitations that affect satellite remote imaging operations. Any limitations of this kind could adversely affect our business or our results of operations.

 

International

 

All satellite systems providing services in the international markets must comply with the following general international regulations as well as the specific laws of the countries in which satellite imagery is downlinked or satellite imagery products are distributed.

 

 

 

While we believe we will be able to obtain all U.S., ITU and foreign government licenses, authorizations and registrations necessary to provide services internationally, we cannot assure you that we will be successful in doing so. The failure to obtain some or all necessary licenses, approvals or registrations could have a material adverse effect on our business or results of operations.

 

 

The risks described below, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-K or presented elsewhere by management from time to time.

 

A substantial portion of our revenues are generated from contracts with U.S. government agencies. Termination of these contracts at any given time could materially reduce our revenue and have a material adverse effect on our business.

 

Revenues from U.S. Government contracts accounted for 67% of our total revenues for the year ended December 31, 2009. U.S. government agencies may terminate or suspend their contracts at any time, with or without cause, or may change their policies, priorities or funding levels by reducing agency or program budgets due to budgetary constraints. Our primary contract with the U.S. Government, through the NGA, is the NextView imagery contract. On March 1, 2010, the U.S. Government signed a modification to the SLA to provide the option to extend this contract through June 30, 2010, followed by six additional one-month option periods, with the last option period expiring on December 31, 2010. Although we anticipate the NGA will award a new contract to us on or around June 30, 2010, there can be no assurances that either such event will occur or that the U.S. Government will continue to purchase imagery from us at its current level, if at all. If the NGA terminates or suspends any of its contracts with us, or changes its policies, priorities, or funding levels, these actions would have a material adverse effect on our business, financial condition and results of operations. The SLA provides for monthly payments of up to $12.5 million, subject to a maximum reduction of 10% based on performance metrics. We recognized $124.9 million of revenue under the SLA for the year ended December 31, 2009, which accounted for approximately 46% of our revenue during the year ended December 31, 2009.

 

Changes in U.S. government policy regarding the use of commercial imagery products and service providers, or material delay or cancellation of the planned U.S. government EnhancedView program may have a material adverse effect on our revenue and our ability to fund operations and achieve our growth objectives.

 

Current U.S. government policy encourages the use of commercial imagery products and services to support U.S. national security objectives. We are considered by the U.S. government to be such a provider. U.S. government policy is subject to change and any change in policy away from supporting the use of commercial imagery products

and service providers to meet U.S. government imagery needs could materially affect our revenue and our ability to fund operations and achieve our growth objectives.

 

EnhancedView is a large U.S. government procurement that is intended to serve as the follow-on program to the NextView program, in which we currently participate. Our revenue under the NextView program accounted for 46% of our total revenue in 2009. The EnhancedView procurement is in the proposal stage.

 

Satellites have limited useful lives and are expensive to replace.

 

Satellites have limited useful lives. We determine a satellite’s useful life, or its expected operational life, using a complex calculation involving the probabilities of failure of the satellite’s components from design or manufacturing defects, environmental stresses, estimated remaining fuel or other causes.

 

The expected operational lives of our satellites are affected by a number of factors, including the quality of construction, the supply of fuel, the expected gradual environmental degradation of solar panels, the durability of various satellite components and the orbits in which the satellites are placed. Certain advanced components, such as its cameras, are integral to a satellite’s design functionality and expected operational life. The failure of satellite components can cause damage to, or loss of, the use of a satellite before the end of its expected operational life. Electrostatic storms or collisions with other objects could damage our satellites which could, in turn, impair their design functionality. Such objects could include debris from exploded satellites and spent rocket stages, dead satellites and meteoroids. We cannot assure you that each satellite will remain in operation for its expected operational life. We expect the performance of any satellite to decline gradually near the end of its expected operational life.

 

Our GeoEye-1 satellite was launched in September 2008 and has an expected operational life of nine years. IKONOS, another of our satellites, was fully depreciated in June 2008. We currently expect to continue commercial operations with IKONOS through 2011 based on a study that was completed in August of 2008 and updated in January 2010 by the IKONOS manufacturer, which resulted in a revised life expectancy for IKONOS. However, there can be no assurance that IKONOS will continue to operate adequately to remain commercially viable. During the last year, our OrbView-2 satellite has on several occasions experienced operational anomalies related to various components. When these have occurred, OrbView-2 has switched into “safe-hold mode” in order to protect itself while our ground operations personnel worked to restore its functionality, which has historically taken two weeks to several months. When in safe-hold mode, OrbView-2 is unable to provide imagery. The satellite recently returned to normal operations and we continue to monitor the situation. Management is currently doing a cost-benefits analysis of continuing OrbView-2 operations, since we can obtain the information it provides from other external sources.

 

Replacing a satellite is expensive. We anticipate using funds generated from operations to develop and launch future high-resolution imagery satellites. If we do not generate sufficient funds from operations or we cannot obtain financing from outside sources, we will not be able to deploy new satellites to replace GeoEye-1 at the end of its expected operational life. We cannot assure you that we will be able to generate sufficient funds from operations or to raise additional capital on favorable terms or on a timely basis, if at all, to develop or deploy follow-on high-resolution satellites.

 

We cannot assure you that our satellites will operate as designed. We may experience in-orbit satellite failures or degradations in performance that could impair the commercial performance of our satellites, which could lead to lost revenue, an increase in our operating expenses, lower operating income or lost backlog.

 

Our satellites employ advanced technologies and sensors that are subject to severe environmental stresses in space that could affect the satellite’s performance. Hardware component problems in space could lead to degradation in performance or loss of functionality of the satellite, with attendant costs and revenue losses. In addition, human operators may execute improper implementation commands that negatively impact a satellite’s performance. Unanticipated catastrophic events, such as meteor showers or collisions with space debris, could reduce the performance of or completely destroy any of our satellites. Even if a satellite is operated properly, minor technical flaws in the satellite’s sensors could significantly degrade their performance, which could materially affect our ability to collect imagery and market our products successfully.

Our business model depends on our ability to sell imagery from our high-resolution satellites. We do not presently have plans to construct and launch a replacement satellite for IKONOS or OrbView-2 if either fails. During the last year OrbView-2 has on several occasions experienced operational anomalies related to various components. When these have occurred, OrbView-2 has switched into “safe-hold mode” in order to protect itself while our ground operations personnel work to restore its functionality, which has historically taken two weeks to several months. When in safe-hold mode, OrbView-2 is unable to provide imagery. In September 2009, OrbView-2 switched into safe-hold mode and has been unable to provide imagery on a regular basis. The satellite recently returned to normal operations and we continue to monitor the situation. While we have historically had success in returning OrbView-2 to operational status from this mode, we cannot assure you that Orb View-2 will continue to operate normally or will return to operational status should it re-enter the safe-hold mode.

 

We are developing the GeoEye-2 satellite program, which will likely take approximately three to four years to complete. Accordingly, GeoEye-2 cannot be considered a near-term replacement if the GeoEye-1 satellite were to fail. 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. This irregularity appears to limit the range of movement of GeoEye-1’s downlink antenna, which affects GeoEye-1’s ability to image and downlink simultaneously to a few of our international customers that have contracted for that service. GeoEye-1 is still able to downlink imagery to GeoEye’s four ground stations, since down-linking to these ground stations is separate from imaging activities; however, as of the date of this filing, the irregularity has not yet been remedied and we cannot assure you that this irregularity will ever be fully remediated. In May 2009, we announced that we had identified an issue with a particular color imagery collection feature of GeoEye-1. While we have subsequently modified our operations mode to mitigate the risk associated with this imagery collection issue and believe that this was an isolated occurrence, we cannot assure you that our cameras will not experience similar issues in the future, which could have a material adverse affect on our collection capacity. Any other failure of our satellites or any interference with such satellites’ commercial operations could have a material adverse effect on our results of operations and business.

 

New or proposed satellites are subject to construction and launch delays, the occurrence of which can materially and adversely affect our operations.

 

We have in the past experienced delays in satellite construction and launch which have adversely affected our operations. Such delays can result from delays in the construction of satellites, procurement of requisite components, launch vehicles, the limited availability of appropriate launch windows, possible delays in obtaining regulatory approvals and launch failures. Failure to meet a satellite’s construction schedule, resulting in a significant delay in the future delivery of a satellite could also adversely affect our marketing strategy for the satellite. Even after a satellite has been manufactured and is ready for launch, an appropriate launch date may not be available for several months. Further, any significant delay in the commencement of service of any of our satellites would allow customers who pre-purchased or agreed to utilize capacity on the satellite to terminate their contracts and could affect our plans to replace an in-orbit satellite prior to the end of its service life.

 

We operate in a highly competitive and specialized industry. The size and resources of some of our competitors may allow them to compete more effectively than we can, which could result in loss of our market share.

 

Our products and services compete with satellite and aircraft-based imagery and related products and services offered by a range of commercial and government providers. Certain of these competitors may have greater financial, personnel and other resources than us.

 

Our major U.S. competitor for high-resolution satellite imagery is DigitalGlobe. DigitalGlobe currently operates three high-resolution satellites, Quickbird, launched in 2001, WorldView-1, launched in September 2007, and WorldView-2 satellite, launched on October 8, 2009. We believe that WorldView-1 has the ability to provide commercial customers with 0.5 meter resolution imagery. In addition, WorldView-2 has the ability to collect color imagery, which could strengthen DigitalGlobe’s position in the industry. Our satellites have different capabilities from those of DigitalGlobe. In particular, all of our satellites have the ability to produce color imagery, while only two of DigitalGlobe’s satellites can image in color and GeoEye-1’s image resolution of 0.41 meters is believed to be

the highest resolution of any commercial satellite. Historically, we have enjoyed a competitive advantage over DigitalGlobe in the international markets because our high-resolution satellites have had the capability to directly download imagery to our customers’ ground stations. However, the WorldView-1 and WorldView-2 satellites may now have some of the same capabilities. Additionally, both the WorldView-1 and WorldView-2 satellites have higher resolutions and more advanced technologies than our IKONOS satellite.

 

It is possible that foreign governments could subsidize, fund the development, construct, launch and operate imagery satellites with higher resolution and accuracy in the future, which could enable them to sell earth imagery from their satellites in the commercial market and thereby compete on price with our imagery products.

 

If competitors develop and launch satellites with more advanced technologies than ours, or offer services at lower prices than ours, our business and results of operations could be harmed. If we cannot maintain our margins, our financial position could be impacted and our stock price could decline.

 

U.S. and foreign governmental agencies may build and operate their own systems which could affect the current and potential market share of our products and services.

 

The U.S. Government currently relies and is likely to continue to rely on government-owned and operated systems for classified satellite-based high-resolution imagery. The U.S. Government could reduce its purchases from commercial satellite imagery providers or decrease the number of companies to which it contracts with no corresponding increase in the total amount spent.

 

The U.S. government and foreign governments also may develop, construct, launch and operate their own imagery satellites, which could reduce their need to rely on commercial suppliers. In addition, such governments could sell Earth imagery from their satellites in the commercial market and thereby compete with our imagery products and services. These governments could also subsidize the development, launch and operation of imagery satellites by our current or future competitors. Any reduction in purchases of our products and services by the U.S. Government could have a material adverse effect on our business and the results of operations.

 

The success of our products and services will depend on market acceptance, and you should not rely on historic growth rates as an indicator of future growth.

 

Our success depends on existing markets accepting our imagery products and services and our ability to develop new markets. Our business plan is based on the assumption that we will generate significant future revenues from sales of high-resolution imagery produced by GeoEye-1 and IKONOS to current and new customers in our existing markets and to customers in new markets. The commercial availability of high-resolution satellite imagery is still a fairly new market. Consequently, it is difficult to predict accurately the ultimate size of the market and the market acceptance of our products and services. Our strategy to target certain markets for our satellite imagery relies on a number of assumptions, some or all of which may be incorrect. The actual market for our products and services could vary materially from the potential markets that we have identified causing us to target less promising markets and miss opportunities.

 

We cannot accurately predict whether our products and services will achieve significant market acceptance or whether there will be a market for our products and services on terms we find acceptable. Market acceptance of our commercial high-resolution Earth imagery products and services depends on a number of factors, including the quality, scope, timeliness, sophistication and price and services and the availability of substitute products and services. Lack of significant market acceptance of our offerings, or other products and services that utilize our products and services, delays in acceptance, failure of certain markets to develop or our need to make significant investments to achieve acceptance by the market would negatively affect our business, financial condition and results of operations.

 

We may not continue to grow in line with historical rates, or at all. If we are unable to achieve sustained growth, we may be unable to execute our business strategy, expand our business or fund our liquidity needs and our prospects, financial condition and results of operations could be materially and adversely affected.

Interruption or failure of our infrastructure and image downloading systems could impair our ability to effectively perform our daily operations, protect and maintain the Earth imagery content stored in our image archives and provide our products and services, which could damage our reputation and harm our results of operations.

 

The availability of our products and services depends on the continuing operation of our infrastructure, information technology and communications systems. Any system downtime or damage to or failure of our systems could result in interruptions in our service, which could reduce our revenue and profits. Our systems are vulnerable to damage or interruption from floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems. Our data centers and ground stations have the ability to be powered by backup generators. However, if our primary source of power and the backup generators fail, our daily operations and operating results would be materially and adversely affected.

 

In addition, our ground stations and collection systems are vulnerable to damage or interruption from human error, intentional bad acts, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. Our satellite imagery is downloaded directly to our ground stations and then stored in our image archives for sale to our customers. As a result, our operations are dependent upon our ability to maintain and protect our Earth imagery content and our image archives and to provide our images to our customers, including our foreign distribution network and value-added resellers. The impairment of our ability to perform any of these functions could result in lengthy interruptions in our services and/or damage our reputation, which could have a material adverse effect on our financial condition, liquidity, and results of operations.

 

We rely on resellers and a foreign distribution network to market and sell our products and services in certain markets and to certain customers. If these distributors and resellers fail to market our products and services successfully, our business, financial condition and results of operations will be materially adversely affected.

 

We rely principally on foreign regional distributors to market and sell our imagery from the GeoEye-1 and IKONOS satellites internationally. We are currently intensifying our efforts to further develop our current and future operations in international markets. These regional distributors may not have the skill or experience to further develop regional commercial markets for our products and services. If we fail to enter into additional regional distribution agreements or if our foreign regional distributors fail to market and sell our imagery products and services abroad successfully, these failures could negatively impact our business, financial condition and results of operations.

 

We rely on resellers to develop, market and sell our products and services to address certain target markets, including certain industries and geographical markets. If our value-added resellers fail to develop, market and sell our products and services successfully, this failure could negatively affect our business, financial condition and results of operations.

 

Insurance coverage may be more difficult and costly to obtain or maintain.

 

In October 2009, the Company issued $400.0 million of Senior Secured Notes due October 1, 2015 (2015 Notes). The terms of the 2015 Notes require us to obtain launch and in-orbit insurance for any future satellites we construct and launch and also requires us to maintain specified levels of in-orbit operation insurance for GeoEye-1, to the extent that such coverage can be obtained at a premium that is not disproportionately high. With respect to GeoEye-1, we currently carry $250.0 million of in-orbit insurance, consisting of $63.0 million of in-orbit insurance in the event of the total loss of the satellite expiring December 1, 2010, plus $187.0 million of in-orbit coverage to be paid if the satellite’s capabilities become impaired as measured against a set of specifications, of which $20.0 million expires on September 6, 2010, $117.0 million expires on December 1, 2010 and $50.0 million expires on September 6, 2011. We believe that under current market conditions the premiums for additional coverage would be disproportionately high. This insurance is not sufficient to cover the cost of a replacement high-resolution imagery satellite such as GeoEye-1 or to provide us with sufficient funds to repurchase all of the 2015 Notes then outstanding in the event that, as a result of such a loss, we are required to make a mandatory offer to

repurchase the 2015 Notes. With respect to IKONOS, we currently carry $20.0 million of in-orbit coverage to be paid if the satellite’s capabilities become impaired as measured against a set of specifications, expiring December 1, 2010. We do not carry any insurance coverage for the OrbView-2 satellite. Accordingly, our current levels of insurance coverage may not be sufficient to fund operations in the event loss proceeds are required for the repurchase of our 2015 Notes.

 

Insurance market conditions or factors outside our control at a time when we would seek required insurance, such as failure of a satellite using similar components or a similar launch vehicle, could cause premiums to be significantly higher than current estimates. Higher premiums on insurance policies will increase our costs. Should the future terms of launch and in-orbit insurance policies become less favorable than those currently available, this may result in limits on amounts of coverage that we can obtain or may prevent us from obtaining insurance at all. Any failure to obtain required insurance could cause a default under the 2015 Notes.

 

A partial or complete failure of a revenue-producing satellite, whether insured or not, could require additional, unplanned capital expenditures, an acceleration of planned capital expenditures, interruptions in service, a reduction in contracted backlog and lost revenue and could have a material adverse effect on our business, financial condition and results of operations.

 

The global financial crisis may impact our business, financial condition and results of operations in ways that we currently cannot predict.

 

The continuing credit crisis and related turmoil in the global financial system may have an impact on our business, our financial condition and results of operations. In particular, the cost of capital has increased substantially while the availability of funds from the capital markets has diminished significantly. Accordingly, our ability to access the capital markets may be restricted or be available only on terms we do not consider favorable. Limited access to the capital markets could adversely impact our ability to take advantage of business opportunities or react to changing economic and business conditions and could adversely impact our strategy.

 

The current economic situation could have an impact on our customers, causing them to fail to meet obligations to us, which could have a material adverse effect on our revenue, results from operations and cash flows. State and local governments may be more vulnerable to the economic downturn and, accordingly, our MJ Harden operations have and could continue to face greater exposure to this risk. For example, our revenue from production and other services decreased $0.9 million for the year ended December 31, 2009 compared to the same period in 2008, which we believe was partially due to a decrease in state and local funding for imaging products from our digital aerial imagery services as a result of the economic downturn. A continued economic downturn coupled with the uncertainty and volatility of the global financial crisis may have further adverse impact on our business and our consolidated financial condition, results of operations and cash flows that we currently cannot predict or anticipate.

 

In addition, the current economic downturn has also led to concerns about the stability of financial markets generally and the financial strength of our counterparties. For example, if one or more of our insurance carriers fails, we may not receive the full amount of proceeds due to us in the event of loss or damage to one of our satellites. In addition, if we attempt to obtain future insurance in addition to, or replacement of, our existing coverage, the credit market turmoil could negatively impact our ability to obtain such insurance.

 

Our business is capital intensive, and we may not be able to raise adequate capital to finance our business strategies, including any future satellite, or we may be able to do so only on terms that significantly restrict our ability to operate our business.

 

The implementation of our business strategies requires a substantial outlay of capital. As we pursue our business strategies and seek to respond to opportunities and trends in our industry, our actual capital expenditures may differ from our expected capital expenditures and there can be no assurance that we will be able to satisfy our capital requirements in the future. We currently expect that our operational liquidity requirements in 2010 will be satisfied by cash on hand, cash generated from our operations and the net proceeds from the 2015 Notes offering. However, we cannot provide assurances that our businesses will generate sufficient cash flow from operations or that future borrowings will be available in amounts sufficient to enable us to execute our business strategies.

Lending institutions have suffered and may continue to suffer losses due to their lending and other financial relationships, especially because of the general weakening of the global economy. As a result, changes in the financial markets may impact our ability to obtain new financing or refinance our existing debt on commercially reasonable terms and in adequate amounts, if at all. If we determine we need to obtain additional funds through external financing and are unable to do so, we may be prevented from fully implementing our business strategies. In particular, if we determine to construct and launch a next generation satellite, we may require significant capital, and the timing of the construction will depend on our ability to raise the necessary capital on terms which we deem to be acceptable. We expect to continue to make reasonable investments in GeoEye-2’s development, but we do not expect to launch or commission the GeoEye-2 satellite on an accelerated basis without an agreement with the NGA under its EnhancedView Program. Therefore, we would most likely proceed so that a next generation satellite could be used as a replacement satellite for GeoEye-1 in the 2016 to 2017 timeframe, which may nonetheless require additional capital. Regardless of our desired delivery schedule, if any, we can provide no assurance that we will be able to raise sufficient capital to allow for the construction of a next generation satellite.

 

Failure to obtain, or the revocation or suspension of, regulatory approvals could result in service interruptions and materially adversely affect our business, financial position and results of operations.

 

U.S. Government Approvals.  Operation of our satellites requires licenses from the DoC. The failure to obtain these licenses, or the revocation of one or more licenses, could adversely affect our ability to conduct our business. The DoC licenses provide that the U.S. Government may interrupt service or otherwise limit our ability to distribute satellite images to certain parties, including certain of our customers, in order to address national security or foreign policy concerns or because of the international obligations of the U.S. Actual or threatened interruptions or limitations on our service could adversely affect our ability to market our products. In addition, the DoC has the right to review and approve our agreements with foreign entities, including contracts with international customers for high-resolution imagery. We have received such approvals for the agreements in place with our existing international customers. However, such reviews could delay or prohibit us from executing new international agreements or renewals or extensions of our existing agreements, which could materially adversely affect our financial condition and results of operations.

 

We have in the past and may in the future supply certain of our international customers with access to ground stations that enable these customers to downlink data directly from our satellites. Exporting these ground stations and technical information relating to these stations may require us to obtain export licenses from the DoC or the U.S. Department of State. If the DoC or the U.S. Department of State does not issue these export licenses in connection with future exports, or if these licenses are significantly delayed or contain restrictions, or if the DoC or the U.S. Department of State revokes, suspends or denies a request for renewal of existing licenses, our business, financial condition and results of operations could be materially adversely affected.

 

Our operation of satellites and ground stations also requires licenses from the FCC. The FCC regulates the construction, launch and operation of our satellites, the use of satellite spectrum and the licensing of our ground stations terminals located within the United States. We currently have all required FCC licenses necessary to operate our business as it is currently conducted. However, these licenses have expiration dates which are expected to occur while the satellites and ground systems are still in use. The FCC generally renews licenses routinely, but there can be no assurance that our licenses will be renewed at their expiration dates for full terms or without adverse conditions. Failure to renew these licenses or obtain FCC authorization to construct, launch and operate any new satellites could have a material adverse affect on our ability to generate revenue and conduct our business as currently planned.

 

International Registration and Approvals.  The use of satellite spectrum is subject to the requirements of the ITU. Additionally, satellite operators must abide by the specific laws of the countries in which downlink services are provided from the satellite to ground station terminals within such countries. Our customers or distributors are responsible for obtaining local regulatory approval from the governments in the countries in which they receive imagery downlinked directly from our satellites to ground stations within such countries. If the necessary approvals are not obtained, we will not be able to distribute real time imagery in those regions and this inability to offer real time service in a foreign country could negatively affect our business. In addition, regulatory provisions in countries where we wish to operate may impose unduly burdensome restrictions on our operations. Our business may also be

adversely affected if the national authorities where we plan to operate adopt treaties, regulations or legislation unfavorable to foreign companies or limiting the provision of our products and services.

 

Material weaknesses in our internal control over financial reporting. If we fail to maintain effective internal control over financial reporting at a reasonable assurance level, we may not be able to accurately report our financial results or prevent fraud, which could have a material adverse effect on our operations, investor confidence in our business and the trading prices of our securities.

 

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Management’s assessment of our internal control over financial reporting as of December 31, 2009 identified one material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. With respect to the material weakness, our management concluded that we did not maintain effective controls over the accuracy and valuation of the provision for income taxes. See “Item 9A. Controls and Procedures”. Until the material weakness is fully remediated, this material weakness could lead to errors in our reported financial results and could have a material adverse effect on our results of operations.

 

Notwithstanding our remediation efforts, the material weakness described above will not be remediated until the new controls operate for a sufficient period of time and are tested to enable management to conclude that the controls are effective. Our management will consider the design and operating effectiveness of these controls and will make any additional changes management determines appropriate.

 

Further, we cannot assure you that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses and cause us to fail to timely meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the accuracy and reliability of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated under Section 404. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information.

 

Our international business exposes us to risks relating to increased regulation and political or economic instability in foreign markets.

 

For the year ended December 31, 2009, approximately 27% of our total revenues were derived from international sales. We intend to continue to pursue international contracts and we expect to continue to derive substantial revenues from international sales of our products and services. International operations are subject to certain risks, such as:

 

 

These risks are beyond our control and could have a material adverse effect on our business.

Our success depends upon a limited number of key personnel.

 

Our success depends on attracting, retaining and motivating highly skilled professionals. A number of our employees are highly skilled engineers and other professionals. In addition, our success depends to a significant extent upon the abilities and efforts of the members of our senior management. Competition for highly-skilled individuals is intense, and if we fail to continue to attract, retain and motivate such professionals, our ability to compete in our industry could be adversely affected.

 

Fluctuations in our operating results could adversely affect the trading price of our common stock.

 

Our operating results may fluctuate as a result of a variety of factors, many of which are outside of our control, including, without limitation:

 

 

As a result of these possible fluctuations, period-to-period comparisons of our financial results may not be reliable indicators of future performance.

 

The price of our common stock has been volatile and an investment in our common stock could suffer a decline in value.

 

The market price of our common stock has been, and is likely to continue to be, volatile. In recent years, the stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many companies in the technology sector. In particular, over the last twelve months, the stock market has experienced extreme price and volume fluctuations that have particularly affected the market prices for small companies and which have often been unrelated to their operating performance or prospects for future operations. These broad fluctuations may adversely impact the market price of our common stock. Future market movements may materially and adversely affect the market price of our common stock.

 

The Company has agreed to issue to Cerberus Capital Management L. P., subject to certain conditions, up to $115 million of convertible preferred stock of the Company which could adversely impact the price of our common stock.

 

We do not intend to pay dividends on shares of our common stock in the foreseeable future.

 

We currently expect to retain our future earnings, if any, for use in the operation and expansion of our business. We do not anticipate paying any cash dividends on shares of our common stock in the foreseeable future. We are prohibited from paying dividends under instruments governing our 2015 Notes until the principal amount of all the 2015 Notes has been repaid.

 

We have substantial amount of indebtedness.

 

As of December 31, 2009, after giving effect to the offering of the 2015 Notes, we have $400 million of long-term debt in the aggregate, consisting of the 2015 Notes and $0.5 million of the outstanding 2012 Notes which remain outstanding. The $0.5 million of 2012 Notes were repaid in full on January 22, 2010. We also hold a commitment from Cerberus Capital Management L. P. to purchase up to $100 million of senior unsecured notes if the Company so elects, with the notes maturing in 2016.

 

Our substantial indebtedness has important consequences. For example, it:

 

 

 

Interest costs related to our debt are substantial and, as a result, the demands on our cash resources are significant. Our ability to make payments on our debt and to fund operations and planned capital expenditures will depend on our future results of operations and ability to generate cash. Our future results of operations are, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

 

Servicing our indebtedness will require significant amount of cash. Our ability to generate sufficient cash depends on numerous factors beyond our control, and we may be unable to generate sufficient cash flow to service our debt obligations.

 

Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, political, financial, competitive, legislative, regulatory and other factors that are beyond our control.

 

For the year ended December 31, 2009, our interest expense was $36.2 million, compared to $38.8 million for the year ended December 31, 2008. We cannot assure you that our business will generate sufficient cash flow from operations to enable us to pay our indebtedness or to fund our other liquidity needs. If our cash flows are insufficient to allow us to make scheduled payments on our indebtedness, we may need to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, or that we will be able to refinance on commercially reasonable terms or that these measures would satisfy our scheduled debt service obligations. If we are unable to generate sufficient cash flow or refinance our debt on favorable terms it could have a material adverse effect on our financial condition, the value of our outstanding debt (including the 2015 Notes) and our ability to make any required cash payments under our indebtedness.

 

Government audits of our contracts could result in a material charge to our earnings and have a negative effect on our cash position following an audit adjustment.

 

Our government contracts are subject to cost audits which may occur several years after the period to which the audit relates. If an audit identifies significant unallowable costs, we could incur a material charge to our earnings or reduction in our cash position.

 

Our effective income tax rate may vary.

 

Various internal and external factors may have favorable or unfavorable effects on our future effective income tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates; the results of any tax examinations; changing interpretations of existing tax laws or regulations; changes in estimates of prior years’ items; acquisitions; changes in our corporate structure; and changes in overall levels of income before taxes. All of these factors may result in periodic revisions to our effective income tax rate.

 

 

None.

 

The properties used in our operations consist principally of satellite ground stations and terminals, production facilities and administrative and executive offices. The following table sets forth certain information about the location of each property used in our business:

 

 

 

In the normal course of business, we may be party to various lawsuits, legal proceedings and claims arising out of our business. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of any existing or known threatened proceedings, even if determined adversely, should not have a material adverse effect on our business, financial condition, liquidity, or results of operations.

 

 

None.

 

 

Our sole class of common equity is its $0.01 par value common stock, which is listed on the NASDAQ Global Market and is listed under the symbol “GEOY.” Effective September 14, 2006, our common stock began trading as GEOY. From the period January 13, 2004 to September 13, 2006, our common stock traded over-the-counter and sales were reported on the NASDAQ bulletin board under the symbol “ORBM.” Prior to January 13, 2004, there was no established trading market for our common stock.

 

We had approximately 131 holders of record of our common stock at December 31, 2009, one of which is Cede & Co., a nominee for Depository Trust Company (DTC). All of the shares of common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC, and are therefore considered to be held of record by Cede & Co. as one stockholder.

Information concerning the stock prices as reported on the NASDAQ composite transaction tape is as follows:

 

 

We have never paid any cash dividends on our common stock, nor do we anticipate paying cash dividends on our common stock at any time in the foreseeable future. We are prohibited, with certain exceptions allowed under the debt indenture, from paying dividends under instruments governing our 2015 Notes until the principal amount of all such notes has been repaid. These restrictions are more fully discussed in “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Cash Flows” below.

 

The transfer agent for our common stock is:

BNY Mellon Shareowner Services,
480 Washington Boulevard
Jersey City, New Jersey 07310
Telephone:  (877) 295-8616
www.bnymellon.com/shareowner/isd

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table sets forth, as of December 31, 2009, the number of securities outstanding under our equity compensation plan, the weighted average exercise price of such securities and the number of securities available for grant under this plan:

 

Stock Performance Graph

 

The following graph compares the yearly percentage change in the cumulative total shareholder return on our Common Stock during the period December 31, 2004 to December 31, 2009, with the cumulative total return on the NASDAQ Global Market Index and with a selected peer group consisting of us and other companies with comparable market capitalizations between $500.0 million and $600.0 million. The old peer group consists of the following publicly-traded technology and government contracting companies: Cubic Corporation, Ion Geophysical Corporation, Measurement Specialties, Inc., MTS Systems Corporation, Nanometrics Incorporated, OYO Geospace Corporation and Trimble Navigation Limited. The new peer group consists of the following publicly-traded technology and government contracting companies: Aerovironment, Inc., Applied Signal Technology, Inc., Argon St Inc., Costar Group, Inc., Cubic Corporation, DigitalGlobe, Inc., Neustar, Inc., SWS Group, Inc., Trimble Navigation Limited, Tyler Technologies, Inc., Viasat, Inc. This graph (i) assumes the investment of $100 on December 31, 2004 in our Common Stock (at the initial public offering price of $20.25 per share), the NASDAQ Global Market Index, and the peer group identified above and (ii) assumes that dividends are reinvested.

 

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG GEOEYE, INC.,
NASDAQ MARKET INDEX AND A PEER GROUP

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Geoeye Inc., The NASDAQ Global Market Composite Index,
The NASDAQ Global Select Index,
An Old Peer Group And A New Peer Group

 

 

* $100 invested on 12/31/04 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

 

ASSUMES $100 INVESTED ON DECEMBER 31, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2009

 

 

The information under “Performance Graph” is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this 10-K and irrespective of any general incorporation language in those filings

 

 

GeoEye is a holding company, formerly ORBIMAGE Holding, Inc., that was formed in April 2005. Its wholly-owned subsidiary, ORBIMAGE Inc. was established on December 31, 2003, in conjunction with the predecessor company, Orbital Imaging Corporation’s reorganization and emergence from Chapter 11 bankruptcy. On January 20, 2006, we acquired the assets of Space Imaging, mainly financed through the incurrence of $50.0 million of indebtedness. The debt was paid off in February 2007. On March 15, 2007, we acquired MJ Harden Associates, Inc. through a stock purchase of all of the outstanding stock of MJ Harden’s sole owner, i5, Inc.

 

The table below sets forth the selected historical consolidated financial and operating data for each of the five years ended December 31, 2009 which has been derived from the audited consolidated financial statements of GeoEye, Inc. The following consolidated financial information should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes in Item 8. of this Annual Report.

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

 

The following discussion and analysis should be read in conjunction with GeoEye’s consolidated financial statements and related notes and the discussions under “Application of Critical Accounting Policies” (also under Item 7), which describes key estimates and assumptions we make in the preparation of its consolidated financial statements and “Item 1A. Risk Factors,” which describes key risks associated with our operations and industry.

 

Overview

 

GeoEye is a leading commercial provider of highest accuracy and highest resolution Earth imagery, image processing services and imagery information products 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 fixed-wing aircraft with advanced high-resolution imagery collection capabilities. GeoEye-1 is the world’s highest resolution and most accurate commercial 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 high-resolution image processing and production facilities which can process, manage, analyze and share imagery from any commercial or government satellite. Our satellite and aerial imagery products and services provide our customers with the timely, and accurate location intelligence, enabling them to analyze, monitor and map 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, and disaster preparedness and emergency response. We own one of the largest commercial color digital satellite imagery libraries in the world, which contains more than 405 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, and our color digital imagery library differentiates us from our competitors. This enables us to deliver a comprehensive range of imaging products and services to our diverse customer base.

 

Impact of Significant Transactions

 

GeoEye-1 Satellite, NextView Program and Service Level Agreement

 

The U.S. Government’s 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 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 final capitalized costs (including financing and launch insurance costs) of the GeoEye-1 satellite and related ground systems were $480.8 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 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 year ended December 31, 2009, we recognized $21.1 million of deferred revenue under the NextView contract.

On December 9, 2008, we entered into a SLA, with the NGA under which the NGA agreed to purchase GeoEye-1 imagery from us through November 30, 2009. The SLA provides for monthly payments of $12.5 million, subject to a maximum reduction of 10% based on performance metrics. Under the SLA, to the extent that less than $12.5 million is paid by NGA in any month, the shortfall is used to fund an extension of the contract. 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 has been extended through June 30, 2010, followed by six additional one-month option periods. The last option period expires on December 31, 2010. During the year ended December 31, 2009, we recognized $124.9 million of revenue under the SLA.

 

In addition to the SLA modification to the NextView contract, we received new U.S. Government awards during the year ended December 31, 2009, totaling more than $37.9 million to supply geospatial products and services. Under these awards, which are expected to be completed during 2010, 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 first quarter of 2009 and recognized $10.4 million of imagery revenue during the year ended December 31, 2009.

 

In December 2009, our engineers detected an irregularity in the equipment 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 four ground stations, since down linking to these ground stations is separate from imaging activities. As a result, we expect no impact on our on-going ability to deliver imagery to the NGA under the SLA and to those of our regional affiliates for whom we collect and deliver imagery.

 

GeoEye-2 Satellite

 

We believe that demand for satellite imagery from the U.S. Government will increase beyond the available supply in the 2013 timeframe. 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 has commenced work on the advanced camera for GeoEye-2, which could be used to accelerate the deployment of GeoEye-2 so that it could be launched in late 2012 and commercially available in the 2013 timeframe. As of December 31, 2009, we have spent a total of $66.8 million on components of GeoEye-2. We view these expenditures as prudent and believe they will position us to move quickly should an opportunity arise to expand our existing NGA relationship to a new satellite. On March 11, 2010, the Company announced the selection of Lockheed Martin Space Systems Company to build the GeoEye-2 Satellite. We expect to continue to make reasonable investments in GeoEye-2’s development, but we do not expect to launch or commission the GeoEye-2 satellite on an accelerated basis without an agreement with the NGA under its EnhancedView Program. We are currently participating in the NGA request-for-proposal contract process for the EnhancedView Program. This program will allow our government to continue to receive a supply of unclassified, highly accurate satellite imagery from commercial satellite imagery providers and will replace the NextView program, which could expire in June 2010, unless the NGA exercises their option to extend it through December 2010. Prior to launch and commissioning GeoEye-2, we may require additional capital depending on the terms of our agreement, if any, with NGA. If we were not to build GeoEye-2 on an accelerated basis, we would most likely proceed so that a new high-resolution satellite could be used as a replacement satellite for GeoEye-1 in the 2016 to 2017 timeframe.

 

Business and Industry Factors

 

Business Strategy

 

With a broad range of imagery collection assets, world class image processing and production facilities, and a strong global distribution network, we are well positioned as a leading global provider of imagery and imagery information products. Key elements of our strategy to take advantage of our competitive position and grow our business include:

 

 

 

Industry Factors

 

The geospatial technologies industry is affected by many factors. Factors that drive market demand for our products and service include, but are not limited to, increased demand for technologies in response to national defense and environmental observation initiatives, commercial demand for satellite mapping technologies, infrastructure project initiatives and advances in communication technologies. Factors that could negatively impact market demand for our products and services include, but are not limited to, U.S. and foreign governments launching their own imagery programs, the proliferation of competing surveillance technologies such as unmanned aerial vehicles, U.S. export constraints and decreasing defense budgets.

 

As with any industry there are trends, both positive and negative, that can have an impact on the commercial data providers. Positive trends include the following:

 

 

The frequency of natural disasters such as tsunamis, hurricanes and earthquakes has increased awareness of the utility of imagery information products for humanitarian missions and the need for geo-information in risk assessment, response and recovery. Satellite data is a valuable tool in assessing disaster response and recovery and planning logistical operations.

 

Commercial satellite imagery was once again put to immediate use following the January 2010 earthquake in Haiti. GeoEye was the first to deliver commercial satellite imagery to the U.S. Government, foreign governments and commercial customers. Within twelve hours of the earthquake, imagery from the GeoEye-1 satellite was posted to the Web. The entire world saw the practical application of commercial satellite imagery for understanding the extent and scope of the damage in and around Port-au-Prince, Haiti. Relief and government agencies used GeoEye’s satellite imagery to make better decisions about their relief and

recover efforts. Additionally, in late February 2010, GeoEye provided imagery from both GeoEye-1 and IKONOS to the U.S. Government after a magnitude 8.8 earthquake struck Chile.

 

 

We believe the heightened focus on the global environment could increase use of imagery for global observation to support climate change initiatives or to verify or monitor carbon reduction projects established through legislation or done voluntarily.

 

 

There are also some negative industry trends:

 

 

 

Results of Operations

 

Comparison of the Results of Operations for the Years Ended December 31, 2009 and 2008

 

 

Percentages in this table and throughout our discussion and analysis of financial condition and results of operations may reflect rounding adjustments. The totals shown above may not appear to sum due to rounding.

Revenues

 

 

Imagery revenues increased $104.3 million primarily due to the substantial increase in levels of deliveries to NGA using the GeoEye-1 satellite under the new SLA agreement which commenced in February 2009. During the fourth quarter of 2009, we recorded reductions of revenue of $6.1 million as a result of the GeoEye-1 satellite irregularity and contract modifications. NextView cost share revenues of $21.1 million are related to the recognition of deferred revenue from cost share amounts received from NGA and recognized over the useful life of the satellite. Production and other services revenues decreased by a net $0.9 million in 2009 compared to 2008 primarily due to a $4.0 million revenue decrease in the combination of our digital aerial imagery service and the SeaStar Fisheries Information Service, both of which have been negatively affected by the economic downturn resulting in lower sales volumes. This revenue decline was partially offset by a $3.9 million increase in our U.S. Government and commercial based value-added production services.

 

Operating Expenses

 

Direct Costs of Revenue

 

 

Direct costs of revenue include the costs of operating our satellites and related ground systems, as well as on-going costs related to our operations and maintenance contracts. Subcontractor expenses include payments to third parties for support in operating the IKONOS and GeoEye-1 satellites and their related ground stations. Subcontractor costs increased $3.2 million in 2009 compared to 2008 primarily due to an increase in operational and maintenance costs to support the GeoEye-1 satellite during 2009. Other direct costs include third party costs and fees to support our satellite programs as well as payments to international regional affiliates to purchase IKONOS imagery collected by them in their exclusive regions and which we resell to our customers. Other direct costs decreased $9.8 million in 2009 compared to 2008 primarily due to the impact of the sale of ground station upgrades of $6.0 million in 2008 that did not occur in 2009 as well as our decreased need to purchase IKONOS imagery from our regional affiliates for resale to other customers by $5.6 million, offset by a $1.7 million increase in 2009 related to the recognition of the costs of the ground systems upgrades that are being recognized over the combined delivery term of the service. Labor and overhead costs increased $21.5 million compared to the same period in 2008 primarily due to increased labor and overhead related to the operation of the GeoEye-1 satellite, which became operational in the first quarter of 2009. Satellite insurance increased $7.6 million compared to the same period in

2008 due to the commencement of amortization of in-orbit insurance premiums for the GeoEye-1 satellite which began operations in February 2009.

 

Depreciation and Amortization

 

 

The increase of $45.9 million in depreciation in 2009 from 2008 was primarily due to the commencement of GeoEye-1 satellite operations in February 2009, when we began depreciating the GeoEye-1 satellite and the related ground systems. Amortization expense is primarily associated with acquired contracts and customer relationship intangibles.

 

Selling, General and Administrative Expenses

 

 

Selling, general and administrative expenses include the costs of the finance, administrative and general management functions as well as the costs of marketing, advertising, promotion and other selling expenses. Payroll, commissions, and related costs increased $3.9 million in 2009 compared to 2008 primarily due to increases in headcount, commissions, and the annual performance bonus and stock compensation expense as a result of growth of our operations. The increase in professional fees of $4.3 million compared to the same period in 2008 was primarily attributable to fees for accounting and tax services and related internal control remediation efforts as well as for bid and proposal efforts related to new business development mainly for the EnhancedView program. Research and development expenses primarily include the cost of services and supplies in the development of the new information services business.

 

Inventory Impairment and Satellite Impairment Settlement

 

During 2008, we determined that $2.2 million of certain inventory costs related to a terminated customer contract should be written off.

 

We had a post-launch on-orbit milestone payment obligation with Orbital Sciences in connection with the ongoing performance of OrbView-3 that was written off in the first quarter of 2007 in conjunction with the loss of OrbView-3. The obligation was subsequently settled and $1.1 million was paid in April 2008.

Interest Expense, net

 

The composition of interest expense, net is as follows:

 

 

Interest expense, net includes interest expense on our 2012 Notes and 2015 Notes, amortized prepaid financing costs, amortization of debt discount, market adjustments to fair value of the related derivative instruments and excludes capitalized interest expense associated with the construction of the satellites and related ground systems as well as interest income.

 

Interest expense, net increased primarily due to the decrease in capitalization of interest of $17.9 million as a result of the commencement of the GeoEye-1 satellite operations in February 2009 offset by the $2.4 million decrease related to losses recorded on the derivative instruments in 2008 and not incurred in 2009.

 

Due to the issuance of the 2015 Notes in the fourth quarter of 2009, we were able to lower our cost of capital by reducing our interest rate from a floating rate of at least 12% to a fixed coupon rate of 9.625%. Interest expense related to the 2012 Notes was $26.9 million and $36.4 million for the years ended December 31, 2009 and 2008, respectively. Interest expense related to the 2015 Notes was $9.3 million for the year ended December 31, 2009.

 

In connection with the issuance of the 2012 Notes, we entered into an interest rate swap arrangement in June 2005 pursuant to which the effective interest rate under the 2012 Notes was fixed at 13.75% through July 1, 2008. In February 2008, we entered into a $250.0 million interest rate cap agreement that intended to protect us from increases in interest rates by limiting our interest rate exposure to the three-month LIBOR with a cap of 4.0%. The cap option cost was $0.5 million and was effective July 1, 2008 through January 1, 2010. As of December 31, 2009 the fair value of the interest rate cap was zero.

 

Interest income decreased by $4.3 million in 2009 primarily due to lower average cash balances and lower average interest rates on cash balances during 2009 as compared with 2008.

 

Other Non-Operating Expense

 

During the fourth quarter of 2008 we impaired a cost-method investment in the amount of $1.0 million.

 

Loss from Early Extinguishment of Debt

 

The loss from early extinguishment of debt for the year ended December 31, 2009, was $27.1 million, due to the issuance of the 2015 Notes with a face value of $400.0 million in October 2009 and repayment of $249.5 million of our 2012 Notes. The early extinguishment of debt represents the expensing of the unamortized prepaid financing costs, unamortized discount and tender premium related to the 2012 Notes.

 

Provision for Income Taxes

 

We recorded an income tax benefit of $17.6 million and $16.3 million for 2009 and 2008, respectively. Tax provisions were calculated using our estimated annual effective tax rate of approximately 39% and 42% for 2009 and 2008, respectively, prior to the application of discrete items.

 

The total liability for unrecognized tax benefits for 2009 and 2008 was $0.2 million and $1.4 million, respectively. During 2009, we paid certain items that were reserved, removed certain items for which we have received waivers from related jurisdictions and removed those items settled as a result of filing our 2008 income tax

returns and related method changes. We recorded additional reserves related to income tax penalties and interest for state taxes and research and development credits.

 

On October 15, 2009, the Internal Revenue Service approved our ruling request regarding an ownership change to effectively allow us to recover $57.6 million of previously limited net operating loss generated prior to November 2004. We plan to amend prior year income tax returns resulting in a tax receivable of approximately $12.4 million and the remaining $24.1 million carryforward balance has been recorded as an $8.9 million deferred tax asset. The utilization of the deferred tax asset related to the restored net operating loss carryforward is limited to approximately $4.0 million per year as part of a Section 382 ownership change. Additionally, we plan to carryback our current year loss for tax purposes and adjust the effect of prior year restatements, resulting in an income tax receivable of approximately $27.3 million and the remaining $31.1 million carryforward balance has been recorded as an $11.8 million deferred tax asset. The total federal and state net operating loss carryforward, is approximately $55.0 million. The federal net operating loss carryforward will expire between tax years 2021 and 2029 and the state net operating loss carryforward from various jurisdictions will expire between tax years 2017 and 2029.

 

The statutes of limitations for income tax returns in the U.S. federal jurisdiction and various state jurisdictions for tax years 2005 through 2008 have not expired and thus these years remain subject to examination by the IRS and state jurisdictions. Significant state jurisdictions that remain subject to examination include Colorado, Virginia and Missouri for tax years 2005 through 2008. For tax years that we are no longer subject to federal, state and local tax examinations by tax authorities, the tax attribute carryforwards generated from these years may still be adjusted upon examination by tax authorities.

 

During 2008, we filed an application for change in method of tax accounting for the NextView cost-share payments with the Internal Revenue Service. As a result of the filing, we will recognize a revenue adjustment of $48.5 million annually until tax year 2011.

 

Comparisons of the Results of Operations for the Years Ended December 31, 2008 and 2007

 

Percentages in this table and throughout our discussion and analysis of financial condition and results of operations may reflect rounding adjustments. The totals shown above may not appear to sum due to rounding.

 

Revenues

 

 

Imagery revenues include imagery purchases, as well as affiliate access and support fees. Imagery revenues decreased $44.6 million in 2008 from 2007 due primarily to a reduction in NGA imagery orders with the delay of the launch of the GeoEye-1 satellite until the end of 2008, offset by $7.2 million related to the sale of a ground station in late 2008. Production and other services revenues increased $8.2 million in 2008 from 2007 primarily due to production orders for NGA and commercial customers, increasing by $5.5 million, and revenue from MJ Harden, acquired in March 2007, increasing by $4.1 million, offset by decreases in international production and other revenue sources.

 

Operating Expenses

 

Direct Costs of Revenue

 

 

Labor and overhead costs increased $1.4 million in 2008 from 2007 mainly due to additional staff to support the ramp-up of the GeoEye-1 satellite in 2008. Subcontractor costs increased $4.1 million in 2008 compared to 2007 due to an increased level of effort for the affiliate ground stations as well as software development and integration for the GeoEye-1 satellite. Other direct costs increased $2.3 million in 2008 from 2007 primarily due to an increase in direct costs related to the sales of ground station upgrades in 2008.

 

Depreciation and Amortization

 

The decrease of $5.1 million in depreciation in 2008 from 2007 was primarily due to the reduction of depreciation expense for IKONOS, which was fully depreciated in June 2008, and for OrbView-3 which was declared inoperable in March 2007. Amortization expense is primarily associated with acquired contracts and customer relationship intangibles.

 

Selling, General and Administrative Expenses

 

 

The overall increase of $14.3 million in 2008 is primarily attributable to staff increases in the telecommunications, accounting and other support services functions, as well as professional fees for accounting and tax related services.

 

Interest Expense, net

 

The composition of interest expense, net is as follows:

 

 

Interest expense, net includes interest expense on our 2012 Notes, amortized prepaid financing costs, amortization of debt discount, market adjustments to fair value of the related derivative instruments and excludes capitalized interest expense associated with the construction of the GeoEye-1 satellite and related ground systems as well as interest income.

 

Interest expense, net declined due to increased capitalization of interest and declining interest rates applicable on the $250.0 million of Senior Secured Floating Rate Notes due July 1, 2012 (2012 Notes) issued on June 29, 2005. Interest expense related to the 2012 Notes was $36.4 million and $39.4 million for the years ended December 31, 2008 and 2007, respectively. In 2007, interest expense on our $50.0 million indebtedness (SI Credit Agreement) incurred on January 10, 2006 to finance our purchase of Space Imaging was $0.4 million. Our final payment for this debt occurred in February 2007.

 

In connection with the issuance of the 2012 Notes, we entered into an interest rate swap arrangement in June 2005 pursuant to which the effective interest rate under the 2012 Notes was fixed at 13.75% through July 1, 2008. The fair value of the derivative instrument at December 31, 2007 was approximately $1.9 million and was included in other assets on the consolidated balance sheet. In February 2008, we entered into a $250.0 million interest rate cap agreement that is intended to protect us from increases in interest rates by limiting our interest rate exposure to the three-month LIBOR with a cap of 4.0%. The cap option cost was $0.5 million and was effective July 1, 2008 through January 1, 2010. As of December 31, 2008 the fair value of the interest rate cap was immaterial.

On the settlement of the interest rate swap on July 1, 2008, we recorded a realized loss of $0.5 million. We recorded unrealized losses of $1.9 million and $3.1 million on the derivative instruments for the years ended December 31, 2008 and 2007, respectively. These amounts are included in net interest expense.

 

Interest income decreased primarily due to lower average cash balances and lower average interest rate returns on cash balances during 2008 as compared to 2007.

 

Other Non-Operating Expense (Income)

 

We recorded a loss of $36.1 million in the first quarter of 2007 due to the impairment of the OrbView-3 satellite. We submitted an insurance claim on June 8, 2007 and received the full proceeds during the third quarter of 2007 and recognized the net $3.0 million as a non-operating gain.

 

Non-GAAP Financial Measures

 

Adjusted EBITDA

 

Adjusted EBITDA is a non-GAAP financial measure that represents net income (loss) before depreciation and amortization expenses, net interest income or expense, loss from early extinguishment of debt, income tax expense (benefit), non-cash loss on inventory and investment impairments and non-cash stock based compensation expense. We present adjusted EBITDA to enhance understanding of our operating performance. We use adjusted EBITDA as one criterion for evaluating our performance relative to that of our peers. We believe that adjusted EBITDA is an operating performance measure, and not a liquidity measure, that provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. However, adjusted EBITDA is not a recognized term under financial performance under GAAP, and our calculation of adjusted EBITDA may not be comparable to the calculation of similarly titled measures of other companies.

 

The use of adjusted EBITDA as an analytical tool has limitations and it should not considered in isolation, or as a substitute for analysis of our results of operations as reported in accordance with GAAP. Some of these limitations are:

 

 

Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or as an alternative to net income or cash flow from operations determined in accordance with GAAP. Management compensates for these limitations by not viewing adjusted EBITDA in isolation, and specifically by using other GAAP measures, such as cash flow provided by (used in) operating activities and capital expenditures, to measure our liquidity. Our calculation of adjusted EBITDA may not be comparable to the calculation of similarly titled measures reported by other companies.

A reconciliation of net earnings to adjusted EBITDA is as follows (in thousands):